atin Americans frequently complain about being far from the rest of the world, but sometimes distance can be an advantage. As the great economic historian Carlos Díaz-Alejandro noted, in “the 1930s and 1940s, most Latin Americans could feel lucky.” After all, the “Spanish and the Chinese Civil Wars, World War II, the depth of depression in the United States, Stalinist purges, the political dependence of Asia and Africa, and the pains of decolonization in India and elsewhere could be viewed by Brazilians and Mexicans as remote events.”
Nowadays, Latin Americans can feel lucky again. Should Russian President Vladimir Putin or North Korean leader Kim Jong-un launch a tactical nuclear weapon, at least it will not land anywhere near São Paulo or Santiago.
There are economic similarities with the interwar period, too. The 1930s brought the end of laissez-faire and free trade, and eventually the division of humanity into warring blocs. Similarities with today’s incipient deglobalization, and the risk that countries will have to choose between China and the United States, are more than passing.
In the same essay, Díaz-Alejandro argued that the succession of global crises also brought opportunities to Latin America. The supply difficulties caused by WWII spurred the production of domestic substitutes, and the absence of foreign capital (in the 1930s and 1940s, British and U.S. lenders had bigger fish to fry) forced countries to adopt bolder and more innovative economic policies. The result was that growth outpaced the rest of the world, enabling Latin America to recover quickly from the pain of the Great Depression.
Today’s crises also bring opportunities. The region has benefited from high prices for the commodities it exports, and the green transition could make those same commodities increasingly valuable. Brian Winter recently made the case for the “cautiously hopeful, things-are-looking-up-but-let’s-not-get-carried-away” feeling that is emerging in some quarters of the region. Winter’s first point is the same as Díaz-Alejandro’s: Latin America is far, and therefore relatively insulated from turmoil elsewhere.
But Latin America is also close—at least to the U.S. and the massive North American market. Near-shoring and friend-shoring are potentially great news for the region. Mexico is already benefiting from the arrival of firms that no longer want to produce in China. Might countries farther south benefit, too?
The third advantage is potentially the biggest: Latin America could be a clean energy powerhouse. It is sunny, windy, and (in parts) endowed with abundant water, and therefore very competitive in solar, wind, and hydro power. And if hydrogen technology lives up to the hype, Latin America could soon be peddling green energy worldwide. Alternatively, if hydrogen turns out to be too bulky, expensive, or dangerous for long-distance transport, energy-intensive industries might find it profitable to relocate to the region, as Harvard’s Ricardo Hausmann has argued. That could be a game-changer for growth and jobs.
And, of course, Latin America has the minerals and rare earths that anyone who is thinking green desperately wants. Need lithium for that electric-vehicle battery? The salt-flats of Argentina, Bolivia, and Chile are the best places to find it. Brazil, Cuba, and Chile also possess the scarce cobalt that EV batteries require as well.
There is one additional opportunity Winter does not mention. Over the last quarter-century, Latin American countries have massively increased university enrollment, but the new professionals cannot always find jobs to match their skills. The Zoom revolution could be about to change all this, as Peruvian engineers get online work from Chicago and Colombian accountants service firms based in Texas. This is what Richard Baldwin has described as the next “unbundling”: people providing services abroad without having to leave home.
But there is a catch. Eighty years ago, Latin America missed the opportunity to reshape its economies and societies. The growth of the 1940s gave way to the inflation and balance-of-payments crises of the 1950s and 1960s, and then to the lost decade of the 1980s. The gradual democratization of the post-WWII period, enthusiastically celebrated by Díaz-Alejandro, was drowned, two decades later, by a toxic wave of military regimes.
Could it happen again? At least four things could go wrong.
Despite the opportunities, the investments may not materialize—at least not in the volume needed to make a lasting difference. For example, although Brazil is much more stable and far less dangerous than the Democratic Republic of the Congo (which produces 70% of the world’s cobalt), it remains far from an investment paradise. Transport infrastructure is mediocre, the bureaucracy is often intractable, and macroeconomic and political risk still deter potential investors. And talk among international bureaucrats about using financial engineering to “de-risk” investments in emerging and developing countries has yet to yield concrete results.
Another risk is that the investments will come but will remain siloed, with limited economy-wide impact. Chile is now the second-largest producer of lithium in the world (after Australia), with exports becoming a welcome source of foreign exchange. But the industry employs relatively few people, and the positive spillovers to the rest of the economy are limited. Politicians often make speeches about Chile’s potential to produce and export lithium batteries, but I have yet to meet someone who thinks that will happen in the near future.
Attempts at creating local linkages are worthy, but they can take time. Chilean president Gabriel Boric has announced plans to create a state-owned national lithium company that would seek foreign partners to help move Chile up the lithium value chain. Doing so will take years, however, and by then the lithium boomlet could be over: China and others are close to a technological breakthrough that would replace scarce lithium with plentiful sodium in the production of batteries.
The last and biggest risk is purely political: will the world want to invest in a region that governs itself so poorly? Argentina’s presidential election exemplifies the problem: the second-round runoff will be between an economy minister who has allowed inflation to reach 12.7% per month and a libertarian economist, Javier Milei, who takes advice from his cloned dogs and recently called the Pope “a leftist son of a bitch.”
In the early 1950s, according to Díaz-Alejandro, Latin Americans “looked back with satisfaction” at the changes of the previous two decades. Will the same be true in the 2030s? Perhaps Milei’s cloned dogs know the answer.
Copyright: Project Syndicate, 2023.
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Latin America’s Splendid Isolation
Torres del Paine National Park, Chile. Photo by Olga Stalska on Unsplash
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November 8, 2023
Latin Americans often complain about being far from the rest of the world. Yet that distance can bring great advantage to the region—in terms of economics, security, clean energy, and commodities—but there are political challenges to taking advantage, writes Andrés Velasco.
L
atin Americans frequently complain about being far from the rest of the world, but sometimes distance can be an advantage. As the great economic historian Carlos Díaz-Alejandro noted, in “the 1930s and 1940s, most Latin Americans could feel lucky.” After all, the “Spanish and the Chinese Civil Wars, World War II, the depth of depression in the United States, Stalinist purges, the political dependence of Asia and Africa, and the pains of decolonization in India and elsewhere could be viewed by Brazilians and Mexicans as remote events.”
Nowadays, Latin Americans can feel lucky again. Should Russian President Vladimir Putin or North Korean leader Kim Jong-un launch a tactical nuclear weapon, at least it will not land anywhere near São Paulo or Santiago.
There are economic similarities with the interwar period, too. The 1930s brought the end of laissez-faire and free trade, and eventually the division of humanity into warring blocs. Similarities with today’s incipient deglobalization, and the risk that countries will have to choose between China and the United States, are more than passing.
In the same essay, Díaz-Alejandro argued that the succession of global crises also brought opportunities to Latin America. The supply difficulties caused by WWII spurred the production of domestic substitutes, and the absence of foreign capital (in the 1930s and 1940s, British and U.S. lenders had bigger fish to fry) forced countries to adopt bolder and more innovative economic policies. The result was that growth outpaced the rest of the world, enabling Latin America to recover quickly from the pain of the Great Depression.
Today’s crises also bring opportunities. The region has benefited from high prices for the commodities it exports, and the green transition could make those same commodities increasingly valuable. Brian Winter recently made the case for the “cautiously hopeful, things-are-looking-up-but-let’s-not-get-carried-away” feeling that is emerging in some quarters of the region. Winter’s first point is the same as Díaz-Alejandro’s: Latin America is far, and therefore relatively insulated from turmoil elsewhere.
But Latin America is also close—at least to the U.S. and the massive North American market. Near-shoring and friend-shoring are potentially great news for the region. Mexico is already benefiting from the arrival of firms that no longer want to produce in China. Might countries farther south benefit, too?
The third advantage is potentially the biggest: Latin America could be a clean energy powerhouse. It is sunny, windy, and (in parts) endowed with abundant water, and therefore very competitive in solar, wind, and hydro power. And if hydrogen technology lives up to the hype, Latin America could soon be peddling green energy worldwide. Alternatively, if hydrogen turns out to be too bulky, expensive, or dangerous for long-distance transport, energy-intensive industries might find it profitable to relocate to the region, as Harvard’s Ricardo Hausmann has argued. That could be a game-changer for growth and jobs.
And, of course, Latin America has the minerals and rare earths that anyone who is thinking green desperately wants. Need lithium for that electric-vehicle battery? The salt-flats of Argentina, Bolivia, and Chile are the best places to find it. Brazil, Cuba, and Chile also possess the scarce cobalt that EV batteries require as well.
There is one additional opportunity Winter does not mention. Over the last quarter-century, Latin American countries have massively increased university enrollment, but the new professionals cannot always find jobs to match their skills. The Zoom revolution could be about to change all this, as Peruvian engineers get online work from Chicago and Colombian accountants service firms based in Texas. This is what Richard Baldwin has described as the next “unbundling”: people providing services abroad without having to leave home.
But there is a catch. Eighty years ago, Latin America missed the opportunity to reshape its economies and societies. The growth of the 1940s gave way to the inflation and balance-of-payments crises of the 1950s and 1960s, and then to the lost decade of the 1980s. The gradual democratization of the post-WWII period, enthusiastically celebrated by Díaz-Alejandro, was drowned, two decades later, by a toxic wave of military regimes.
Could it happen again? At least four things could go wrong.
Despite the opportunities, the investments may not materialize—at least not in the volume needed to make a lasting difference. For example, although Brazil is much more stable and far less dangerous than the Democratic Republic of the Congo (which produces 70% of the world’s cobalt), it remains far from an investment paradise. Transport infrastructure is mediocre, the bureaucracy is often intractable, and macroeconomic and political risk still deter potential investors. And talk among international bureaucrats about using financial engineering to “de-risk” investments in emerging and developing countries has yet to yield concrete results.
Another risk is that the investments will come but will remain siloed, with limited economy-wide impact. Chile is now the second-largest producer of lithium in the world (after Australia), with exports becoming a welcome source of foreign exchange. But the industry employs relatively few people, and the positive spillovers to the rest of the economy are limited. Politicians often make speeches about Chile’s potential to produce and export lithium batteries, but I have yet to meet someone who thinks that will happen in the near future.
Attempts at creating local linkages are worthy, but they can take time. Chilean president Gabriel Boric has announced plans to create a state-owned national lithium company that would seek foreign partners to help move Chile up the lithium value chain. Doing so will take years, however, and by then the lithium boomlet could be over: China and others are close to a technological breakthrough that would replace scarce lithium with plentiful sodium in the production of batteries.
The last and biggest risk is purely political: will the world want to invest in a region that governs itself so poorly? Argentina’s presidential election exemplifies the problem: the second-round runoff will be between an economy minister who has allowed inflation to reach 12.7% per month and a libertarian economist, Javier Milei, who takes advice from his cloned dogs and recently called the Pope “a leftist son of a bitch.”
In the early 1950s, according to Díaz-Alejandro, Latin Americans “looked back with satisfaction” at the changes of the previous two decades. Will the same be true in the 2030s? Perhaps Milei’s cloned dogs know the answer.
Copyright: Project Syndicate, 2023.
