conomic theory suggests that poor countries should, over time, converge toward the income levels of advanced economies. While that has happened in East Asia and Central Europe, Latin America still lags behind. Since 1960, only a few countries in the region have managed to narrow the gap between their per capita income and that of the United States—and even in those cases, the gains have been small.
As we explain in a new report for the G30, there is no single cause for Latin American economies’ mediocre growth over the decades. In some countries—such as Argentina, Ecuador, and Venezuela—there will be little to no sustained growth until policymakers address serious outstanding fiscal, debt, and (in some cases) inflation problems.
Brazil, too, has struggled to achieve sustained growth. Not only has its growth rate per capita been lower than that of the U.S. for most of the past 40 years, it was even negative half the time during that period. While inflation and extreme poverty have fallen, macro policies have yet to deliver sustained low interest rates and lower volatility, and microeconomic policies have been woefully inconsistent, indicating a surprising inability to learn from past errors and successes. As a result, informal labor arrangements are common, unemployment remains high, investment remains low, and productivity has stagnated.
In Mexico, micro distortions and poorly designed social policies have led to a widespread misallocation of resources. Though there have been suitable reforms and closer trade integration with Canada and the U.S., these developments have had only a small impact on growth, owing partly to the growing economic divide between Mexico’s north and the south. Low investment in physical and human capital in the south has coincided with increased investment in the north, due to nearshoring. Making matters worse, increased violence and a decline in state capacity have contributed further to the weak economic performance, threatening Mexico’s future prospects.
Notwithstanding the recent global inflationary spike, other Latin American countries—among them Colombia, Peru, Chile, and Uruguay—have managed to stabilize their economies and achieve decades of low inflation and low financial volatility (for the most part). By pursuing macro-stabilization policies and opening themselves to international trade, they have benefited from high-growth episodes that raised per capita incomes and brought unprecedented prosperity.
But even in these more successful cases, growth slowed long before income levels had converged to those of advanced economies, suggesting that macro stability is a necessary but not sufficient condition for sustained growth. All four countries still need a growth strategy aimed at overcoming market and government failures, with a goal of diversifying the economy and developing new sectors with high growth potential.
More broadly, Latin America remains one of the most unequal regions in the world. Although policies in many countries substantially reduced inequality and poverty in the first decade and a half of this century (thanks in part to the commodity boom), the pandemic caused substantial backsliding. Many countries therefore must recover lost ground.
The political economy of the region also remains problematic. The final decades of the twentieth century brought widespread democratization—a major achievement—but now democratic backsliding is a major concern. Some countries, such as Venezuela and Nicaragua, are no longer democratic at all, while others, including El Salvador, are exhibiting increasingly authoritarian tendencies.
Even among the many countries that remain firmly democratic, institutional design problems have made governance difficult. The peculiarly Latin American combination of presidential regimes and proportional electoral systems often produces governments that lack parliamentary majorities. With no mandate, they are unable to pursue reforms or fulfill their campaign pledges, leading to deeper voter frustration and disenchantment.
With declining trust in institutions across the region’s political landscape, Latin America seems to be caught in a low-credibility, low-performance trap. Because citizens do not trust the government, law enforcement and consistent adherence to government rules and regulations are weak. As a result, policies often have poor results, confirming citizens’ distrust and thus completing the circle of dysfunction. Restoring trust and rebuilding state capacities are two sides of the same problem. Solving it will require a coordinated effort, involving both technocratic tinkering and bold political leadership.
But in an atmosphere of polarization and political deadlock, engineering deep and lasting reforms is an uphill battle. Mediocre economic and distributional outcomes will continue to poison the well of mutual trust, leading to further political fragmentation and polarization, and a diminished capacity to make tough choices.
But it is not all doom and gloom. The Mexican government’s recent populist and autocratic tendencies have been effectively checked by the judicial system, and electorates elsewhere have begun to respond positively to calls for reform. One can still imagine large-scale political bargains in which a strengthening of the region’s social safety net and an improvement in the quality of public services are coupled with reforms to increase the attractiveness of productive investment. Boosting productivity and lowering inequality are obvious policy goals, but they need to be supported by public-sector reform.
For many Latin American countries, faster and more equitable growth, and a more diversified and resilient economy, remain within reach. The region is well placed to produce abundant clean energy, and it is richly endowed with the minerals needed for the transition to a low-carbon economy. New technologies such as green hydrogen, which could be a source of sizable hard-currency earnings, can help to reignite growth.
Latin America is not condemned to fall into stagnation and political deterioration. The slide can be halted before it becomes irreversible. But while better outcomes are easy to imagine, they will require good politicians, good policies, and good luck. If there is going to be a change across the region, it needs to happen now.
Copyright: Project Syndicate, 2023.
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Latin America’s Growth Conundrum
A favella in Brazil. Image by anja_schindler from Pixabay
October 1, 2023
Throughout Latin America, economic growth has failed to meet economist projections. There are a variety of reasons for this, but issues largely boil down to failures of—and declining trust in—governance institutions, write Arminio Fraga, Guillermo Ortiz, and Andrés Velasco.
E
conomic theory suggests that poor countries should, over time, converge toward the income levels of advanced economies. While that has happened in East Asia and Central Europe, Latin America still lags behind. Since 1960, only a few countries in the region have managed to narrow the gap between their per capita income and that of the United States—and even in those cases, the gains have been small.
As we explain in a new report for the G30, there is no single cause for Latin American economies’ mediocre growth over the decades. In some countries—such as Argentina, Ecuador, and Venezuela—there will be little to no sustained growth until policymakers address serious outstanding fiscal, debt, and (in some cases) inflation problems.
Brazil, too, has struggled to achieve sustained growth. Not only has its growth rate per capita been lower than that of the U.S. for most of the past 40 years, it was even negative half the time during that period. While inflation and extreme poverty have fallen, macro policies have yet to deliver sustained low interest rates and lower volatility, and microeconomic policies have been woefully inconsistent, indicating a surprising inability to learn from past errors and successes. As a result, informal labor arrangements are common, unemployment remains high, investment remains low, and productivity has stagnated.
In Mexico, micro distortions and poorly designed social policies have led to a widespread misallocation of resources. Though there have been suitable reforms and closer trade integration with Canada and the U.S., these developments have had only a small impact on growth, owing partly to the growing economic divide between Mexico’s north and the south. Low investment in physical and human capital in the south has coincided with increased investment in the north, due to nearshoring. Making matters worse, increased violence and a decline in state capacity have contributed further to the weak economic performance, threatening Mexico’s future prospects.
Notwithstanding the recent global inflationary spike, other Latin American countries—among them Colombia, Peru, Chile, and Uruguay—have managed to stabilize their economies and achieve decades of low inflation and low financial volatility (for the most part). By pursuing macro-stabilization policies and opening themselves to international trade, they have benefited from high-growth episodes that raised per capita incomes and brought unprecedented prosperity.
But even in these more successful cases, growth slowed long before income levels had converged to those of advanced economies, suggesting that macro stability is a necessary but not sufficient condition for sustained growth. All four countries still need a growth strategy aimed at overcoming market and government failures, with a goal of diversifying the economy and developing new sectors with high growth potential.
More broadly, Latin America remains one of the most unequal regions in the world. Although policies in many countries substantially reduced inequality and poverty in the first decade and a half of this century (thanks in part to the commodity boom), the pandemic caused substantial backsliding. Many countries therefore must recover lost ground.
The political economy of the region also remains problematic. The final decades of the twentieth century brought widespread democratization—a major achievement—but now democratic backsliding is a major concern. Some countries, such as Venezuela and Nicaragua, are no longer democratic at all, while others, including El Salvador, are exhibiting increasingly authoritarian tendencies.
Even among the many countries that remain firmly democratic, institutional design problems have made governance difficult. The peculiarly Latin American combination of presidential regimes and proportional electoral systems often produces governments that lack parliamentary majorities. With no mandate, they are unable to pursue reforms or fulfill their campaign pledges, leading to deeper voter frustration and disenchantment.
With declining trust in institutions across the region’s political landscape, Latin America seems to be caught in a low-credibility, low-performance trap. Because citizens do not trust the government, law enforcement and consistent adherence to government rules and regulations are weak. As a result, policies often have poor results, confirming citizens’ distrust and thus completing the circle of dysfunction. Restoring trust and rebuilding state capacities are two sides of the same problem. Solving it will require a coordinated effort, involving both technocratic tinkering and bold political leadership.
But in an atmosphere of polarization and political deadlock, engineering deep and lasting reforms is an uphill battle. Mediocre economic and distributional outcomes will continue to poison the well of mutual trust, leading to further political fragmentation and polarization, and a diminished capacity to make tough choices.
But it is not all doom and gloom. The Mexican government’s recent populist and autocratic tendencies have been effectively checked by the judicial system, and electorates elsewhere have begun to respond positively to calls for reform. One can still imagine large-scale political bargains in which a strengthening of the region’s social safety net and an improvement in the quality of public services are coupled with reforms to increase the attractiveness of productive investment. Boosting productivity and lowering inequality are obvious policy goals, but they need to be supported by public-sector reform.
For many Latin American countries, faster and more equitable growth, and a more diversified and resilient economy, remain within reach. The region is well placed to produce abundant clean energy, and it is richly endowed with the minerals needed for the transition to a low-carbon economy. New technologies such as green hydrogen, which could be a source of sizable hard-currency earnings, can help to reignite growth.
Latin America is not condemned to fall into stagnation and political deterioration. The slide can be halted before it becomes irreversible. But while better outcomes are easy to imagine, they will require good politicians, good policies, and good luck. If there is going to be a change across the region, it needs to happen now.
Copyright: Project Syndicate, 2023.
