Exuberance Tempered by Political Worries at Latin America World Economic Forum

On April 6-8, I participated in the World Economic Forum on Latin America, which this year took place in beautiful Cartagena, Colombia. The meetings convened about 600 leaders from industry, government and civil society from over 40 countries. It included the participation of 6 Presidents from the region. I spoke in two panels on: (a) the impact of newly proposed international financial regulation on the stability of Latin America’s financial systems and (b) the development of local capital markets.Perhaps the most distinguishing feature of the meetings (and especially during coffee breaks and other social interactions) was the optimism among investors regarding the economic prospects of the region. The prevailing view among investors was that Latin America had been able to deal with the global financial crisis effectively. A point often underlined: contrary to previous episodes of adverse external shocks, this time not a single financial system in the region experienced a crisis. The high level of optimism in the private sector contrasted with experts’ forecasts for relatively modest growth of around 4 percent. These experts stressed that the region’s growth significantly lags that in Asia. Worse, they said, deficiencies in education and infrastructure will limit productivity gains and put the brakes on the growth outlook for years to come.Among countries in the region, Brazil stood out as the new darling. Investors now perceive Brazil as a super power with enormous potential; I got the feeling that they are tripping over each other to buy Brazilian assets. As one high-level Brazilian entrepreneur put it: “I used to sell Brazil, now foreign investors are selling Brazil to me.”I share the view held by some experts participating in the meetings (and a number of Central Bank governors) that the enthusiasm of the international capital markets for Latin America is exaggerated—and may be a source of additional regional fragility. Right now, the external environment for the region is very favorable (very low interest rates in developed countries and high prices of commodities exports); but the risks of changes in these favorable conditions are high, especially that of higher international interest rates as the global economy recovers.Moreover, in recent months real exchange rates have been appreciating in many countries, especially in Brazil, but this trend might only be temporary fueled by large capital inflows. If investors’ perceptions about risk in the region were to deteriorate, capital inflows could reverse, bringing about serious challenges for policymakers in the region.In sharp contrast with the upbeat mood among private sector participants regarding economic prospects there were strong concerns about the political divide between countries in the region. While one group of countries can be characterized as having market democracies, another group is governed by totalitarian regimes, with no respect to basic human rights, such as freedom of speech.Importantly, there is no international institution with sufficient powers to prevent abuses of human rights in the region.Since the meeting took place in Colombia, there was discussion regarding the jailing of some Colombian citizens in Venezuela accused as being spies. The discussions made it clear that an institution like the Organization of American States (OAS) lacks the tools to deal with problems of governance. Thus, there were calls for both increased collaboration between countries in the region and for reforming the role of the OAS.