Coming out of one of the worst financial downturns since the Great Depression, we are still waiting for all of the pieces of the economic jigsaw puzzle to fall into place.
The United States continues to suffer from persistently slow rates of growth, Europe remains roiled by ongoing economic uncertainty and the once ironclad fortunes in China have even begun to fade. And despite many expert predictions, a surprisingly and strikingly different picture is emerging in, of all places, Latin America. Experts predict Latin America, now home to a middle class of 225 million people, will likely grow at a 4 percent clip this year — nearly twice the level of growth expected for the United States.
As Vice President Joe Biden recently observed, the dynamic has changed from, “What can the United States do for Latin America?” to “What can the United States do with Latin America?”
A number of factors have contributed to Latin America’s relative economic resilience in the years following the 2008 global financial crisis.
Chief among them are strong demand for commodity exports from China and a boom in infrastructure, such as what we see in Brazil today. What should not be overlooked, however, are the buffers that Latin America had in place prior to the recession, which enabled the region to emerge early and reasonably unscathed from the global meltdown. Resulting in part from the crises of the 1990s and early 2000s, in the years leading up to the 2008 crisis Latin American governments instituted a number of smart macroeconomic changes — from the lowering of public-sector debt, to the adoption of inflation-targeting policies by central banks.
Together, these policy changes enabled Latin American governments to handily implement counter-cyclical policies — cutting interest rates, introducing stimulus money and injecting liquidity into the financial markets.
This new fiscal policy provided significant help beyond automatic stabilizers as discretionary spending was accelerated, taxes were lowered, and central banks distinguished between tools that could stimulate domestic demand, such as interest rates, and instruments that could ensure an adequate transmission of the monetary policy rate to the economy.
While it’s true that Latin America’s growth coincided with robust development in China, a drop in global volatility and a rebound in commodity prices, the actions governments took during this time unquestionably helped the region become less vulnerable to external shocks than in the past, proving that there is no substitute for quality risk management and supervision of banking frameworks during times of uncertainty.
As the global economy continues to regain its footing, others can learn from Latin America’s experience.
At the same time, for growth in Latin America to continue, it is incumbent on countries in the region to retain the same pro-active and preemptive stance which enabled it to weather the most recent crisis. The reality is that macroeconomic policy frameworks still have room for improvement. Specifically, countries such as Peru should further de-dollarize their economies to reduce currency mismatch, and Mexico should diversify its tax base. All countries should do more to increase their savings.
The private sector — particularly financial institutions — also bears a responsibility. To foster continued growth and guard against ongoing global uncertainty, we must first focus on getting the basics right by investing in human capital and by being prepared for potential scenarios of decreased growth. We must work to strengthen our leadership position in the world by exploring new markets and developing alliances that will enable us to expand international relationships.
Economically, Latin America has much to be proud of, but it is critical we move forward with a sense of cautious optimism. Not only do we face pending challenges within our economy — including persistent barriers to social mobility — but we are inherently part of a larger, interconnected, and still fragile global economy. Let us embrace our newfound economic prosperity, while remaining mindful of the best practices that we and others have learned to keep Latin America on its current trajectory for future generations.
Ricardo Villela Marino is CEO for Latin America of Banco Itaú Unibanco.