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Thu. June 20, 2019
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Please Don´t Stop the Music: How the Latin American Economy Skipped a Beat
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By José Luis Alvarado Valenzuela

Latin America`s economy danced to the rhythm of a fast-paced salsa song, showing rapid growth and enjoying the good times. However, somewhere along the way, the music stopped, ending the economic boom this year after a decade of sustained growth due to high commodity prices fostered by China´s gigantic thirst for resources. Last year had by far the lowest regional growth rate since 2009, with a meager economic expansion of 0.8%, according to the World Bank.   

Even the fastest growing economies have experienced considerable declines in economic production. Panama, a small Central American economy who has lead the growth charts in the region, has shown a steady decline since 2011. Nevertheless, once again, Panama topped the scoreboard with the highest GDP expansion (6.5%) of any country in the region.  Similar stories can be told of Bolivia, Peru, and Ecuador, all of whom grew at a slower pace than at the beginning of this decade.

The larger economies have not been able to propel the region´s growth average, leaving the task to other countries, particularly those who make up the Pacific Alliance (Chile, Colombia, Mexico, and Peru.) Brazil, the South American powerhouse, has been sluggish at best, even the 2014 Soccer World Cup tournament did not fare well for the Brazilian National team, nor as a kickstart to the local economy. Ms. Roussef is struggling to increase production in the region´s largest economy, with growth rates under 1%, after a staggering 7.5% in 2010. According to data from the World Bank, the Argentinean and Venezuelan economies have undergone economic recessions of -1.5% for the former and -3.0% for the latter. Ms. Fernandez has been dodging creditors and, at the same time, has stood idle with a stagnant economy, a falling Peso and high inflation. In the meantime, Mr. Maduro is going through difficult times with the post-Chavismo era, with plunging oil prices, political opposition at home and alarming levels of inflation and debt.

Analyst Andres Oppenheimer even went on to suggest in his weekly Op-Ed for the Spanish version of the Miami Herald that during 2015, the Americas would see a lack of leadership, due to political and economic woes of the more prominent Latin American countries.

On the other hand, Mexico, the second largest economy in the region, is cautiously optimistic, not because of its 2.1% GDP growth in 2014, but rather due to the promise of higher production rates stemming from President Peña Nieto’s long overdue structural reforms. The Mexican President has introduced a series of reforms aimed at improving productivity, competitiveness and to foster economic growth and development. The current Mexican administration relies heavily on the success of the telecommunications, financial and tax, education and energy reforms, which combined, estimate a growth rate of close to 5% in the medium term.

In keeping with its regional economic leadership, Mexico held the Latin American version of the World Economic Forum at the Riviera Maya near the resort city of Cancun last week. It was not easy to host the WEF-LA 2015 on the onset of a gloomy horizon due to the poor regional growth rate pointed out by the IMF. However, President Peña Nieto struck the correct note during this forum – which gathers hundreds of high-ranking government official, business people and opinion leaders - when he stated the need to invest in human capital - as a key pillar towards a better and more innovative workforce-, infrastructure, research and development, startup stimuli, and fostering a knowledge-based economy. Nobel Prize winning economist Joseph Stiglitz correctly pointed out the need to use private capital to develop infrastructure and to put a curb on social inequality, since more equal societies tend to grow more, especially within the context of social inequality and public safety concerns in a few Latin American countries.

Albeit, Mexico still has security and corruption-related issues on the forefront of the national and international agenda. However, in spite of security-issues in some parts of the country, foreign direct investment keeps flowing in, as evidenced in 2013, when it reached a record 35 billion dollars. Multinational corporations like Audi, BMW, Mazda, Mercedes, KIA, and Toyota have already pledged investments in the billions, all of which have helped Mexico jumpstart its position up to the fourth largest car exporter in the world, as well as creating thousands of new jobs. Major infrastructure projects, like a new airport for Mexico City, and foreign participation in the long-withheld energy sector are sure ways to attract more national and foreign direct investment.

Speeding up the tempo

So what should Latin America do? Last December, the Organization for Economic Co-operation and Development (OECD) and the United Nation´s  Economic Commission for Latin America and the Caribbean (ECLAC) launched the Latin American Economic Outlook on the sidelines of the Iberoamerican Summit held in Mexico. What where their findings? Latin America needs to implement structural reform aimed at increasing productivity, in order to sustain economic growth in the midst of a weaker Euro-economy, lower prices of commodities, and uncertainty surrounding external and monetary conditions.

OECD Secretary-General, Ángel Gurría, was quoted saying that [Latin America] was happier with high commodity prices. Gurría, a Mexican national, seemed to express what is on everyone’s mind nowadays: Latin America profited from an economic bonanza due largely to external factors, instead of increasing productivity at home, modernizing the economy and drafting sound industrial policies.

Given a few exceptions in Latin America, most notable the Pacific Alliance, the OECD and ECLAC prescribed technological innovation, solidification of national institutions, improved logistic performance and a reduction of transport cost, among others.

However, the disparities between Latin America countries are ever so evident. They are on a pathway that will quickly lead to the crossroad depicted in the article, "The Two Latin Americas" from the Wall Street Journal. The Pacific bloc - made up of countries that embrace free trade and free markets - will fare better than the Atlantic bloc, which prefers a larger role of the state in the economy. It will be up to the trade partners in North America, Europe, and Asia to choose with which side of the Latin American countries they will want to do business.

Oil prices slick up the dance floor

It’s impossible not to include oil prices in the equation of economic growth for Latin America and the rest of the world for that matter. Oil exporting countries like Venezuela, Mexico, Brazil, and Ecuador (only Venezuela and Ecuador are members of OPEC) may be headed towards tougher times.

At the beginning of this year, Venezuela´s President was travelling the world; seeking investments from allied countries like Russia, China, Qatar, and Iran. However, oil was its main source of public spending, which means bad news for Venezuela and the smaller Caribbean member nations of Petrocaribe.

History seems to repeat itself for Mexico, where the drop in oil prices could not have come at a worse time. The change in oil prices has policy-makers frenetically factoring in variables regarding possible consequences in economic production and bids for oil projects. However, Mexico has a more diversified economy (oil makes up for less than 5.9% of the GDP) and a better perspective, due to the implementation of structural reforms.

Nonetheless, it cannot be all that bad. In the end, lower oil prices also translate into extra cash in consumer pockets, which will increase demand, especially in the net oil-importing countries. At the same time, lower transportation costs will also benefit economic production. So who stands to benefit? Except for a few oil producing states and companies tied to oil income, the U.S. (large oil producer and exporter, but also a net-importer) and China stand to gain from declining energy prices, which is good news for their trade partners, especially those in Latin America. Many Latin American countries already have the U.S. as one of their major trade partners. Likewise, China is Chile´s first commercial partner and Peru, Mexico, and Brazil´s second.

However, taking a look into the percentage of trade as GDP output, we can see that the more open economies stand to gain from a recovering U.S. and China. This is particularly true for Chile and Mexico, where trade equals more than 60% of GDP, contrasting with Argentina or Brazil where less than half of economic production comes from trade, according to figures from the WTO.

It is no easy task to make predictions in a never-before-seen economic cycle where low oil prices - that do not seem to go up anytime soon - are the main factor. Hopefully, the driving forces will come from increased productivity at home, structural reform, and more regional aggregate consumer demand coupled with rising exports to the U.S. and China. Remember, it takes two to tango!

Mr. José Luis Alvarado is a career diplomat of the Mexican Foreign Service. He is currently posted in Guatemala City as head of the Economic Section of the Embassy of Mexico.

The views expressed in this article are personal and do not necessarily reflect the position of the Government of Mexico

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