The U.S. Should Act Before a Global Downturn Destabilizes Latin America

Jorge G. Castañeda

The trade war between the United States and China, coupled with warning signs of a potential slowdown in the global economy, have sharply increased the chances that the world will fall into recession. While nearly every country will be impacted, longstanding economic weakness and the fragile state of its political institutions mean that a potential downturn will disproportionately batter Latin America.

The world’s largest economies should work together to coordinate policies before the storm breaks. President Trump’s conflict with Beijing should be resolved, shelved or postponed to prevent needlessly intensifying a downturn.

Here’s what the region is facing.

Venezuela’s economy imploded long before any signs of a potential recession in the United States surfaced, but lower oil prices will make matters worse. More than four million Venezuelans have fled the country. The number could rise to six million if economic conditions worsen.

An international downturn could also exacerbate Argentina’s current economic crisis and lead to another default, as in 2001. Inflation has soared to 54 percent, interest rates even higher, and the peso has depreciated 30 percent since last month’s primary election almost guaranteed a win for the center-left, Peronist candidate in the presidential elections in October. The price of soybeans — the country’s main export — has dropped to half its mid-2012 peak. Support from the International Monetary Fund, or I.M.F., and the markets could be much more complicated to secure under this backdrop.

The countries of the so-called Northern Triangle in Central America — Guatemala, Honduras and El Salvador — continue to be plagued by violence, political instability, corruption and institutional weakness. Their modest economic growth is largely dependent on commodity exports and remittances from emigrants in the United States. Along with Mr. Trump’s inhumane and chauvinistic immigration policy, a recession in the United States would cause layoffs, forced returns and a drop in remittances. This in turn could translate into more migration, and more violence.

Brazil and Mexico round up this tale of regional woe. The two countries’ new presidents are poles apart ideologically but curiously resemble each other in their blustering lack of respect for truth and institutions.

Brazil has not recovered from the recession that dragged on from 2016 to 2018. The I.M.F. is forecasting less than 1 percent growth this year; the sluggishness of the country’s largest trading partner, China, will affect economic performance significantly. Brazil has impeached two presidents over the past thirty years, jailed one ex-president and is currently investigating another. The political problems the country has experienced over recent years, and President Jair Bolsonaro’s dislike of democratic institutions and the rule of law, could generate serious political trouble.

Mr. Bolsonaro has picked fights with President Emmanuel Macron of France, the Group of 7 and the international community over the fires raging in the Amazon; his administration is mired in scandals; and his popularity has plummeted. Brazil’s democratic institutions are under threat: The president’s son Carlos said last week that the changes Brazil needs cannot be achieved democratically. A world recession could wreak havoc on the country’s fragile democracy.

Mexico is teetering on the edge of a recession — growth was zero for the first half of the year — and is the country most affected by any economic problems the United States faces. Like his Brazilian counterpart, President Andrés Manuel López Obrador disrespects institutions and has an authoritarian streak.

Contrary to Mr. Bolsonaro, he remains highly popular and is pursuing ambitious social programs that could sustain his standing in the polls, despite the brazen incompetence of his administration and its dismal performance. But a United States recession will in all likelihood doom these social programs. They depend on enhanced government revenues, which can only stem from growth and higher oil prices. Neither is likely.

A 2018 Gallup poll showed that one third of all Latin Americans would emigrate if given the choice, the highest share in years and the highest in the world today. Weak economic growth, political instability, poverty, inequality, crime and violence are endemic in nearly all nations south of the Rio Grande. With the exception of a brief period between 2006 and 2013 — not including the Great Recession of 2009 — Latin America has long been plagued with crime and slow economic growth.

But a downturn in the world economy this time around will make matters worse. The 2009 slump hit the region after a few years of strong, commodity-driven growth that allowed effective social policies to be responsibly funded. Violence, while higher than elsewhere, was under relative control. Corruption was widespread, though not as overt as it is now. The region emerged largely unscathed by that recession. Circumstances today are far different.

The Group of 7 should work together to ensure a slowdown would be brief, if it cannot be avoided. There is not a great deal of leeway on the monetary policy side. Except for in the United States, interest rates cannot go much lower and even in Washington the room for easing is limited. On the fiscal side, there is perhaps more room for countercyclical approaches, although fear and prejudice often stand in the way.

And it is not only Latin America that has problems. Europe has Brexit, China has Hong Kong, America has Mr. Trump. Nonetheless, policy is always possible, if only on the margins. The most important fact for the leaders of rich countries to keep in mind is that while their nations’ institutions may withstand a new bout of economic difficulties, not everybody’s can. There are strong political reasons for choosing the right economic policies.

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