The Economist Europe – July 22-28, 2017

32 The Americas The EconomistJuly 22nd 2017

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CAN the Latin American newspapers

and it is hard to find much sign of a con-

vincing economic recovery. True, Brazil’s

industrial production is perking up after a

two-year slump. Mexico’s energy reform

is starting to pay off, atlast, with a big new

oil discovery by an international consor-

tium. And Peruvian restaurateurs cele-

brated “National Char-roasted Chicken”

day on July 16th, hoping to dispatch a mil-

lion birds, up from last year’s720,000.

Otherwise, animal spirits are in short

supply. After five years of deceleration

and one of recession, Latin America

should registermodest economic growth

of 1-1.5% this year, according to forecasters.

The picture varies from country to coun-

try. The return to aggregate growth is

largely thanks to Brazil and Argentina,

which are coming out of recessions. Vene-

zuela’s economy is collapsing. Mexico,

Chile, Colombia and Peru are expanding

at a sluggish rate of2-3%. Only in Central

America, the Dominican Republic and

Bolivia is growth a respectable 4% or so.

What makes this particularly worry-

ing is that external conditions are general-

ly favourable. The world economy is pick-

ing up speed. The United States and

China, the region’sbiggest trading part-

ners, are growing nicely. Financiers look

favourably on Latin American govern-

ments and companies, as Argentina’s re-

cent launch of a 100-year bond illustrated.

So why is the region still so off-colour?

One answer is that adjusting to the end of

the commodity boom, which benefited

South America particularly, has taken lon-

ger than expected. Between 2003 and

2010 China’s industrialisation boosted

demand for minerals, oil and foodstuffs.

Commodity prices fell steadily between

2010 and 2015. As export revenue shrank,

the region’s currencies weakened, curb-

ing imports and pushing up inflation.

The good news is that in many coun-

tries this external adjustment went

smoothly and is largely over. The region’s

current-account deficit narrowed by 1.4

percentage points ofGDPlast year (to 2.1%).

Inflation is falling swiftly, allowing central

banks to cut interest rates (see chart). That

offers hope of a pickup in growth in 2018.

But Latin America also faces a fiscal

squeeze. The commodity boom temporar-

ily boosted tax revenues. Too many gov-

ernments spent, rather than invested or

saved, this windfall. The primary fiscal

deficit (ie, before interest payments) in the

region as a whole increased from 0.2% of

GDPin 2013 to 2.6% last year. In other

words, public debt is rising. Many govern-

ments have started to retrench. Few are in a

position to prime the pump of recovery.

There is a second factor slowing the re-

bound: political uncertainty. That starts

with Donald Trump. While he has agreed

to renegotiate, rather than scrap, the North

American Free-Trade Agreement with

Mexico and Canada, he continues to

threaten to impose protectionist mea-

sures, discourage investment south of the

Rio Grande and deport millions of Mexi-

cans and Central Americans. So far Mexi-

co’s economy has held up better than

feared: the peso is stronger now than it

was before Mr Trump’s election last No-

vember. The annual growth rate was 2.7%

in the first quarter of this year. But Mexico

is living from month to month.

The second doubt concerns domestic

politics. Latin America will not return to

faster growth unless it does more to solve

the structural problems that hold it back.

They include inadequate infrastructure,

poor-quality schooling, badly designed

taxes and regulations that hobble busi-

ness. Fixing these requirespersuasive

leadership. But in the larger countries, the

only president who is even moderately

popular is Mauricio Macri of Argentina.

In Brazil, Michel Temer has an approval

rating of 7% and may be evicted from of-

fice because of corruption allegations.

Between November of this year and

October 2018, Chile, Colombia, Mexico

and Brazil all face presidential elections

(while Argentina has an important mid-

term congressional election this October).

These contests will take place amid popu-

lar disillusion with politicians, caused

partly by corruption. In each, there is

some risk that a populist could triumph.

No wonder investment remains de-

pressed. Growth this year is coming main-

ly from a small recovery in exports and

from importsubstitution. The first task

facing governments is to provide invest-

ors, both local and foreign, with a reason-

able degree of policy certainty. More than

is usually the case, for insights on their

economic prospects, Latin Americans

should turn to political scientists rather

than to economists.

The long squeeze

Room for improvement

Source: IMF

Latin America and the Caribbean

% change on a year earlier

Primary fiscal balance, % of GDP

FORECAST

FORECAST

3

0

3

6

+

2010 11 12 13 14 15 16 17 18

GDP

Consumer prices

3

2

1

0

+^1

2010 11 12 13 14 15 16 17 18

Bello

Latin America’s commodity hangover has been compounded by political uncertainty

judges as an infringement of sovereignty,

has both provisions in its sights.

This will provoke a battle. Negotiations

on a free-trade agreement between Cana-

da and the United States, which came be-

fo re NAFTA, nearly broke down in 1987 be-

cause the United States refused to

relinquish the option to impose retaliatory

duties. A clause like chapter 19 was a com-

promise that saved the deal (“you can have

your goddamn dispute-settlement mecha-

nism,” grumbled James Baker, then the

American treasury secretary).

Canada, and now Mexico, want it more

than ever. The United States is threatening

to impose trade barriers against other

countries to protect such industries as

steel. Itis fighting with Canada about soft-

wood lumber, aerospace and paper. With-

out a panel to rule speedily on disputes,

and protection against trade remedies,

NAFTA’s smaller members will be more

vulnerable to the punishment that the Un-

ited States metes out to other trading part-

ners (see chart on previouspage).

While seeking more protection for the

United States, Mr Lighthizer is pushing

Canada and Mexico to lower their trade

barriers. His letter aims at protected Cana-

dian sectors such as telecoms and financial

services (and, less explicitly, dairy and

poultry farming). Mexico, the target of Mr

Trump’s abuse on the campaign trail,

seems to get off more lightly.

Negotiations are due to begin on Au-

gust 16th. The United States’ partners are

preparing defences and counter-demands.

Mexico’s businesses are thinking about

how to change their supply chains in case

the deal blows up. Canada is pushing for

access to contracts awarded by American

states and cities, which Mr Lighthizer

wants to keep out ofNAFTA2. Expect plen-

ty of squabbling in the North American

home. 7