Latin American governments should prepare public opinion for a period of adjustment, instead of blaming other countries for the magnitude of the global financial crisis, analysts warned this week.
Complacency may eventually expose the region to “the risks of a social backlash”, said Liliana Rojas-Suarez, senior fellow at the Centre for Global Development in Washington, in an interview with Emerging Markets.
“[Policy-makers] should say ‘this is going to affect you’ so that adjustment can take place,” she said. “There has been complacency in the sense that there has been no effort to protect social programmes whilst other adjustments can be made.”
The region is up against a “perfect storm”, according to Augusto de la Torre, chief economist of the World Bank: it faces the triple blow of the US recession, weakening commodity prices and sharper economic slowdown.
The turmoil is bound to test Latin America’s decade-old commitment to debt reduction and open markets. On a positive note, several regional governments have used revenue from the commodity boom to pay down debt and build reserves.
But as the crisis gains momentum, policy response need to go beyond the initial reaction of some regional leaders that tried to minimize its impact. Brazilian president Luiz Inacio Lula da Silva, asked ten days ago about the possible spillover of the US crisis, told reporters: “Crisis? What crisis?”
Hugo Chavez, the Venezuelan president, said that the region would be hit with the force of “100 hurricanes”, but Lula later said the “tsunami” would be confined to the developed countries and would only hit Brazilian shores with the force of a “small wave”.
Meanwhile, the crisis provided the opportunity for those countries that were formerly bailed out by the IMF for settling old scores with advocates of “neo-liberal” economic policies.
Such a political stance also means that pressures to rein in public spending will probably have little effect, as Latin governments tend to increase public expenditure. “The general public is going to say no,” said Rojas-Suarez. “It is a political dilemma. Voters just want more public spending,” said Armando Castelar, at the Brazilian hedge fund Gavea.
So far, “policy-makers have been falling short of the mark”, said Gray Newman, Latin America chief economist at Morgan Stanley in New York. “The dangers for the region are that some policy makers confused the heavy and robust growth of the past five years as a substitute to move on towards the micro reforms to make these countries more competitive,” he said.
As crisis pressures mount, several Latin American emerging market countries will take part in an extraordinary meeting of the financial G-20 tomorrow, co-chaired by Brazil and the US, after Lula repeatedly called for a co-ordinated political response to the global crisis.