World Bank: China crucial in Latin America economic recovery (Feature)

By Silvia Ayuso Apr 22, 2010, 19:04 GMT

Washington - Thank you, Beijing: That is more or less what Latin America should be saying to China, according to the World Bank.

For the multilateral financial institution, the Asian giant has been a key factor in Latin America's quick recovery from the global economic crisis as well as the region's Gross Domestic Product (GDP) growth prospects. The International Monetary Fund has projected growth in the region of about 4 per cent in both 2010 and 2011.

'The connection with China is helping a good portion of the countries in the region,' Augusto de la Torre, chief economist for Latin America at the World Bank, said Wednesday.

Statistics show that the Latin American countries that export the most to China, like Chile, Peru, Costa Rica, Brazil and Argentina, 'are those that are showing the greatest vigour in economic recovery,' De la Torre said.

On the contrary, he noted, 'Those that have fewer connections with this new pole of growth in the world are recovering more slowly.' One example is Mexico, whose economy does not beat to the rhythm of the Chinese economy, but rather to that of the United States and to a lesser extent Europe.

The 'China connection' does not only affect export capacity. Beijing also has a lot to say in commodity markets, which account for 97 per cent of Latin America's economic activity. In the region, 93 per cent of the population lives in countries that benefit from high commodity prices, the expert said.

'China interacts (with Latin America) not just through imports and exports, but also through the huge effect it has on the price of commodities,' De la Torre noted.

'For Latin America, activity in international commodity markets and their prices have become crucial, and an important link through which Latin American economic activity is tied to Asian economic activity, and China's in particular,' he explained.

In spite of this, the World Bank warned in a report on the growth prospects for Latin America and the Caribbean (LAC) that although the region's short-term outlook may be 'very favourable,' it will not be easy to maintain the current rates of economic growth in the future, due to the uncertainties and complexities that also affect China.

'While growth in LAC (especially in South America) can continue on the strength of its ties to emerging Asia, there are doubts about the sustainability of China's investment-reliant/export-based growth model,' the report said.

'A smooth shift towards more of a consumption-based growth model in China would be easier to achieve with the help of international macroeconomic policy coordination, which seems unlikely to materialize at this stage,' the World Bank added.

The report further said that, 'while China is expected to continue to grow strongly in the short-run, as its stimulus dwindles (a few measures have already been taken towards a normalization of conditions) uncertainties rise about the durability and sustainability of China's investment-based growth pull on the rest of the world.'

It is fortunate, then, that the Chinese miracle has not been the only factor to help Latin America get over the crisis.

Other elements have made a contribution to prevent the region from succumbing to old mistakes, De la Torre said.

Among these factors, there is a 'fundamental improvement' in macroeconomic policy frameworks, a greater integration in international financial markets and 'more vigorous, useful and flexible' assistance from multilateral organizations.