EAST ASIA´S GROWING DEMAND FOR PRIMARY COMMODITIES - MACROECONOMIC CHALLENGES FOR LATIN AMERICA

Abstract

This paper analyses the macroeconomic impact of East Asia’s growing demand for primary and industrial commodities in four Latin American countries – Brazil, Chile, Peru and Venezuela. The paper shows that whilst the export boom has contributed to improved external accounts in these countries, it has posed the challenge of how to manage the surpluses. Policy makers in the region have responded by pursuing prudent macroeconomic management policies. Venezuela is the only country that has increased public expenditure significantly, mainly in the social sectors. A striking finding is that in Peru, government revenues from the mining sectors are very small. A further finding is that public investment in the four countries has not increased in line with the increase in surpluses. However, foreign investors have demonstrated interest in investing in the extractive sectors in these countries. This paper concludes that Latin American countries benefiting from the ongoing upward trend in commodity prices should do more to increase investment, especially in the infrastructure sectors. They should also avoid excessive currency appreciation, which undermines the competitiveness of their manufactured exports, which are the ones that really create jobs and value added, and through export diversification contribute to reduced variability in the terms of trade.