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Latin America achieves record growth

While Puerto Rico’s economic growth stagnates, Latin America is catching up with the rest of the world


April 21, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Volatile, unstable, and unsafe. Those are just some of the terms that have been used in the past decades to describe the economic situation in Latin American countries. Political environments and social factors such as health, education, poverty, and criminal activities have long kept the region at bay for pure and steady economic growth. These factors and other systematic flaws have kept the countries in the region from taking full advantage of their potential. However, all that changed in 2004 as different economic indexes all confirmed positive growth in the region.

World Bank registered the growth of Latin America and the Caribbean at 5.7% in 2004, the fastest in 24 years. For 2005, the International Monetary Fund (IMF) expects that to lower to 4.1%, which is still a healthy growth percentage. In 2004, Puerto Rico grew around 2.5%. Future growth projections for the island in 2005 have recently been lowered by some economists to 2%.

Meanwhile, the Latin American region is roaring full speed ahead. "The good times are back in the region," stated World Bank Chief Economist for Latin America and the Caribbean Guillermo Perry.

Demand for commodities

One of the factors that helped the region was high demand of commodities such as copper, oil, and coffee that are heavily produced in Latin America. With the exemption of Mexico and Brazil, these products represent more than one-third of the exports of all the countries in the region. Increased demand has actually rapidly increased the price of raw materials. The good news is the high demand led by developing countries such as China and India hasn’t given any signs of letting up anytime soon, although prices may stabilize at some point in the near future. According to the BBVA Economic Studies Service, the price of copper increased 59.1%, oil went up 34.1%, coffee jumped 23.4%, and soybeans increased 18.8%.

The economists also pointed out that with the exception of Venezuela all countries in the region are reducing their fiscal deficits, allowing the countries to have more credit access. After three years in which the buying power was nonexistent, internal demand in all the countries of the region has also increased. Banks are lending more money for longer periods of time.

In Puerto Rico, the looming budget deficit has jeopardized the island’s credit and has the government in a virtual paralysis while the budget for the present fiscal year is still being debated by the legislative and executive branches.

Another factor that has undoubtedly contributed to Latin America’s development is the increasing amount of remittances arriving from other countries. World Bank estimated that $37 billion entered the region through private transfers, compared with $34 billion registered in 2003. Mexico alone received $14.6 billion in 2003.

Population growth

Population growth projections also seem to be a favorable factor, which according to World Bank will grow more than North America, Europe, and Central and Eastern Europe by the year 2050. The population on average is also younger than in the U.S. and Europe, allowing for greater potential for future growth.

Globalization tendencies also play out as a positive factor for the region’s growth on account of the increased flow of capital. The increase in commerce has allowed the region’s currencies to stabilize and become less vulnerable to shocks. Total merchandise trade between Latin America and the U.S. reached $351.8 billion in 2003, a 3.0% increase over 2002, according to the U.S. Census Bureau. A free trade agreement between the U.S. and Latin America, which is expected to be approved in the near future and is supported by the U.S. Secretary of Commerce Carlos Gutiérrez, is expected to further support the growth of the gross domestic product (GDP) in the region.

BBVA economists expect the impact could result in an increase of 1% in the GDP. In Puerto Rico, many economists believe approval of this trade agreement will be harmful to the island’s economy because it will erode the advantages Puerto Rico has had as a consequence of the island’s relationship with the mainland U.S. The concern is when everyone has equal access to U.S. commerce, Puerto Rico will be forced to compete with larger Latin American countries that offer cheaper products.

Many investment firms are highlighting Latin America as a wise investment opportunity. Some market managers have gone as far as to say returns on emerging markets such as Latin America can reach 10% to 11% a year for the next 10 to 15 years. In Puerto Rico, many analysts are acting on the side of caution on account of a number of factors supporting economic uncertainty.

Despite the marked improvement achieved by Latin America, challenges in the area persist. Political tensions have historically had a negative impact on the region’s economies. According to a BBVA study, all election years during the past 30 years have been accompanied by sharp devaluations. In 2005, there are five scheduled elections; and in 2006, there are 11. However, the fact that Brazil managed to maintain relative stability during the recent elections provides an optimistic example for the rest of the region.

Puerto Rico can perhaps boast of better social conditions and a more historically stable political environment, however, the present conflicts arising from the divided government and the economic stagnancy of the last years could eventually rob the island of many of its present bragging rights.

This Caribbean Business article appears courtesy of Casiano Communications.
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