The recent IMF economic outlook report entitled, “The Western Hemisphere: Rebuilding Strength and Flexibility,” is overall quite bullish on the region. Fueled by favorable commodity prices and plentiful international credit, it lauds (as much as the IMF does) the steady growth of the past decade. Perhaps as important for the IMF, many Latin American governments have used rising revenues in economically sound ways. The region as a whole has turned deficits to surpluses, and lowered debt to GDP levels by some 15 percent. Many countries invested in targeted social programs, helping reduce regional poverty levels from 44 percent in 2002 to 33 percent in 2008.
Commodities have driven this growth, led by South American exporters such as Argentina (soybeans and grains), Peru (gold and copper), and Uruguay (beef and rice). But their booms also reflect other forces—for instance, expansionary policies in Argentina, high levels of foreign direct investment in Peru, and domestic demand in Uruguay. The report also highlights the expansion of the middle class and consumption-led growth, focusing particularly on the rapid increase in mortgages. In countries such as Brazil, Chile, Colombia, Mexico, Peru, and Uruguay this sector has grown an average of 14 percent a year since 2003.
The report distinguishes between financially integrated commodity exporters (Chile, Brazil, Colombia, Peru, and Uruguay) and those not integrated into global financial markets (Argentina, Bolivia, Ecuador, Paraguay, and Venezuela). Not surprisingly, the report favors the former group, talking up their macroeconomic management, lower inflation rates, and in some cases rainy day funds. It also argues that the latter haven’t been able to take advantage of cheap international financing to their economic detriment.
The real economic test for the countries in the region will be how they fare when external conditions become less favorable—the commodity boom slows and/or widespread cheap credit fades. If the IMF is right, the divides between integrated and non-integrated exporters will only deepen, revealing the wisdom and folly of today’s diverging economic policies.