Economy & Trade, Eye on the IFIs, Financial Crisis, Global Governance, Headlines, Latin America & the Caribbean

ECONOMY-LATAM: Crisis Means Slower Growth Ahead

Humberto Márquez

CARACAS, Oct 1 2008 (IPS) - The financial crisis shaking the United States will have repercussions in the rest of the world, which means "tough times lie ahead for Latin America," the permanent secretary for the Latin American Economic System (SELA), José Rivera, told IPS.

The knock-on effects of the crisis "will make it more difficult to continue making the same kind of progress in the fight against poverty that we have seen in the past few years," said the head of the regional body that brings together 26 Latin American and Caribbean states with the aim of promoting regional economic cooperation and coordinating Latin American positions in international economic forums.

The region’s relationship with the U.S. economy "will be affected on at least five fronts: tourism, investment, financing, remittances and trade," said Rivera.

"The economic slowdown in the United States will be even sharper when the current financial crisis spreads to the real economy," warned Rivera, "with the consequent effects in terms of a reduction in demand and the contraction of all aspects tied to financing and investment."

U.S. foreign direct investment in Latin America and the Caribbean totals 50 billion dollars a year, and remittances sent home by Latin Americans living in the United States amount to 45 billion dollars a year, according to SELA.

In addition, the United States absorbs half of this region’s exports, amounting to 375 billion dollars a year.

"The impact on the region will be clearly felt when all of these aspects contract," said the Mexican economist.

In Rivera’s view, "it is preferable to anticipate a decline in economic growth in the region," which has posted average gross domestic product (GDP) growth of five percent over the last five years.

International financial institutions had forecast four percent GDP growth for the region in 2009, "but a new updated projection should put the figure at around three percent," said Rivera. "We have to be realistic; it is better to anticipate this situation than to overestimate positive results for the next few years."

Latin America and the Caribbean "have achieved macroeconomic equilibrium, with favourable external accounts, an increase in trade and an accumulation of foreign reserves. But now, because of external factors, the region will enter a cycle of slower growth," said Rivera.

The U.S. financial crisis represents a passing problem, but the Latin American and Caribbean region "has structural challenges to which it must dedicate substantial efforts, such as boosting productivity and improving competitiveness; in effect, it has to enter the knowledge economy with greater determination and resolution," he said.

"It is very difficult to foresee the duration and depth of the present crisis, because its complex interrelationship with the real economy is difficult to analyse, and because the policies that are followed, whether those recommended by U.S. President George W. Bush or others, will need time to mature, thus making necessary a period of observation," said Rivera.

However, it is clear that the region will feel the impact of slower flows of tourism from the United States, for example, as consumption there shrinks overall, while the tightening of credit in the U.S. will also lead to a reduction of financing for this region, he added.

Trade flows will be affected as well, he said.

And, underlining that economics is not an exact science, he also said the speculation that has driven up food and fuel prices is likely to continue, although it will drop off "in the not-so-distant future" as a consequence of the global economic slowdown.

SELA is drawing up a study on the effects of the crisis, that will be ready in a few weeks to be presented to the member states, which will decide whether or not to convene a meeting to examine possible precautionary and cooperation measures.

"The region must insist on the need to reform the international financial institutions so that they will provide better monitoring of banking and financial systems with respect to their impact on the rest of the economy," said Rivera.

For example, the International Monetary Fund "should have been more insistent in sounding the alert and drawing attention to the lack of supervision, monitoring and controls by financial oversight agencies in the United States, which reacted tardily," he said.

On Tuesday, Brazilian President Luiz Inácio Lula da Silva, hosting his fellow Presidents Evo Morales of Bolivia, Rafael Correa of Ecuador and Hugo Chávez of Venezuela in Manaus in northern Brazil, complained that "the institutions that spent the last three decades telling us what to do didn't follow their own advice."

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