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How Latin America Misplayed Its Commodities Boom

How Latin America Misplayed Its Commodities Boom

Posted by Juan Gavasa on February 13, 2015

Economic growth, which was somewhat elusive for Latin America in the 20th century, finally returned at the beginning of this one. In the last decade, poverty decreased by half, and income distribution improved moderately. As a result, the middle class expanded significantly, and by 2009 encompassed a third of the population.

So, are we done? Have we made it? The temptation is to say yes, but not everything that shines is gold, as they say. Maintaining prosperity requires persistence, and potential pitfalls and frustrations lurk along the roadside.

The region's excellent economic performance in the past decade was firmly tied to the bonanza in prices of commodities and natural resources. For an economic development strategy based on raw materials to work, many factors must be considered: an adequate analysis of global dynamics, proper estimates of available natural resources, the monitoring of fiscal revenues, and so on.

To complicate things, a single weak link can cause the entire effort to collapse. In other words, crucial to success is how well we correct the worst of our mistakes so far.

We've analyzed a number of factors for South American countries and have reached some of the following conclusions about the last decade:

Successes and failures

• The region faced another lengthy cycle of expansion in the world economy, though it's been mitigated by the mortgage crisis and readjustment in China. This strongly fueled the global market in natural resources, with greater exchanges and relatively higher prices. In terms of quantity, it had a strong impact on agricultural goods. And in price terms, the effect was significant in areas of fuel and minerals.

• South America has not been particularly capable (or lucky) in transforming its resource potential in natural wealth, and this is particularly true of non-renewable assets. The portfolios and quantities of natural assets differ from country to country.

• The level of natural resource exploitation has markedly increased. Have countries made up for this relative capital loss with the creation of other assets? In general, yes. Genuine savings, which compensate for the loss of one set of assets with the accumulation of others, has increased this decade. On the other hand, using the strictest "strong sustainability" criteria, the human impact on biological capabilities remains relatively low in this region, though again, this varies from country to country.

• While productivity has increased and is advancing toward generating quality jobs, it hasn't been enough to increase aggregate productivity (the ratio of everything produced to its costs). We see a general pattern of low investment in human capital, know-how, infrastructure and technology.

• South American countries show a high recurrence of foreign trade shocks, particularly those that specialize in energy and metals. This meant that the last period of inflated prices fueled a trend in currency revaluation — more or less pronounced depending on national policies — as well as a rise in labor costs and external trade deficits. But current moves toward regional financial integration involve fewer risks than before.

• Governments have significantly increased their ability to absorb part of the profits from the commodities bonanza, both by directly imposing fees and through indirect mechanisms. Where has the money gone? In various directions, but certain countries appear to have spent more than they should have while others have saved it. But deficiencies remain with all of them in areas like basic infrastructure and human capital. So while the forecast is brighter than before, too many dark patches remain.

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