Latin America Escapes Economic Crisis

Published on December 08, 2010

For the first time in a century, a current economic "crisis" is not automatically associated with Latin America, said Sebastian Edwards, professor of international business economics at UCLA. "The absence of crisis is the result of important and massive macroeconomic reforms in the region in the last decades," Edwards said during a Myron Scholes Global Markets Forum, sponsored by the Initiative on Global Markets, at Gleacher Center on November 17.

"Even the Economist, which usually bashes either the United States or Latin America, suddenly loves Latin America," he said. "And there is good reason for this. These are the results of the amazing macroeconomic reforms put in place throughout Latin America, much of it with the help and aid of University of Chicago economists, people trained by University of Chicago economists, or people trained by people trained by University of Chicago economists."

These reforms are characterized largely by floating exchange rates, a huge buildup of international reserves, and full capacity to borrow internationally, Edwards said. "The public debt-to-GDP ratio is so low that most Latin American countries would qualify today to join the Euro zone, while France, Germany, the United Kingdom and the United States would not," he said.

The benefits of these reforms must not be underestimated, Edwards said. "For example, my statistical models show the difference between a country with no major economic crisis and the typical Latin American country — a mixture of Argentina and Mexico — experiencing a major Argentine-type crisis," he said. "After a generation, that typical country would have 20 percent lower income per capita."

However, these macroeconomic reforms alone are not enough in the long haul, Edwards said. Latin America must also implement microeconomic reforms to spur productivity and institutional reforms, he said. Furthermore, three major concerns in the short run are:

  • the strengthening of regional currency in real terms
  • the threat of political populism to economic reforms
  • drug trafficking, particularly in Mexico, where officials are considering legalizing marijuana

The three "mysteries" of promoting growth in the long run are capital investment in infrastructure and equipment, increased numbers of qualified workers to operate that equipment, and constant improvements in the efficiency and production of those machines and workers, he said. "It turns out that Latin America is not doing very well in any of these key areas," Edwards said.

For that reason, despite the vastly improved economic conditions in the region, the 2010s will not be "Latin America's decade," he said. "These are countries that invest very little, that have awful infrastructure, and that make it very difficult to start a business, close a business, hire someone, fire someone, get a license, or get a permit," Edwards said. "This is the 'region of the future?' I doubt it. It doesn't work like that. Commodity prices are great, but if you want to grow in the long run, you must deal with the fundamentals."

Going forward, Latin America will likely operate at three different speeds, he said. The fastest group — Chile, Costa Rica, probably Peru, and maybe Colombia — will look more like growing economies including Australia, New Zealand, and Canada, Edwards said. The populist countries — Venezuela, Nicaragua, "and others" — will be left behind in the slowest gears, he said.

"Others will be in the middle and operate as typical Latin American countries, such as the big three: Brazil, Mexico, and Argentina," Edwards said. "They will muddle through and make some progress, but continue to lag behind and grow at a rate that is slower than the rest of the world. I have great hopes for Brazil, I'm very concerned about Mexico, and my heart bleeds for Argentina."

— Phil Rockrohr