Can Latin America Avoid Another Lost Decade?
As Latin America enters the 2020s, it must take steps to ensure that the next five years are not lost. Yes, the international context will make a difference. But the region’s governments have it within their power to improve economic performance significantly.
BOGOTÁ – 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 through a half-decade of anemic growth for the second time since the 1980s, and its lowest-performing quinquennium since World War II. In the region’s previous lost half-decade, after the 1997 East Asian crisis, annual GDP growth averaged 1.2%. In 1980-1985 – the worst five years of the debt crisis – average growth amounted to 0.7%. Over the last five years, it reached a mere 0.4%.
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 international trade overall, and two years of renewed financial turbulence in emerging economies. But other developing regions have faced the same external headwinds, and every one of them has outperformed Latin America, not only in the last five years, but since 1990 – a period during which annual GDP growth in the region averaged just 2.7%.
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 countries.
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% – one of the sharpest economic contractions in history for a country not at war.
Recent international sanctions have exacerbated Venezuela’s economic travails. But the problems began long ago, and have been fueled by the sharp political polarization and catastrophic economic policies of President Nicolás Maduro, the late Hugo Chávez’s handpicked successor.
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Excluding Venezuela, Latin America’s average GDP growth rises, but only to 1% per year – still worse than the region’s last lost half-decade. This partly reflects the fact that the region’s largest economy, Brazil, experienced its deepest recession since WWII in 2015-2016, and has been recovering very slowly.
In Mexico, Latin America’s second-largest economy, President Andrés Manuel López Obrador (widely known as AMLO) pledged, upon taking office in December 2018, to achieve 4% annual GDP growth. Instead, the economy has stagnated, and even slipped into recession in the first half of 2019. Concerns about AMLO’s economic management have contributed to this outcome.
Elsewhere, Argentina has struggled with domestic macroeconomic imbalances, in addition to global financial turbulence and, more recently, concerns about the return of a Peronist government. Political turmoil in Ecuador, and more recently in Bolivia and Chile, has also undermined economic performance.
But Latin America’s economic problems began long before the current wave of economic and political instability. Latin America achieved faster growth – a 5.5% 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 countries to undertake market reforms that, so far, have failed to fulfill their promise. On the contrary, countries’ dismantling of their industrial policies – together with the repercussions of the debt crisis, the “Dutch disease” effects of the commodity-price super-cycle after 2003, and rising competition from China – led to premature de-industrialization.
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 the developed countries, 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 last 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% of GDP, on average. That is about one-third of what China (2.1%) and the OECD countries (2.6%) spend. In Latin America, only Brazil invests more than 1% of GDP in R&D. During the Fourth Industrial Revolution, 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 2010-2011 – and poverty has increased.
As Latin America enters the 2020s, it must take steps to ensure that the next five years are not lost. Yes, 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 re-industrialization (including by pursuing greater regional economic integration, thereby supporting intra-regional trade in manufactured goods) and invest in science and technology. Together with active social policies, such growth-enhancing measures can enable Latin America to regain its economic footing and lay the foundations for a better future for its people.