Domestic Dynamics: Why Latin America's 'New Resilience' Will Keep Growth in Reach - Knowledge@Wharton

Domestic Dynamics: Why Latin America's 'New Resilience' Will Keep Growth in Reach - Knowledge@Wharton

Besides hailing from the same region, what do Brazil, Panama and Colombia have in common? When it comes to the economic recovery, these countries -- along with Chile, Uruguay and Peru -- have become the stars of Latin America. Each of them has stood up to the crisis with what the Organisation for Economic Co-operation and Development (OECD) calls a "new resilience," paving the way for counter-cyclical policies without impairing fundamentals. According to the OECD's "2010 Latin American Economic Outlook," inflation-targeting in these countries has been particularly effective in building confidence-enhancing institutional strength.

In contrast, the recession and the fall in commodity prices in the early part of 2009 exposed weaknesses in a group of countries with leftist-leaning governments -- namely, Argentina, Venezuela and Ecuador. Each of them has pursued unorthodox economic policies and suffered from institutional frailties. Yet those hardest hit by the downturn in Latin America have been the countries with the closest ties to the U.S., namely Mexico and many of its neighbors to the south in Central America and the Caribbean. Not only is the U.S. their key market for goods and services; weaker remittances sent by immigrants working in America have also had a damaging effect.

Where does that leave the region as a whole? After contracting around 2% in 2009, it is expected to grow 4% in 2010 -- that is, stronger than developed markets but weaker than Asia, according to the U.N.'s Economic Commission for Latin America and the Caribbean. Although that doesn't come close to the 5% levels of the previous four years, there's plenty of reason for optimism.

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