Can Latin America's Economy Rebound?

Amid the relatively sluggish growth achieved by most of the world’s leading economies in recent years, one region has stood out for its particularly poor economic performance, Latin America.  In fact, over the past three years, no region in the world has seen its economy struggle more than Latin America.  In this region, some of the leading economies have found themselves in the midst of an economic free fall.  Others, while avoiding the recessions impacting a number of Latin American economies, have failed to achieve the levels of economic growth that had been expected of them.  It may seem like a long time ago, but in the early years of this decade, there were hopes that Latin America would be able to achieve the levels of sustained economic growth seen only in Asia’s largest emerging markets.  However, the past few years have not only dashed these hopes, but have called into question whether or not Latin America can achieve much growth at all in the years ahead.

This pessimism surrounding Latin America is the result of the dire performance of many of the region’s leading economies in recent years.  For example, the region’s largest economy, Brazil, is in the midst of its worst recession in modern times, with that country’s economic output declining by nearly 10% over the past three years.  Latin America’s second-largest economy, Mexico, has avoided the recession that has occurred in Brazil, but its economic performance in recent years has been highly disappointing and its rising tensions with the Trump Administration in the United States threatens Mexico’s near-term economic future.  Argentina too has seen its economic outlook deteriorate in recent years, as inflationary pressures threaten to usher in a deep recession in that country.  Much worse inflationary pressures are to be found in Venezuela, where a full-blown economic collapse is underway in what was once Latin America’s wealthiest country.  Finally, the Andean economies of Peru, Chile and Colombia had been achieving very high rates of growth earlier in the decade, but lower commodity prices in recent years have cut growth rates significantly in each of those countries. 

There are many reasons for the sharp deterioration in Latin America’s economic performance.  First, governments in most of the region’s largest economies have dramatically mismanaged their countries’ economies, squandering the gains of the commodity boom earlier in the decade and failing to enact the reforms needed to diversify their countries’ economies.  This is most evident in Venezuela, but has also been a factor in the recent struggles in Brazil and Argentina.  This economic mismanagement left the region ill-prepared to deal with the sharp fall in commodity prices over the past few years.  As most Latin American countries have seen their economic competitiveness levels fall vis-à-vis rivals in Asia and elsewhere, they have struggled to attract the investment needed to diversify their economies away from their dependence upon commodity exports.  Add to this mix the fact that the region’s domestic market has not grown as had been expected, and it is clear that they are few avenues for growth available to most Latin American economies outside of commodity exports.

Given the current economic situation in Latin America and around the world, it is clear that a strong recovery for the Latin American economy will be a difficult proposition.  Sure, external shocks could lead to a new increase in commodity prices, leading to higher rates of economic growth across the region.  However, it is unlikely that commodity prices will rise to the levels they reached earlier in this decade.  Instead, Latin American governments need to enact the type of reforms that will boost the region’s economic competitiveness, something that would allow for the region to attract more foreign investment and begin the process of diversifying its economy.  With these reforms, Latin America could even become a key manufacturing location as China and other rivals become more expensive.  However, this will be difficult as increasing foreign competition and the region’s slowing demographic expansion will reduce the region’s attractiveness for many investors.  As a result, without an unforeseen commodity boom, it is hard to see how most Latin American economies will be able to achieve much higher rates of growth in the years ahead.