Has the Dust Settled? Economic Recovery and Political Continuity in the Americas

Keynote Speaker:

• Richard Peach, Senior Vice President Macroeconomic and Monetary Studies Function Federal Reserve Bank of New York

Panelists:

• Bertrand Delgado, Senior Research Analyst, Emerging Markets-Latin America, Roubini Global Economics
• Shannon O’Neil, Douglas Dillon Fellow for Latin America Studies, Council on Foreign Relations
• Christopher Sabatini, Senior Director of Policy, Americas Society/Council of the Americas and Editor-in-Chief, Americas Quarterly
• Lisa Schineller, Director, Latin American Sovereign Ratings, Standard & Poor’s (Moderator)
• Tulio Vera, Chief Strategist and Head of Client Relations, Bladex Asset Management

Summary

On April 14, the Americas Society/Council of the Americas (AS/COA) hosted a public panel to question whether the “dust” has settled after the “Great Recession” of 2008 to 2009. To answer these questions, the AS/COA assembled a program that started with an overview of the U.S. economy by Richard Peach. Following his presentation, Lisa Schineller from Standard & Poor’s chaired a panel discussion on political and economic issues in Latin America.

Panelists discussed the region’s economic resilience in the 2008 to 2009 period amid the global recession and in stark contrast with its past, reflecting improvement in underlying economic fundamentals and policy frameworks. While Asian emerging markets are leading the global economic recovery, Latin America looks set to post the next highest growth as a region in 2010, versus the much more modest recovery in the industrialized economies and Eastern Europe.

Outlook for the U.S. Economy

The discussion started off with a presentation from Richard Peach on the state of the U.S. economy, providing background information on the recession and recovery. Focusing on graphs and figures, Peach analyzed U.S. financial conditions, which have greatly improved, signaling that a recovery has begun. He said that growth over the early stages of this recovery is likely to be “muted” in comparison to previous post-World War II recoveries with core inflation remaining under downward pressure in the near term.

He also identified three economic indicators to evaluate how the depth of the recession: unemployment, inflation and inflation expectations. Although there are tell-tale signs of an economy emerging from of a recession, with the employment rate starting to grow, a “W” shaped recovery is not ruled out, given that we are likely to be confronted with a period of time in which the unemployment rate will continue to remain “stubbornly” high for some time. Click here to download Dr. Peach’s presentation.

Temporary Growth?

Following Peach’s presentation, Standard & Poor’s Lisa Schineller began the panel discussion by asking whether Latin America’s impressive growth since 2008-2009 is a temporary phenomenon or a stable trend that will continue over the medium term. Though Asian markets still lead global growth, the Latin America region still boasts 4 percent average growth compared to flat or negative growth of industrialized nations and Eastern Europe.

Bladex Asset Management’s Tulio Vera explained that the global economic recovery will benefit the region in three ways. First, it will rebalance global growth, which implies the weakening of the U.S. dollar and, consequently, the strengthening of Latin American currencies. Second, it will result in ample global liquidity. This liquidity can potentially restart investment projects in infrastructure and energy that have been on hold due to the recession and spur new projects. Finally, the lofty expectation for emerging markets will draw attention away from developed countries and attract investment to Latin America and Asia.

Along the same lines, Roubini Global Economics’ Bertrand Delgado expects 4 percent overall growth for Latin America. He also agreed that lose liquidity around the world will help to finance projects in emerging markets. Nonetheless, there is a differentiation between those countries such as Colombia and Mexico, where domestic demand is still sluggish, and countries experiencing robust performance, as in the case of Brazil, Chile, and Peru. Delgado also mentioned that global interest rates are likely to remain low, which is positive for Latin American asset classes, currency appreciation, and increases in international reserves. From an inflationary perspective, countries might start increasing interest rates in the second half of 2010 to counterbalance this pressure.

The Importance of Institutions

Following the conversation about Latin America’s recovery as a region, CFR’s Shannon O’Neil switched gears to look at the differences in political trends. According to O’Neil, the important political question is not whether the region is showing a trend of turning to the left. Rather, we should focus on the strength and durability of political institutions within these countries. Without a solid foundation, countries in Latin America and elsewhere are more susceptible to the undermining of rule of law and democracy. O’Neil pointed to Chile, Brazil, and Colombia as nations with a strong institutional base that can provide examples for their neighbors.

The Political Center

AS/COA’s Christopher Sabatini turned the conversation to the role that the political party system plays in strengthening or weakening institutions. He argued that though many political parties ultimately implode, a country with strong institutions like Colombia or Peru will retain a strong center that maintains a degree of balance in the political landscape. This political center is the principal deterrent to the idea of demagogic populist movement spreading throughout Latin America. However, Sabatini warned that as nations emerge from the recession, there may be a shared perception that because they survived the downturn, there is no need to push for economic reform in the aftermath. It is important that these nations maintain a critical perspective on national and global economic institutions and practices, and focus on preventative measures in addition to recovery mechanisms.