Saturday, December 24, 2011

The risks for Latin America in 2012

Nope, not a collapse of China, and also, not clear that it would be a severe collapse in the center, in particular Europe, although that one cannot be completely ruled out. The big risk comes from the macroeconomic policies adopted by Latin American economies.

A study by Esteban Pérez and Ramón Pineda, from ECLAC, shows that Latin American economies are, from a regional comparative perspective, good at withstanding the negative effects of contractions and bad at taking advantage of expansions to achieve convergence with the developed world.

While it is true that during this last crisis Latin American economies did recover fast, and pursued counter-cyclical fiscal policy, it is also true that the willingness to maintain expansionary policies has waned pretty fast. The IMF fear about overheating and the obsession with inflationary pressures has become dominant in the region (see my discussion of that earlier this year here).

The graph below shows government spending as a share of GDP in the big four (Argentina, Brazil, Chile and Mexico). As it can be seen only in Argentina spending did not shrink in 2011 (an election year by the way), whereas in the other three the reduction were of 0.3, 0.5 and 1.2 of GDP. With a multiplier of around 2, ceteris paribus, there is a potential for a significant slowdown in the region.

In fact, in Brazil the economy already stalled to almost zero growth in the third quarter of the year (see here). Following Pérez and Pineda, one could hope for 2012 that countries in the region "instead of viewing expansions through the lens of ‘crisis management,’ expansions should be seen and understood as an opportunity to grow and expand and promote greater levels of well-being, employment and equity in the region." That's this blogger's hope for the New Year. Happy Holidays!

PS: Data from ECLAC here.

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