Latin America's Ongoing Economic Troubles

Not long ago, there were hopes that 2017 would be a year of recovery for the battered economies of Latin America, some of which have languished in deep slumps for a number of years.  However, a number of developments have taken place in recent weeks that suggest that Latin America’s economic woes could prove to be much harder to shake than had been initially anticipated.  Some of the issues that have led to Latin America’s poor economic record in recent years are country-specific and involve many of the region’s largest economies, including Brazil, Mexico, Argentina and Venezuela.  However, there are also some region-wide factors that have hindered growth across Latin America in recent years and will continue to do so in the future.  Therefore, as many of the region’s leading economies continue to struggle, the potential for more political unrest will rise, threatening to usher in a very difficult period for Latin America.

Brazil: One country that encapsulates the hopes and disappointments of the Latin American economy in recent years is Brazil.  In the early part of this decade, economic growth rates in Brazil soared thanks to a surge in demand for its commodities in Asia and elsewhere.  However, Brazil has fallen into a deep recession that has resulted in economic output in Latin America’s largest economy declining by 8% over the past two years.  Furthermore, it was expected that Brazil would now be emerging from this deep recession, but instead, recent data suggests that this recession could continue for a longer period than had been expected.  Like the rest of Latin America, Brazil has been hit hard by the decline in demand for its commodities in Asia and elsewhere.  However, Brazil’s problems run much deeper.  For example, Brazil’s manufacturing sector has suffered massive losses at the hand of Chinese, Mexican and other manufacturing centers due to a lack of competitiveness in Brazil, particularly in terms of productivity and infrastructure.  Furthermore, Brazil’s political problems, many of which stem from the rampant corruption in the country, have severely lowered business and investor confidence in Brazil.  As a result, Brazil may find it hard to generate much, if any, growth in the coming years.

Mexico: Mexico is another country that highlights the challenges being faced by Latin American economies in 2017.  While Mexico has undoubtedly benefitted from its membership in NAFTA, its overall level of economic growth over the past 25 years has not been as high as had been expected when Mexico gained increased access to the markets of the United States and Canada.  This was due to the fact that, while Mexico’s competitiveness levels improved vis-à-vis most other Latin American economies, it still trailed the competitiveness levels found in many of Asia’s largest emerging markets.  Furthermore, political issues also held down business and investor confidence levels in Mexico, as crime and corruption remain major issues facing businesses in that country.  Now, Mexico faces the threat of protectionism in the United States, a development that could severely curtail exports to Mexico’s dominant trading partner.  With few other options for export markets, Mexico is now faced with a major threat to its economic well-being.  Furthermore, Mexico is likely to turn to other Latin American countries as potential export markets, a move that could hurt many of its partners in the region, such as Brazil.

Regional Factors: Clearly, many of the issues facing Latin America’s leading economies are domestic ones, particularly in the region’s worst performing economies such as Venezuela and Argentina.  However, there are also a number of region-wide factors that have resulted in Latin America being forced to deal with its current economic difficulties.  First and foremost, too many Latin American economies remain dependent upon commodity exports for much of their growth, leaving them exposed to the threats of a slowdown in export demand and the rise of protectionism in key export markets.  Second, few Latin American economies have taken the necessary steps to diversify their economies and to enact the reforms needed to improve their competitiveness levels vis-à-vis rivals such as China or Southeast Asia.  Third, the political climate in much of Latin America continues to hold down business and investor confidence in the region, hindering the expansion of trade and investment.  Unless Latin American governments take action to improve the business and investment climate in the region, growth rates will remain well below their potential, especially if commodity prices do not return to their earlier levels.  However, it remains to be seen if the governments and the voters of the region have the will to push for these reforms before it is too late and unrest spreads across the region.