By Alex Kaiser*
Beyond the local problems that each country has, the truth is that a very difficult year is coming, not only in Latin America, but throughout the world: we have China with the worst levels of economic growth in decades (3%), with a very pronounced deceleration process, which is not seen to recover very soon, because the Xi Jinping government is transitioning towards a more statist model, much more interventionist, contrary to economic freedom, which is going to affect significantly , in the medium and long term, the Chinese economy.
The United States continues with inflation problems and the worst part will come in 2023. The recession seems to me to be practically inevitable, so we have these two countries, which are the first and second economies in the world, in trouble. And Europe is also in trouble: it is going through a major crisis, as many of its countries are mired in unsustainable public debt, such as Italy and Spain. Interest rates may generate a new euro crisis. In the Old Continent they also have inflation that they cannot control, close to 6, 7 or 8%.
Germany has very big problems due to its dependence on Russian hydrocarbons, especially gas. They have an energy crisis, because they have made very bad decisions, such as stopping fracking, closing nuclear power plants, prohibiting the exploitation of their own gas wells, among others. All of them decisions that do not make economic sense. So we are going to have a Europe with problems.
Latin America has always suffered from high interest rates, because capital flight begins to take placewho seek higher returns in safer areas, such as the US, rather than risk in less secure regions.
In addition, we have a very complicated situation politically, because the presidents, in most countries, are not very supportive of the rule of law, nor of promoting foreign investment or local markets. Among all of them, the following stand out: Chile, Argentina, Peru, Brazil and Mexico, which does not escape this problem either,
So, we have our own wave of anti-market, anti-institutions, anti-free economy people, and that clearly scares investors, including our own, who end up taking their money to other regions. We have capital flight in Colombia, in Mexico, in Chilee, capital that escapes to different parts. I insist, because of the form of government that we are experiencing.
In Mexico they have the whole problem of the energy reform, where there have been emblematic projects that, by the will of the president, have been undermined in a very arbitrary manner. There is a permanent tension with the institutional framework, which is very harmful for economic and legal security. We also have a security crisis, which is not good either. It is an era in which we should be doing everything right so that things don’t go wrong, but we are doing everything wrong.
What can happen to Mexico if the US economy falls into recession? Same as everyone: economic contraction and rising unemployment. If the US gets sick, the whole world gets infected, but Mexico with particular force. What Mexico seems to have done well so far is not having overflowed with fiscal spending, as other countries have done, and maintaining a relatively stable currency, which is very good.
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Latin America is not showing, in general, this trait of fiscal sustainability. Chile, which was one of the most disciplined countries or the most disciplined in the region, threw everything away in recent years, ruined its international credibility and devalued its currency to levels we had not seen in many decades. So I think that if Mexico maintains fiscal prudence and achieves a stable exchange rate, at least it will get rid of the worst problems; because, if in addition to recession and stagnation, you suffer from inflation, you are in economic hell by definition.
In the same way, if Mexico does things right, all the production that is going to stop being done in China, with this deglobalization process, could reach the country and benefit Mexican workers. But if we have internal political risk and insecurity, it will be more difficult.
*Alex Kaiser is a Chilean-German lawyer, PhD in Philosophy from the University of Heidelberg, director of the Friedrich von Hayek Chair at the Adolfo Ibáñez University and senior fellow of the Atlas Center for Latin America, based in Miami.
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