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Can Latin America escape its second lost decade?

Jan 04,2024 - Last updated at Jan 04,2024

BOGOTÁ — Latin America has come to the end of its second lost decade of development. Average annual growth hovered just below 0.9 per cent for the 2014-23 period, worse than the 1.3 per cent rate in the 1980s. GDP per capita, however, is projected to be slightly higher in 2023 than in 2013, owing to slower population growth. By contrast, it was not until 1994 that the region’s GDP per capita returned to its 1980 level. Still, Latin America has a severe growth problem.

To be sure, economic performance has varied across countries. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) estimates that Mexico, Central America, and the Caribbean outperformed South America in 2023. Among the largest economies, Mexico, Brazil and Colombia fared better than Chile and Peru, which recorded zero growth, while Argentina’s ailing economy contracted by 2.5 per cent. Venezuela grew by 4.5 per cent, but its GDP remains less than a third of its size a decade ago.

Although foreign direct investment has remained robust, private external financing has been limited, and borrowing costs have increased. While bond issuance in Latin America and the Caribbean grew by 30 per cent in the first ten months of 2023, it was still roughly half of the annual average between 2019 and 2021. Moreover, the average yield of Latin American bonds is currently around 8 per cent, compared to roughly 5 per cent in 2021, despite a modest decline in risk margins. The primary driver of this increase has been the higher yield on ten-year US Treasuries.

Another factor contributing to Latin America’s poor economic performance is the limited recovery of international trade. According to The Netherlands’ Bureau for Economic Policy Analysis, the low growth in trade volumes that has characterised the global economy since the 2008-09 financial crisis has been followed by virtual stagnation over the past two years.

Global trade volumes declined by 1 per cent year on year in the first three quarters of 2023, while the value of traded goods fell by 5.5 per cent. In this regard, Latin America has performed better than the global average: while the value of Latin American exports decreased by roughly 2 per cent, ECLAC estimates that trading volume has increased slightly.

Still, the global trade slowdown and the decline in commodity prices have adversely affected growth in the region, especially in South America. While the world economy’s ongoing fragmentation has had a limited economic impact so far, Latin American leaders should not underestimate the risk that growing tensions between the West and China could spark broad decoupling, as the International Monetary Fund’s First Deputy Managing Director, Gita Gopinath, recently warned. Instead, the region’s economies should seize the export and FDI opportunities offered by both sides.

The region is also grappling with deep political and social turmoil. For example, Argentina’s recently elected president, self-described “anarcho-capitalist” Javier Milei, has embarked on a programme of radical economic reforms. Meanwhile, Chile, Colombia and Peru are in the midst of severe political crises of their own, and Venezuela’s path back to democracy remains unclear. Fortunately, the political regimes of Latin America’s two largest countries, Brazil and Mexico, remain relatively stable.

Against this backdrop, Latin American economies must reevaluate their current development models. Following the widespread adoption of market reforms in 1990, the region’s annual average growth has been roughly 2.5 per cent, compared to the 5.5 per cent rate during the period of state-led industrialisation between 1950 and 1980. Moreover, ECLAC estimates that the region’s annual potential growth has been limited to just 1.6 per cent since 2010, making Latin America the worst-performing developing region of the past 30 years.

Latin American governments could take several steps to accelerate economic growth. First, they should increase funding for science and technology, where the region lags significantly. According to the latest UNESCO data, regional investments in these areas amount to 0.6 per cent of GDP, which is roughly one-fifth of what high-income countries invest on research and development and one-fourth of China’s R&D spending. Notably, Brazil is the only Latin American country that invests more than 1 per cent of its GDP in science and technology, while the rest allocate 0.5 per cent or less.

Second, Latin American governments should develop proactive production-sector strategies, focusing on sectors where the region has a significant advantage and those at the forefront of the ongoing industrial revolution. The first group includes food production and minerals essential for the green transition, especially copper and lithium, along with their associated value chains. The second includes digital technologies, which must be widely adopted and integrated into the region’s economies.

The clean-energy transition holds great promise, especially for Latin American countries with abundant solar and wind resources. This shift can also benefit companies whose production processes consume large amounts of energy, such as steel and aluminum manufacturers. Moreover, Mexico, Central America, and countries with a Caribbean coast, like Colombia, stand to gain from near-shoring, given their proximity to major markets like the United States.

Given the sluggishness of global trade, greater regional integration is crucial. Latin American governments should deepen trade-integration processes and negotiate a broader regional free-trade agreement. But the current tensions between Argentina and Brazil, together with Milei’s threats to withdraw from the Mercosur bloc, could undermine such efforts.

Beyond trade, the region should strengthen its financial institutions, particularly the Development Bank of Latin America and the Latin American Reserve Fund. Latin American countries should also deepen the integration of their transport and electricity systems and foster scientific and technological collaboration.

Last but not least, Latin American countries must reaffirm their commitment to democracy. The economic turmoil of the 1980s weakened authoritarian regimes and led to rapid democratisation. But rising authoritarianism poses a significant threat to what had become the world’s most democratic developing region. To accelerate economic development, political leaders must identify and implement effective means to mitigate the growing polarisation that jeopardises both national and regional stability.

José Antonio Ocampo, a former United Nations under-secretary-general and a former minister of finance and public credit of Colombia, is a professor at Columbia University, a member of the UN Committee for Development Policy, and a member of the Independent Commission for the Reform of International Corporate Taxation. Copyright: Project Syndicate, 2023.

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