Financial Markets

Winds of Change

By Miguel Mantelli, GGI

During 12 years of President Cristina Fernández de Kirchner's government and her late husband, President Néstor Kirchner, Argentina isolated the world by nationalising foreign companies, curbing imports and cutting normal ties with the International Monetary Fund. The Kirchners once left behind Carly Fiorina, the then CEO of the American computer giant Hewlett-Packard, when she went to visit them at Government House.

Some countries in Latin America never turned their backs on globalisation, especially those on the Pacific coast, including Chile, Mexico and Peru. However, others did. Stimulated by the record prices of their raw material exports, they turned themselves over and subjected their economies to state controls, repeating to a lesser extent the model that had failed in the region in the 1970s.

President Macri's initiative is not the only sign of a renewed Latin American desire to connect with the world. The Brazilian Congress is set to overturn a law that gave Petrobras, the state-controlled oil company, a monopoly over deepwater operations. President Michel Temer, who recently took over from the impeached President Dilma Rousseff, seeks to relax the rules that govern national content in the oil industry.

In Ecuador, President Rafael Correa, a leftist populist who boasted that his country was doing well because it ignored IMF prescriptions, plans to leave the presidency next year amid a recession. His government has already accepted a USD 364 million unconditional loan from the IMF for reconstruction following an earthquake, and whoever wins the election will likely seek a conventional IMF programme.

These changed attitudes are in response to a harsh reality. Due to the end of the commodities boom, 2016 will be the sixth consecutive year of economic slowdown in Latin America. It is true that the IMF's prediction of a cumulative contraction of 0.4 percent this year is depressed by recessions in Argentina, Brazil and Venezuela. The fund assumes that the first two will recover during this year, and that the region will see a return to growth of 1.6 percent. In other words, even those countries that followed responsible macroeconomic policies are growing at a mediocre rate of approximately 3 percent.

The IMF estimates that the region's potential, ergo, non-inflationary, growth rate has fallen from 4.5 percent to 3 percent. That is not enough to satisfy the aspirations of an extended middle class, nor to complete the task of eliminating poverty.

So, what can be done? Due to better policies, some countries have seamlessly adapted to the prices of the lowest raw materials. Their currencies have depreciated without triggering high inflation. As central banks now set out to reduce interest rates, cheaper currencies should trigger strong export-led growth.

Unfortunately, there are few signs of this. During the boom years accompanied by strong currencies, many Latin American manufacturing companies lost links with the export markets they once had. Resetting them will require time and effort. It is even more difficult because world trade is now growing at a much slower pace than in the recent past.

The need for Latin America to conquer new markets occurs while globalisation is retreating elsewhere. In April, after years of procrastination, the Mercosur trade group based in Brazil and Argentina began formal negotiations for a trade pact with the European Union. Due to the agricultural protectionism of France and others, Europeans are unlikely to offer anything useful.

Earlier this year, Chile, Mexico and Peru signed the proposed Transpacific Treaty Association (TPP), which unites 12 countries. This pact now seems to have failed because both candidates in the US Presidential Election were opposed to it. President Donald J. Trump threatens to erect tariff barriers around what remains largely, despite the rise of China, Latin America's largest export market.

At the beginning of the century, parts of Latin America suffered the kind of negative reaction against globalisation that has now arisen in Europe and the USA. Kirchner and Venezuelan President Hugo Chavez attacked "neoliberalism" and "savage capitalism", referring to free trade and free markets that are the basis of globalisation. They attributed the extreme inequality that affects Latin America to “imperialism”, just as Trump now blames foreigners for the loss of US industrial jobs.

A lesson from Latin America is that governments can alleviate inequality through social programmes. Another is that the disconnection of the world makes the situation worse for the poor, as is the case now in Venezuela.

After going through its anti-globalisation reaction, Latin America is finding that the world now offers fewer easy benefits than in the past. It will be difficult to make up for lost time, but at least the region, for the most part, is on the right track again.


Dr Miguel Mantelli

Dr Miguel Mantelli

GGI | Geneva Group International, Buenos Aires, Argentina
T: +54 911 4076 96 69
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Published: May 2017 l Photo: Spectral-Design -

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