Wednesday, June 23, 2010

Why A Lot of South American Countries are Screwed for a Really, Really Long Time

I came across these this morning while going through my regular news sources, and thought it should be shared. Others reading this have a far better grounding in South American issues, I don't claim to be an expert, but it is an important set of points that usually gets ignored by specialists.
Lots of South America has a commodity-dependent economy (lots of farming, oil/lithium, lumber, etc).
Interestingly (and we always forget this), Canada, Australia and Norway have economies that are nearly as commodity-dependent as the third world, but they end up ok. The reason why they can survive in a commodity dependent economy is a) they have a floating currency and the ability to run one (including encouraging foreign investment when currency values make that tempting by NOT expropriating foreign assets), and b) they are considered credible business partners who won't purposefully inflate their currency to pay off debt, so they can borrow in their local currency and benefit from moderate unintentional inflation. Without these features, every time commodity prices fluctuated, they'd end up with whipsaw government windfalls and shortfalls, with associated political/societal instability (which I'd posit is a pretty good predictor of many types of corruption).
South America, and for that matter, most OPEC countries, have few of those features. Most countries are clearly not able to run a currency - look at how many currency crises they have and how many situations a la Kirchner seizing the central bank's foreign monetary reserves they face - and they clearly have massive inflation problems and have no ability to convince the international capital markets of their credibility from an expropriation standpoint or a purposeful inflation standpoint. It's hard to thrive when nobody internationally takes you seriously.
Some countries are better than others - Brazil and Russia, for example, retain a degree of credibility on a lot of issues that their neighbors do not, partially because their size makes the reward side of risk-reward more appealing (with no incremental risk for size) and partially because of a reasonably predictable set of policies by third-world standards. I can't speak for a few isolated countries like Chile because I don't look to invest there much. But for a lot of places, especially in South America, this definitely applies.

If interested, I'd encourage you to read both of these:

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