Latin America's Uncertain Economic Future
Not that long ago, many economists were predicting that Latin America was on the verge of a new golden age in which the region’s economy would follow in the footsteps of Asia’s leading emerging markets by recording consistently high rates of economic growth that would transform the region into an economic powerhouse. In fact, in the decade between 2004 and 2013, the Latin American economy grew by an average rate of 4.2% per year thanks to soaring commodity prices that allowed some of the region’s leading economies to record their highest rates of growth in decades.
Unfortunately, things have taken a turn for the worse in recent years and nearly all of Latin America’s leading economies have fallen into a deep slump. As a result, Latin America’s economy recorded growth of just 1.3% in 2014 and the region’s economy actually shrunk in 2015. Looking ahead, Latin America’s economy is forecast to continue to shrink this year and returning to higher rates of growth could prove very difficult given the internal and external constraints facing the region.
Undoubtedly, the past 30 months have presented Latin America with some of the region’s most difficult economic challenges in recent decades. The source of many of the economic woes facing the region has been the sharp fall in commodity prices in recent years that stems from the downturn in demand from China and the failure of other key export markets to pick up the slack.
Meanwhile, too many governments in Latin America have provided very poor economic leadership in recent years, resulting in lower levels of business and investor confidence in the region. Likewise, crime and corruption remain severe problems in many countries in Latin America, further eroding business and investor confidence in the region. Altogether, these factors have resulted in lower rates of economic growth in Latin America than in East Asia and other emerging regions and a failure to improve the region’s economic competitiveness in order to face the challenges of the 21st century.
Latin America’s struggles are exemplified by the poor economic records in recent years of the region’s two largest economies, Brazil and Mexico. Prior to its recent downturn, Brazil had been recording some of the highest rates of growth in its modern history, with GDP growth peaking at 7.5% in 2010. However, this growth was driven almost entirely by higher commodity prices and Brazil did little to improve its export competiveness during this period, while experiencing one of the largest scandals in the world in recent years. As a result, when commodity prices fell, so to did Brazil’s economy and Brazil has found itself stuck in a deep recession over the past two years as business and investor confidence in Brazil has plunged.
To the north, Mexico had been expected to be one of the world’s most successful emerging markets thanks to its access to the wealthy US and Canadian markets. However, since Mexico joined NAFTA in 1994, the Mexican economy has grown by a relatively anemic 2.6% per year, and the average growth level has actually slowed in recent years. This is due in large part to the fact that China and other Asian emerging markets proved to be more competitive than Mexico when it came to exporting to North America, while Mexico itself was beset with high levels of crime and poor economic mismanagement from its government. As such, Mexico has been one of the world’s most disappointing emerging markets in recent years.
A number of things will have to happen, and a number of issues will have to be resolved, in order for Latin America to return to higher levels of economic growth. First, more countries in the region will need to improve their access to key export markets in North America and Asia through improved transportation links and more free trade deals with these key export markets. Second, the region’s leading economies will have to do much more to improve their export competitiveness so that they can effectively compete with China and Asia’s other successful export-oriented emerging markets. Third, governments across the region must do more to combat crime and corruption within their borders in order to facilitate an improvement in business and investor confidence that will boost investment in their countries.
Without all three of these changes being implemented, Latin America faces a prolonged period of sluggish growth as commodity prices appear set to remain well below earlier levels for an extended period of time. This bodes ill for a region that not too long ago was believed to be on the verge of a long period of economic expansion.