Just when we were all celebrating that Latin America had come out relatively unscathed from the world economic crisis, a new threat could endanger the region's growth: its increasingly strong currencies.

On the surface, the steady appreciation of most Latin American currencies has a feel-good domestic effect: Once again, many Latin Americans will find it easier to import luxury goods, vacation in Miami or Madrid and perhaps even go back to the good old times when they were known by Florida store keepers as "dame-dos" (give-me-two,) because they used to buy two sets of whatever they purchased.

But, at the same time, strong local currencies will hurt the region's exports.

Marcelo Giugale, the head of the World Bank's Economic Policy and Poverty office for Latin America, brought that danger to my attention during a conversation last week. He noted that, ironically, the region's best performing economies may be the ones most affected by the strength of their currencies.

"Successful Latin American countries will have to learn to live with appreciated currencies," he said. "That will make them less competitive."

The reasoning is simple: With interest rates in the United States at near zero, growing numbers of U.S. and European investors are buying local currencies in Latin America to take advantage of higher interest rates in the region and later converting their savings back into U.S. dollars at great profits.

Granted, a lot of investors in the developed world got burned by playing this game in several Latin American financial crises followed by devaluations in recent decades. But most economists say that, at least for the next year or so, financially responsible Latin American countries will do reasonably well and the region as a whole will grow by more than 3 percent.

Whether it's because of a weakening of the U.S. dollar or an appreciation of local currencies, or both, over the past 12 months, Brazil's currency has gained 24 percent in relation to the dollar, Colombia's 25 percent, Uruguay's 19 percent, Mexico's 17 percent, Chile's 12 percent and Peru's 10 percent.

Among the exceptions to the rule is Argentina, whose currency depreciated by 7 percent over the past 12 months because the country attracted very little foreign capital, economists say.

"Exporting from places like Bogotá, Lima, Sao Paulo or Santiago will be more expensive," Giugale said, explaining that local labor costs will increase in U.S. dollars. "It will be more difficult for them to sell their products in the United States and in any other country that keeps its currency tied to the U.S. dollar, including China."

So what should countries in the region do?

Judging from what I heard from Giugale and several other economists, signing new free-trade agreements to expand export markets will help, but will not be enough. To grow, the region will have to produce new and better products.

In other words, to be competitive, Latin American countries will have to focus on innovation.

That will be a big challenge, because right now the region gets only 2 percent of the world's overall investments in research and development, compared with 28 percent received by Asian countries, according to RICYT, a region-wide science and technology research network.

While China invests 1.4 percent of its gross domestic product in research and development, Brazil is investing 1 percent, Argentina 0.6 percent, Mexico 0.4 percent and Colombia and Peru 0.1 percent, respectively, RICYT says.

Even more worrisome, the bulk of Latin America's investments in research and development are state-funded projects on theoretical issues of no commercial value. Consider this: While South Korea registered 80,000 patents worldwide last year, Brazil registered only 580, Mexico 330, and Argentina 80, according to the World Intellectual Property Organization.

My opinion: A strong currency is usually a sign of a healthy economy and should be any country's goal. But Latin American countries should aim for a gradual appreciation of their currencies, rather than sudden spikes resulting from financial speculation and should make sure that it doesn't affect their exports.

To achieve long-term growth with strong currencies, the region will have to export increasingly sophisticated goods, and that will require more innovation and more education.

 

 

(c) 2010, The Miami Herald DISTRIBUTED BY TRIBUNE MEDIA SERVICES