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Acting smart when income grows

The expansive economic cycle in Latin America rests largely on the rise of key commodity prices, but experience suggests caution in thriving years.

High commodity prices and high taxes could help Argentina grow strong during 2008 and 2009, and maybe even sustain high levels of economic growth beyond those years, according to a group of economists from Argentinian think tank FIEL (Fundación de Investigaciones Económicas Latinoamericanas). But when the terms of trade deteriorate, adjustments could be difficult. Fiscal and wage restraint is their prescription to contend with the challenges resulting from high growth rates, inflationary pressures and energy shortages.

Argentina is expected to grow around 7.5 percent in 2008, commented economist Daniel Artana at IDB headquarters, and prospects are good as long as agricultural commodity prices remain high, But "the country is growing today at the cost of growth in the future,” he argued

Artana,  Juan Luis Bour and Fernando Navajas, three FIEL chief economists, analyzed their country’s prospects and policies during a recent seminar at the Washington, D.C., headquarters of the IDB.

The country has coped with energy shortages by purchasing electricity from Brazil and natural gas from Bolivia, they said, and by drastically curbing gas exports to Chile. These decisions have cut into Argentina’s trade surplus, while a rise in spending has put pressure on the budget. Activities of the private sector, meanwhile, are limited by energy shortages. The economists predicted more energy shortages and warned that additional gas supplies from Bolivia and cuts in exports to Chile were no longer viable policy alternatives.

They also expressed concern about rising wage demands to keep up with inflation. “Everybody wants to join the fiesta,” commented Navajas. He and his fellow economists recommended wage and budget restraint to make the economy more resistant to an eventual downturn in commodity prices, and they also favored less government energy regulation, which they said was producing price distortions and a fall in investment.

They cited Chile as an example of an economy that managed to save during periods of boom to be better prepared to contend with downward cycles. Argentina and Venezuela, they added, were countries in which a rise in export income resulted in a parallel rise in government spending.

During the upcoming IDB Annual Meeting in Miami, April 4-8, economic experts will address the issue of Latin America's bonanza related to high commodity prices during the seminar titled All that glitters may not be gold: Pending macroeconomic challenges for Latin America and the Caribbean.