SAO PAULO, April 11 (UPI) -- They share a border, a continent and are strong trading partners, but when it comes to making the trip to economic recovery, Brazil and Argentina are rolling down the road in opposite directions.
Argentina cannot please the International Monetary Fund and get billions of dollars in aid unlocked. The IMF points to Brazil, with qualifiers, as an example of how it can help bring a country back from the brink, although neither nation is as stable as Mexico or Chile.
In Argentina, the former economy minister is charged in connection with an arms deal in the early 1990s while President Eduardo Duhalde remains extremely vulnerable to uprisings within his party and his populace. In Brazil, despite upcoming presidential elections and serious bad blood between the leading parties of the governing coalition, politicians are calling a truce to a certain extent, understanding that having vital economic bills languish in Congress helps no one come election day.
Brazil, since devaluing in 1999, has gained footholds in foreign markets, especially in Latin America, as its products became cheaper with its currency weaker. Argentina devalued in January, ostensibly setting up a situation where its suddenly cheaper exports could also gain ground, but then the country promptly slapped high taxes on exports, nipping in the bud this possible spark for an economic turnaround.
The IMF released a report earlier this week noting that Latin American nations could bolster economic stability if they increased exports, maintained discipline, better managed their equities markets, and tried to wean themselves off foreign loans. "Progress has been made in some countries in limiting macroeconomic instability through the adoption of credible fiscal and monetary reforms ... most notably in Brazil, Chile and Mexico," the Fund noted in its World Economic Outlook report for April, in an essay that Argentina could take as a recipe for getting its aid unlocked.
The IMF did point out one area where Brazil is lamentably tied to Argentina. "It seems crucial that Latin America become more open to foreign trade," the Fund noted. "While countries such as Chile and Mexico have made remarkable progress on this front in recent years, heavy external borrowers in the region, such as Argentina and Brazil, continue to have relatively limited trade links with the rest of the world."
But, the report also acknowledged how Brazil is beginning to have an eye for the future, differentiating itself on the trade front: Sixty percent of the nation's exports are now manufactured goods. This is a relatively new phenomenon for Latin America, that a country on the continent isn't dependent on a handful of commodity exports, such as copper in Chile.
Argentina, too, has not caught on to this diversification, and its manufacturing sector will never make the necessary quantum leap if its hands are tied with high export taxes that President Duhalde has imposed. Argentine officials point out that until they receive IMF aid, they must use the export taxes to fund basic social programs. But the IMF, while noting the severe situation for the poor in Argentina and committing itself to helping the country build a program to help the destitute, also stresses that the aid will not be coming until the country learns that the cash should not be used to keep a bloated provincial bureaucracy alive.
Anoop Singh, who is heading the IMF delegation in Buenos Aires which is set to end its current two-week round of talks with Argentine officials, said that in addition to reining in provincial governors and their free spending, Argentina has to continue on its path to sound monetary policies.
"Now that the peso is floating, it is monetary policy that has to provide the anchor," Singh said Wednesday. "A more permanent anchor will be a full fledged inflation-targeting regime -- such as that adopted by other countries, including Brazil after its own difficulties in 1999."
The IMF's use of Brazil as an example of doing the right thing, however, could become obsolete should the man who leads all polls become the next president. Luiz Inacio "Lula" da Silva, the Workers Party candidate who according to most recent polls is the favorite of 31 percent of the voters, would certainly bring a dose of protectionism to the country, although analysts say he would eventually be pulled to the center of the political spectrum by the realities of the job. Nevertheless, other leading candidates are beginning to engage in some populist talk to counter Lula's popularity among voters.
The government-backed candidate Jose Serra, who is running second to Lula in the polls, noted earlier this week that if elected he would more closely control prices that the state-run oil giant Petrobras charges. While market analysts are taking Serra's comments as just campaign talk and the company's stock remained somewhat stable, the fact remains that a populist trend is popping up across the continent to help politicians remain in favor with their constituents, which in no way helps out the region's economic situation.
Political leaders, both in Brazil and Argentina, are now walking the fine line between keeping the IMF, other international lenders and emerging market investors engaged in their economic growth, and taming the protests of citizens feeling the pain of austerity measures, floated currencies, and other realities of free-market policies. How they continue on this road will determine whether the region will finally emerge from the cycle of economic despair that haunts it, or remain mired in suspect policy making that has historically shackled it to stunted growth.
