During the last three years, Latin America has experienced an economic boom without precedent. Growth has been strong, inflation is under control, and international reserves have increased steadily. The 2004-2006 period has been the best three years for Latin America’s economies since the early 1960’s.
This bonanza has largely been the result of an extraordinarily positive international environment. Commodity export prices are at record levels, global liquidity has been ample, and international interest rates have been low.
Yet, despite this good news, the continent’s politics have turned upside down, calling into question whether economic success can be sustained. An increasing number of Latin American countries have elected left-wing presidents who criticize market reforms and globalization. Colombia recently bucked this trend, and it now appears that the leftist candidate in Mexico’s presidential election, Andrés Manuel López Obrador, was narrowly defeated. But voters have catapulted left-wing politicians to power in Argentina, Bolivia, Brazil, Chile, Costa Rica, Ecuador, Peru, Venezuela, and Uruguay, while López retains the ability – and perhaps the will – to mobilize his supporters.
The main concern is that left-wing politicians will implement populist policies that will generate large fiscal deficits, high inflation, and, eventually, currency collapses. External crises have a long history in the region. Since the 1970’s, Latin American countries have experienced, on average, 1.6 balance of payments crises per decade; some of the better known include the Mexican crisis of 1994-95, the Brazilian crisis of 1999, and the Argentine crisis of 2001-2002.