Que Paso With Latin America's Economy?

greenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Posted on: 11/01/2001 Fair use for educational/research purposes only

Que Paso With Latin America's Economy? By Lara L. Sowinski

Ay, Caramba! Looks like the global slowdown has spread south

It's no surprise that the near-term economic outlook for Latin America, like nearly every other region in the world, continues to be suppressed by the global economic slowdown. Furthermore, gross domestic product growth projections for Latin America have been repeatedly adjusted downward for months, with most analysts saying output will likely expand by only around 2 percent this year, half of last year's 4 percent rate.

The region's exports have been among the hardest hit sectors of the economy-there's weaker demand abroad and prices for exports have also fallen. Countries in the Mercosur trade bloc-Argentina, Brazil, Paraguay, and Uruguay-were somewhat of an exception, however, especially Brazil, whose exports so far this year are growing by about 12 percent. By contrast, imports are growing strongly, maybe too strong for some countries that are now worrying their trade and current account deficits will widen appreciably.

And, while some economic indicators are widening, others are narrowing, especially the economic disparity that's existed over the past five years between Mexico and Central America on one side, and South America on the opposite side. In particular, Mexico and Central America have experienced very strong export growth during this time, helped by their close relationship to the strong U.S. economy and also their robust maquila industries. But manufactured goods, such as electronic products, are highly sensitive to the business cycle, and the U.S. demand for the kinds of electronics made by maquila industries in Mexico and Costa Rica have fallen significantly. At the same time, while Mexico and Central America were flourishing, many South American countries were struggling. The effects of the international financial crisis of 1997-98, in particular, were hard felt in South America. Therefore, performance for the Latin American region as a whole will be more uniform this year.

Similar to last year, foreign direct investment in Latin America will decline in 2001, although it will still amount to approximately $50 billion. Mexico is expected to receive increased flows, but Brazil is likely to get only half of its previous levels. Nonetheless, the two countries combined will attract almost two-thirds of the region's total.

Latin America's overall economic outlook will share other features this year, including a moderate fall in inflation along with slightly rising unemployment. But, there are distinct differences among the twelve largest Latin American economies. Following is a look at some of the notable economic indicators and political conditions for these countries.

Argentina The country's recession, now in its fourth year, continues to weigh heavily on the country as does the joblessness rate, which remains stuck around 16 percent. Indeed, many Argentine citizens are starting to wonder if the market based reforms, which were paying off handsomely in the early 1990s, were such a good idea after all. When the government began the reforms, including the selling of state-owned enterprises and tying the peso to the U.S dollar, many were encouraged by the drastic fall in inflation and the dramatic improvement in the country's infrastructure. But suspicion surrounding political corruption and unfair awarding of contracts have begun to spoil the fun. On a positive note, the International Monetary Fund's loans have helped restore some confidence in the country.

Bolivia Political instability has dominated Bolivia's economic "tough times" for the past few years, although there may be some hope on the horizon. President Jorge Quiroga seems committed to pushing through stringent economic reforms in an effort to revive the ailing economy, erradicate institutional corruption, and eliminate coca production. The country's economy, which is still largely driven by agriculture and mining, remains locked in a three-year downturn. Since 1998, GDP has dropped from 5.5 percent to zero. Hopes for a recovery, on the other hand, have improved with the appointment of Mr. Quiroga, a U.S.-trained engineer who worked for IBM for seven years in the U.S. before returning to Bolivia.

Brazil The country's electricity crisis shocked more than Brazilians-it has also taken its toll on foreign business confidence. Meanwhile, the real fell to an all time low of R2.42 to the U.S. dollar in mid-June as investors sold the currency out of fear that energy rationing would slow growth. Argentina's economic problems are also hurting Brazil, and the country's economic growth forecasts for 2001 are half of the 4 percent rate put forward earlier this year. Under an agreement with the IMF, the government must achieve a primary fiscal surplus next year of 3.5 percent of GDP, up from an initial target of 3 percent.

Chile Mining and forestry, two of the industrial pillars in Chile's economy, are feeling the pressure of the global economic slowdown. Weak copper prices and a slowing external demand, mostly from the U.S., are working to discourage new investment in these industries. And, while Chile has historically been one of the safest places for business in Latin America, there's now a threat of rising violent crime, industrial conflict, and internal unrest. The possibility of internal armed conflict is still low, but violent land protests by the Mapuche Indians are beginning to cause concern. In addition, a labor reform bill will lead to a rise in industrial conflicts if it is approved. Meanwhile, the country's free trade talks with the U.S. should result in a final agreement by the end of the year.

Colombia Colombia's still trying to fight back from severe economic recession. The country's unemployment rate, one of the highest in Latin America, reached 17.8 percent in thirteen major cities in July, and averages just more than 15 percent nationwide. The government has proposed labor reforms designed to attack the high unemployment rate, but the weak economy and union opposition remain formidable obstacles. Even if the reforms are implemented, Colombia must face underlying structural problems such as the ongoing civil conflict, high rates of urban violence, lack of a highly trained workforce, and an unstable regulatory climate, all of which cripple job creation, new investment, and expansion.

Costa Rica Although Costa Rica has been one of the better performing economies in Latin America in recent years, downward pressure on the country's key industries and exports are beginning to hurt. The computer chip industry, a leading foreign exchange earner and driver for domestic activity, is suffering because of a glut on the world market and slower demand. Coffee exports, too, are grinding to a slowdown as world prices fall to record lows. And finally, banana exports are slipping as well. New markets in Russia and China haven't been as promising as anticipated and foreign fruit marketing companies such as Dole and Chiquita are cutting back on production and employment. Adding to this is competition from Ecuador, the world's largest banana producer. Production costs in Costa Rica are about $5.20 per box, compared to Ecuador's $3.80 per box.

Ecuador The government's 2002 budget, announced in early September, included a 10 percent increase in fuel prices aimed at offsetting a decision by the high court that decreed an increase in value added tax from 12- to 14 percent was unconstitutional. There are fears, however, that the hike in fuel prices will ignite protests and social unrest similar to those that brought the country's capital, Quito, to a standstill two years ago. The budget is 14.1 percent larger than this year's and it's likely to yield a 33.7 percent increase in tax collection. In the meantime, the country's tentative relationship with the IMF hasn't changed. The Ecuadorian judiciary and the Congress have long opposed the fiscal policy reforms required by the IMF, specifically a three percentage point increase in value-added taxes (VAT) to 15 percent as a prerequisite for the release of funding.

Mexico

As stated previously, the downturn in industrial output, characterized by lower maquila exports to the U.S., is a significant attribute of Mexico's present economic conditions. Furthermore, because the U.S. economy has yet to bottom out, Mexico will likewise endure these conditions for at least the mid-term. The good news, though, is that investor confidence has remained healthy, evidenced by strong capital flows to the country. Other positive signs include downward trending inflation and interest rates. Nonetheless, rising labor costs and industrial relations problems has some manufacturers bugged, especially Volkswagen, which said in September it was suspending its $1 billion investment scheme at its assembly plant in Puebla. The announcement came on the heels of a 19-day strike at the plant, the second in two years for Volkswagen, which prompted company officials to say the company would begin manufacturing the Jetta model in China in order to reduce dependence on Volkswagen's Mexican operations. The company also said it would begin investing in Mexico again only if the government was able to reform the country's labor laws and introduce a policy of wage moderation.

Panama The poverty that pervades Panama shows no hint of abating and the government has thus far inadequately addressed the underlying causes. In spite of this, President Mireya Moscoso is wisely advancing plans for an $85 million information technology center in Panama. Five international broadband fiber optic cables pass through the country between the Atlantic and Pacific oceans. Panama's trade and industry minister said investors are attracted by the country's geographic location, large free trade zone, international banking center, use of the U.S. dollar, quality telecommunications and transport infrastructure, and one of the first e-commerce laws in Latin America. The center hopes to attract call centers, Internet access and content providers, and Web site servers. Analysts predict e-commerce in Latin America will represent $7.6 billion in business by 2003.

Peru The new government headed by President Alejandro Toledo has its work cut out, and must deliver quickly on its promise to reduce poverty and eliminate corruption. In August, Toledo's administration earned its first major political success when Congress gave its approval to five specific measures aimed at reviving the country's stagnant economy. Among the measures is a plan to cut the payroll tax paid by companies to 2 percent from 5 percent and do away with it entirely within a year. The sales tax will also be eliminated, yet the government didn't specify when that will occur. Realistically, Peru will need some time to get its ailing $54 billion economy back on track again.

Uruguay Uruguay's economic reliance on Brazil and Argentina, which has served it well in the past, may now be a detriment. Specifically, Argentina has been an important market for Uruguay's exports, and Argentina and Brazil constitute more than 90 percent of tourism profits for Uruguay. These revenue sources are tightening up, though, and high unemployment coupled with a depressed construction sector is only exacerbating the situation. To prosper, the country must become more competitive in the global market and rely less on Argentina and Brazil, for starters.

Venezuela Although President Chavez has been criticized for not effectively dealing with rising crime, unemployment, and corruption, his popularity remains fairly high among voters. The same can't be said for multinational oil companies doing business in Venezuela, the third largest oil exporting nation in the world. In particular, they're worried about new legislation that would increase royalty tax payments from 16.6 percent to 30 percent, a level that would be one of the highest in the industry. At the same time, royalties in other countries have fallen in recent years. For instance, Saudi Arabia's royalties are set at 20 percent, while Nigeria's range from 20 percent to zero.

Lara is a features editor for World Trade. /

http://www.worldtrademag.com/CDA/ArticleInformation/features/BNP__Features__Item/0,3483,66511,00.html

-- Martin Thompson (mthom1927@aol.com), November 02, 2001


Moderation questions? read the FAQ