Economy & Trade, Headlines, Latin America & the Caribbean

ECONOMY-LATIN AMERICA: From Optimism to Concern

Daniela Estrada

SANTIAGO, Apr 22 2008 (IPS) - The Economic Commission for Latin America and the Caribbean (ECLAC) called on countries in the region Tuesday to take urgent measures to deal with the rising cost of food, which threatens to tip an additional 15 million people into extreme poverty.

ECLAC projected 4.7 percent Gross Domestic Product (GDP) growth for Latin America and the Caribbean this year, one percentage point down from last year’s rate.

The executive secretary of the regional United Nations body, José Luis Machinea, said in a press conference that the recession that the United States is “entering” will have an impact on the region, although not as sharp an impact as in past crises, because Latin America is better prepared this time around.

The effects of the current downturn, he said, will differ depending on the country.

The region’s poorest countries will be hit the hardest, because of the rising food prices, as well as countries that export manufactured products to the United States and the recipients of huge inflows of expatriate remittances, like Mexico and the nations of Central America.

Mexico receives the largest amount of remittances, nearly 24 billion dollars in 2007, or 2.7 percent of GDP, while the more than eight billion dollars a year sent home by Haitians abroad amounts to 30.4 percent of GDP.

According to Machinea, it is hard to say whether the prices of commodities, which are the region’s main export products, will begin to come down.

The sharp slowdown of the global economy, which will likely have a mild effect on China, should tend to bring down prices of commodities as a result of reduced demand, although there is also a speculative bubble in commodities that makes projections difficult, said the head of ECLAC.

But the U.N. agency warned of a possible rise in poverty as a result of climbing food costs.

An ECLAC communiqué released on Apr. 18 says that since early 2006 and especially 2007, consumer price indexes for food have increased in most countries in the region, by between six and 20 percent a year, and around 15 percent on average.

Because this situation mainly affects the poorest families, ECLAC urged countries in the region to adopt urgent measures, adapted to the reality of each country. Some of the recommendations are to reduce import tariffs and/or sales taxes, provide targeted subsidies to the most vulnerable sectors, or increase already existing assistance.

“In countries where 15, 20 or 30 percent of the population lives in extreme poverty, action must be taken now,” Machinea told IPS. “But there are several countries in the region that do not have the fiscal resources to act, and in these cases, international aid is crucial.”

ECLAC considers it necessary for industrialised and middle-income countries that are net exporters of food to make a special contribution to agencies that can deliver emergency aid to at-risk populations, like the World Food Programme (WFP).

A 15 percent increase in food prices would drive up extreme poverty in the region from 12.7 to 15.9 percent, says ECLAC.

This means that if steps are not immediately taken, 15.7 million Latin Americans could fall into extreme poverty and a similar number into poverty.

In the worst-case scenario, the number of people living in poverty and absolute poverty in Latin America and the Caribbean could climb to 204 million and 84 million, respectively.

A less drastic estimate, based on a five percent rise in household income, in keeping with regional inflation, indicates that 10 million people would fall into extreme poverty, not to mention the worsening of conditions for those already living in poverty and absolute poverty.

Asked about the social and political conflicts that could break out in the region as a result of the deteriorating conditions, Machinea said the main risk factor today is the increasing cost of food, and not slower GDP growth, given that many Latin American economies will continue expanding at rates of five to seven percent in 2008.

ECLAC predicts that the highest growth rates will be seen this year in Panama (eight percent), followed by Argentina and Peru (seven percent), Uruguay (6.5 percent), Colombia and Venezuela (six percent), and Bolivia, Paraguay and the Dominican Republic (five percent).

The list continues with Brazil (4.8 percent growth), Chile, Costa Rica, Guatemala and Honduras (4.5 percent), El Salvador (four percent), Haiti and Nicaragua (3.5 percent), Ecuador (three percent) and Mexico (2.7 percent).

The U.N. regional agency also referred to the “dilemma” of monetary policy in the region.

Machinea said that if central banks decide to raise interest rates to curb inflation, the measure should be accompanied by exchange rate intervention and restrictions on the influx of short-term capital, to keep the local currency from appreciating.

The only countries currently following these guidelines to any extent, he said, are Colombia, Brazil and Argentina.

The Central Bank in Chile, one of the countries where the dollar has depreciated the most in the last few months, plans to buy eight billion dollars in currency markets this year. But it has not yet considered the possibility of setting restrictions on the inflow of capital, as ECLAC suggests.