It's time for a new growth model for Latin America

Economic growth
Macroeconomics - Economic growth - Monetary Policy

During the first decade of the 21st Century, several Latin American countries were swept by populist sentiment. The primary roots of the social discontent that fueled the turn toward populism are by no means unfamiliar to the region: low income levels, high wealth inequality, poor labour prospects, widespread corruption, political favoritism, and crony capitalism, among others.

In a leftward turn, several countries established closer ties with Cuba and came together forming a - more or less - unified bloc. Venezuela and Cuba, in particular, took a leading role, while Argentina, Brazil, Ecuador, Nicaragua, Bolivia, and Peru stayed somewhat more in the background. With varying degrees of success, these countries were able to achieve some of their goals. However, change was not structural and governments failed to deliver on many promises.

Following the political shift, most “bloc countries” achieved individual growth rates that were higher than the previous five years and outstripped those of Latin America as a whole (figure 1). To keep things in perspective, it should be noted that many of the bloc countries’ economies are dependent on commodity exports, and commodity prices happened to be booming. Likewise, Chinese involvement in the region (figure 2) allowed most block countries to increase their total trade as a percentage of GDP (figure 3) and their net foreign direct investment (figure 4).

Over the past couple of years, however, the bloc countries’ model has begun to reveal its fragility. The commodity price slump has caused GDP growth rates to plummet. And as China transitions to a consumer-led growth, its locomotive - while still powerful - has begun to lose steam. In short, the bloc countries’ model has started to implode.

Today, some of the bloc countries are moving toward the political centre and centre-right. For now, Argentina, Brazil, and Peru have already shifted, and others are likely to follow before long. However, given that non-bloc countries following more orthodox paths have achieved relatively disappointing social and economic results, it seems unlikely the traditional centre and centre-right will give satisfying answers to the continent’s long-standing challenges.

Latin America, with a status quo that fails to meet the majority of its citizens’ legitimate aspirations, needs to reinvent itself. And neither the bloc countries’ model nor the more traditional model seems to hold the answer. A new paradigm is needed.

A new growth model for Latin America should revolve around increasing productivity, in order to achieve a corresponding increase in GDP per capita. Each country needs to define its own approach to sustainable productivity growth, while recognizing the individual developmental challenges facing each country in such a heterogeneous region.

However, many issues ring true for Latin America as a whole. Leaders across the region need to:

· Focus on increasing investment in human capital, capital goods, infrastructure, and technology

· Open their economies to trade and foreign investment

· Reduce government involvement in productive activities

· Develop alliances between all stakeholders in the private, public, academic, and social sectors to craft a coordinated response to each country's most pressing needs

· Further integrate with global supply chains

· Drive competitiveness at the city/cluster level

· Transform governments into agile, coordinated entities

The successful and joint implementation of these steps could allow Latin America to close the inclusion gap between its citizens, and the productivity gap with the wider world economy. The positive feedback loop between productivity and inclusion in the region would secure a strong starting point for long-term, sustained, sustainable growth.

This post first published in the World Economic Forum Blog, on June 17, 2016.

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