OPPORTUNITY FOR LATIN AMERICA? (ANALYSIS)

Montevideo, January 24- The dynamics of the past few months regarding the price of oil, prime materials and food stuffs, worryingly reminds us of what happened to the world economy mid-2008. At the time the sky high price of oil -which reached U$147 a barrel- and the food crisis caused havoc.

In rich countries inflation leapt out of control, which led to increases in interest rates in Euro countries, because the global recession was about to begin. In poor countries with large, built up urban areas, there were uprisings and looting. According to the World Bank over 100 million people fell below the poverty line.

To Latin America, one of the principal exporters of commodities in the world, the boom generated mixed feelings. Large exporters in the southern cone made profits and substantial improvements in the exchanges relationship. But there were problems due to the increase of prices internally, which led to export taxes being established and a dilemma for central bank’s. The countries in Central America that imported food products suffered serious social problems as a result of the increases.

According to the commodities index put together by The Economist, with the exception of oil, prices are at the same maximums they were in 2008. It is possible that they continue to increase because world economic recovery has not yet begun. The challenge for Latin America is to learn from mistakes and from the boom, maximise their benefits from exports. This requires a good diagnostic of the macroeconomic situation and rapid response when dealing with the adverse socio- economic effects of high prices which can affect the more vulnerable members of society. From the macro point of view the increase in prices seems to have several causes. The first is the strong growth in emerging countries for commodities. In some exporting countries in the last two years investments have ceased, as demand has risen, prices have shot up because there is limited offer. This is particularly true in the case of oil.

The second is the enormous laxity of monetary policy in developed countries (especially the United States) which seems to have fuelled speculation in these markets, leading investors to turn to commodities as a another asset. Ever since the Federal Reserve announced the second round of Qualitative Easing in October 2010, the new liquidity, as could be expected, could be creating a bubble in these markets, as happened in the first half of 2008 when liquidity abandoned the United States real estate market and turned to commodities.

The third factor is the increase in oil, which implies an increase in production costs, prime materials and food, because of a rise in the costs of transport, fertilisers and so on.

And last of all, in the case of foods, there have been bad harvests in some exporting countries, plus the production problems in Russia following the fires at the end of last summer. As none of these scenarios is going to change in the short-term, it is foreseeable that prices continue to rise.

In this context, the exporting countries of Latin America will have to try and avoid their currencies devaluing, which is also caused by the growth of the United States monetary market and could reduce the competitive price of their exports and possibly encourage internal inflation, which can also reduce their competitiveness and generate social unrest.

That is why, the present capital controls will have to continue and it would be desirable to carry out counteractive fiscal controls to avoid having to increase interest rates, which would curb growth and increase even more the amount of capital coming in to the region from abroad.

Another alternative would be to use the Chilean model and create a fund with the extra Income from exports, to use when the current cycle of growth ceases. This would not be politically simple because the demands of expenditure in the region are enormous. However, given that the majority of countries are growing at great speed and certain risks of overheating of their economies can be seen, it is possible that the authorities in the majority of countries have a high degree of legitimacy and can explain to their citizens the need for this new strategy.

Last of all, if there are social problems because of the increase in the price of food or energy, as recently occurred in Bolivia, the accumulated budget surplus income would have to be used.

The high prices of commodities seem to discern a good future for the majority of Latin American countries. However, the authorities will have to make a great effort so that this change in prices does not discourage production is other areas of exporting industries. Simultaneously, they will have to halt the increase of internal prices from having an impact socially.

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