Commentary by Alexandre Marinis
Oct. 21 (Bloomberg) -- The world financial crisis will lead to an important relocation of wealth across the globe. Not all emerging markets are poised to take advantage of it.
Latin America's historic economic deficiencies, such as overdependence on commodity exports and severe budget constraints, are now combining with the rebirth of a flawed pro- government, anti-market mentality. If translated into economic policies, these weaknesses will hurt productivity, foster corruption and jeopardize the chances of Latin America strengthening its role in the global economy.
From 1970 through 2007, Latin America's share of worldwide gross domestic product remained unchanged at a 5.7 percent, while Asia boosted its share from 18 percent to 29 percent, according to United Nations data.
In three decades, China increased its participation in the global economy sixfold, from less than 1 percent in 1980 to 5.9 percent in 2007, while India's share more than doubled, to 2.6 percent. Latin America wasn't nearly as successful. As a share of the world's economy, Brazil fell from a peak of 2.4 percent in 1980 to 2.1 percent last year, Mexico from 1.4 percent to 1.2 percent, and Argentina from 0.94 percent to 0.77 percent.
These figures should be a wake-up call to Latin Americans. Between 2003 and 2007, the region was beguiled by what I like to call the four C's: Commodities, Commerce, Currency and Credit.
The price of commodities surged, boosting commerce and generating hefty trade surpluses. The overflow of foreign capital strengthened local currencies, allowing countries to repay foreign debt and accumulate international reserves. And while the region didn't manage to bump up its share of the world economy, it did achieve an improved credit stance that helped finance an expansion greater than the mediocre performance of the 1980s and '90s.
In Reverse
As soon as the U.S. real estate bubble burst and financial markets began to melt, the mechanics of the four Cs reversed and Latin Americans confronted a harsh reality. Commodity prices plunged, trade and current accounts worsened, foreign capital fled, currencies weakened and as credit dried up, so did investments.
Regardless of how Latin America's politicians try to spin it, the reversal of the four Cs will make it difficult for the region to maintain a positive economic outlook. The many leaders who suggest that growth won't stumble are denying history.
Between 2000 and 2001, as the dot-com bubble burst and the annual growth rate of the U.S. economy slowed from 3.7 percent to 0.8 percent, Brazil slumped from 4.3 percent to 1.3 percent, Mexico from 6.6 percent to zero, while the recession in Argentina deepened. Other emerging markets didn't fare well, either. Russia's growth rate was cut in half, India's by one fourth. China's growth rate in 2001 was the lowest of the past eight years.
More Government Spending
Many Latin American countries are now determined to increase government spending as a means to meet expectations, keep investments afloat and sustain economic growth. Mexico's 2009 budget bill proposes the first fiscal deficit in four years and the largest shortfall since 1990. The Brazilian government is forecasting next year's tax revenues based on a growth rate of 4.5 percent, even though market analysts forecast growth of 3.35 percent or lower.
Watching highly indebted Latin nations increase government spending as a global recession looms should raise eyebrows, as well as questions:
Do the governments have enough resources to sustain growth in a credit crunch? Is that even possible? What will happen to tax revenues as economic growth slows? How will the region's debt dynamics respond? How would rating companies react to Latin America's debt spiraling out of control?
Nationalized Banks
What makes these questions more disturbing is that many Latin American presidents seem to view the recent nationalization of banks worldwide -- an act of desperation forced by the credit crisis -- as justification to increase the size of the government even more.
``I nationalize strategic companies and get criticized, but when Bush does it, it's OK,'' Venezuelan President Hugo Chavez said on Sept. 21. He added, ``Bush is turning socialist. How are you, Comrade Bush?''
Addressing the United Nations General Assembly on Sept. 23, Argentina President Cristina Fernandez de Kirchner summarized the dominant sentiment among Latin leaders today: ``We were told that the market would solve everything, that the state was not necessary, that state intervention was nostalgia of groups that had not understood how the economy had developed.''
Latin Americans can't let themselves be fooled by ideologies, dogmas, bitterness or a sense of revenge. If it is true that banking crises have always required government intervention, it is also true that governments can't replace markets as the most efficient way to allocate scarce economic resources. From government, markets need regulation and supervision, not opposition.
If Latin American leaders continue to mistake today's events as an opportunity to bloat government -- while Asia goes in the opposite direction, with China allowing farmers to lease and exchange land -- Latin America will be doomed to an insignificant piece of the world's wealth pie for many years to come.
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