Sunday, January 09, 2005

Something Different is Happening

The latest survey of Latin America's economies from the UN's Economic Commission for Latin America begins with an interesting observation:

One of the distinguishing characteristics of the current recovery that makes it stand out from other events in the region’s economic history is that, for the second year in a row, GDP growth has been coupled with a surplus on the balance-of-payments current account; moreover, both of these aggregates are on the rise. In the past, when GDP was growing, the current account was deteriorating, and when the current account was improving based on positive trade balances, this was because imports had contracted owing to slack domestic demand in the countries of the region. A strengthening current account has been combined with GDP growth of over 2% for the region as a whole in only three of the last 20 years; the other two cases were 1987 and 2000, but the increase in economic activity has been sharper in 2004 than it was in either of those two years. (italics mine)
One has to wonder: is it a coincidence that all of Latin America's economies (with the exception of a few Central American countries) found religion at the same time and suddenly became export powerhouses, or is something else going on?

The irony is that, given the fact that monetary policy is so loose in the US (or that the real interest rate in dollars is very low, which might not be the same thing) if Latin America's economies needed to finance large current account deficits, they probably could do so very easily. After all, the world's capital allocators, whether portfolio of fixed, need to find places where the real rate of return is not negative, as it is in the US. A depreciating dollar makes emerging markets investing even more attractive.

The stars are aligned for Latin America's economies to prosper thanks to this external windfall. Of course, the period of free money won't last forever, though. Policymakers should keep this in mind. My guess, though, is that economic success in coming months will be seen as a validation of existing economic policies, rather than a result of pure luck.

The report goes on to note something that should be obvious: that a current account surplus means that the region is a net saver. In other words, that Latin America is exporting capital.
A second distinctive trait which is related to the first is that the sharp increase in GDP has occurred at a time when the region is registering capital outflows, which means that the net capital flow being received by the region is much smaller than it was in 2003. Decreases of this scale have never before been seen in conjunction with an increase in GDP growth. Furthermore, this situation has been accompanied by a downward trend in sovereign risk premiums, which are now approaching record lows. Thus, the net outflow of capital has coincided with strengthening demand for regional financial assets.
Latin America a net saver? Something strange must be going on. I would explain this phenomenon in a positive way, by stressing very competitive exchange rates, along with an improvement in the terms of trade that is not expected to be permanent. Therefore, Latin America is saving its windfall gains, something that has not happened in a long time.

However, La Jornada of Mexico takes a very different viewpoint on the phenomenon. According to the paper, Latin America's net resource transfer is essentially the result of foreign investors milking the productive resources of the region. How frustrating. If Latin America is a net borrower, then foreign capital is exploiting the region. If Latin America is a net saver, then foreign capital is exploiting the region. Make up your mind...


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