Latin America’s Weak Economic Recovery
by José Antonio Ocampo – December 31, 2018
With the right approach, Latin America, which has recorded just 0.5% average annual GDP growth during the last five years, could improve its economic prospects considerably, potentially avoiding another lost half-decade. The question is whether it will muster the political will to take the necessary steps.
Latin America is reaching the end of its fifth consecutive year of anemic economic growth. From 2014 to 2018, annual GDP growth has averaged just 0.5%, slower than during the first five years of the Latin American debt crisis (1981-85) and the five that followed the 1997 Asian financial crisis (1998-2002). It is safe to say that Latin America has suffered a “lost half-decade.”
While a few small economies have achieved annual growth rates exceeding 4% – notably, Panama and the Dominican Republic, and, to a lesser extent, Bolivia and Paraguay – Latin America’s larger economies have struggled. Venezuela, in particular, has experienced not only the sharpest collapse of any Latin American economy in history, but also the most severe hyperinflation. (Five other Latin American economies have endured hyperinflation in the past.)
Then there is Argentina, which this year faced a currency crisis, a run on the peso, and double-digit inflation, and had to secure an International Monetary Fund bailout totaling more than $57 billion – the largest the IMF has ever disbursed – to help it shore up its finances. In the last five years, Brazil also underwent its deepest-ever recession, from which it is emerging very slowly. Mexico, for its part, has maintained a mediocre growth record for decades.
Even the relatively strong performers of the past, such as Chile and Colombia, have struggled with slow economic growth over the last five years. Peru, which stood out among the world’s large and medium-size economies for its robust performance in the early twenty-first century, has not been able to recapture strong growth.
The good news is that Latin America’s economic prospects seem to be improving, though the recovery will be slow. The UN Economic Commission for Latin America and the Caribbean has recently projected an average growth rate of 1.7% for 2019, half a percentage point less that what the IMF had projected just two months ago.
Although Brazil’s recovery is expected to continue, growth will be constrained by the need to address fiscal imbalances, whereas Mexican growth will remain slow. In both countries, major political changes accompanying the election of new presidents are generating uncertainty.
The large and medium-size economies that will fare the best are Peru, Colombia, and Chile – possibly in that order – though their growth rates will remain much lower than during the commodity boom of 2004-2013. The worst performers will be Argentina, where the recession will continue, and Venezuela, which shows no signs of escaping its plight anytime soon.
The weakness of Latin America’s recovery is partly a result of an unsupportive international environment. Growth is slowing in the major developed countries, as well as in China. Protectionism is on the rise, with the United States and China engaged in an escalating trade war, the consequences of which will be transmitted to Latin American primarily by means of trade diversion.
Moreover, commodity prices, which began recovering in 2016 from their collapse in previous years, have been falling again in recent months. Oil prices, which increased the most sharply, peaked in October and have plummeted since.
Finally, portfolio capital flows have slowed, while their costs have increased, owing to rising US interest rates – a trend that is likely to continue – and increasing risk spreads. Fortunately, as I have previously argued, there are no signs of a “sudden stop” in external financing, which led to catastrophe during the debt crisis of the 1980s and after the 1997 Asian financial crisis.
The solution to Latin American countries’ economic travails lies in deep reforms, though not necessarily market reforms, which have a relatively poor record in generating rapid growth in recent decades. In 1950-1980, when Latin America experienced rapid industrialization, its average growth rate was 5.5% per year. Yet, since 1990 – after the debt crisis of the 1980s – the region has managed just 2.8% annual growth.
The rapid and premature deindustrialization that Latin America has experienced since the 1980s is a key reason for this. Indeed, the most significant long-term slowdown has occurred in Brazil and Mexico, the region’s two largest economies and the main success stories of industrialization.
Given this, Latin America should pursue reforms that support industrial manufacturing, even as it continues to exploit its strong comparative advantage in natural resources – an advantage that has facilitated increasingly close ties with China. Such reforms should include increased infrastructure investment, which, according to the Development Bank of Latin America, currently amounts to about half of what the region needs.
At a time of rapid technological change, Latin America also needs to invest much more in research and development. UNESCO reports that the region currently spends only about 0.7% of GDP on R&D, compared to 2.1% in East Asia and 2.4% in high-income (OECD) countries.
Finally, Latin America must consolidate its regional integration processes. To be sure, there have been some successes, especially the Pacific Alliance (with Chile, Colombia, Mexico, and Peru as full members). Central American integration has also made steady progress. But the two biggest South American integration projects – Mercosur and the Andean Community – have lately failed to bridge the political divisions among their members.
With the right approach, Latin America could improve its economic prospects considerably, potentially avoiding another lost half-decade. The question is whether it will muster the political will to take the necessary steps.
Originally published on Project Syndicate.