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Latin American Countries Worlds Apart in Economic Downturn

BY Admin  March 13, 2009 at 3:20 PM EDT

Workers in Brazil. Photo: Scott Wallace/World Bank

Like the rest of the world, the economic slowdown has not been favorable in Latin America. In general, exports are falling, unemployment is rising and the economic predictions are grim.

Regional experts point to Honduras and Brazil as representing two different responses to the economic downturn.

In Honduras, where remittances from immigrants living in the United States make up a quarter of the country’s gross domestic product, the situation is more precarious than a larger economy such as Brazil, which is better suited to weather the financial turmoil. Growth there has slowed but remains positive, and a social safety net is in place to buffer the harshest effects of the downturn.

“Brazil in a way has been one of the bright spots in this economic downturn,” said Reena Aggarwal, a professor of finance at Georgetown University. “It’s still going to be one of the few countries with positive growth in 2009.”

Compounding the effects in Honduras, the government recently raised the minimum wage, pinching small businesses, which have been forced to lay off workers.

“There was a wave of unemployment, and we don’t know how much was generated by that measure as opposed to the crisis,” said Dante Ariel Mossi Reyes, the World Bank’s senior country officer for Honduras.

Brazil’s fiscal policies are part of the reason why experts expect it to do comparatively better than other emerging markets. When the country had surpluses, Brazil paid off its debt to the International Monetary Fund. Inflation was also brought under control, and the government took measures to reduce the deficits.

By the time crisis hit, the central bank’s reserve requirements were high, and the banking sector was strictly regulated, said Makhtar Diop, the World Bank country director for Brazil. The largest banks in Brazil are domestic, and as a result, the country is not deeply exposed to international capital markets.

Yet Brazil has not emerged unscathed. Unemployment grew from 6.8 percent in December to 8.1 percent in January, Diop said.

After the global meltdown hit, the Brazilian government took action to directly help the financial sector and consumers. One tax break cut the costs of cars, another lowered the income tax for the middle class, according to Diop. To soften the impact on the poor, the government expanded its requirements for the conditional cash transfer program, which provides money to poor families who promise to meet certain conditions, such as visiting medical clinics.

But Brazil’s economy, like most in Latin America, relies at least in part on commodities, and as the crisis goes on, trade remains a concern. The World Bank recently predicted the global economy will shrink for the first time since World War II, and trade will hit its lowest point in 80 years.

This spells much uncertainty for most Latin American countries, especially ones such as Honduras that rely on exports to the United States.

“Honduras is very affected when one of the biggest buyers, the United States, stops buying,” said Reyes, adding that effects have been mixed. On one hand, demand for clothing assembled in Honduras from retailers in the United States is down, but at the same time, some orders for products from China are now being directed to Honduras.

The textile industry employs about 130,000 people. Of those, 30,000 jobs were lost this year, Reyes said.

Before the crisis hit, the economy of Honduras grew at a rate of more than 6 percent for four consecutive years, according to the State Department. While Honduras used to rely on agriculture, its exports have become more diverse in recent years. Still, it is one of the poorest countries in the Americas. The average gross income is $1,635 per person, according to the State Department.

The slowdown in remittances from immigrants in the United States will exacerbate the poverty, and mean fewer or less-nutritious meals for families that rely on them, Reyes said. It could also create more emigration to the United States, weakening the Honduran labor force and creating more villages with households missing a mother and father.

And the longer the economic crisis lasts, the worse things will get.

“This is something that is not written in stone as of today,” warned Otaviano Canuto, vice president for countries at the Inter-American Development Bank.

If one were to ask a Honduran on the street, they would likely say the effects of the global crisis are not so drastic thus far, said Reyes, but the potential risks continue to loom large.

Reyes explained that if the global economic crisis becomes more profound in the United States, and the economy doesn’t rebound quickly enough, unemployment and related problems will further squeeze Honduras.