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Why South American economies are rebounding first

Commodities-hungry China is pulling Brazil, Chile, and others out of recession. But Mexico and Central America, dependent on US sales, are lagging.

By Staff writer of The Christian Science Monitor, Andrew DownieCorrespondent of The Christian Science Monitor / October 27, 2009

Computermakers: Workers assemble Positivo computers in Curitiba, Brazil. Unemployment there is expected to fall to all-time low of 6.7 percent by year-end.

Cesar Ferrari/Reuters

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Mexico City; and SÃo Paulo, Brazil

Latin America, long tied to the economic well-being of the United States, finds itself in a rare position these days: recovering from the global financial crisis faster than most of the rest of the world.

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After shrinking 2.5 percent this year, the regional GDP is expected to return to 2.9 percent growth next year, according to the International Monetary Fund's World Economic Outlook.

But the recovery has two faces.

Brazil and other commodities-­exporting nations in South America are blazing the way forward thanks to increased trade with China, as Mexico and Central America languish from a sustained drop in demand in the US.

"Every time that the US or Europe or any other of the big world locomotives were in trouble, Latin America fell," says Alfredo Coutino, Latin America director at Moody's Economy.com. "This is the first time in many, many decades in which Latin America is better prepared, in terms of economic strengths, to deal with the external recession."

Behemoth Brazil leads

The region certainly has learned from past mistakes and adjusted policies that have helped it weather the crisis. In general, nations have kept within their budgets, built up currency reserves, and adopted flexible exchange-rate systems.

The region's recovery is led by Brazil, whose gross domestic product (GDP, the total output of goods and services) is expected to decline by 0.7 percent this year, but grow to 3.5 percent by next year, according to the International Monetary Fund. Its domestic market has remained strong throughout the crisis, in large part because government aid programs and rises in the minimum wage mean more people have more money to spend.

Tax breaks for purchases of goods such as freezers, fridges, and cars have also helped keep cash registers ringing, and credit remains available from the country's heavily protected Brazilian banks.

Soy, copper, and other commodities, which South America exports to Asia, have also helped buffer the region, a main reason Brazil is leading the recovery.

"China is going to be an engine for recovery of Latin America," says Eric Farnsworth, vice president of the Council of the Americas, a consultancy based in New York.

China has overtaken the US as largest trading partner for both Chile and Brazil. Other commodities exporters, particularly those with strong ties to China, are also rebounding, including Peru and Argentina.

IADB: Remittances will fall 11 percent this year

The boom from China stands in stark contrast to the drag that the US is putting on Mexico and Central America.

Mexico's GDP is expected to contract by 7.3 percent this year – exacerbated by the swine-flu outbreak that discouraged tourism.

More than 80 percent of exports from Mexico head to the US, where demand has dampened considerably as consumers pinch their pennies while riding out the recession. And total exports account for 30 percent of Mexico's GDP, says Mr. Coutino. In Brazil, that figure is only 12 percent, making the South American giant more resilient to external problems, he says.

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