Ten years ago, faced with a US slowdown, the economies of Latin America would have toppled like dominoes. Lately, however, they are holding together relatively well in the midst of the ongoing global financial crisis, as the US and other OECD economies struggle. Many economists even said in recent months that Latin America had supposedly “decoupled”, breaking free of the economic dominance of its northern neighbour.
There is certainly no decoupling, as the latest Latin American Economic Outlook shows. Latin America will face a slowdown in 2009, whose severity will depend on the severity of slowdowns in OECD countries. But we are witnessing a more profound phenomenon than that. In fact, a tectonic shift has taken place, which far from a mere decoupling between old neighbours, has led to a much more fundamental rebalancing in the wealth of nations. As capital has spread around the globe, so too has wealth, trade and power. So while the present global financial crisis is striking financial markets everywhere, including in Latin America, there is every reason to believe that what were once dependent developing countries might not only withstand the crisis, but emerge from it feeling stronger than ever in relative terms compared to their OECD peers.
The OECD share in global output has eased in recent years, while the US stock market (before the crisis) accounted for a little over 30% of world market capitalisation, compared to 50% just 10 years ago. In 2007, the share of foreign direct investment from OECD countries decreased to 85%, while it represented nearly 100% in 1970. A sign of these new realities is that Mexico, Korea and Turkey, three leading emerging markets, are already OECD members, while others such as Chile, Israel or Russia are on accession track.The same underlying trends apply to corporations. Just to name a few Latin examples, a company like ImBev, born from the merger of Belgian and Brazilian brewers, is already an exotic bird hatched from these new global relationships: difficult to classify in either emerging market or OECD asset classes, it recently bought the icon of North American beer companies, Anheuser-Busch. Cemex, the Mexican cement giant, is still headquartered in Monterrey but its strategic, financial and economic research centres are located in Spain.
Brazil, in particular, is growing into a global trader, reaching into distant markets such as the Middle East, Africa or South East Asia. Companies like Vale, Petrobras or Odebrecht are active in African markets while Embraer and Marcopolo are becoming big players in China. These global multilatinas, with headquarters in Latin America, are following a trend instigated by companies based in India, China, Russia, South Africa and beyond. Indeed, it is somewhat ironic to see a company like India’s Tata now owning crown jewels of the old Empire, such as Corus (formerly British Steel), Jaguar and Rolls- Royce. Far from decoupling, the periphery is becoming part of a new, wider centre, or to put it differently, what we are witnessing is the emergence of a much more multipolar world.
All this does not mean that Latin America is immune from a downturn in external markets and in the US in particular. Mexico is clearly exposed: nearly 85% of its exports go to the US, compared to the 40% average for Latin America. Mexican exports to the US accounted for 27% of its GDP in 2007 compared to less than 3% of GDP for Brazil. Another channel for the transmission of shocks is the banking sector: 85% of banking assets are held by foreigners (some struggling banks among them), compared to less than 30% for example for Brazil.
The impact of the current crisis will not be limited to Mexico or Central American countries. Like the Mexican peso, the recent depreciation of the Brazilian real reflects the degree of exposure of many Latin American firms with debt denominated in US dollars and exposures to credit derivatives markets. Deleveraging among all portfolio investors is already affecting liquidity throughout emerging economies, including Latin America. Remittances will also suffer and are expected to decrease in real terms for the first year in recent history: adjusted for inflation and exchange rate variations, the IADB estimates that they will contribute 1.7% less to the household incomes in Latin America and the Caribbean than in 2007.
Nevertheless, Mexico, Brazil and most Latin American countries remain in much better shape economically than a decade ago and may yet weather the storm. Fiscal and current accounts are sounder, public foreign debt is low, inflation contained and high oil and mineral revenues have boosted investment by an astonishing 50% in 2007, though this will undoubtedly ease along with crude oil prices in the final quarter of 2008 and beyond. Moreover, for the first time Latin America is benefitting not from one or two exogenous growth drivers (the US and Europe), but also from a third exogenous pillar of growth: Asia.The real question for 2009 and beyond is therefore not only about the US but also about China. If China’s demand holds up, exports of commodities might be resilient enough to prevent Latin American countries from being dragged into a recession. Barely a decade ago, any suggestion that Latin America could ever escape the pulling force of the US would have been dismissed. However, a sharp downturn in the Far East could now be just as great a concern for Latin America as a recession in the US. If China’s growth is contaminated by the current financial and economic crisis in OECD countries–and the possibility is far from just theoretical– the impact will be larger, above all through the commodity markets.
One fundamental component of the rebalancing of wealth between nations is the growth of south-south linkages as the new centre of world economy evolves. The figures bear this out: in 2007, for the first time ever, emerging markets exports towards China surpassed those to the US and is bound to rise further with flatter US demand in 2009. In turn, in 2006, for the first time, China became more exposed to emerging economies than to the rich G7 countries: in the early 2000s, Chinese exports to G7 countries accounted for nearly 50% of the total; since then, the share going to the G7 countries has fallen to about 40%, while exports towards emerging markets have been rising. Half of Chinese exports are now going to emerging countries, including Latin America. And the opposite is true, too. Chile, for instance, is already exporting 36% of its total products to Asia, more than to any other region of the world, with nearly half of those going to China alone.
So, how will this new Latin America weather an impending global recession? Like other emerging markets, it will likely not avoid the storm clouds from the North, but its shift towards Asian markets should prevent that storm from becoming a deluge. What seems likely is that countries like China, India and Brazil will feel the global crisis, but are now more robust than in the past to ensure that the re-centering of the world economy continues. We are just entering a brave new world order, a mundo féliz, in which the old OECD countries will remain key players, but with Asia and Latin America sitting firmly at the table too.
OECD (2008), Latin American Economic Outlook 2009, OECD Development Centre, Paris, available at www.oecd.org/bookshop
Santiso, Javier (2006) Latin America’s Political Economy of the Possible, MIT Press
©OECD Observer No 269 October 2008