“If we could only do it like the Norwegians, or the Australians, even.”
It is an old refrain, often heard in Latin American policy circles — a special mix of aspiration and envy for a duo that managed to climb to the 2nd and 5th places respectively on the Human Development Index.
What makes the Australian and Norwegian experience so painfully appealing is that they got there on the strength of something that Latin America has in abundance yet has never managed to leverage as successfully: raw materials.
Lithium has brought the question into sharp focus. The newly essential mineral, expected to be irreplaceable in building a carbon-free future, has conjured dreams of prosperity not seen since the massive Tupi oil field was discovered off the shore of Rio de Janeiro more than 15 years ago.
Chile, Bolivia and Argentina, sitting on top of more than 60 percent of the world’s known stock of lithium, bubble with ideas about how to build industrial economies on the basis of the indispensable input for electric mobility. Mexico, Brazil and Peru want in, too. The old question resonates in the background: If Norway and Australia could do it, why can’t we?
It might not be impossible. However, any such effort must begin by acknowledging that Norway and Australia have dealt with their natural resources quite differently from most Latin American nations. Emulating their success requires a different long-term strategy for the exploitation of the resources themselves, one that treats them as an integral economic building block rather than an expendable means to an end.
And that is the easy part. The real challenge is political. It will likely also require Latin America’s fragile democracies and polarized societies to achieve a new political consensus. Latin America’s GDP per head has declined in relative terms, from 16.5 percent of Australia’s in 1960 to 14.3 percent in 2021. The immediate, befuddling paradox, from the Latin American perspective, is that the Norwegian and Australian economies managed their feat not by weaning themselves off commodities, as Mexico tried to do by inserting itself into North America’s industrial supply chains.
Raw materials account for about 10 percent of Mexico’s exports, down from 46 percent in 1990, before it joined the North American Free Trade Agreement. By contrast, raw materials still account for about 60 percent of Australia’s exports and 41 percent of those of Norway (on top of vast exports of hydroelectricity, which is not a material).
Latin American policymakers are wedded to the idea that prosperity is always downstream from natural resources: From Buenos Aires to La Paz, the vision of lithium-fueled prosperity features factories to process the lithium, make lithium-ion batteries and build full-fledged electric vehicles to export overseas. By contrast, 49 percent of Norway’s exports are fuels; minerals account for 36 percent of Australia’s. Leaving commodities behind, their experience suggests, is not a necessary condition for development.
A couple of economists from Norway’s University of Oslo and Australia’s University of Wollongong wrote a piece about a decade ago fleshing out the secret of their commodity-based success. Exploiting natural resources led to innovations and investments — in machines, financial products, infrastructure, commercial networks — which, in turn, supported the development of new natural resource industries, they wrote.
“Gradually, a wider part of the natural environment has become incorporated into economic activities,” they wrote.
Over the past 200 years, Australia branched out from sealing, whaling and coal to add minerals and wheat, sugar and refrigerated meat, oil, aluminum, natural gas, uranium, farmed fish and liquefied natural gas. Similarly, Norway’s portfolio grew from fisheries, timber and mining to add wood processing, metals and frozen fish, electricity and oil, among others.
These industries yielded innovations. Local foundries that appeared in the 19th century to sell pumps, crushers, engines and other machinery to Australian miners evolved into specialized engineering concerns to help exploit an expanding array of valuable minerals. Today, mining equipment, technology and services is a booming Australian economic engine on its own.
The state can play a critical role in guiding progress. In the 1970s, foreign companies eager for concessions to exploit Norway’s oil were required by the government in Oslo to link up with Norwegian universities and research institutions to address production challenges, and to call on Norwegian companies to provide equipment and services.
Thus it is that Norway’s offshore oil helped give birth to domestic information and communications technology (ICT) to provide the critical control systems needed in the production process. At the turn of the century, oil and gas were still the main customers for the local ICT industry and for many Norwegian research institutes.
In principle, Latin America should be able to build such linkages. There is technology in Brazil’s soy crop, and in Chile’s copper industry. Chile has grown its natural resource footprint, from mining to salmon, fruit and wine. Still, the total factor productivity of the Chilean and Brazilian economies remains below the levels achieved in the 1960s.
Neither has built the linkages across industries that could propel their economy forward. Instead, Brazil’s innovative soybean technology has enabled deforestation by expanding the viable cultivation footprint. Chile’s copper mining has failed to deliver much productivity growth and is slowing. Neither soybeans nor copper have helped to birth other innovative industries that could prosper on their own.
Why not? The question stirs up Latin American policy circles. The answer likely has many parts. It would include a human capital deficit, a product of ineffective public education; hostility toward foreign investment complicating the introduction of foreign technologies; myopic governance that failed to see opportunities beyond the immediate value of the natural resource. And then, of course, there is governance. Norway and Australia are both high-functioning democracies that can muster a national consensus over a strategy to maximize the social payoff from their natural bounties. Latin American countries are not.
A World Bank study of how different countries managed their oil wealth put it like this: “Revenue streams from ‘black gold’ can finance productive physical and social investment, or fuel unsustainable consumption booms and eventual fiscal crises; they can improve public welfare through transparent distributional mechanisms, create elite arenas of competition, or underpin kleptocratic governments.” Guess which path Latin America chose?
It is not just about self-serving, corrupt leadership (and Latin America’s history has plenty of that). Rents — from oil or copper or gas or lithium — can reshape the political economy in several ways. They fund clientelistic governance, providing resources for governments to pay for support among political constituencies. They remove the budget constraint, allowing economically irrational behavior to take hold. Governments can do stupid things when they feel rich.
In the 1970s, Mexico spent its oil bounty in a wild pursuit of industrial development behind high tariff barriers to protect domestic firms from international competition — a strategy that came crashing down in the 1980s. Bolivia spent its gas bounty on much needed redistribution, but closed itself to foreign investment and technology in pursuit of a state-run autarkic economic model. Moreover, it failed to invest in the resource itself, letting its wells run dry.
Can Latin America leverage its lithium into prosperity? The Australian and Norwegian examples offer some cause for optimism. Moreover, they provide a blueprint for developmental success that does not depend on the ability to turn your lithium into homegrown flying electric cars. Whether Latin America’s unstable, contested politics can follow it is another matter.
Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, US economic policy and immigration. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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