Friday, January 21, 2011

After Boom Year Latin America Turns Thoughts to Bust

Sources: Latin America Sees Uncertain 2011 So Near and Yet So Far Waging the Currency War Risk of Bust After Boom Haunts Latin America Lack of Rainfall in Argentina is Pushing up Prices for Corn and Soybeans

Latin America just finished one of its best economic years in history to wrap up one of its best economic decades in history. Nearly every country in the region experienced growth rates above 3% of GDP for the year, with Brazil and Peru setting the pace with near double digit growth rates. For the decade, every country experienced average annual GDP growth of between 1.8% (Mexico) and 5.6% (Cuba). Some observers have hailed the news as proof that Latin America has finally turned the page on its disastrous economic history. Recent news, however, suggests that Latin American leaders have not forgotten their history lessons just yet.

Latin America has historically suffered through the boom-bust cycles associated with commodity driven economies. No other region of the world has complained so much about its natural resources than Latin America, a region rich in precious metals, oil, and agricultural land. Because of that history, Latin American leaders are currently very aware of the fact that the high commodity prices prevalent today will not last forever and that they carry risks equal to their potential rewards. Many politicians and commentators are claiming that this is the year the world will find out if the region has developed truly mature economies.

The fear of the end of the boom began in the fall of last year with the talk of an impending currency war coming out of Brazil. Latin American countries began expressing concerns that appreciated currencies would spell doom for their exports, and thus drag down their entire economies. Since that time several countries in Latin America, including Brazil, Chile, and Peru, have moved to prevent their currencies from appreciating. This may actually be a good sign of economic maturity.

For example, Chile could easily sit back and do nothing while the price of copper remains at a record high (Chile is the world’s largest copper producer), but the appreciation of its currency that comes with the increased foreign investment in the mining industry has begun to negatively impact other industries, including the wine and agriculture industries whose products are less competitive on the global market with a higher currency. Though the idea seems fairly basic, these currency moves seem to show Latin America’s realization that a diversified economy is necessary for continued growth, and thus moves must be made to protect broad portions of the economy, not just the largest, often commodity-based, portion.

At the same time, the risk still exists that none of these measures or any other measure put in place over the last decade will work to prevent another period of economic bust. The region cannot prevent the poor weather that has lead to lower crop forecasts in Argentina and Brazil, (which generally provide the world’s soy and wheat crops during the North American winter) nor can it accurately predict when and if China, the country currently consuming all of Latin America’s commodities, will reduce its production levels and subsequent demand for Latin America’s resources. Only when uncontrollable and unexpected economic shocks occur will the world be able to accurately determine whether Latin America has moved away from its past, or if it is still stuck in the boom-bust cycle that has defined it to date.

1) How do Latin American countries’ moves to protect their currencies show economic maturity? How might they be examples of the region’s economic instability?
2) How should Latin American countries plan their economies considering the natural resource wealth and the boom-bust cycles that accompany commodities?

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