Look to the East for Recovery in the West

Although the global economic crisis has touched Latin America as elsewhere, the region has largely sidestepped the worst. Leaders are predicting that 2010 will be a year of rebounding growth. Yet renewed regional growth is not guaranteed. If they are to achieve their full economic potential, Latin American leaders should look more intensively to Asia, both as important markets for expanding exports and also to gain insights for economic development, including ways to move production up the value added chain.

It’s well known that in Chinese, the character for “crisis” also means “opportunity.” Indeed, the current economic crisis presents Latin America with a rare opportunity to lay the groundwork for renewed growth. Prior to the final months of 2008, Latin America had enjoyed historic, year-on-year growth, driven largely by the explosion of China and other emerging markets hungry for Latin America’s raw materials. Annual growth rates of 6, 7, 8 percent or higher were not uncommon across the region. The middle class was enlarging, poverty was decreasing, and economies were decoupling, or so it appeared. But the implosion of the U.S. economy, followed rapidly by others, showed again Latin America’s ongoing dependence on the United States for its own well-being.

With the U.S. economy on the mend, some argue that Latin America’s own economies will also bounce back, because a healthy United States is critical for the region. This is doubly so for Mexico, Central America, the Caribbean Basin, and Venezuela, due to patterns of trade, remittances, tourism, and energy. Even so, the U.S. economy faces a long road back to full health. Future growth, while positive, is predicted to be sluggish. At the same time, the U.S. Federal Reserve and others are watching closely for any hint of inflationary pressures as a result of the $785 billion stimulus package, and will be prepared to raise interest rates and take other actions in an attempt to restrain inflation over time.

What this means for Latin America is that any nation looking primarily to the United States for a restoration of its own growth may be disappointed, because pre-crisis U.S. growth rates are not likely to return anytime soon.

So what will be Latin America’s own engine of recovery? Most likely Asia, particularly as nations including China attempt to pull themselves out of the economic doldrums by increasing their own domestic demand through consumer spending and consumption. Doing so would restore the status quo ante, building Asian demand for Latin America’s raw materials, this time for the Asian consumer rather than the U.S. consumer. In fact, China has now surpassed the U.S. as the top market for both Chile and Brazil. China also has formal trade agreements with Chile and Peru, and is looking to increase its ties with others, including Venezuela. Other Asian nations are also looking to increase their presence in the region.

But the commodities trade is a double-edged sword. According to the World Bank, some 90 percent of the region’s population relies either directly or indirectly on commodities for their well-being. Over-reliance on commodities trade does not allow producers to capture the benefit of higher valued products that use commodities as inputs, rather than final goods. From that perspective, the recent decline in commodity prices may be a blessing in disguise—a wake-up call of the importance of fully developing long-term growth potential beyond commodities.

Education is a key, of course, and disparities between Asian and Latin American education levels are well known, and ripe for attention. Where, for example, is the Latin American Wendy Kopp, who will establish “Teach for the Americas” to draw recent college grads into public service while directly assisting under-resourced schools and communities, the way Teach for America has done in the U.S. for 20 years? Beyond education, fundamental questions of the emphasis on research and development and predictability of the political economy, just to take two, are also directly relevant for economic growth, as are access to capital, entrepreneurial training, the rule of law including intellectual property protection, and numerous other factors.

The time to be focused on these issues is now, even before the global economy has fully recovered. Formal trade links between Asia and Latin America are good, including APEC, the Pan-Pacific Partnership and bilateral arrangements, and they should be encouraged and in some cases expanded. At the same time, Latin America’s ability to take full advantage of Asia’s recovery will hinge largely on attending to its own competitiveness. Otherwise, we’ll be right back to where we were before, and the boom and bust cycle will once again begin.