Why consumer debt is good for Latin America

by moveforward on May 18, 2013

Why consumer debt is good for Latin America

Why consumer debt is good for Latin America

Over the last few months there has been increased focus upon the growing level of consumer debt across Latin America and while some experts are concerned about this trend, is it something we should worry about?

If we take a step back and look at the overall economic situation in Latin America we will see economies which are more prosperous than they have been in living memory, inflation which is relatively under control and improving lifestyles across the region. This has led to a feelgood factor amongst the Latin American consumer which has often crystallised in increased debt. So what does this mean?

Growing economies lead to growing debt

Many experts believe that in simple terms, you cannot have economic growth without consumer debt because in many ways consumer debt funds the economic growth of the future. It also acts as something of a spur for individuals to find employment, bring in their own income and ultimately leads to a more work-based population.

When individuals become more prosperous this will attract a whole host of financial services, consumer services and retail services. Many individuals will treat themselves to items and services which they had never thought of before the increase in economic growth and the increase in their own personal wealth. What is known as “disposable income” will very often push ahead in the short term while the cost of living will lag somewhere behind.

Controlling consumer debt

The key to economic growth and controlling consumer debt is how attractive or unattractive governments ultimately make debt in the eyes of consumers and businesses. The most basic of levers used by governments around the world are interest rates which have an immediate impact upon the cost of borrowing for finance companies and businesses which will ultimately feed down to consumers.

Quote from Gringos.com : “The fact that the Brazilian government has finally updated employment laws giving domestic workers, i.e. maids, etc, the same benefits as non-domestic workers has been loudly applauded by many people. However, why has it taken the Brazilian government so long to recognise this anomaly and finally do something about it?”

If consumer debt is beginning to run out of control then governments will simply increase interest rates thereby increasing the cost of debt. Again, the trick here is to balance interest rate rises against the impact this will have on the economy and inflation and ultimately on an individual’s ability to finance their debt. Historically this is where perhaps many Latin American governments have failed to grasp the nettle and either inflation has run ahead, economic growth has stalled or government and consumer debt has spiralled out of control.

Improving working standards and protections

One of the major problems which the Latin American workforce has historically experienced, and to a lesser extent is experiencing today, is that of working standards and employee protection. As governments in Latin America continue to introduce labour-based regulations to protect the workforce this gives them the confidence to join the economy, pay their taxes and feel relatively secure in their employment.

This also puts the emphasis upon businesses to look after their employees, push their businesses further ahead and ultimately look to work together for the future.

Conclusion

In simple terms the government and consumer debt of today will fund the economic growth of tomorrow if it is handled correctly and balanced. If one or more of these elements runs out of control this will have a knock-on effect to either the economy, government debt or consumer debt and ultimately short to medium-term economic growth.

The fact is that debt is good as long as it is under control and individuals, governments and businesses are able to finance it. When it becomes uncontrollable, when interest rates rise to levels which are difficult to finance this is when the whole economic pack of cards can come tumbling down.

{ 2 comments… read them below or add one }

ONTIME May 22, 2013 at 6:49 pm

Unless S. American wants the problems of so many countries concerning debt, they too had best watch their national debt as opposed to the consumer spending vs the government spending and make the private sector the main priority for a decent GDP…don't dig a hole you cannot get out of or bring a ladder.

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Jacoscott May 24, 2013 at 2:56 pm

Consumer debt in the form of credit cards already carries an interest rate of about 50%, so governments can't really raise interest rates to slow the growth of consumer dent. Right now, both government and consumer dent is growing at an alarming rate.

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