The Aftermath of the Latin American Boom?
Throughout this academic year, we have learned about European policy making, immigration issues in the United States, OECD´s effort to put up with the current crisis, Spain’s unemployment and labor market and why Northern countries engage in intra-industry trade. My contribution to this blog is oriented towards the Southern Cone of the globe, and is a personal assessment of some of the challenges that Latin America in particular, faces as a region today.
While many countries in the north confront one of the worst financial crisis in history, the ability that Latin American countries have had to adapt to the recent crisis has been remarkable. Nevertheless, what was first called as the Latin American boom now appears to be coming to an end.
The region experienced an outstanding economic growth during the first five years of the 2000s, however, the rates have decreased mainly as a result of the European contraction and the Chinese downturn. Some harsher experts have defined this period as one of “superficial prosperity”, in which instead of taking advantage of the boom, Latin American governments have chosen to squander the excess of public revenues, and as a consequence, “after the party, will come the hangover”. As a matter of fact, it seems the hangover is finally hitting the region and if it doesn’t get hydrated enough it is going to hit hard. But, can we really just blame it on the Chinese?
The past decade has taught us that Latin American countries have a competitive advantage in terms of natural resources provision, commodities, and cheap raw material. However, most of the economic growth occurred because of a favorable economic context (I.e. increasing demand for exports), and not necessarily due to economic performance. Latin America is facing a crucial moment in history, and its performance in the following years will be defined by a set of challenges it must overcome as a region.
First, important progress has been made towards eradication of extreme poverty; yet, the region stands far from overcoming social inequality. The region has not been capable of translating economic prosperity into inclusive development that reduces the existing income disparities. In fact, Latin America is still considered to be the most unequal region in the world, according to a recent UN report, which is not something to be proud of. The role of international organizations together with the national governments is therefore crucial for designing strategies and development policies that allow economic growth to coexist with the reduction of inequality.
Second, consumption patterns have changed in the past decade; households are wealthier and are thus demanding different and larger consumption baskets. However, the region has not been able to meet the increasing demand with own production, but instead with an increase in imports. It is true that theories of international trade tell us that people love variety, but a wider variety should be achieved through structural reforms that foster own production. Industrialization reforms that channel the capital surplus into investment and infrastructure need to take place to widen the possible production frontier.
Third, Latin America must be capable of creating sustainable jobs. The region has demonstrated great potential in the creation of small and medium enterprises and in the service sector (e.g. ecotourism and gastronomy). With the appropriate incentives to entrepreneurs, the region could finally escape from the dependence of natural resources and avoid falling into the natural resource curse. Instead, it could point to the creation of new markets for exports, diversifying productive sectors, and multiplying competitive actors. This can be achieved through strengthening institutions and enforcing property rights that foster innovation, thereby creating more productive jobs.
Fourth, ¨Unity is strength¨. Latin American countries should combine efforts in order to achieve the so-desired regional integration. It is important for the region to consolidate as an economic block in order to restore growth, taking advantage of the large economies of scale, building production chains, and using the available competitive advantages. Having a local representative recently appointed as head of the World Trade Organization will allow the region to be repositioned in the international market, as long as regional interests are clear and a joint strategy is implemented.
Finally, and most importantly, none of the progress in the history of world economic development has been achieved without human capital. Having such a large human wealth, Latin America cannot afford to remain at the bottom of the world education rankings. Public policies must focus on improving the quality of basic schooling in order to achieve a more socially integrated education system. Moreover, incentives need to be created in order to avoid those educated minds permanently leaving Latin America, but instead allowing them to contribute to the education reforms with their knowledge. It is through accumulation and preservation of human capital that the region will be able to boost competitiveness in order to overcome the challenges mentioned above.
Though discouraging, Latin American growth prospects do not look so bleak. In fact, recent FMI World Economic Outlook predicts an economic growth rate of 3.4% in 2013 as opposed to 3% rate in 2012. The numbers are far from being exceptional, but there is still hope for the so-called “decade of Latin America” to occur. In order to do so, shortsighted measures must be set aside, allowing for economic and institutional reforms that translate present revenues into future projects that promote sustainable growth. The Latin American boom might be over, but reformers and decision makers might still be able to consolidate the region as leader in socio economic development within the context of a global economic restructuring, that is taking place as we read this blog.