I can’t let go of an article from the July 2 edition of the Economist. “Who’s Overheating” proposes an “emerging-markets overheating index” that crunched six factors:
1) Inflation
2) GDP growth since 2007, compared to the past decade
3) Unemployment
4) Credit growth
5) Real interest rates, and
6) Change in current-account balance.
Twenty-seven countries received consideration. Argentina came out as the most overheated economy—“blinking red” on all six dials. Brazil got the dubious runner-up title. Things aren’t likely to turn out well for Argentina. Cristina Kirchner has emasculated central bank independence, inflation is underreported (the question is by how much), and the country’s growth relies on grain and soybean exports, making meltdown all the more likely if global commodity prices slip.
By contrast, Brazil’s central bank can’t get ahead of inflation and credit growth without luring in hot money from foreign investors who seek a high return, as I recently detailed in an article on World Politics Review.
Peru, Chile and Colombia place in the “amber zone,” each country having some macro-worries. But average growth over the past decade has been in the 5-6 percent range in these countries: with moderate inflation, policymakers have ample room to maneuver. Venezuela is also in the amber zone; it may not overheat, but generally bad economic management will show further signs of wear in the 2010s.
Mexico was the only Latin American country that placed near the bottom of the overheating index—the green zone. Modest growth and minimal inflation, among other technical factors, mean Mexico is positioned to take advantage of global growth trends and also keep its macroeconomic house in order.
A decade of growth does not a developed economy make. Wrapping loose macro-policies around immense demand for commodities led to frothy gains in parts of Latin America. It can’t be sustained: steady and balanced will win the race.
Image from Yanquimike’s blog
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