Halting Latin America’s economic slide

BOGOTÁ — “Nobody’s backyard: The rise of Latin America” was the headline on the cover of The Economist on September 11, 2010. Inside was a special report that presented an optimistic view of the region’s future. And little wonder, given that high commodity prices were enabling most Latin American countries to expand social programmes and significantly reduce poverty and inequality.

Governments across the region managed to improve living standards, regardless of whether they were led by left-leaning presidents such as Luiz Inácio Lula da Silva in Brazil and Néstor Kirchner in Argentina, or by those on the right such as Álvaro Uribe in Colombia. China’s rapid growth and rising demand for Latin America’s minerals, soybeans and oil created jobs and boosted tax revenues. In addition, quantitative easing by central banks in developed economies boosted global liquidity, making large amounts of capital available for investment.

But those days are long gone. Today, Latin America is at a crossroads. Economic growth has decelerated, living standards have stagnated and the region’s social progress is at risk. The emerging middle class is now vulnerable, and a return to poverty is a real possibility for many. To avoid this worrisome scenario, Latin America urgently needs to increase investment in infrastructure, technology and human capital.

The International Monetary Fund expects Latin America to grow at an average annual rate of just 2.5 per cent over the next five years, making it the slowest-growing region in the emerging and developing world, well behind sub-Saharan Africa, Asia and the Middle East and North Africa. Moreover, average growth of 2.5 per cent would be about half the pace of Latin American growth in the five years leading up to the 2008 global financial crisis. As a result, unemployment and poverty are likely to increase throughout the region.

Worse, this does not seem to be a cyclical downturn. Various estimates indicate that the potential growth rate for most Latin American economies is now a full percentage point lower than it was in 2010. For example, Colombia and Peru can no longer sustain a growth rate of 4.5 per cent, as they did a decade ago. These days, their central banks assume that 3.5 per cent is closer to potential. Using time series, I estimate Brazil’s potential growth rate to have fallen from 3 per cent a decade ago to 2 per cent today, and this month, Chile’s central bank will release a new revision of potential growth, which the market expects fell from 4 per cent to 3 per cent.

Although the Latin American slowdown reflects lower commodity prices, this is not the only factor. True, oil and copper prices are well below their peaks in the early part of this decade. Yet they remain far above their average level in the 1990s, when the region grew at a much faster pace than today. And although China’s slower growth, and the even faster deceleration in its imports, is of course having an impact, the main reason for Latin America’s sluggishness is a lack of investment.

As a result of austerity measures across the region during the past few years, investment rates have fallen and not recovered. This is partly the result of budgetary rigidities. Because current expenditures, such as pensions and salaries, are often constitutionally protected, the burden of fiscal adjustment tends to fall on more flexible capital spending. For example, investment rates (as a share of GDP) fell by 4 per cent in Peru and Argentina as a result of the recent shock.

Increasing the level of investment across the region must therefore be a high priority. There is also a need to raise productivity and narrow the significant gap with advanced economies in this regard. But, crucially, measures to increase investment can produce faster results.

The shortfall in investment concerns not only public infrastructure, but also technology and human capital. For starters, Latin America is not investing enough in the technologies that could integrate the region into global value chains. This reflects the absence of a shared regional vision, barriers to entrepreneurship and inadequate financing, especially for small- and medium-size enterprises. Making matters worse, the region is underinvesting just when its relatively abundant unskilled labour is coming under threat from rapid advances in artificial intelligence and robotisation.

Latin America’s need for more investment is not a right- or left-wing issue, but simply a matter of urgency. Although the region’s policy makers may differ on the details, they need to agree to increase investment in the three priority areas: infrastructure, technology and human capital. Moreover, this investment should come from all sources, public spending, private financing, crowdfunding, global markets and multilateral institutions.

Latin America has not invested enough in the past few years, and it is not investing enough today. This must change quickly if the region is to prevent low growth and rising poverty from becoming its new normal.

Mauricio Cárdenas, a former minister of finance of Colombia, is a visiting professor at Columbia University. Copyright: Project Syndicate, 2019.
www.project-syndicate.org