Outlook improves for Latin American economies
- Commodity prices are fueling an economic recovery in Latin America
- Sustainable growth will depend on domestic policy choices
- U.S. protectionism is spurring increased trade among countries in the region
- Investments in education and infrastructure will also boost economic growth
For the first time in several years, the economic news out of Latin America is positive, if not quite enthusiastic. After two years of stagnation, the region appears headed toward modest growth in 2017. This rebound has mostly been fueled by trade flows, which increased nearly 20 percent over the previous year. Most of that increase was the result of rising prices for the commodities that the countries in the region export. These prices continue to recover, but remain well below the historic peaks of the past decade.
Also contributing to analysts’ optimistic outlook is that, with some notable exceptions, most of the countries continue to practice fiscal discipline, which helps stabilize the region and enhances its appeal to foreign investors. Finally, and most significant, the threat of United States protectionism has moved leaders throughout the region to seek closer trade ties with their neighbors and outside groups. This is the most positive indication of possible regional cooperation in the past decade. One must credit President Donald Trump with stirring the region’s leaders to action.
Slow pace of change
Significant challenges remain. The Latin American countries could sit on their hands and wait for global commodity prices to rise, but sustainable development will depend on domestic policy choices that improve returns on labor, capital and productivity. The two most debilitating weaknesses that need to be tackled are crippling inequality linked to low social spending, especially in education, and establishing more robust regulatory and legal frameworks that make investing less risky. Foreign direct investment remains necessary to sustain levels of economic activity in most countries.
The principal obstacle to sustained growth in the region continues to be the extreme inequality
Economic growth has been uneven across the region. Of the larger economies, only Peru has been consistently successful over the past few years. Even there, the political difficulties of dealing with a fractious legislature dominated by the opposition makes it difficult for the market-friendly government to pursue more aggressive expansionist economic policies.
Argentina is recovering from several years of stagnation, but at a much slower pace than anticipated by the government. Here, too, the government is having trouble getting legislation approved by a congress controlled by the opposition. The slow pace may make it difficult for President Mauricio Macri to increase his support in the coming elections.
In Brazil, the economy has returned to modest growth despite continuing semi-paralysis in the face of the long-running, widespread corruption scandal that now threatens President Michel Temer himself. Mexico, the country that will suffer most if the Trump administration implements protectionist policies, continues to grow, but at a slower pace than in recent years.
The principal obstacle to sustained growth in the region continues to be the extreme inequality that reduces productivity and hampers the growth of consumer participation in the economy.
The biggest reason that it has been so difficult to reduce inequality is the low level of social spending, especially on education. During the years of booming commodity prices in the first decade of this century, governments made dramatic increases in programs to relieve poverty and, until the collapse of commodity prices in 2013-2014, those programs showed some success. However, poverty alleviation is not the same as reducing inequality, and it is inequality, along with inadequate social spending, that is making it difficult to help the labor force keep pace with the rapid changes in technology. Without a labor force capable of meeting new challenges, it is very difficult for the countries in the region to diversify their economies away from dependence on the production and export of raw materials (commodities) and to break into the ever more vital international value chains.
The Trump administration’s protectionist policies will hit Mexico the hardest
It is worth noting that Argentina has introduced a revolutionary computer literacy program to high schools throughout the country. Education reform in Chile and Colombia have been held up by wrangling in the legislature over questions of access and financial subsidies to the neediest. In Mexico, reforms finally made it through congress after more than two years of debate, but have not produced the results anticipated by the government of President Enrique Pena Nieto.
The Trump administration’s protectionist policies will hit Mexico the hardest. Elsewhere in the region, the negative impact will be slight. The challenge for most of the countries will be to diversify their export markets.
Perhaps the best news for Latin American economies is the awareness on the part of several leaders, especially in the countries of the Pacific Alliance (Chile, Peru, Colombia and Mexico), Argentina and Brazil, that intra-regional trade needs to increase. In the first months of this year, the leaders of Mercosur, Argentina and Brazil, declared that they would seek closer relations and greater trade with the Pacific Alliance. Mercosur also has indicated that it will renew efforts to strike a trade deal with the European Union, the negotiations for which were allowed to lapse in 2015.
Latin American trade alliances
Venezuela (suspended since December 2016)
Bolivia (in process of incorporation)
While it is too early to tell if these efforts will bear fruit, it is cause for cautious optimism that these countries recognize the challenge they face and have indicated a willingness to increase their activity in global markets – despite U.S. protectionism and the Trump administration’s palpable lack of interest in the region. Some in Latin America complain about the lack of U.S. leadership, but the region’s economic development is now mainly in the hands of its governments.
Economic growth will remain positive, though a bit sluggish
Perhaps the most obvious obstacle confronting Latin American countries is the lack of infrastructure to facilitate the transportation of goods and people among them. Projects to improve infrastructure are on the agenda of the Union of South American Nations (UNASUR) and have been for years. Now, financing for such ambitious projects as the transcontinental railroad is available from Chinese banks. The only thing lacking is political will.
The most likely scenario for the coming months is that economic growth will remain positive, though a bit sluggish throughout the region. Even so, efforts by Brazil and Argentina to lower barriers to trade within Mercosur hold real promise for improving the situation in the short term. And, given the collective will of the members of the Pacific Alliance and their commitment to expanding trade within the region, there is reason to expect progress in talks between them and the members of Mercosur, particularly Argentina. In terms of infrastructure, there will be a real movement toward improving the transportation across the Andes. Already there have been several bilateral agreements on facilitating trade, which are beginning to bear fruit.
A less likely scenario is that there will be a total lack of political will among the major countries in South America to improve intra-regional trade. In this scenario, the economies will grow or not according to the slow evolution of global commodity prices. Most countries will remain dependent on Chinese demand for their primary products. In the early months of 2017, the prices of iron and of copper increased. If they continue to do so in the coming months, even this scenario will show a slight increase in the growth rates in the region.
Legislative and presidential elections will be held in Chile, Argentina, Colombia and Brazil over the next 12 months, and these will have a major impact on the politics of the marketplace and on social spending.