Australia should be doing the Latin American tango

One of Prime Minister Kevin Rudd’s budget messages that has slipped under the radar, but which has potentially major ramifications for Australia, is his contention that Australia should be more focused on Latin American business and strategic opportunities. Mr Rudd is right to suggest this, because this region is not only emerging as a major player in the 21st century economy, but also because it shares common geographic areas of interest with Australia.

Of course, it is not that Australians are ignoring Latin America - we have a Free Trade Agreement with Chile for example - it’s just that it does not grab the media or political attention it deserves in this country. While newspapers and the electronic media place foreign correspondents in traditional cities like London and Washington, and in emerging economies like China and India, Latin America is simply not on the radar. This is a mistake.

The impact of South America, and this includes Mexico, on the Australian economy is already substantial, but the potential can be said to be, without exaggeration, huge.

The value of Australian exports to Latin America is currently about $2.1 billion, while imports from Latin America to this country sit at $2.5 billion. Trade Minister Simon Crean noted in November last year that Australian exports to the Latin American region had increased 20 per cent in the past two years - Brazil and Mexico are our biggest trading partners - but he also made the sanguine observation that it constitutes only 2 per cent of our total trade.

While the “Chindia” story understandably gets the Australian media, business community and defence strategists excited, it is time to recognise that it is not the only game in town. When it comes to economic growth potential, cultural influence and strategic importance Latin America is front and centre of Australia’s future.

In May this year the United Nations Economic and Social Council graphically described the stellar economic performance of Latin America in recent years. “Economic activity in Latin America and the Caribbean grew by 4.2 per cent in 2008, marking the fifth consecutive year of per capita GDP expansion averaging over 3 per cent per year. This was coupled with improvements in labour-market indicators and a reduction in poverty in the region,” the UN report observed.

The global financial crisis is hitting Latin America less severely than some other areas of the globe, with the UN predicted a decline of 0.3 per cent in GDP growth for 2009, and rise in unemployment to 9 per cent.

But longer term the picture looks fairly healthy. While there are strong political currents and cross-tides in some countries such as Ecuador, Paraguay, Bolivia and potentially Peru later this year, and Venezuela’s Hugo Chavez looms on the edge of the stage while occasionally moving to its centre, but countries such as Chile, Brazil, Mexico and to a lesser extent Argentina are politically and institutionally more sound now than at any time in recent memory. Even Bolivia, the poorest nation in the region, is perhaps the least impacted of any nation around the world by the GFC.

The longer term impact of the GFC on Latin America is also potentially less catastrophic than it is for say Europe, or North America - major trading partners of Australia. As a recent paper from the Intern-American Development Bank notes, many Latin American countries have “rainy day” reserve funds, and this allows for “well-managed reserve financed public investment programs [to] fill an important deficiency in the availability of productive public goods and would stimulate domestic aggregate demand, thereby minimizing the effects of the adverse external shocks that the crisis has generated on real economic activity,” the Paper by Eduardo Fernández-Arias and Peter J. Montiel notes.

The World Bank’s regional Chief Economist, Augusto de la Torre, added weight to this view with a comment on June 8 that this crisis demonstrated Latin America’s reduced vulnerability to negative effects compared to past crises and to the performance of other emerging regions.

Then there are the factors of demography and per capita income in Latin America that need considered attention by Australian policy makers. While fertility rates in the largely Catholic Latin America are declining, the UN estimates population will rise from 589 million this year to 769 million by 2050 - a 30 per cent increase. And long term economic growth rates for Latin America, which as always must be read with caution, are in excess of 4 per cent for most countries in the region.

So what should the Rudd Government do if it is serious about getting Australians more focused on the Latin American region?