Latin America and Global Finance: Lessons on How to Survive a Crisis

A interesting article from the Brookings Institution’s Latin America Initiative was published online today called Fiscal Policy Rules and Latin America: Lessons from the Crisis. The article makes the point that for much of Latin America, with the exception of Mexico, has fared well despite the latest global economic crisis. A region that often has had its own economic storms and has been the origin or victim of much of the global contagion in the past is now one of the world examples of how to manage a national economy in the middle of a severe economic crisis. Two countries stand out in particular, Brazil and Chile.

Brazil, as the largest and most economically significant country in Latin America and the next worldwide economic powerhouse has done relatively well over the last year. Brazil and many of its Mercosur partners have often diversified their economic trade between the US and EU, as well as the rest of the world. Currently investments with Asia, and China specifically will further split Brazil’s trade away from Western countries and divide it more extensively to maintain an economic balance in any future economic crisis. Brazilian banks had to be well capitalized and as a result of these stricter rules, were one of the major economies in the world that did not have to recapitalise its banks or were in danger of industry-wide bank failures. Economic diversity within the Brazilian economy is a combination of natural resource production, oil revenues, production capabilities and technological training and innovation which has paid off since President Cardoso’s growth policies were further championed by opposition leader Lula Da Silva in order to build Brazil out of a position of debt, into a country where political opposition and debates continue, but growth is part of everyone’s future in Brazil.

The weakening US dollar and future prospects for the US has turned many investors’ eyes to other regions of the world that have been seen as relatively stable over the past year. Many countries in Latin America at the end of 2008 were running surpluses, or had little debt on their books and were well capitalized. In the Americas, while the US still will be the region’s powerhouse, countries like Canada, who also had a surpluses and no bank failures in 2008 and Chile, the region’s most economically secure economy, have been able to minimize their losses over the past year and will likely come out as being notable economies over the next few years.

The Brookings article focused on Latin America as a whole, but used the case of Chile to make its main argument. The goal of the Chilean economic system has evolved in a region where economic crisis was an expected event for the most part and occurred every 7-10 years without fail. Chile’s growth came from strict economic measures which developed to be flexible enough to face challenges in tough times, and maintain an economy that could not be used by political forces for political needs at the detriment of Chile as a whole. Detailed descriptions of the Chilean fiscal methods are described in the article, but the main goal was to keep fiscal measures from losing in tough times and not being abused in good times. The success of Chile has even been adopted to some degree by Germany as claimed by the author, and has kept countries like Chile and Brazil above water and in proper shape to grow in the future. For the most part, Contagion in Latin America will no longer be a symptom of the region as a whole, but only of specific countries in the Americas in the future. I recommend you read and comment on the article. The Brookings article can be found here.