The Count: LAC 2009 unemployment

0.8...

...is the percentage point rise in unemployment in Latin America and the Caribbean during 2009. That's right folks, ECLAC and the International Labor Organization have a new report out, showing that contrary to fears about the potentially grim effects of the global financial crisis, unemployment in Latin America and the Caribbean only increased from 7.3 percent to 8.1.

Following almost a decade of decreasing unemployment rates, the onset of the global crisis posed the threat of erasing all that hard-earned progress. Indeed, during the first quarter of 2009 many countries saw an alarming spike in unemployment rates. So then what happened next? To quote ECLAC:

"Although the crisis caused a drop in employment, an increase in unemployment rates and the deterioration of the quality of employment, the impact was mitigated by the signs of economic recovery as of mid-2009 around the globe, the countercyclical policies adopted in many countries and the stability of the purchasing power of wages due to decreasing inflation, which restrained the fall in domestic demand."

But how did each country fare individually? Well, below are the ECLAC/ILO numbers presented all pretty like courtesy of Maladjusted Charts™:

[South America: Percentage point change in unemployment, 2008-09]

For a while now the Count has been getting a little bored of seeing Chile "bestest-society-ever" scoring highest in every freaking social indicator around (except inequality, haha!). So it is surprising to see it leading the pack in unemployment increases. But what's most remarkable about this picture is Uruguay on the opposite end, showing unemployment actually decreasing by 0.2 points.

Not bad Uruguay. Not bad at all.

The Count: friday FDI wonkiness

40 to 50...

...is the percentage that foreign direct investment (FDI) to Latin America is expected to grow in 2010. After contracting sharply between 2008 and 2009 during the world financial crisis, FDI is expected to make a big comeback this year due largely to stronger than anticipated recovery across the region. Or at least according to Eclac's new annual report on FDI.

The climate of uncertainty, tight credit conditions, falling commodity prices and recessions across the world that followed Lehman's collapse caused FDI flows to Latin America to shrink a whopping 42% from 2008 to 2009. The biggest contractions, predictably, took place in countries that in the past have attracted the most FDI. For instance, flows to Brazil shrank $19 billion, a 42.4% decline. In Argentina, FDI flows contracted by $4.8 billion or by 49.6%.

But while in almost every country FDI, though slowing significantly, was still coming in, in Venezuela FDI just wanted to get the fuck out. In 2008 FDI inflows to Venezuela were just barely positive. And during 2009, Venezuela experienced net FDI outflows of $3.1 billion, a 990% decline! This was due mostly to the various nationalizations that took place in 2009.

But before we predict doom and gloom for the Venezuelan economy, we should remember that it's not exactly Greece, has plenty of oil cash lying around, and just signed a $20 billion deal with China to develop it's heavy crude refining capacity.

Whatever. In any case, the regional decline is indeed quite impressive. But why don't we put it in perspective? The graph below shows FDI flows to Latin America and the Caribbean between 1990 to 2009 in billions of dollars.

As can be seen, the lead up to the 2009 crisis was nothing short of an FDI bonanza. In fact, 2007 and 2008 were historical records for FDI. And even after its huge decline, FDI inflows in 2009 were still the 5th largest ever recorded. In other words, FDI flows to Latin America have wethered the crisis quite well, all things considered.

On a compositional note, the sharpest decline between 2008 to 2009 was in FDI flows to natural resource extraction. As can be seen below, this surged in 2008 coinciding with the large worldwide rise in commodity prices. The share of the service sector, the largest recipient of FDI, remained more or less at its 2008 level.But while FDI flows to the manufacturing sector retook the second place, its technological content remained weak. Moreover, Eclac notes that the technological content of FDI to Latin America has been low accross the board. This takes us to our final graph:
The graph above divides all announced FDI in Latin America into "low", "medium-low", "medium-high", and "high" technology content. As can be seen, low and medium-low dominate new FDI inflows.

This is a big problem because one of the biggest supposed benefits of FDI in textbook economic theory is that it transfers technology to developing countries, leading to positive "spillovers" into other industries and thus increasing overall productivity. Of course, no one seriously believes that FDI in and of itself leads to technology transfers and productivity growth. Smart developing countries, like China for instance, have always used industrial policy to harness FDI to suit their development strategies. It's a real shame that so many countries in Latin America have abandoned this type of thinking.

Contagion Time

Ah, remember the good old days, back in the early 2000s, when the certain and ever lasting benefits of "free trade" with the U.S., extolled as a sure route to development-freedom-democracy-and-awesomeness, offered us comfort from the anguish of our fleeting, uncertain and all around unknowable world? Well that was then and this is now.

According to a new study by the IMF, Central American contagion from the global financial crisis is largely due to increased trade integration with the U.S., which was caused primarily by, you guessed it, the Dominican Republic and Central American Free Trade Agreement (DR-CAFTA). In other words, DR-CAFTA countries have become more dependent on U.S. markets and thus more vulnerable to recessions from up north. According to the study:

"A one percent shock to U.S. growth shifts economic activity in Central America by 0.7 to 1 percent... Shocks to advanced economies associated with the 2008-09 financial crisis are found to have lowered economic activity in the region by about 4 to 5 percent, on average, accounting for a majority of the observed slowdown."

Well, there you have it: "freer trade" with the U.S. has amplified the transmission of recessions to Central America. Hey at least free trade agreements still have all those other wonderful provisions on intellectual property, industrial policy, environmental and labor standards and... oh wait, never mind.