Will Latin America make the changes necessary to achieve its full economic potential?
Over the past month, Latin America has seen two high-profile nationalizations of Spanish-owned companies. In Argentina, Cristina Kirchner announced the expropriation of a majority stake in her country’s biggest oil firm, YPF. A few weeks later, Bolivia’s Evo Morales seized TDE, which operates most of his nation’s electricity lines. To a casual observer of regional affairs, the decisions by Morales and Kirchner might appear to suggest that Latin America is still characterized by destructive economic populism.
But look closer: The economic policies of Argentina and Bolivia are notable mainly for being so out of sync with the more responsible, pro-market policies embraced by regional heavyweights such as Brazil, Chile, Colombia, Mexico, and Peru. (Those five countries generate a large majority of the economic output in Latin America and the Caribbean.) The most influential Latin American leader of the past decade was not Venezuelan autocrat Hugo Chávez, but rather Lula da Silva of Brazil, whose centrist policy formula has been emulated in countries across the hemisphere. Lula belongs to a left-wing party, but he governed like a pragmatist keen on maintaining economic stability and attracting foreign investment. The same could be said of current or recent presidents in Chile (Michelle Bachelet), El Salvador (Mauricio Funes), Panama (Martín Torrijos), Peru (Ollanta Humala), and Uruguay (Tabaré Vázquez and José Mujica). Even Sandinista boss Daniel Ortega, a Chávez disciple when it comes to eroding democracy, has tried to promote a strong business climate in Nicaragua.
“Stock markets in much of the world may have suffered a lost decade, but there was much to gain by investing in Latin America,” the New York Times noted last month. “A vigorous and persistent economic and political renaissance, especially in Brazil, produced annualized returns of 17.1 percent for funds that focus on the region during the 10 years through March, including a 13.3 percent return in the first quarter of this year.”
Indeed, Latin America has never enjoyed better economic management than it does today. The obvious exceptions — Argentina, Bolivia, Ecuador, Venezuela — merely confirm how much the rest of the region has progressed. Latin America has always been rich in minerals and natural resources, but its commodity wealth never translated into broadly shared prosperity or solid economic fundamentals. Now that is finally changing. From 2002 to 2010, the regional poverty rate dropped by 28 percent, according to theUnited Nations Development Program. (By contrast, the same rate had increased by 20 percent during the 1980s, and it had fallen by only 9 percent between 1990 and 2002.) By 2011, per capita income in Latin America was 57 percent greater than it had been a decade earlier, and the regional unemployment rate was at its lowest level in 21 years. Most remarkably, perhaps, “A region which had become a byword for financial instability mostly sailed through the recent recession,” as Michael Reid of The Economist has written.
No wonder so many people are bullish on Latin America: Countries with massive amounts of raw materials have achieved the economic and financial stability that long eluded them. Last year, the president of the Inter-American Development Bank, Luis Alberto Moreno, published a book titled The Decade of Latin America and the Caribbean. China has been flooding the region with investment, and India is starting to catch up. According to the Congressional Research Service, U.S. trade with Latin America grew at a faster rate (82 percent) than U.S. trade with Asia (72 percent) between 1998 and 2009. Looking ahead, Brazil will benefit enormously from its recent discovery of enormous new offshore oil deposits; Colombia has been included in the CIVETS bloc of emerging-market economies; and Panama is in the process of completing a $5.25 billion expansion of its famous canal, which has been described as a “game changer.”
Now for the bad news: Latin America’s overall competitiveness is still hampered by inefficient tax codes, cumbersome regulations, shoddy infrastructure, poor education systems, rampant corruption, and high crime rates. Many countries are still way too dependent on commodities, which tends to increase economic and fiscal volatility. Goldman Sachs economist Alberto Ramos put it well last year: “This definitely could be the Latin American decade — if policymakers seize the opportunity to adopt longstanding structural reforms geared to increase productivity, diversify the economic base, and boost real GDP growth.”
In other words, the region has great potential, but nothing is guaranteed. Thus far in the 21st century, economic and political reformers have been winning key ideological battles in most of the major Latin American countries. (Chávez and his fellow leftist autocrats are, thankfully, outliers.) But the region is still lagging on critical reforms, and the global economy gets more competitive every day. Now is the time for bold, far-reaching leadership.
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