Why South American economies are rebounding first

Commodities-hungry China is pulling Brazil, Chile, and others out of recession. But Mexico and Central America, dependent on US sales, are lagging.

Latin America, long tied to the economic well-being of the United States, finds itself in a rare position these days: recovering from the global financial crisis faster than most of the rest of the world.

After shrinking 2.5 percent this year, the regional GDP is expected to return to 2.9 percent growth next year, according to the International Monetary Fund's World Economic Outlook.

But the recovery has two faces.

Brazil and other commodities-­exporting nations in South America are blazing the way forward thanks to increased trade with China, as Mexico and Central America languish from a sustained drop in demand in the US.

"Every time that the US or Europe or any other of the big world locomotives were in trouble, Latin America fell," says Alfredo Coutino, Latin America director at Moody's Economy.com. "This is the first time in many, many decades in which Latin America is better prepared, in terms of economic strengths, to deal with the external recession."

Behemoth Brazil leads

The region certainly has learned from past mistakes and adjusted policies that have helped it weather the crisis. In general, nations have kept within their budgets, built up currency reserves, and adopted flexible exchange-rate systems.

The region's recovery is led by Brazil, whose gross domestic product (GDP, the total output of goods and services) is expected to decline by 0.7 percent this year, but grow to 3.5 percent by next year, according to the International Monetary Fund. Its domestic market has remained strong throughout the crisis, in large part because government aid programs and rises in the minimum wage mean more people have more money to spend.

Tax breaks for purchases of goods such as freezers, fridges, and cars have also helped keep cash registers ringing, and credit remains available from the country's heavily protected Brazilian banks.

Soy, copper, and other commodities, which South America exports to Asia, have also helped buffer the region, a main reason Brazil is leading the recovery.

"China is going to be an engine for recovery of Latin America," says Eric Farnsworth, vice president of the Council of the Americas, a consultancy based in New York.

China has overtaken the US as largest trading partner for both Chile and Brazil. Other commodities exporters, particularly those with strong ties to China, are also rebounding, including Peru and Argentina.

IADB: Remittances will fall 11 percent this year

The boom from China stands in stark contrast to the drag that the US is putting on Mexico and Central America.

Mexico's GDP is expected to contract by 7.3 percent this year – exacerbated by the swine-flu outbreak that discouraged tourism.

More than 80 percent of exports from Mexico head to the US, where demand has dampened considerably as consumers pinch their pennies while riding out the recession. And total exports account for 30 percent of Mexico's GDP, says Mr. Coutino. In Brazil, that figure is only 12 percent, making the South American giant more resilient to external problems, he says.

A drop in remittances (money that migrant workers send home from the US) is also hurting both Mexico and Central America.

Remittances are an important crutch for millions of Mexican families, and the US recession is a major factor in fewer remittances. This is especially true in the construction industry, which has traditionally employed some 20 percent of Mexican migrant workers.

The Inter-American Development Bank estimates that remittances to Latin America and the Caribbean will fall by 11 percent this year.

Despite Latin America's resiliency, the crisis has left millions in poverty after years of gains.

From 2003 to 2008, 60 million people in the region emerged from poverty. Today, the World Bank estimates that 8 million people will return.

In Mexico, between 2006 and 2008, poverty increased by 5 percent after years of gains, according to government figures.

Alberto Aziz Nassif, a specialist in democracy and civil society at the Center for Research and Higher Education in Social Anthropology in Mexico City, says poverty will undoubtedly grow this year.

"The crisis has deteriorated the well-being of many Mexican families," Mr. Nassif says.

Mexico is not alone in dealing with the ramifications of the crisis on its most vulnerable populations.

The United Nations' Economic Commission for Latin America and the Caribbean (ECLAC) says that unemployment in Latin America and the Caribbean rose to 8.5 percent in the second trimester of 2009, and a decline in foreign direct investment – as well as remittances – is complicating the poverty reversals for the region.

Brazil's middle class growing, and better off

The poor are faring better in Brazil. Although industrial output fell heavily and jobs were lost, economists say the crisis was light and the rebound is strong.

The rural poor are only slightly worse off than they were this time last year, while the urban poor are in a marginally better position, according to Marcelo Neri, a leading economist with the Fundacao Getulio Vargas in Rio de Janeiro.

"Income inequality underwent a serious deterioration in January, when part of last year's gains were lost, but it has now come back closer to its precrisis levels," Mr. Neri wrote last month.

Brazil's middle class is 2.5 percent better off than it was 12 months ago and now comprises 53 percent of the population, the highest percentage in years, Neri added.

There are concerns. Brazil's extraordinarily strong currency, the real, is starting to worry exporters; interest rates, while at their lowest level in decades, are still among the highest in the world. And more and more workers are asking for – and getting – above-inflation-rate pay raises, reawakening old fears about inflation.

Brazil's recovery also reveals old patterns.

Relying on sales of commodities to pull the country out of recession might help GDP prospects, but it does not buoy all people or sectors.

"It's certainly a net positive that the region is going to recover quicker and faster … the global economic crisis did not hit it as much as it could have in the past," Mr. Farnsworth says.

"But [commodity growth] is primarily capital-intensive," he cautions. "It takes billions of investment [dollars], but the number of jobs is not terribly high compared with other sectors."