The Inter-American Development Bank meetings are all about chummy Latin solidarity and business opportunities, entwined with high-falluting discussions on the region’s prospects. They usually come with a slightly positive spin thanks to the prospect of all the business available from government ministers and Central Bankers who attend these jollies in force. This year was no exception although Latins are able to congratulate themselves with good reason as economic prospects do really look positive as the region continues to outpace the developed world. But let’s not get too smug. Latins are deeply split on two key issues: protectionism and capital controls.
Argentina in particular and Brazil more fuzzily have been stepping up protectionism. Argentina is facing a massive outflow of dollars and (further) drops in investor confidence and wishes to avert a balance of payments catastrophe. It is undermining Mercosul and causing howls of anguish in neighbouring Uruguay. Brazil meanwhile is facing a grinding de-industrialization as its currency remains buoyant thanks to continued demand for its commodities although the effect of the slow-down in China remains to be seen. It is trying a blend of selected tax cuts for badly-hurt industries, the opening of anti-dumping enquiries and attempts to depreciate the currency through rate cuts.
The attitude of the two Mercosul giants pits them against free trade poster child Mexico, which is understandably miffed as both have sought to rip up agreements on car imports, signed at a moment where Mexico was an importer (it is now a net exporter to both). Brazil got its deal which limits imports to $1.55bn per year for three years. Last year, Brazil imported $2.1bn of Mexican cars and parts. But Mexico blew Argentina a raspberry.
Meanwhile, Brazil’s capital controls – with financial taxes on bonds stepped up progressively and constant references to possible unspecified further measures to keep markets on their toes – has split the region and indeed economists. Some bewail the unpredictability and the long-term effects on investor confidence while others support what they see as necessary moves to stem speculation.