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Monday, April 28, 2008
Special Reports

Experts: Latin America Vulnerable

The U.S. slowdown, and a possible spillover to China, will hit Latin America, experts warn.
Brian O'Neill, Enrique Garcia and Nora Lustig at the Inter-American Dialogue last week. (Photo: Elisabeth Burgess/Latin America Avisor)

BY ELISABETH BURGESS
Latin America Advisor

WASHINGTON, DC — Latin America is in a good position to weather global economic turmoil sparked by the downturn in the United States, but the region—and especially its poor inhabitants—remain vulnerable, experts said last week.

"[Latin America's] direct exposure to global market turmoil appears to be quite limited," Brian O'Neill, the U.S. Treasury's deputy assistant secretary for the Western Hemisphere, told an audience at the Inter-American Dialogue.

NOT IMMUNE

But this doesn't mean the region is "immune" to the global downturn, which has primarily affected growth prospects in the G7 group of wealthy nations, he explained. In Latin America, the subregions of Central America and the Caribbean are the most vulnerable because they are small net energy and food importers, and depend on U.S. tourism and remittances, according to O'Neill. Mexico is also vulnerable because its exports to the U.S. account for about 25 percent of its GDP, he explained.

Latin America's poor will be hit the hardest, especially as migrant remittances from the US are not growing as fast as they once were, according to Nora Lustig, a professor at George Washington University and former head of the Inter-American Development Bank's poverty and inequality unit. Even though the region's macroeconomic outlook is not bleak, the U.S. slowdown will cause "moderate poverty" rates to increase by 1 percent overall and by 17 percent among remittance recipients, Lustig said.

Enrique Garcia, president of the Andean Development Corporation, believes that "Latin America today is much better prepared to face any crisis than it was ten years ago." Still, the region's economies have suffered on several fronts. He listed lower growth prospects, less access to global financial markets, high prices, and a deceleration in remittances.

CHINA EFFECT

Additionally, the region could be at risk as the U.S. downturn affects China's growth, thereby reducing the Asian giant's demand for Latin America's exports, Garcia said. Latin America has enjoyed a commodities bonanza in recent years, but if China's economy grows just 7 percent this year compared to 10 percent last year, Latin America will feel an impact.

"High concentration on few exports has become a rule, and that makes the region very vulnerable if terms of trade change," Garcia explained.

Meanwhile, rising prices for food staples are "a major crisis" for Latin America's poor, according to Lustig. Around the world, an estimated 105 million people will have become poor because of food price spikes since 2005, she said.

SOCIAL SPENDING

The U.S. downturn and high food prices are two serious adverse shocks for the region's citizens, and dealing with them both will not be easy for policymakers, Lustig and Garcia agreed. To protect the poor, governments could boost social safety net programs, but such countercyclical policy is unlikely to happen because most fiscal resources are already committed, Lustig said.

On the macroeconomic front, "the dilemmas that Latin America faces are similar to those the U.S. is facing," Garcia said.

"On the one side, you have to lower interest rates to solve the financial crisis, but at the same time that can be contrary to anti-inflationary policies and the strength of the dollar," he said.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

 

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