"Latin America has built defence lines"
Enrique Iglesias, the former Chairman of the Inter-American Development Bank (IDB), said yesterday that no one knows how and when developed countries will be able to get over the current Financial crisis. He also analyzed how that crisis, which erupted in the United States, affects Latin American countries.
Speaking at an event organized by the Torcuato Di Tella University, Iglesias said that the current crisis is the worst since the 1930"s global crisis—originated by the Wall Street crash — as the consequences are still uncertain.
"Everyday we hear news that show things getting worse, and we don"t know what the turning point will be. At the beginning, it was believed that bank losses were going to be US$400 billion. Now, the International Monetary Fund is forecasting losses for US$1 trillion or more."
When analyzing the causes of the crisis, Iglesias pointed out the financial innovation process that has been going on in the world in the years after the 1990"s crisis. Though he welcomed the innovation, he questioned the lack of regulation over finances, which from his point of view was a key factor in the current crisis. "This crisis would have never occurred if the countries had applied more rigorous and efficient regulation systems."
The growing uncertainty and mistrust that the credit crisis generated among society led to a decrease in every level of economic activity, Iglesias explained. "The banks don"t lend money, there is a general decrease in the supply of credit that affects the consumption. As less goods are demanded, production slides," he summarized. The drop in confidence, which played a key role in the multiplying effect of the credit crisis, has to be restored in order to overcome what has become a global economic crisis, he added. As to the effects on developing countries, Iglesias said that it is surprising how they are getting over the consequences of the global credit crisis. To back up his words, he mentioned some figures: "Developing countries are responsible for two thirds of the world economic growth; they are growing at rates that double that of the developed countries; and their international reserves are growing strongly. For instance—he added—Latin American international reserves are reaching US$ 450 billion."
For the first time, the economic crisis doesn"t directly affect Latin America. Iglesias pointed out two reasons for this immunity. Firsdy, the rising energy, metals and food prices, which are Latin America"s main resources.
Secondly, he said that Latin American governments have learnt how to manage their economies from past experiences, and have built certain "defence lines" —such as fiscal surpluses, reduced foreign debt as a percentage of GDP, the adoption of flexible exchange rate policies, a conservative use of trade surpluses and accumulation of foreign currency reserves—that saved them from suffering the direct consequences of the international crisis.
Nevertheless, he predicted that if the United States economy ends up in a recession.Latin American countries will be directly, and deeply, affected. "If the decrease of economic activity in the United States ends up in a recession, the demand for Chinese goods will slide and therefore demand for Latin American commodities will fall as well," he explained.
But for now, Iglesias said that although food prices are expected to slide, they won"t drop steeply.
As a conclusion, he said that if developed countries respond fast and effectively to the credit crisis, avoiding its possible deep effects over Latin American economies, and if the local governments keep managing their economies in an intelligent way, the region will have the greatest opportunity ever for a big step forward.
To take advantage of that opportunity, Iglesias outiined some recipes. In the short term, governments should be aware of inflation and, related to that, rising food prices. He defended the adoption of selective subsidies for poor people and the implementation of fiscal policies to respond to the different challenges that may turn up.
He was optimistic about the growth possibilities that Latin America has in the long term, thanks to its natural resources. Nevertheless, he pointed out that countries should invest money in key sectors of the economy, such as energy, education and technology, in order to keep growing sustainedly.