Latin America’s bonanza may be short-lived

There have been big headlines in recent weeks about projections that Brazil will become the world’s fifth-largest economy in five years, and that Latin America in general will become a new global economic star. But there are little-known data that should raise questions about such optimistic forecasts.

During the next 12 months, there is no question that the region is likely to do well. According to new projections by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), the region’s economy will grow by a combined 4.2 per cent this year, following a 6 per cent growth last year.

Panama is expected to grow by 7.5 per cent this year, Chile and Peru by 6 per cent each, the Dominican Republic and Uruguay by 5 per cent each, Argentina by 4.8 per cent, Brazil by 4.6 per cent, Bolivia by 4.5 per cent, Colombia by 4 per cent, Mexico by 3.5 per cent, Costa Rica and Guatemala by 3 per cent each, and Venezuela by 2 per cent, the ECLAC figures show. In several countries, it will be the eighth consecutive year of steady growth – a remarkable feat amid the world’s worst recession in recent memory. The region’s steady growth, in part thanks to its exports or minerals, soybeans and other raw materials to China, has led most international financial institutions to think that, this time, the region is poised for long-term growth.

A recent World Bank report on Latin America’s future, entitled ‘Beyond boom and busts?’ challenged the long-held conventional wisdom among economists that countries that rely excessively on raw materials – such as Venezuela and Nigeria – tend to become populist, corrupt, authoritarian and ultimately poorer.

The new World Bank study asserted that “recent evidence suggests that, overall, natural resources may indeed have a positive impact on growth.”

Translation: commodity exports saved Latin America from the impact of the world financial crisis, and may be the start of an extended period of solid growth. Several developed countries, including Canada, Australia and New Zealand, have shown that raw-material exporting countries can indeed rise to become First World economies, and many Latin American countries may be on the same path.

But in the medium and long term, there are disturbing trends that may spoil these optimistic projections.

Rather than using their current cycle of growth to invest in infrastructure, education, innovation and other future-looking endeavours that would allow them to diversify their exports – like Canada, Australia and New Zealand did – most Latin American countries are spending their income on feel-good consumer subsidies, while becoming increasingly dependent on a few commodity exports.

Consider these little-known – and frightening – figures from the UN’s ECLAC:

• Brazil’s dependence on commodities and commodity-related manufactured goods has risen from 51 per cent of the country’s total exports in the early 1980s to 59 per cent now.

• Venezuela’s reliance on commodity-related products rose from 92 per cent in the early 1980s to 97 per cent now.

• In the past 10 years, Latin America’s commodity exports have risen from 27 per cent to 39 per cent of the region’s total exports. “It’s worrisome,” says Osvaldo Rosales, head of ECLAC’S international trade division. “While economic history shows there are no cases of successful development without diversification of exports, we’re seeing that the region’s exports tend to be increasingly concentrated in commodities.”

That’s dangerous because the current commodity export boom may not last beyond five years, and raw material exports tend to produce fewer lasting jobs than more sophisticated exports, Rosales told me.
“The key question is whether South American countries, especially, are taking advantage of this commodity export boom to invest in key areas, such as infrastructure and education,” he said. “My impression is that we are not doing it.”

My opinion: I agree. While countries should take advantage of their commodities, putting their eggs in the same basket is not a smart recipe for long-term growth.

To follow the paths of countries such as Canada, Australia and New Zealand, they should use their current economic bonanza to save for a rainy day and invest more – and better – in science, technology, education and other areas that would allow them to diversify their exports.
Otherwise, the region’s current economic growth cycle will be just another big bubble, like so many in the past.
© The Miami Herald, 2011. Distributed by Knight Ridder/Tribune Media Services.

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