Latin America’s Era of Milk and Honey

Whenever signs of change appear in Latin America’s economies, people ask if the change will be transitory or permanent. Driven mainly by the almost insatiable appetites of China and India, a profound burst of growth has come to Latin America. Over the past five years, Chile’s GDP has been expanding 5% annually, Argentina’s by almost 9%, Venezuela’s by more than 10%, and the Andean Community’s by 6%. The continent’s aggregate growth, at 4.5%, is expected to lag behind the world average of 5% in 2007, but only because the largest countries, Mexico and Brazil, are growing more slowly.

One regular aspect of post-war Latin America has been that such bonanzas have been undermined by large current account deficits, and thus indebtedness. But that is not happening this time. Latin America will finish 2007 with a current account surplus and growing foreign-currency reserves, insulating them from financial crisis. On the one hand, world trade is growing, and so are Latin America’s exports. On the other hand, the terms of trade have improved.

High commodity prices have benefited producers of oil and gas (such as Venezuela and Bolivia) and minerals (such as Chile). Moreover, producers of foodstuffs (such as Argentina and Uruguay), which suffered for decades, are now gaining from notable biogenetic innovations that increased arable land area. There is also a surprising phenomenon that favors everyone: prices of technology-based capital assets imported by Latin America have been falling throughout the past decade.

Another phenomenon is linked to the first. Structural deflationary pressures in the developed countries – such as highly debated increments of productivity in the United States – help the central banks to maintain price stability, which means that growing exports and high terms of trade have been accompanied by reasonably low interest rates.