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Worldcrunch

American Political And Economic Problems Still Have A Way Of Trickling South

Countries like Chile and Brazil fared far better than expected during the 2008-2009 global financial crisis. It may still be too soon, however, to celebrate the region’s “independence” from its historic reliance on the United States.

Article illustrative image Partner logo Chile's busy industrial port in Valparaiso

MIAMI -- The fact that South America’s commodity exporting countries weathered the 2008-2009 crisis so well led many observers to conclude that the region had finally cast off the ties that bound it to the United States. Two years later, however, it’s now clear that that conclusion was at best premature. At worst, it was just outright wrong.

Brazil, the only South America country in the so-called BRICS club, illustrates the fallacy of the theory that the region is no longer inextricably linked to the United States. After growing by 7.5% in 2010, the Brazilian economy is expected to slow down to just 3.7% growth this year, according to Morgan Stanley. The consulting firm, furthermore, lowered its 2012 growth forecast from 4.6% to 3.5%.

Brazil survived the 2008-2009 recession thanks to an increase in public spending and state-subsidized credit. The resulting inflation, currently above 7% annually, makes it unlikely the Brazilian government will use the same recipe twice. Adding to its woes is the fact that the Brazilian currency, the real, has appreciated 47% against the U.S. dollar in less than three years, making it increasingly difficult for Brazil’s exported manufactured goods to compete.

At the same time, China – whose insatiable demand for raw materials has been the principal force behind the commodities boom – also seems headed toward an economic slowdown. Michael Pettis, of China Financial Markets, predicts that unless China modifies its growth model toward one that depends more on domestic consumption and less on public debt and major investments, its economic growth will begin to drop significantly in 2013-2014 and “level off at an average of 3% annual growth before the end of the decade.”

Additionally, with the U.S. economy expected to grow at just 1% annually over the next couple of years, it’s not clear how China will make up for the loss in export earnings from the United States. If that weren’t enough, China’s vast holdings of U.S. treasury bonds have lost considerable value due to the fact the United States has allowed the dollar to devalue.

Thanks to the latest economic slowdown, in other words, analysts are once again focusing on the economic links that tie together developed countries with their developing counterparts. Not much attention, however, has been paid to how politics fit into the equation.

Bad politics reflect real fears

During the recent – and incredibly tense – debate in the United States over whether to raise the debt ceiling, for example, the conclusion drawn by most people who followed the process was that the U.S. political system has become completely polarized and thus dysfunctional, nearly pushing the United States to default on its massive debt.

But the political system didn’t cause the problem. Rather, the political problems are a reflection of fear and uncertainty regarding the deterioration of the U.S. economy, rising unemployment numbers, and spiraling national debt. When things work well, it’s relatively easy to reach a consensus on what should be done, which tends in that case to be “more of the same.” When things aren’t working well, when there’s a sense that conditions are deteriorating, no one has a monopoly on ‘the truth.’

In the United States, there is currently a major disagreement about how to treat the problem of the debt. The spectrum of opinions goes from radical measures to reduce debt and spending, on the one hand, to increasing spending in order to spur the economy and create jobs, on the other. Many people don’t want to lose the benefits they already have. Low growth creates a zero-sum game. The political polarization will continue in the United States until the economy begins to grown again.

When the global crisis begins affecting them as well, South America’s commodity exporting companies – which have gotten used to rapid economic growth during recent years – will also see an increase in political polarization.

In Brazil, President Dilma Rousseff has already started talking about the need to control spending, which has provoked a backlash among her allies in Congress against the measures she has begun to implement. In Chile, another solid democracy and the regional economic leader in terms of international competitiveness, strikes and protests by workers and students have intensified significantly of late. That in turn has led to increased right-left political polarization. Even the region’s autocrats are having more trouble leading, despite the billions they spend to appease their supporters.

Perhaps the only good thing that can be said about the contagious nature of these links between north and south is that the phenomenon operates in both directions. In other words, when one or two large Latin American countries start to grow again, there is an increased possibility that the economic recovery can spread northward.

Read the original article in Spanish

Photo - pablo/T

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About this article source Website: http://www.americaeconomia.com/

America Economi­a is Latin America's leading business magazine, founded in 1986 by Elias Selman and Nils Strandberg. Headquartered in Santiago, Chile, it features a region-wide monthly edition and regularly updated articles online, as well as country-specific editions in Chile, Brazil, Ecuador and Mexico.

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