The Latin America Rift

The economic rift between the Atlantic and Pacific side of Latin America is continuing to widen. According to the International Monetary fund, the Atlantic-facing nations of Argentina, Brazil and Venezuela which are also the largest members of Mercosur are expected to grow 0.6% this year. In significant contrast, Chile, Colombia, Mexico and Peru which have formed the Pacific Alliance are estimated to grow by 4.2% in 2014. Whereas some people may see the divide as being a result of western Latin America’s orientation toward a dynamic Asia whist the east faces a stagnant Europe; this has very little to do with this widening gap.

Commodity Rich & Wasteful

It’s a well-known fact that the Latin American giant of Brazil is blessed with an abundant range of natural resources and has almost a 200-million-strong consumer market while Venezuela has some of the largest petroleum reserves in the world. However, at the end of what has been an economic boom for these countries driven by cheap money and strong commodity prices, growth in Brazil and Venezuela has been lagging that of its neighbours. Their Pacific neighbours, in spite of a more challenging global environment have not reverted to becoming static or protectionists and while the Atlantic nations, especially Brazil, splurged during the boom, the Pacific countries can be said to have been doing their homework. The days of Latin America being a unified bloc with a synchronised business cycle is now a thing of the past. There is a significant difference between the two sides of the region with Brazil spending 40% of its GDP between 2010 and 2013 whilst the Pacific nations of Chile, Colombia, Peru and Mexico, spent just 27.5% during the same period. In spite of spending more of its GDP, Brazil also saved 4.4% of its GDP less than the Pacific nations during this 3 year period.

The World Taking Note

This trend and widening rift is being taken note of around the world, especially by debt-rating companies. Moody’s Investors Services raised Mexico’s credit rating to AAA in February whilst in March; Brazil’s credit rating was downgraded by Standard & Poor to the lowest investment grade of BBB-. The economy of Mexico is set to expand 3% this year according to the IMF and will be almost double Brazil’s growth this year in spite of the upcoming World Cup and future Olympics. With money generally following growth the Pacific region of Latin America looks set to be the main focus for foreign investment during 2014.

Heavy-Handed Atlantic Politics

Unfortunately, the Atlantic countries are no strangers to heavy-handed government intervention by squeezing company profits, discouraging foreign investment and curbing demand. The economy of Argentina which had its spectacular crash back in 2001 is now spluttering due to a drain of foreign reserves. President Cristina Fernandez de Kirchner’s method in coping with such economic problems could be seen in December 2013 when she added a 50% tax on foreign cars with a pre-tax value of more than ARS$210,000 pesos (£15,405). In April 2014, car sales fell 40% in comparison to the previous year and with car dealers struggling to make sales, the loss of jobs in this sector is becoming more common. The Argentinean Peso devalued 19% in January 2014 and further added to the country’s woes resulting in a surge of consumer prices. Although this situation is not ideal, these measures have translated into the international reserves of Argentina beginning to stabilise, although for how long remains to be seen.

The Rise Of The Pacific

In stark contrast, Peru for example, has embraced free-market principles awarding almost $12billion in infrastructurecontracts to build new motorways, lay power lines and upgrade port facilities with the aim to increase exports. In just the last 5 years, the Andean country has concluded free-trade agreements with the United States, China and the European Union. Trade is at the root of the divide in Latin America with members of the relatively new Pacific Alliance seeking to become more competitive and increase trade by lowering tariffs and seeking new export markets. Mercosur on the other hand has been acting in a protectionist way adopting opposite measures to their Pacific neighbours.

Which Side Will Be The Winner?

The outward-looking, dynamic and market oriented nature of the Pacific Alliance is paying dividends with its shipments clearing US and European customs faster than its Atlantic counterparts due to bilateral and regional trade agreements. Many companies on the Pacific side of the region are also paying lower duties on the imports they need to make their products making countries such as Colombia famous for products worldwide which were normally associated with production in Brazil. This widening rift is likely to  continue and although all countries of the region face hurdles such as lower commodity prices and rising international borrowing costs, the Atlantic nations of Latin America have little or no to relax their economic policies without further increasing their inflation rates. With better institutions and policy frameworks, the Pacific countries will continue to drive, grow and diversify their economies and look set to enjoy a bigger, better and brighter future.

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