The Principal Economist of the IDB Integration and Trade Sector, Paolo Giordano, wrote an article where he explains why Latin America should bet on exports to get out of the crisis. Next, the informative detail of Giordano.
“Since the middle of last year, the IDB In the midst of the first wave of COVID-19 infections, he argued that the economic impact of the pandemic in Latin America and the Caribbean was particularly devastating because it implied the sudden and simultaneous paralysis of three fundamental flows for development: finance, people and goods. It is what economists call a sudden triple stop either sudden-stop.
What signs does 2021 start with on these three planes?
Although in each of them there are reasons for optimism and caution, the region cannot afford to bet on a way out of the crisis that does not place export development at the center of the strategy.
In the financial area, there are signs that worldwide the restrictions are softening. According to the analysis of Financial Times using data from Institute of International FinanceIn the first weeks of the year, investors in search of high returns would be quickly returning to the markets of emerging economies, following the massive injections of liquidity from the central banks. However, growing inflationary risks in advanced economies, the possibility of normalization of their monetary policies and an overreaction of the markets call for caution. In addition, it is worth asking to what extent Latin America will benefit from the commitment to emerging economies and how investors will assess the macroeconomic risks in the region in the coming months.
In the real economy, the mobility of people is increasing both within the region and abroad, even without reaching pre-pandemic levels. Greater internal mobility could enable a rebound in economic activity, but it will also generate greater risks of contagion. A recent analysis suggests that to date countries in the region have been less effective than others in implementing closure and reopening strategies that simultaneously minimize health and economic costs. Furthermore, the region has been slow to launch vaccination campaigns and could face the consequences of a worrying mutation of the virus. In this way, in the coming months the boost to economic growth in the region will probably come more from the normalization of mobility in trading partners than from the increase in internal mobility.
Exports, the key to recovery
All of the above invites us to carefully consider the prospects for importing growth from the rest of the world through the commercial channel. They were recently published Estimates of Trade Trends for Latin America and the Caribbean, which present data observed until September and projected until the end of the year, report that the contraction of exports for 2020 would be located in a range between -11.3% and -13.0%. More specifically, they confirm that the rebound in exports lost momentum in the third quarter. In this sense: What signals emerge from the most recent data?
The prices of the commodities They are sustaining export performance and the boom is expected to continue, for both temporary and structural reasons. With the notable exception of oil, commodity prices withstood the crisis relatively well and started to rebound in the last quarter of 2020. Supply and demand factors are aligned to fuel a rise this year and experts are even debating if we are on the eve of another structural super cycle, driven by massive, synchronized infrastructure investment programs around the world, the transition to a greener economy, and a downward trend in the dollar.
The impact of these nominal variables has already been reflected in the values exported by the region. According to the last reading of the world trade monitor, the growth of the prices of Latin American exports in the last quarter of 2020 (+8.41TP3Q) eclipsed the world average performance (+4.01TP3Q) and that of emerging economies (+4.61TP3Q).
However, in real flows the signs are less encouraging. In October, the volume of world trade grew at a month-on-month rate of only 0.4%, a fraction of that observed in September (+2.4%), in November it picked up again, although at a lower rate (+1.6%) , and in December it continued in a stagnation trend (+0.6%). In this global context, both in October (-2.61TP3Q) and in November (-0.91TP3Q) and in December (-0.51TP3Q) the month-on-month variation of the volumes exported by Latin America was negative. What's more: the region is among the few in which real export performance deteriorated continuously, and the only one that fell firmly into negative territory in the last quarter (-3.9%).
Looking ahead, purchasing managers' indices (Purchasing Managers Index either PMI), some high-frequency indicators that anticipate the commercial performance of the region, confirm a global slowdown trend. But they also give an indication of which will be the most dynamic trading partners. The best news comes from the global leading indicator of the United States, which increased strongly in February (58.8). The acceleration was greater than in January, which reflects that confidence in the private sector is clearly on the rise. China's manufacturing index in February reflected the lowest level in the last nine months (50.9) although, with a level above the critical threshold of 50, it remained in expansionary territory. In contrast, in Europe the new containment measures kept the global indicator for the month of February (48.8) in the recession zone.
Betting on trade, investment and integration
Decision makers should, therefore, promote the strategy of international insertion and integration of the region. This includes: better articulating the economies of the region with that of the United States, where an expansion phase is beginning, taking advantage of the new opportunities that arise from the strengthening of the regional value chains of the private sector; consolidate and diversify the commercial relationship with Asia, which is leading world growth; and to identify new business opportunities in Europe and in the markets of Latin American partners, to take advantage of the potential of these regions when the ongoing recessions are overcome.
However, the region's history indicates that the boom in commodity prices commodities it can undermine the incentives for a change of gear in reforms and investments aimed at promoting integration and trade competitiveness. It is to be hoped that this will not be the case on this occasion in which the boom in commodities coincides with a deep economic, health and social crisis.
While it is appropriate that the efforts of decision-makers in the region focus on saving lives in the short term, it is also essential to lay the foundations for post-pandemic economic growth, employment, and poverty reduction. If there is a time to promote integration and export development, that time has come now," concluded the Principal Economist of the Integration and Trade Sector of the IDB.
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