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IRAQ: Brief War Could Spur Latin America, says Bank Official

Emad Mekay

WASHINGTON, Mar 17 2003 (IPS) - A short U.S.-led war with Iraq could benefit stagnant Latin American economies if they were to receive capital redirected from northern countries plunged further into recession by effects like higher oil prices, says the chief economist of the Inter-American Development Bank (IDB).

”What we’ve seen in Latin America in the past is that when things don’t work out well for the north, sometimes the flow of capital increases to Latin America and that compensates for the (sliding) trade effect,” IDB Chief Economist Guillermo A. Calvo told IPS in an interview.

The United States is massing troops in the Persian Gulf country of Kuwait and elsewhere in the Middle East to prepare for what now seems an inevitable invasion of Iraq.

Washington wants to topple the regime of President Saddam Hussein and disarm the Arab country of its alleged weapons of mass destruction.

The war spectre has already taken a heavy toll on the world economy, boosting oil prices and fuelling uncertainty that has depressed most of the world’s stock markets, trade and investments.

Because of the economic stagnation in the United States, Europe, and Japan – known as the three engines of the global economy – Latin American and Caribbean exports have already declined.

Calvo said that while high oil prices could hurt oil-importing countries such as Bolivia, it could benefit exporting nations like Venezuela.

But with possible further recession in the United States, Latin American countries, particularly Mexico which has the region’s strongest trade links to Washington, could see trade decline.

Only nations not tied closely to the northern giant might be spared from the slump in trade, said Calvo.

”Some countries can be more sure about negative effects, like Mexico for example because 80 percent of its exports go to the U.S.,” he said. ”There is a strong linkage there. But when you go south the link breaks down in economies like Brazil’s or Argentina’s.”

In the case of Chile, whose economy is tied more closely to that of Asia, the negative impact will only be felt if the war and oil prices affect that continent, Calvo added.

But the drop in trade and higher oil prices could be counter-acted by rising investment in the region.

”There are two effects. The rise in the price of oil and that by itself, for many countries in the region, is not good except for the producers. But if it is accompanied by an inflow of capital, which is quite possible for Argentina and Brazil, that could more than compensate for the price of oil.”

That increased investment followed the 1991 Gulf War, said Calvo, as the U.S. economy stagnated.

He said that although capital flow to Latin America contracted over most of 2002, the tide is slowly changing and flows are trickling back.

The Economic Commission for Latin America and the Caribbean (ECLAC) said that capital inflows in 2002 were in the area of 50 billion dollars, down from an average 74 billion dollars from 1996 through 1998.

Reduced inflows have affected small and medium-size enterprises, the largest employers in the area, which already had difficulties accessing funding.

In 2002, real gross domestic product (GDP) in the region fell by about 0.5 percent – led by a sharp recession in Argentina – yet the region is recovering thanks to stabilisation in Argentina and sound policies in Brazil, Colombia, and Peru, said Horst Kohler, managing director of the International Monetary (IMF) last week.

In January, ECLAC said that imports to Latin America and the Caribbean fell nine percent in 2002 compared to 2001 while exports rose marginally by a meagre 0.6 percent to 0.8 percent.

Calvo, who heads the Bank’s research department, said that because the region went through a period of adjustment in 2002, it has a strong potential for recovery.

A return of capital would also brake spiralling poverty levels in the continent, he argued.

"For some countries it will make a big difference, like in Argentina for example. There’s no question about it because we saw poverty rising very quickly in the recent recession so any recovery there will have a very positive effect on poverty levels and things like that.”

But he said that the effect would not be so great in countries where poverty levels were more stable, like Brazil.

”For more normal economies, those that haven’t gone through big recessions like Brazil, then the impact of this will be relatively minor,” he added.