South America struggles to recover from 'lost decade.'

Business America, June 5, 1989 by William J. Des Rochers

President Bush recently stated: "At no other time in U.S. history has international commerce been as important to our domestic economic growth as it is today." The President's remarks help draw attention to the importance of South America as a region for U.S. trade and investment. Two-way trade between the United States and South America has reached $36 billion. U.S. companies have $19 billion of direct investment there, and U.S. banks hold more than $48 billion of the region's commercial bank debt. From every standpoint, U.S. stakes in South America are already large, but can and should be larger.

Today, U.S. businesses may confront many obstacles in the region, economic difficulties, debt problems, structural changes, and protectionism. Nonetheless, American businesses have the strategies and desire to face up to these challenges. In so doing, the United States will expand its economic presence in the region, at a time when the competition is taking a fresh look at South America. In support of the efforts of American businesses in South America, the United States Government has continued to work with countries in the region to encourage their dismantling of trade and investment barriers. There have been many successes, and the United States will continue to press for more. The rest is up to American business. It should not take for granted a market of 274 million people, and economies with a combined GNP of $642 billion. South America's import needs range from aircraft and telecommunications equipment to chemicals and consumer products. These needs or opportunities will continue to diversify and broaden as the region realizes its potential and individual economies improve. American companies that remain alert to the changing situation will be well positioned to take advantage of these excellent opportunities.

South America has continued to struggle in what has been termed its "lost decade." In the 1980s, real growth has slowed sharply, inflation has accelerated, and the region again has been a net capital exporter to the industrialized countries. The international debt's size and scope has continued to be a drag on economic growth, and a major preoccupation of government authorities. External financial flows to most countries have remained weak and some governments have compensated by rapidly expanding the domestic money supply.

The outlook for the remainder of 1989 is uncertain. Several countries will have new governments, hold elections, or prepare for them in 1990. Thus, potential policy changes will in large part be constrained by political considerations. Moreover, against the backdrop of the debt overhang and continuing net resource outnows, economic policy makers will also continue to find their options greatly constrained.

South America's gross domestic product grew by about 1 percent in 1988, well below the 2.5 percent achieved in 1987. This resulted from sluggish aggregate growth in two major economies-Argentina and Brazil. The other major economy, Venezuela, recorded a solid increase, at 4.2 percent. The overall lackluster performance kept many countries at a per capita output level no higher than that achieved in the late 1970s. Today, policy options for many countries are much more limited. For example, the current overall reluctance of private lending institutions to provide substantial new financing will continue to act as a brake to new investment.

The sizable jump in inflation last year eroded real purchasing power in the region. If investment and consumption are relatively stagnant, it will be left to the external sector (exports) and local governments to spur growth. Governments throughout the region are struggling, however, to curb their fiscal deficits and thereby reduce inflation and structural inefficiencies.

Fortunately, the region's impressive export performance last year is continuing in 1989. The countries' currencies largely move with the dollar, and thus South America is increasingly competitive in Asia and Europe. Export expansion, and by implication export diversification, is playing a central role in the region's growth prospects this year.

Indeed, for South American countries, export market diversification was significant in 1989; overall exports expanded by 20 percent, but those to the United States increased by only 7 percent. This export diversification, while a slow process, should in the long term assure steadier growth and lessened dependence upon the health of one major market.

South America's debt concerns are being addressed more actively this year. There is recognition in both the public and private sectors that debt reduction will be required. However, from an international trade perspective, the region's use of potential savings will be especially important in implementing its export expan- sion goals. While numerous social objectives will compete for the debt savings, it is important that the savings be channeled to those productive enterprises which assure long-term growth.