In the 1980s, Latin America endured a debt crisis so severe that the entire decade was “lost” to poor economic performance.
Since then, other economies — most notably Japan — have endured their own “lost decades,” but today it is again Latin America that is facing difficulties. In fact, it has already lost five years.
Latin America has suffered a half-decade of anemic growth for the second time since the 1980s, and its lowest-performing five years since World War II.
In the region’s previous lost half-decade, after the 1997 East Asian crisis, annual GDP growth averaged 1.2 percent.
Between 1980 and 1985 — the worst five years of the debt crisis — average growth amounted to 0.7 percent. Over the past five years, it reached a mere 0.4 percent.
This is partly the result of an unfavorable global environment, reflected in Latin America’s deteriorating terms of trade since 2014, the virtual stagnation of overall international trade and two years of renewed financial turbulence in emerging economies.
However, other developing regions have faced the same external headwinds, but every one of them has outperformed Latin America, not only in the past five years, but since 1990 — a period during which annual GDP growth in the region averaged just 2.7 percent.
Clearly, long-term domestic and regional factors are also contributing to Latin America’s underperformance. They have economic origins, but also reflect political crises and complex political transitions in several nations.
Nowhere are these political challenges more apparent than in Venezuela, which, despite having the world’s largest proven oil reserves, is in economic free fall.
Since 2014, Venezuela’s GDP has contracted by more than 60 percent — one of the sharpest economic contractions in history for a nation not at war.
International sanctions have exacerbated Venezuela’s economic travails, but the problems began long ago, and have been fueled by sharp political polarization and the catastrophic economic policies of Venezuelan President Nicolas Maduro.
Excluding Venezuela, Latin America’s average GDP growth rises, but only to 1 percent per year — still worse than the region’s last lost half-decade. This partly reflects the region’s largest economy, Brazil, experiencing its deepest recession since World War II in 2015 and 2016.
In the second-largest economy, Mexican President Andres Manuel Lopez Obrador pledged, upon taking office in December 2018, to achieve 4 percent annual GDP growth. Instead, the economy has stagnated, and even slipped into recession in the first half of last year. Argentina has struggled with domestic macroeconomic imbalances, in addition to global financial turbulence and concerns about the return of a Peronist government. Political turmoil in Ecuador, and in Bolivia and Chile, has also undermined economic performance.
However, Latin America’s economic problems began long before the latest wave of economic and political instability.
Latin America achieved faster growth — a 5.5 percent average annual rate — in the 30 years that preceded the lost decade of the 1980s, when state-led industrialization was the order of the day, than in the 30 years that followed it.
The economic orthodoxy that took hold three decades ago derided the state-led approach and urged Latin American nations to undertake market reforms that, so far, have failed to fulfill their promise.
On the contrary, the dismantling of nations’ industrial policies led to premature deindustrialization.
Specifically, manufacturing’s share of GDP has been declining fairly consistently since the 1980s, to the point that current levels are similar to those in the 1950s.
While a shift away from manufacturing is a natural upshot of economic development, it began in Latin America at much lower income levels than in developed nations, making it far more difficult for the region to escape the “middle-income trap.”
Though Chinese demand for Latin American commodity exports has boomed over the past decade, it remains insufficient to offset manufacturing losses.
Undermining Latin America’s prospects further are its low levels of investment in research and development — about 0.7 percent of GDP on average.
That is about one-third of what China (2.1 percent) spends. In Latin America, only Brazil invests more than 1 percent of GDP on research and development. No economy can compete, let alone rise from middle to high-income status, without a strong capacity for innovation.
Latin America’s lost half-decade has had severe social consequences.
From 2002 to 2014, poverty declined rapidly in the region and inequality — which had risen during the 1980s and 1990s — was on a downward trend. Since then, progress on inequality has stalled — income distribution has remained relatively constant since 2010 — and poverty has increased.
As Latin America enters a new decade, it must take steps to ensure the next five years are not lost. The international context will make a difference, but the region’s governments have it within their power to improve economic performance significantly.
They can foster reindustrialization — including by pursuing greater regional economic integration, thereby supporting regional trade in manufactured goods — and invest in science and technology. Together with active social policies, such growth-enhancing measures, Latin America can regain its economic footing and lay the foundations for a better future for its people.
Jose Antonio Ocampo, a former Colombian minister of finance and UN under-secretary-general for economic and social affairs, is a board member of Banco de la Republica, Colombia’s central bank, a professor at Columbia University and UN Committee for Development Policy chairman.
Copyright: Project Syndicate
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