Let’s Be Clear: This Will Not Be Latin America’s Decade

Keyword: 
Economic growth
Topic: 
Macroeconomics - Economic growth - Monetary Policy

There is a sense of optimism about Latin America. Some of it is, of course, well grounded. Most countries in the region have a record of over two decades of relatively strong fiscal accounts and over one decade of one-digit inflation. The region grew in 2003-07 at the fastest rate since its 1967-74 boom. This led to one of the most spectacular reductions in poverty levels in history (about ten percentage points according the UN Economic Commission for Latin America and the Caribbean, ECLAC), among other reasons because growth was accompanied by improvement in income distribution in about two-thirds of the countries. Investment rates recovered during the 2003-07 upswing and are now high by Latin American standards, with a few exceptions. Equally important, external debt net of reserves fell from about 28% of GDP in 2002 to levels of 5-6% since 2008. This allowed the region to manage the effects of the recent global financial crisis with significant room to maneuver, allowing it to recover fast and avoid both balance of payments and domestic financial crises—a significant improvement, no doubt, over past crises.

But be careful with over-optimism, as reflected in particular in the view that this will be “Latin America’s decade”. There are many reasons to be cautious, but the most important is the mediocre record of economic growth since market reforms: a 3.3% annual growth in 1990-2011 vs. a 5.5% average for 1950-1980. The abnormally good mix of external conditions—in terms of capital flows, growth of international trade, commodity prices and migrant remittances—was the background for fast growth in 2003-07, but those conditions are mostly over. An exception is good access to international capital markets for those countries with low risk premiums. The other is commodity prices, but in this case it seems to be clear that the upward phase of the super-cycle of commodity prices that took off around 2000 has reached its peak (Erten and Ocampo, 2012). The downswing may start, particularly if China slows down in the next few years more than expected today (to, say, 5% annually, rather than 7-8% as currently forecasted). The change in external conditions is reflected in slower growth in 2007-11 (2.7% per year) and an expected growth for 2012 of around 3.5%. The latter (or at most 4%) is probably a sustainable long-term rate of growth for the region.

There are several interpretations for the slow economic performance of Latin America during market reforms, but the most important is that the orthodox export-led model that Latin America adopted during this period is not a strong engine of growth. By this I mean an export-led model that is different from the equally export-led but with a clear focus on the technological upgrading of the export basket that characterizes East Asia. This model was able to deliver at best mediocre rates of growth even in the face of the spectacular rate of growth of world trade that characterized the period 1986-2007: 7.4% a year in real terms (similar to the growth during the 1950-74 “golden age”). But the dynamism of world trade is clearly over. Its rate of growth in 2007-12 has been only 2.7% a year according to the IMF. 

This is, of course consistent with the views long exposed by the Latin American structuralist tradition that the technological upgrading of the production structure is the key to dynamic growth (for a recent statement, see ECLAC, 2012). In export-led models, this means that the technological upgrading of the export basket is key to dynamic growth. This may not be confined to manufactures, as it should include the technological upgrading of natural-resource production and the development of modern services. This is why I much prefer the term “production sector strategies” to the older concept of “industrial policies”.

The problems generated by Latin America’s patterns of specialization in inducing poor growth and productivity performance are now clear. The associated problems include a premature de-industrialization and abandonment of production sector policies. The region specialized according to its static comparative advantages in sectors that offered fewer opportunities for diversification and improvements in product quality (Hausmann, 2011). As ECLAC has illustrated, the technological gap widened, not only in relation with the dynamic Asian economies, but also with the more developed natural-resource-intensive economies. This is reflected in a lower share of engineering-intensive industries, the meager resources used for research and development, and a near absence of patenting in relation to these groups of economies.

There is, therefore, a need to return to more active production sector strategies. It is true that these policies involve risks of failure and rent seeking, but these problems are not unique to them. Developing such new activities is a learning process in which “winners” are in a sense created rather than chosen ex ante. The new activities that should be promoted depend on domestic capacities, must be done in close partnership with the private sector, and should have technological upgrading as the central criteria. And they must be accompanied by competitive exchange rates. This is the component that has been missing in the only country that has recently returned to active production sector strategies: Brazil. 

Needless to say, the need for a clear attention on technological upgrading is critical, given the prospects of lack of dynamism of world trade and the clear evidence that Latin America has ceased to be a region of abundant low-skilled labor. Trade prospects add two ingredients. The first one is the need to link to China, but also to overcome the nineteenth-century pattern that characterizes Latin America’s trade with the Asian giant, in which the region exports a handful of commodities in exchange for an increasingly diversify array of manufactures—a specialization pattern that amply benefits China. And lack of dynamism of world trade also places a premium on domestic markets, in particular in the “expanded domestic market” created by Latin America integration process. But this means stopping the political stalemate that currently characterizes those integration processes in Latin America. 

The triangle of technological upgrading, significantly diversifying its trade with China and betting on strong integration processes would deliver a Latin American decade. But we are far from there.


* Professor Columbia University. Former Under-Secretary General of the United Nations for Economic and Social Affairs, Executive Secretary of ECLAC and Minister of Finance of Colombia.


References

Erten, Bilge and José Antonio Ocampo, “Super-cycles of commodity prices since the mid-nineteenth century”, UN-DESA Working Paper, No. 110, February 2012.

ECLAC (2012), Cambio estructural para la igualdad: Una visión integrada del desarrollo, Santiago, August 2012. 

Hausmann, Ricardo, “Structural Transformation and Economic Growth in Latin America”, in José Antonio Ocampo and Jaime Ros (eds.), The Oxford Handbook of Latin American Economics, Oxford: Oxford University Press, 2011, Ch. 21, pp. 519-545.


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