Latin America and the Caribbean in the World Economy 2010-2011: The region in the decade of the emerging economies

In mid-2011, conditions deteriorated in the industrialized
economies. Early in the year, instability in North Africa
combined with other factors to push up fuel prices. Then,
in March, the tragedy of the earthquake, tsunami and
nuclear disaster in Japan damaged global production chains.
Although the impacts of these factors eased in the second
semester, concern mounted over the threat of default in
Greece, Ireland and Portugal and the repercussions of
such an event for larger European economies. In late July,
the difficulties in securing congressional approval on the
United States public debt ceiling added to the volatility
prevailing in financial markets. The downgrading of the
United States’ sovereign debt rating for the first time ever
and lacklustre economic growth rates in the euro area and
the United States added to the uncertainty.
Volatility and uncertainty are again reaching
worrying levels. Following the agreement by the United
States Congress on the country’s public debt ceiling and
the approval by European authorities and the International
Monetary Fund (IMF) of a second support package for
Greece, the major stock exchanges have been highly
volatile and have seen falls reminiscent of past financial
crises. Economic stagnation in the euro area, including
in its largest economies, France and Germany, is another
cause of volatility. International commodity prices are
beginning to reflect this uncertainty and volatility and
have declined sharply in a short time span, although they
remain above their long-term trend, particularly in the
case of metals and minerals.
Leading composite indicators show that slower
growth in the industrialized countries is starting to act
as a drag on the main emerging economies. Data for
mid-2011 suggest that the slowdown in the industrialized
countries is affecting China and, particularly, Brazil and
India. If these trends continue, exports to Europe and the
United States should be expected to slow in 2012 and export
growth will be compromised in economies whose exports
depend heavily on those markets. As growth slows in the
emerging economies and the industrialized economies
show increasing weakness, international commodity prices
are likely to fall, affecting the trade and current account
balances of net commodity exporters.
The industrialized economies will experience slack
growth for the next few years. The outlook in these
economies is for several years of growth below potential,
high unemployment rates and latent financial threats amid
considerable instability and jittery financial markets. The
inability of political leaders to find credible and sustainable
solutions to fiscal deficits and high sovereign debt adds
another element of uncertainty. The fiscal adjustments
needed in Europe and the United States are highly complex
and will need a long process of consolidation, which will
prove difficult to achieve without broad political support
over several administrations.
This scenario limits the political space for agreement
on the governance of globalization. Economic turbulence
and high unemployment in the industrialized economies
may prompt a resurgence of protectionist forces and
reduce the margin for new initiatives for responding to
the challenges of globalization. The Doha Round of trade
talks, for example, has failed to achieve even the minimal
agreements which could conclude the Round after 10 years
of unsuccessful negotiations. The early announcements
by the Group of Twenty (G-20) on reform of the
international financial system appear to have disappeared
from its agenda. Successive summits on climate change
have not been able to tackle the issues with the required
speed. Furthermore, the increasing weight of emerging economies in the main variables of the global economy
seems to have inspired apprehension and defensiveness
on the part of the industrialized economies.
The decade 2011-2020 could still be a boom
period for the emerging economies. The engines of the
global economy will depend increasingly on growth in
the emerging economies and on South-South trade and
investment. As emerging economies achieve high and stable
growth rates and their population growth slows, their per
capita income will rise and move towards convergence
with the industrialized economies, particularly for the
middle class in these countries.
This trend is not without risks. The announcements
of the United States Federal Reserve concerning the
possibility of a third package of quantitative easing
and a near-zero interest rate for the next two years will
heighten dollar liquidity in financial markets, amid
continuing weakness in the industrialized economies. This
may accentuate the diverging monetary cycles between
industrialized and emerging economies, generating
additional upward pressure on emerging-economy
currencies. In the absence of an effective mechanism
for currency coordination among the main economies,
some emerging economies will find it difficult to avoid
taking trade measures to defend their markets from
competitive advantages arising from inefficiencies in
the international monetary system.
Given the great uncertainty augured for 2012,
the main recommendation for Latin American and
Caribbean economies is macroeconomic prudence.
Financial volatility is affecting economies with deep
financial and stock markets in the region and the slowdown
in Europe and the United States will limit export growth
and depress commodity prices. Fresh quantitative easing
in the United States could worsen currency appreciation
in those countries already grappling with large capital
inflows. In these circumstances, Latin American and
Caribbean economies should strengthen macroeconomic
management, pursue sustainable fiscal and external
accounts, reinforce macroprudential measures, and steer
their policy decisions by the long-term behaviour of main
economic variables.
Prudent macroeconomic management must be
complemented with more strenuous efforts to further
regional cooperation. Deeper commitment to integration
and regional cooperation, with extra support for intraregional
trade, the consolidation of macroeconomic and social
achievements made thus far and progress in forming
an enlarged regional market, could help to cushion the
impacts should international conditions take another turn
for the worse. There is room for more initiatives on trade
facilitation and greater cooperation on infrastructure,
transport, logistics, custom rules, innovation and technology.
Initiatives of this sort would not only open opportunities
for exports by small and medium-sized enterprises (SMEs)
with a stronger manufacturing content, but also make
the region a more attractive partner for trade and foreign
direct investment (FDI) (see section C).