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Latin America’s Next Growth Challenge

Since 2003, Latin America’s economies have been thriving, with GDP, including estimates for 2006, up by 17% – an average annual growth rate of 4.3% and a 12% increase in per capita GDP. While impressive, this is only the second time in 25 years that Latin America experienced four consecutive years of positive economic growth. Will such good times continue?

This recent growth has been fueled by a strong boom in commodity prices, including not only energy inputs such as oil, gas and coal, but also metals, minerals, and agricultural products. Growing demand for raw materials, owing to sharply increased industrial growth in Asia, particularly China and India, has benefited the terms of trade of many Latin American countries, and this is not expected to end anytime soon.

Historically, fiscal profligacy tends to take hold at times like these, with windfall revenues wasted on extravagant public projects. But not this time ­– at least so far. In Latin America’s seven principal economies (Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela), which together account for almost 90% of regional GDP, annual economic growth averaged 6% in the third quarter of 2006, while industrial output was up by 8%. But their governments seem to be taking advantage of the bonanza to pay off pending external debt and increase their foreign reserves.

Remarkably, responsible macroeconomic policy has followed a wave of populist/socialist electoral victories in recent years. Brazil, Chile, Ecuador, Nicaragua, and Venezuela elected socialist or populist/reformist presidential candidates in 2006, while Bolivia elected a populist indigenous president in 2005, Uruguay a socialist president the same year, and Argentina a leftist-centrist president in 2003.