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CHALLENGES 2006-2007: Not All Rosy in Latin American Economy

Diego Cevallos

MEXICO CITY, Dec 28 2006 (IPS) - The economies of Latin America have been performing well over the last four years, and an unprecedented reduction in poverty has been seen. But some leftwing analysts and leaders are questioning the economic model that has been applied, and the rosy future predicted by the Economic Commission for Latin America and the Caribbean (ECLAC).

Poverty in the region fell by four percentage points between 2002 and 2006, and the combined gross domestic product (GDP) grew during that period at an average annual rate of four percent, and is expected to do so again in 2007. However, some political sectors, observers and activists do not find these statistics totally convincing.

“It is understandable that countries with high rates of poverty and inequality should have large segments of the population who have not benefited from the policies that have been implemented, but the overall situation now is positive and the region is better prepared than previously to make sure it continues that way,” Jürgen Weller, an official at ECLAC’s economic development division, told IPS.

According to the regional United Nations agency, the factors driving the regional boom include high international commodity prices, the fiscal discipline maintained by governments of all ideological persuasions, and the increasing cash remittances sent home by emigrants.

Other positive aspects mentioned by ECLAC were a fall in inflation, increased domestic demand, lower interest payments on public debt, and the partial conversion of dollar debt into local currencies.

In this context, the region is growing and poverty is being reduced. However, there are still 205 million people below the poverty line, equivalent to 38.5 percent of the total population, and 79 million people, or 14.7 percent, living in extreme poverty.

“To speak optimistically about the supposed economic growth is an insult to the millions of people who think that this neoliberal system, which is being applied in countries with governments of the centre, left and right, will never bring about real social justice,” José Valdez, a leftwing Mexican activist, told IPS.

“The numbers are nothing but an illusion,” said Valdez, who participates in what is called “the Other Campaign”, a social movement promoted by the indigenous Zapatista National Liberation Army (EZLN) based in the southern Mexican state of Chiapas, among leftists who choose not to participate in elections.

In response to such criticism, Weller admitted that “it cannot be denied that part of the population is still suffering severe problems.”

But he claimed that “the present macroeconomic management, which makes the most of opportunities offered by the global economy, maintains fiscal discipline, strengthens the productive apparatus base to make it more competitive and implements social programmes, is yielding results.”

However, an attitude of “cautious optimism” should be maintained because, although the statistics point to an upswing, the region still has a lot of work to do in terms of productive development, complementing the export of raw materials with more innovative activities, said the analyst. It is also necessary to invest more in education and technology, and to strengthen social programmes, he added.

“Compared with the 1990s, economic growth now has more solid foundations, which encourages hope that in future the situation will change. But obviously, there is still a lot to be done,” said Weller.

Germán de la Reza, an expert on economics and integration issues, disagreed with ECLAC’s point of view. To draw conclusions from the region’s results for the last four years is rash, because it is too short a period to forecast any sustained trends, he told IPS.

“What if we looked at the last decade, instead of the last four years? In the past 10 years a graph of the annual evolution of GDP does not show a rising trend, but a U-shaped curve, with GDP growth rates above five percent at both ends and, in the centre, a negative growth rate of nearly minus one percent,” said de la Reza, a professor at the University of Paris-La Sorbonne and the Metropolitan Autonomous University (UAM).

“What the figures suggest is that we are seeing a rebound effect, not a sustained growth trend,” he added.

De la Reza remarked that Argentina is the clearest example of this rebound phenomenon, experiencing negative growth between 1999 and 2002, then positive growth during the next four years.

The same behaviour, to a greater or lesser extent, could also be observed in Chile, Ecuador, Mexico, Paraguay, Uruguay and Venezuela. Venezuela’s growth rates were among the lowest between 1999 and 2003, and among the highest from 2004 to 2006, he said.

Within the positive average growth rate for the region, there is marked diversity between individual countries. Venezuela, Uruguay and Argentina had GDP growth rates of between 7.3 and 10 percent in 2006, and although their economies may slow down a little, they are expected to continue to grow at over six percent in 2007.

Antigua and Barbuda and Trinidad and Tobago performed remarkably well in 2006 with GDP growth rates in excess of 11 percent.

On the downside, the countries with the lowest GDP growth in 2006 were Haiti and Guyana, with rates below 2.5 percent.

Next year the regional economy is expected to slow down a fraction, and the average growth rate is forecast at 4.7 percent. The accumulated growth in per capita GDP is estimated to be about 15 percent for the period 2003-2007, which works out at an annual average per capita growth rate of 2.8 percent, according to ECLAC.

Weller stated that “economic growth is a necessary condition for generating income and social welfare, but we believe that by itself, it is not sufficient.”

He warned that the Latin American and Caribbean economies are overly dependent on exporting primary products, including farm products, oil, copper and gold, which exposes them to high risks, because prices cannot be expected to remain at their current high levels forever.

In de la Reza’s opinion, although the region’s countries are doing well for the time being, there are storm clouds on the horizon.

“Although higher prices for exports are a good thing in themselves, other factors at this particular juncture (such as high demand from China and India) are equally important, and the perennial difficulties in gaining access to international markets in the most developed countries for agricultural products remain in place,” he said.

As for responsible handling of public finances, which according to ECLAC was a key factor for regional growth, de la Reza had no great regard for its importance.

“It’s true that the countries are handling their finances in an orthodox manner, but I don’t think that is irreversible. In different circumstances, that situation could change, and that would not necessarily be a negative thing,” he said.

“The point is that growth cannot be reduced to the level of macroeconomics. A government in crisis, and every country might experience one, tends to cut loose from orthodoxy, as we have seen in Argentina. After the late 2001 economic collapse, Argentina was forced to default on its debt to the foreign banks, and that worked well for the country,” he said.

But ECLAC insists that in the medium term, at least, the region will continue to move relatively smoothly along a path of growth.

The U.N. agency stated that, as “global growth may cool off to a greater or lesser extent” next year, the region of Latin America and the Caribbean may feel the impact. However, it insists that this region is better prepared than it was in the past to deal with such a scenario.