Latin America: The Big Three Bounce Back

By all readings, Latin America has regained its footing after the shock waves from Mexico's peso crisis. Not only is Mexico itself recovering, as signs of renewed strength in domestic demand begin to emerge, but Argentina and Brazil also are rebounding from their slumps (table).

To be sure, each of the Big Three economies, accounting for 80% of the region's output, is struggling with its own special problems. Mexico's credit crunch is limiting growth. Its foot-dragging on privatization is holding back productivity, and elections in early 1997 could be rough for the ruling party.

Brazil, which experienced a milder recession, already has posted solid second-quarter growth on the way to a 2.5%-to-3% pace this year, with a further pickup expected in 1997. But while the government tries to squeeze inflation down into single digits next year with a strong currency and tight monetary policy, resurging demand will mean more imports and a wider trade deficit. That will mean pressure to devalue the real.

In the longer term, the continued success of Brazil's inflation-control plan will depend on fiscal reform, which is moving at a glacial pace. A second term for President Fernando Henrique Cardoso would help assure continued reform efforts. But to succeed himself in 1998, Cardoso needs a constitutional amendment. Recent setbacks for Cardoso's party in key municipal elections cloud the prospects for winning congressional approval of a constitutional change.

Argentina's third-quarter industrial production rose some 7% to 9% from a year ago, following a steep yearlong recession, but joblessness is stuck at 17%. Growth in 1997, while projected to be stronger than the 3%-to-3.5% pace expected in 1996, will not be fast enough to bring down unemployment quickly, as the government plans another round of fiscal belt-tightening.

With the region rebounding, foreign money is flowing in again. The resulting boost to reserves will help the countries deal with their immediate problems--and help investors to sleep better.

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