Latin America’s big setback

It was Charles de Gaulle, France’s World War II statesman, who said: “Brazil has a great future, and always will.”

Under the benign presidency of the former car metal worker Luis Inacio “Lula” da Silva, the adage seemed to be banished. But now, under his successor, Dilma Rousseff, the tag has stuck once again.

Brazil is back to its old ways, albeit with a difference.

An economy going downhill, incompetent economic mismanagement and massive corruption are frightening investors away.

Brazil is now suffering its biggest recession since the 1930s Great Depression. The difference is that this time the safety net of financial support built for the very poor by Lula remains intact.

Brazil, Latin America’s largest economy, is having it especially bad, but most of the other countries are doing equally bad.

The 2004-2013 decade was exceptional. Inflation, which for the region was 1,200 per cent, came down to single digits and a strengthening of the tax base as economies grew facilitated a well-financed expansion of social spending.

Countries built up large foreign exchange reserves. This allowed them to have extraordinary access to external financing.

There was an investment boom as economies grew at more than 5 per cent a year, and some, like Brazil, Peru, Panama, Uruguay and Paraguay, exceeded 6 per cent.

Even the great recession of 2009, triggered by the collapse of major US banks, only caused a brief slowdown thanks to the resilience of these countries’ economies.

It was not only Brazil that saw a great improvement in income distribution on a continent that had the most inequality of all the world’s continents; most of Latin America did.

It was all the more remarkable as most of the rest of the world has been becoming more unequal.

It is called the “Latin American Decade” in contrast to the “Lost Decade” of the 1980s.

The improvement in social services, health, education, employment opportunities for the workers and a spreading to nearly every country of Brazil’s policy of government subsidies for the poor if families put their children in school led to a spectacular reduction in poverty levels — a decrease of more than 50 per cent.

There has also been a sharp growth in the size of the middle class. This was characterised as the “democratic dividend” because it followed the broad-based return to democracy in the 1980s.

But last year, growth per capita, after years of rapid increase, ground to a halt. The fall in commodity prices, caused not least by China’s slowing growth, together with the slowdown in the world economy, hit Latin America hard.

Few countries used the good times to diversify their economies and build up their industry and services.

Now the average growth rate is down to 1.1 per cent. (To that extent Brazil has the excuse that it is part of the general trend, albeit worst than the others — last week it entered a recession).

All the above achievements are being seriously challenged, although so far unemployment has remained low.

However, there are significant regional differences.

Mexico and the Central American economies (with the exception of crime-torn El Salvador and Honduras) grew last year by 2.5 per cent and will grow at 3 per cent this year.

Paraguay and Bolivia grew by 4 per cent and are expected to continue that rate or even higher this year.

It is low external debt ratios that permit these countries to avoid the need to contract and give them continuing access to private capital markets that are partly responsible for their well-being.

Again, Brazil’s performance makes for a sharp contrast with its rising interest rate and rising inflation.

But even for those less hurt by the fall in commodity prices and the slowdown of world trade, major reforms are needed if growth is to continue.

This means upgrading technology in the production sector and the replacement of a commodity-based economy with a more industrialised one.

The present downwards path of the Chinese economy with its shrinking hunger for Latin American and African raw materials is not going to cease soon. However, the rise of the Indian economy may compensate for this somewhat.

Regional integration is also necessary. This means overcoming the significant political divisions that have slowed economic diversification.

Countries also need more competitive and less volatile exchange rates and macroeconomic policies that lean against booms and growth slowdowns to ensure a more stable and less uneven growth.

They also need major advances in the quality of education and infrastructure development.

Without better education there will be bottlenecks in the supply of well-trained workers that will hold back technological advancement.

There should be a doubling of investment levels in roads, airports and ports and, not least, more land reform in favour of the peasantry to unlock the potential of the agrarian economy.

Brazil and its neighbours do have a future, but it will not come easy.