José Antonio Ocampo
José Antonio Ocampo, a professor at
Columbia University and Chair of the UN Economic and Social Council’s
Committee for Development Policy, was Minister of Finance of Colombia
and United Nations Under-Secretary-General for Economic and Social
Affairs. He is the co-author (with Luis Bértola) of The E… read more
NEW YORK – Across Latin America, there is a growing sense of anguish that is reminiscent of Michael Corleone’s lament in The Godfather III: “Just
when I thought I was out, they pull me back in.” At a time when the
region seemed finally to be grasping economic recovery, Donald Trump's
inauguration as President of the United States has brought new trade and
financial uncertainties to Latin America.
This year, Latin
America is expected to emerge from the recession that began in 2015; but
it will still experience a fourth consecutive year of anemic growth –
or the sixth, if one counts the slowdown that was already evident in
2012 and 2013. Trump’s declarations on topics ranging from tariffs to
the construction of a border wall have already affected some investments
in Mexico, and sent the peso plummeting.
Domestic factors will
also hinder growth in Latin America. Venezuela’s ongoing political and
economic crises are the most important, but not the only, example.
Brazil’s crises seemed to have ended in 2016, but the economy is not yet
positioned for a strong recovery from its worst-ever recession.
Argentina, for its part, is still fighting high inflation and fiscal
deficits. And Ecuador has been saddled by falling oil revenues and
dollarization in a region where most countries have already depreciated
their currencies.
Chile, Colombia, and
Uruguay remain on a slow-growth trajectory as well. Among the region’s
large and medium-size economies, only Peru’s is recovering – but at a
much slower rate than during the last commodity “super cycle.”
Overall, the only ones that seem to be resisting the negative trend are
some small economies of South America (namely, Bolivia and Paraguay),
Central America, and the Dominican Republic.
The good news is that
the demand for Latin America’s exports should improve. The US economy
is expected to expand, the European Union is recovering, and there are
fewer economic uncertainties in China than there were a year ago.
Commodity prices seem to have bottomed out in 2016, and remittance
inflows have recovered, now exceeding 2007-2008 levels.
Still, the benefits
of the latter two trends could be limited. Judging by their historical
dynamics, commodity prices are at the beginning of a long weak period,
while migration opportunities in the US and Spain largely disappeared
after the 2008 financial crisis – and will probably be even scarcer
under Trump.
Latin America will
also have to deal with major adverse trends in international trade and
finance. According to CPB Netherlands, the volume of world trade has
grown less than 2%
since 2007. This is the most tepid growth since World War II, with
trade volume expanding at a slower rate than world production for the
first time in the post-war era.
Slow trade growth
poses a significant risk for Latin American countries, because
increasing and diversifying exports is an essential component of their
recovery strategies. And US protectionism – or even the start of trade
wars – is now a real possibility. This threat has centered not only on
China, but also on Mexico, where firms have already reduced investments
or canceled plans to expand output to serve the US market. And if Trump
follows through on his promise to renegotiate the North American Free
Trade Agreement, the impact could be felt throughout Latin America,
because many other bilateral free-trade agreements between the region’s
countries and the US are essentially NAFTA’s offspring.
Maintaining access to
affordable finance will be a second major challenge for Latin American
countries. In recent years, the region has benefited from abundant
financing, and it has gotten by even as falling commodity prices,
China’s financial disturbances in 2015 and early 2016, and the impending
normalization of US interest rates have raised the costs of external
debt.
But now there could
be new shocks. Following the initial increase in risk spreads after the
US election, financing has become more expensive. The benchmark interest
rate for Latin American bonds – the ten-year US Treasury bond – has
increased by about one percentage point since the election, and the US
Federal Reserve could now push interest rates higher.
Worse still, global
financial disturbances could become more likely if the US mixes an
expansionary fiscal policy – which will depend largely on Congress –
with a contractionary monetary policy and a stronger US dollar. This
would be similar to the policy mix that precipitated global economic
trouble in the mid-1980s, especially if the rising trade deficit gives
Trump another reason to pursue protectionism, as the US did then against
Japan.
The economic-policy
decisions that Trump makes during the first days of his presidency will
be crucial for Latin America. Let us hope that his administration does
not stymie economic recovery and pull Latin America back into recession –
just when it thought it had gotten out.
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