Latin America: Warning – Contains Sarcasm

Santiago, Chile. 28 May, 2009. When the President of Chile, Michelle Bachelet, was in London recently, she proudly told of her country’s budget surplus. By some estimates it had ran at 12 per cent during the boom years, and was cushioning the Chilean economy against the worst of the recession.[br]

Santiago, Chile. 28 May, 2009. When the President of Chile, Michelle Bachelet, was in London recently, she proudly told of her country’s budget surplus. By some estimates it had ran at 12 per cent during the boom years, and was cushioning the Chilean economy against the worst of the recession.[br]

George Osborne, the shadow chancellor of the exchequer and likely chancellor assuming the Conservative Party win the next election (likely) and that he will not lose his seat due to the expenses scandal or some other shenanigans (unknown) was reported by The Economist to have sneered: “Gordon Brown is getting lessons from the Latin Americans about sound public finances. You couldn’t make it up.”

Forgive me, but now EconomyWatch.com is going to sneer a bit. A British MP is lecturing one of the better run countries in the world on sound public finances. You couldn’t make it up.

The world has changed. Although it is not completely apparent yet, America with its Bretton Woods institutions of the IMF and World Bank, along with its western allies, don’t call the shots any more. In history, creditors have tended to wield power over debtors, hence the the US & the IMF could lecture imperiously, and sometimes in a downright racist manner, to the poor mis-managed countries in the ‘south’.[br]

Somewhere along the way they didn’t get the memo that they had gone from ‘biggest creditor’ to ‘biggest debtor’. Or the other one, you know, the one about a financial crisis that makes the ‘Tequila Crisis’ and all the rest the ‘third world’ crises look like pre-dinner mocktails.

China is now the great creditor power. In the future it may start lecturing everyone else about what to do, but for now it is much more interested in investment and economic development. With key commodity exports from the region, it is now surprise that the Chinese have been investing in Latin America, much as they have been in Africa.

Paul Krugman has argued that much of the ‘medicine’ that the IMF has dished out in the past was entirely counter-productive economically. It was purposely designed instead to restore investor confidence. Read: make anglo-saxon fund managers feel ok about putting their money back into the affected country. Let the populace suffer under unemployment, high inflation, high interest rates, lack of investment in services, high taxes or all of the above, as long as foreign investment comes back in.

However the US is clearly not prepared to take its own medicine, since it is doing many of the things it has lectured Latin America and Asia on in the past. Keeping big banks alive with handouts while not declaring the extent of their bad loans. Cosiness between the government and big industry. Protectionism. That kind of thing.

Meanwhile Chile has become in many ways one of the best managed economies in the world, with Mexico (a key NAFTA and FTA trade partner), Brazil (one of the BRIC powerhouses), Colombia, Peru (the best performing stock market in the world so far this year) and Uruguay also showing strength. Their banks(like their Asian counterparts) are well regulated and don’t take undue risks, their governments and companies have stopped over-leveraging during boom times. Can you make that claim, Mr Osborne?

This not to say that Central and South America will not have problems – everyone is in the same boat to a certain extent. There will be contractions and slow growth. There will be reduced demand for core commodity exports, meaning more efforts will be needed to boost domestic demand. But overall, the region and its stronger economies have much to recommend them, and should be part of any investors portfolio.

Vladimir Gonzalez, EconomyWatch.com