Search
  • Kurt Schmidt

Latin America should export its way out of the crisis



In mid-2020, at the height of the first wave of COVID-19 infections, the IDB argued that the pandemic had particularly devastating economic effects on Latin America and the Caribbean because it had slammed the brakes on three flows that are fundamental to development: finances, people, and goods. This is what economists call a triple sudden stop.


How is 2021 shaping up in these three areas? In this post, I argue that, although there are grounds for optimism and caution in each, the region cannot afford to pursue a way out of the crisis that does not place export development at the heart of its strategy.


On the financial front, there are signs that restrictions around the world are easing. According to a Financial Times study using data from the Institute of International Finance, in the first few weeks of the year, investors seeking high returns seem to have returned rapidly to emerging market economies as a result of massive liquidity injections from central banks. However, growing risks of inflation in advanced economies, the possibility of normalizing their monetary policies, and market overreactions are some of the factors suggesting caution. The question also remains as to how far Latin America will benefit from wagering on emerging economies and how investors will assess the region’s macroeconomic risks in the coming months.


In the real economy, people’s mobility is on the rise in the region and beyond, although it has yet to return to pre-pandemic levels. Greater domestic movements may herald a recovery in economic activity, but it could also increase the contagion risk. Recent analysis suggests that to date, countries in Latin America have been less effective than those in other parts of the world at implementing lockdown and reopening strategies that simultaneously reduce health and economic costs. The region has also been slow with vaccination roll-outs and may suffer the consequences of a virus mutation.

Therefore, in the coming months, the region’s economic growth will probably benefit more from the normalization of mobility in trading partners’ economies than from greater internal mobility.


Exports, the key to recovery


All these factors suggest it is necessary to carefully consider the prospects for importing growth from the rest of the world through the trade channel. In the recently released Trade Trends Estimates for Latin America and the Caribbean, which draws on data observed up to September 2020 and projected through the end of the year, we reported that the export contraction for 2020 would range between -11.3% and -13.0%. More specifically, we confirmed that the rebound in exports lost momentum in the third quarter. In the same vein: what signs emerge from the most recent data?


Commodity prices are holding up the export performance, and the boom is expected to continue, for both short-term and structural reasons. With the notable exception of oil, commodity prices have weathered the crisis relatively well and began to rally in the last quarter of 2020. Supply and demand factors are aligned to drive a surge in commodity prices this year. And experts are even debating whether we are on the brink of another structural supercycle powered by massive, synchronized infrastructure investment programs around the world, the transition to a greener economy, and a trend towards the depreciation of the US dollar.


These nominal variables have already impacted the region’s export values. According to the latest World Trade Monitor, the growth of Latin American export prices in the last quarter of 2020 (+8.4%) eclipsed both the average global performance (+4.0%) and that of emerging economies (+4.6%).



However, the signs are less encouraging when it comes to real flows. In October, the volume of world trade grew at a month-on-month rate of just 0.4%, a fraction of that observed in September (+2.4%), before picking up again in November, albeit at a lower rate (+1.6%), and then stagnating in December (+0.6%). Against this global backdrop, the month-on-month variation in Latin American exports was negative in October (-2.6%), November (-0.9%), and December (-0.5%). Moreover, the region is one of the few in which real export performance deteriorated steadily and the only one that has fallen firmly into the negative in the last quarter (-3.9%).


Looking ahead, the Purchasing Managers Index (PMI), a high-frequency leading indicator of the region’s trade performance, confirms a downward trend at the global level. However, it also provides some indication of which trading partners will be the most dynamic. The best news is coming from the global flash indicator for the United States, which rose sharply in February (58.8). This acceleration was sharper than in January, suggesting that private-sector confidence is on the rise. China’s manufacturing index was at its lowest point in February in the last nine months (50.9), although it remained on expansive ground, above the critical threshold of 50. In contrast, new lockdown measures in Europe kept the region’s overall indicator for February in the recession zone (48.8).


Betting on trade, investment, and integration


Therefore, decision-makers should promote the region’s international insertion and integration strategy.


This includes forging better linkages between the region’s economies and the United States, which is entering an expansionary phase, taking advantage of new opportunities that arise from strengthening regional value chains in the private sector; consolidating and diversifying trade relations with Asia, which is leading global growth; and identifying new trade opportunities in Europe and Latin America to take advantage of these regions’ potential when current recessions end.


However, the history of the region indicates that the commodity price boom may undermine the incentives for a new drive in reforms and investments to promote trade integration and competitiveness. Hopefully, this will not be the case this time around when the commodity boom coincides with deep economic, health, and social crises.

While it is timely for decision-makers in the region to focus on saving lives in the short term, it is also vital for them to lay the groundwork for post-pandemic economic growth, employment, and poverty reduction. If there is a time to promote integration and export development, that time is now.


Read more at ALL ARK LLC





Licensed from https://blogs.iadb.org/integration-trade/en/why-latin-america-should-export-its-way-out-of-the-crisis/

1 view0 comments