The Latin American situation

Dr. Humberto Campodonico, professor at the National University of San Marcos in Peru, commenced his presentation by noting the lack of a unified macroeconomic response to the crisis by developed countries, leading the world to face the prospects of another financial and economic crisis.

Dr. Campodonico tackled the ‘de-coupling thesis’ that was put forward in 2006/2007/2008, including by the IMF, which assumed that the newly industrialized countries (i.e. the BRICS) could take the relay when the developed countries were faltering.

Dr. Campodonico noted that in a globalized world one cannot speak of complete decoupling. What it essentially means, he added, is that a group of economies move from dependence on other economies, and have new engines of growth different from the old engines. He noted that the consequences of the lack of unified response to the macroeconomic crisis and the implications left on the BRICS countries and others is a clear demonstration that de-coupling has not been the case.

In regard to the role of the United States, he noted that today there is no hegemony from one economic power anymore. The world has witnessed such hegemony in 1944, when the Bretton Woods system was created, Campodonico noted, and the world economy functioned with this drive during 35 years. Yet currently the global context reflects a lack of such hegemonic forces. On the political side, Campodonico referred to the cases of Ukraine, Syria, and the drive of China, which according to him reflect a lack of such hegemonic force. He also referred to the economic arena, where he reflected on the situation at the WTO and in the Doha Round. He noted that when there were disputes between the BRICS countries and the United States, European Union, and Japan at the WTO, the move was towards free trade agreements where WTO-plus rules have been pushed, including for example the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP). Yet, this cannot be a solution on the longer term, Campodonico stressed.

After the 2009 UN Conference on the World Financial and Economic Crisis, the policy proposals addressed there have not been fully taken on, Campodonico cautioned. The US is not giving the IMF support in order to assume the role of lender of last resort.

Campodonico discussed the context in Latin America, where he highlighted the divide between the free trade and market policies adopted by the countries of the Pacific Alliance (Chile, Columbia, Mexico, and Peru) in comparison to what are called ‘Atlantic policies’ involving Venezuela, Brazil, Argentina and others. The latter adopted more development-focused policies directed towards domestic markets and South-South trade, he explained. This, according to Campodonico, is a confrontation that extends beyond economic policies and involves geo-political aspects.

Another issue raised by Dr. Campodonico was the growing debt of private corporations. He noted that Latin America’s problems during the 1980s were mainly due to external public debt. Yet today, numbers show that private corporate debt is very high. He referred to new data released by the Financial Times, which shows for example that Peru’s external private debt has grown from 7% of GDP to 14.2%, which is bigger than external public debt. That is the case in other Latin American countries.

Campodonico noted that if tapering of the US ultra-easy monetary policy begins, and financial flows falter, and interest rates rise, the outcome could be problematic. He explained that the problem would be limited in the case of mining companies or other companies trading in international currency compared to the case of companies selling in the local markets, whereby the mismatch will be very hard to cover. There is very little data on these aspects given that the debt is in the private sphere, Campodonico added.

Dr. Campodonico noted that governments in Latin America considered that current account surpluses and solid fiscal positions would help them be shielded against systemic risk. Yet, these surpluses could evaporate very quickly, he stressed, especially that some of them are not current account reserves but borrowed money, including cash reserves accumulated at banks.

Dr. Campodonico added that Latin America has witnessed improvements in terms of trade like nothing seen since twenty or thirty years ago, in addition to an increase in financial flows since 2003. The question he raised was about the way in which these improvements have been used.

The degree of utilization of these inflows in order to have structural reform and in order to diversify the productive base has not been very strong in Latin America, Campodonico explained. In this regard, the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) considered that Latin America has lost the decade. Latin American countries have been mostly very complacent about this super cycle.

He also called for distinguishing between export-led growth that involves a big component of industrialization and state intervention, such as the practice in South East Asia and China, compared to export-led growth in Latin America that has been orthodox-based and focused on natural resources. The statistics show a de-industrialization of Latin America. UNIDO’s statistics show that Latin America diminished it values-added in manufacturing of developing countries from 35% in 1992 to 17% in 2010.

Besides cautioning of potential difficulties ahead, Dr. Campodonico pointed out that Latin America cannot be seen in one case or scenario and he addressed a few country cases that he considered successful in their policy choices. He discussed the cases of Bolivia and Costa Rica that he considered have fared very well. Dr. Campodonico explained that Bolivia undertook important reform with oil and gas companies over the last two or three years. Real GDP has been growing (6.7% in 2013) and the overall fiscal balance improving, at a consistent pace, and without current account deficits. In Costa Rica, policy has been oriented towards attracting innovation technology companies. Costa Rica has explicitly stated that they do not want to depend on raw materials for their growth.

Dr. Campodonico summarized that the revenues gathered in recent years from natural resources have mostly been already spent. There has not been inter-temporal funds or pension funds, like in Norway, and most of the revenues have been spent quickly in infrastructure and current flows. So the bonanza has already passed and has not been sufficiently taken into account, because the main framework of appreciation was expecting these trends to last many years. In the meantime, industrial policies were not instituted.

Dr. Campodonico concluded by referring to the technological revolution that the world is witnessing. He questioned whether these trends in technological innovations could create long-term cycles of economic growth and whether they would leave positive long-term implications on the economic situation.


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