Thanks to Andrés Velasco for this article, which in many ways sums up what I've been arguing fairly regularly for over six months regarding the irrational exuberance about Latin American economic growth. But a respected former Finance Minister of Chile may hope to have some more impact.
But today’s situation shares two features with the earlier episodes of financial euphoria over Latin America: sky-high commodity prices and cheap international money. In fact, for many of the region’s countries, the terms of trade are higher and the relevant global interest rates lower than they have ever been. These factors, more than any virtuous policy change in recent years, are propelling growth.
The problem is that governments in the region have yet to realize that countercyclical fiscal policy implies rowing against the current in: spending more when times are bad (the easy part) and spending less when times are good (the true test of virtue). Today, fiscal policy remains too expansionary in virtually every Latin American country.
That fiscal impulse, coupled with high commodity prices and abundant credit, continues to fuel economic growth today – often at the expense of stability and growth tomorrow. Latin America’s time has finally come, too many pundits will keep saying. If only they were right.
On this, I agree to a point, though I think he is pointing primarily to places like Venezuela with a high level of clientelism. You can still spend in good times as long as you are spending on the right things, particularly in terms of encouraging movement away from dependence on commodities.
The key takeaway point, though, is that excitement over GDP growth, leading to talk about how some Latin American economies should be viewed as "models," is short-sighted because it consciously ignores serious underlying weaknesses.