South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
The Brazilian fund manager rolled his eyes. He was tired of his country’s triumphalism. More than anything, he was jaded by the flashy consumerism of new Brazilian wealth. At a recent wedding outside São Paulo, he had been one of the few guests to arrive by car; the rest had flown in by helicopter.
“But it’s only about commodities,” he said. “Without China, none of this would have been.”
The fund manager was only slightly exaggerating. Much of South America’s prosperity over the past decade – and its sense of having arrived, including its significant contribution to global economic growth – has been due to the China-inspired commodity price boom.
In Bogotá, Brasília and Buenos Aires, the eurozone debt crisis is a sideshow by comparison. Total European bank loans are equivalent to about 15 per cent of Latin American gross domestic product – a significant but manageable level. Europe meanwhile accounts for just 11 per cent of the region’s trade. If Brazilian officials occasionally berate the policymaking of their eurozone peers, it may be because they can afford to.
No, China rather than the eurozone is the show that counts. Indeed, the effect of Chinese growth on South America’s economies is as large, or larger, than the rest of the world’s combined, calculates JPMorgan, the investment bank. That is why the possibility the Chinese economy might slow, rather than that eurozone might collapse, is the hotter topic in South America.
The effects are potentially severe. If China slows, the prices of the commodities that account for half of Latin American exports would fall. Current account deficits would widen. Fiscal policy would also have to tighten: commodity-related revenues account for one quarter of Chile’s budget and a quarter of Mexico’s.
China’s substantial financial flows into the region could also crumple. Chinese foreign direct investment in South America is already worth more than that into the US and Europe combined. State-owned Chinese companies have also made multibillion-dollar loans to countries such as Venezuela and Ecuador that have trouble accessing financial markets.
A reversal of that largesse would halt some of South America’s more free-spending extravagances of recent years – such as Venezuelan president Hugo Chávez’s pan-American projection of his “Bolivarian Revolution”. More generally, foreign investment would no longer flow so easily into natural resources. Instead, it would depend on structural reforms, and countries with sound institutions and governance.
A China-prompted slowdown would therefore separate the “wheat” of South America’s more dynamic reformers (usually taken to mean Brazil, Chile, Colombia and Peru) from the “chaff” of its heterodox laggards (often taken to be Argentina, Venezuela and Ecuador.) It would also reveal how much of South America’s recent performance has been due to its own efforts and therefore might endure.
Some of the changes of the past 20 years have been structural, sui generis, and therefore probably permanent. The quelling of guerrilla movements in Colombia and Peru has helped spur their new economic exuberance. Liberal democracy and macroeconomic stability are also firmly established through much of the region: low inflation is no longer the sole concern of bloodless technocrats but a vote-winner that politicians respond to. Inequality has fallen, encouragingly.
Also likely to endure is the productivity growth in South America’s natural resources sector, especially agriculture. Here, since 1995, South American productivity growth has outpaced the rest of the world’s.
Sadly, that performance only highlights poor productivity elsewhere. Indeed, take the World Bank’s annual “Doing Business” rankings as a barometer, and Latin America’s seven biggest economies come in, on average, 84th out of 183 countries – an improvement of just one place in five years.
Of course, China may not slow to the extent that tests the durability of these reforms, or may force more. Even if Chinese economic growth decelerates next year to 7 per cent, that is still equivalent to an extra $490bn of output. To deliver the same, the European Union would have to grow by almost 4 per cent – eight times more than the EU forecasts it will.
“We’re much more observant about what’s going on in Asia than in Europe, though clearly we live in an interconnected world,” says Frank de Lima, Panama’s finance minister.
The jaded Brazilian fund manager would agree.
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