Of growth and globalization

One lesson from Latin America is that governments can ease inequality through social programmes. Latin America wants to rejoin the world. Will the world reciprocate?

“FROM Argentina to the World” is the slogan. This month President Mauricio Macri welcomed 1,600 business leaders to Buenos Aires, inviting them to invest in and trade with his country. That marked a big change. During 12 years of rule by Cristina Fernández de Kirchner and her late husband, Néstor Kirchner, Argentina cut itself off from the world, nationalising foreign businesses, curbing imports and severing normal ties with the IMF. The Kirchners once stood up Carly Fiorina, the boss of Hewlett-Packard, an American computer giant, when she went to visit them at the Casa Rosada.

Some countries in Latin America, especially those on the Pacific seaboard, like Mexico, Chile and Peru, never turned their backs on globalization. Others did. Boosted by record prices for their commodity exports, they turned inward and subjected their economies to state controls, repeating on a smaller scale the model that failed the region in the 1970s.

Mr Macri’s initiative is not the only sign of a renewed desire to connect with the world. Brazil’s congress is poised to roll back a law that gave Petrobras, the state-controlled oil company, a monopoly over deep-water operations. Michel Temer, the new president, is set to loosen rules governing national content in the oil industry. In Ecuador Rafael Correa, a left-wing populist who boasted that his country was doing well because it disregarded the IMF’s recipes, plans to stand down as president next year amid a recession. His government has already accepted a $364m no-strings loan from the fund for earthquake reconstruction; whoever wins the election is likely to seek a conventional IMF programme.

These changed attitudes respond to a harsh reality. Because of the end of the commodities boom, 2016 will be the sixth successive year of economic deceleration in Latin America. True, the IMF’s forecast of an aggregate contraction of 0.4% this year is depressed by the recessions in Brazil, Argentina and Venezuela. The fund assumes the first two will recover next year, and that the region will post a return to growth, of 1.6%. In other words, even those countries that pursued responsible macroeconomic policies are growing at a mediocre rate of 3% or so. The IMF reckons that the region’s potential (ie, non-inflationary) growth rate has fallen from 4.5% to 3%. That is not enough to satisfy the aspirations of an expanded middle class, nor to complete the task of abolishing poverty.

So what is to be done? Thanks to better policies, some countries have adjusted smoothly to lower commodities prices. Their currencies have depreciated without triggering high inflation. With central banks now poised to cut interest rates, cheaper currencies ought to trigger strong export-led growth. But there is little sign of that. During the years of boom and strong currencies, many Latin American manufacturing firms lost the links they once had to export markets. Restoring them takes time and effort. It is harder still because world trade is now expanding much more sluggishly than in the recent past.

Latin America’s need to conquer new markets comes as globalisation is in retreat elsewhere. After years of procrastination, the Mercosur trade group (based on Brazil and Argentina) in April began formal negotiations for a trade pact with the European Union. Because of the farm protectionism of France and others, the Europeans are unlikely to offer anything useful. Earlier this year, Chile, Mexico and Peru signed the proposed 12-country Trans-Pacific Partnership. This now looks stillborn, since both candidates in the American presidential election oppose it. Donald Trump threatens to throw up barriers around what is still, despite the rise of China, by far Latin America’s single largest export market.

At the turn of the century, parts of Latin America suffered the kind of backlash against globalisation that now affects Europe and the United States. The likes of the Kirchners and Venezuela’s Hugo Chávez railed against “neoliberalism” and “savage capitalism”, by which they meant the free trade and free markets that underlie globalisation. They attributed the extreme inequality which scars Latin America to “imperialism”, just as Mr Trump blames foreigners for the loss of American industrial jobs.

One lesson from Latin America is that governments can ease inequality through social programmes. Another is that disconnecting from the world makes the poor worse off, as they are today in Venezuela. Having gone through its anti-globalisation backlash, Latin America is finding that the world now offers fewer easy gains than in the past. So it will be hard to make up for lost time. But at least the region is (mostly) back on the right track.

The Economist | Bello

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