What's Wrong With Latin America?

These are difficult times for Latin America, a region that just a few years ago many believed to be on the verge of a new period of strong economic growth, a higher degree of regional integration, and more political stability. Unfortunately, much has gone wrong in recent years. The region’s economy has failed to generate any growth over the past seven years, with a number of the region’s most important economies falling into major crises. Politically, populism, on both the political right and the political left, has taken hold in a large share of the countries in Latin America, hampering efforts to integrate the region or to bring a higher degree of political stability to the region’s more unstable areas. Now, the coronavirus pandemic is causing major problems for the region in terms of a new, and much more severe, economic downturn, as well as a massive health crisis.

For Latin America, this story is all too familiar, for over the past century, the region has rarely been able to string together a series of major successes. Now, questions are being asked about whether or not Latin America’s recent struggles indicate that the region is doomed to fall further behind other parts of the world in terms of economic development, living standards and wealth creation.

It is easy to dismiss Latin America as being a region that has always trailed behind the more developed or more dynamic regions of the world. However, if we look back 100 years to the year 1920, the picture was very different, at least for some parts of the region. Sure, the level of political instability in Latin America at that time was probably higher than it is today, but this was the case for much of the world in 1920.

What the region had in 1920 that seems to be lacking today is growth potential. This was a period where Latin America’s population was much smaller than it is today (90 million in 1920 compared with 642 million today). This meant that, like modern-day Canada or Australia, Latin America was a vast territory with large amounts of natural resources, but with a relatively small population. This allowed some parts of Latin America to grow very wealthy.  

Most notably, Argentina was among the wealthiest countries in the world 100 years ago, and other countries in Latin America were wealthier then when compared to countries in other regions than they are today. Unfortunately, much has gone wrong over the past 100 years and this has left Latin America looking for a way to turn things around before an even greater decline sets in.

In the years following the Global Financial Crisis, many Latin American countries experienced an economic boom, with growth rates across the region soaring as a result of high commodity prices and a major increase in exports to Asia. This raised hopes that Latin America was on the verge of achieving permanently higher levels of economic growth along the lines of what many East Asian emerging markets had achieved. However, when commodity prices collapsed in the mid-2010s and export demand in Asia began to slow, most Latin American economies were hit very hard, leading to a collapse in economic growth that has persisted to this day.

As you can see, no region has performed worse than Latin America since 2014. Worse, the region’s economic performance is set to worsen dramatically as the coronavirus pandemic has a larger economic impact on Latin America than any other region apart from Europe.

Much of Latin America’s economic troubles stem from the fact that the region’s four largest economies have all suffered from serious economic troubles in recent years.

• Brazil, the region’s largest economy and the world’s ninth-largest economy, fell into a deep recession between 2015 and 2017, and growth rates afterwards were not high enough to offset these losses, and now an even deeper recession is looming due to the pandemic.

• Mexico, the region’s second-largest economy and the world’s 15th-largest economy, hadn’t fallen into a recession until this past year, but even before the current crisis, its levels of economic growth were highly disappointing for a country with unique access to the vast North American market.

• Argentina has been one of the world’s most volatile economies for decades, and the past few years have been no exception, with that country currently in the midst of a very deep recession and yet another debt crisis.

• Venezuela has seen its economy shrink by more than 70% since 2014, the worst performance of any economy in the world, and the coronavirus pandemic is now pushing that country to the brink of a total collapse.

Without these larger economies driving growth, it is more difficult for many of the region's smaller economies, especially those that depend on exports to their larger Latin American neighbors, from generating much growth of their own.

Many factors have hurt Latin America’s economy and prevented the region of generating higher levels of growth.

• Lack of Competitiveness: Most Latin American economies score poorly in terms of economic competitiveness when measured against countries in places such as East Asia and this has prevented the region from attracting foreign investment that could be used to diversify their economies.

• Weak Domestic Markets: Most Latin American countries have failed to develop middle classes that are large enough to attract investors interested in the region’s domestic market, or to shield the region from the worst effects of external shocks.

• Poor Location: With the exception of Mexico and Central America, most Latin American economies are geographically distant from the world’s leading export markets in North America, Europe and Asia, and this, combined with low levels of competitiveness, has led to the region lacking large manufacturing and service sectors that export outside of the region.

• Few High-Tech Industries: Latin America is home to very few successful high-tech businesses or industries, and this has limited the region’s capacity to generate economic growth and has left the region dependent upon high-tech imports.

• Low Productivity Levels: While productivity growth rates are falling in most regions, they have traditionally been a large amount lower in Latin America than in many other regions of the world, and this trend has continued in recent years.

• Worsening Demographics: Population growth across most areas of Latin America has slowed dramatically in recent decades and soon the region will be facing the challenge of generating economic growth with an aging population and a shrinking working-age population.

As one can see, Latin America faces a list of challenges greater than that of any other middle-income region, and so far, most Latin American countries have failed to overcome these challenges.

In order to overcome its long slump and to put itself in a position to generate higher and more sustainable growth over the long-term, Latin America has much to do. First and foremost, the region must undertake the reforms needed to make their economies more competitive, including reforms that open the region to more foreign investment as well as those that focus on developing export-oriented industries. At the same time, the region must foster the growth of domestic industries that are in high-tech and high-growth sectors and lessen its dependence upon commodity exports.

If these goals are achieved, Latin America will then be able to develop a much larger middle class, thus lessening its exposure to external shocks such as those that have devastated the region’s economy many times throughout the region’s history. Finally, a much higher degree of political stability will be needed, but this will require a move towards the center by the region’s leading right-wing and left-wing political movements. Without this, it is hard to see Latin American politics stabilizing anytime soon.

These are undoubtedly some of the most difficult times faced by Latin America in its recent history. Worse, the future of the region looks increasingly uncertain, both politically and economically. The region’s economy is forecast to decline by almost 10% this year, and this is forecast to reduce economic output in Latin America to levels last seen in the early 2010s. Unfortunately, the outlook for post-pandemic growth in Latin America is muddled by the immense challenges facing the region.

In order to overcome these challenges, Latin America is going to have to both stand and develop its economy on its own, while remaining connected to key markets and sources of investment outside of the region. So far, few Latin American countries have been successful in overcoming these challenges. If the region does not do so in the near-future, it faces the prospect of falling further behind other regions in terms of economic development, living standards and political stability.