The Effects of the US Terrorist Attacks on Latin American Economies

 
The World Bank estimates that 10 million more people will fall below the poverty line (defined as living off less than one dollar per day) and thousands of children in poor countries will die as a result of the September 11 terrorist attacks in the United States. This assessment could in fact be overly optimistic, because it assumes that the developed economies will recover from recession in mid 2002. Some independent analysts paint an even worse scenario, predicting that the attacks will sharpen the recession already under way in Japan, the European Union and the United States. Depending on the form and intensity of the international war against terrorism, we could be seeing the beginning of a long cycle of recession in which the biggest losers will be the world's poor.

The effects of this crisis on Latin America will manifest themselves in four main ways. First to be affected will be the region's financial systems. Analysts agree that Latin America will find it more difficult to attract loans and foreign capital as creditors and investors seek to minimize their risks. Sources of financing will be limited to the IMF and World Bank, whose loans carry greater restrictions and are linked to foreign debt payments. In the short term, Latin America will benefit from the rate cuts introduced by the Federal Reserve, which will lower payments on those portions of the region's external debt pegged to flexible interest rates. But Latin America will be unable to benefit from the liquidity of the dollar due to concurrent assessments of increased country risk, as in the case of Argentina. These conditions will delay the region's economic recovery.

Second, Latin American productivity levels could suffer as concerns grow about export viability. As sources of financing dry up, export earnings will be vital for the region. In the short term, the economies most tied to the United States-Mexico, Central America, the Caribbean, Colombia and Ecuador-will feel the impact of reduced US consumer demand. Slowdowns in tourism, transportation and the maquiladora industry could affect the Caribbean and Central America the most. In the medium and long terms, all of the countries in the region will depend on the evolution of the global economic cycle.

Two more considerations should be taken into account. In all probability, the war on terrorism will not be a conventional one involving large movements of troops, but rather a battle fought with information, technology and specialized security. As a result, there is unlikely to be a wartime boost in demand for Latin American export products and associated job creation. In addition, while security has now displaced trade on the US agenda, the need to forge regional alliances with politically and economically stable allies could lead to a reconsideration of the terms for hemispheric integration. The Free Trade Area of the Americas (FTAA) could be reconfigured to minimize the social costs of trade liberalization, compensating for a mutual commitment to hemispheric security. Bilateral free trade agreements-such as the one being negotiated between the US and MERCOSUR-could receive new impetus in the drive to avoid a regional economic crisis, like the one taking shape in Argentina, and the threat of international terrorism. In fact, in the week following the September 11 attacks US Trade Representative Robert Zoellick announced that the Council on Trade and Investment will meet in October to discuss issues related to agriculture, industry, investment and e-commerce.

In the worst-case scenario, we would see the following chain of events: decline of the US economy-increased US protectionism-a drop in Latin American exports-financial and monetary crisis-isolation of the Latin American economies-a decline in the region's imports-increased social and political instability throughout the region.

The third likely effect of the current crisis on Latin America is a potential boost for the region's petroleum-producing countries. In the short term, the threat of global recession has driven down fuel prices, but in the long term the possibility that an eventual war will involve the Arab oil-producing states will favor exports from Venezuela and Mexico and, to a lesser degree, Ecuador and Colombia.

Finally, we can make several cynical predictions about the effects of recent events on the region's economies. The terrorist threat will mean profound changes in the way we live our lives. As in previous wars, human ingenuity will undoubtedly devise new defense technologies that, in peacetime, will find important productive applications. Two existing examples are nuclear energy and the Internet. Past wars also brought a pardoning or restructuring of external debt. Many analysts are saying that we are on the brink of World War III or, at the very least, the first war of the twenty-first century. Can Argentina hang on until it's over?

World Bank Press Release

Manuel Castells, "Análise: Guerra das Redes," Folha de São Paulo, September 21, 2001: http://www.uol.com.br/folha/mundo/ult94u29660.shl