Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
Thousands of years ago, fertile land, water and other natural resources determined the most profound transformation of humanity by offering conditions for settlements and the development of agriculture. A lot of water would pass under the bridge and, around 300 years ago, another profound transformation would begin, this one anchored in knowledge, technology, innovation, organization of production and institutions. In a simplified way, we went from the Neolithic Revolution to the Industrial Revolution and, more recently, to the Digital Revolution. With this, the economic influence of geography would, little by little, give way to ideas, ingenious solutions and efficiency.
This very brief framework helps us understand why countries with relatively few natural resources were able to become rich, while others, rich in resources, remained poor. The high development and fluidity of global commodity markets have guaranteed an order that, in the end, allows countries with scarce natural resources to access, without major inconvenience, the food, energy and minerals they need.
But this order may be coming to an end. Centuries of predatory extractivism have altered geography by destroying forests, wasting water resources, contaminating soils, degrading land, polluting air and water, promoting massive emissions of greenhouse gases and contributing to the warming of the planet. All of this is leading to an increase in the incidence of increasingly extreme weather events and bringing disruption, unpredictability and uncertainty to markets. The increase in volatility and risks underlying those changes are already affecting asset values, the economic and financial viability of projects and even affecting the insurance market.
On the other hand, we are witnessing an accelerated process of deglobalization caused by political factors, with autonomous movements of discrimination, protectionism, capital and investment controls and spectacular packages of subsidies and interventions that add to the challenges of the functioning of markets. These economic self-sufficiency strategies seem to be based on the assumption that natural resource markets will continue to function normally, as if they were an arena separate from other markets, which may be a mistaken assessment.
Everything indicates that the planet's warming will continue to increase and, at this point, it is difficult to believe that we will be able to contain it within safe limits. The euphoria of recent years with environmental commitments and targets is losing steam. In fact, the large predominance of commercial interests over the interests of the planet, the scarcity of funds to finance decarbonization, the procrastination of regulatory measures necessary to guarantee compliance with environmental commitments and goals, the still growing consumption of oil and the revocation of commitments by private investment funds and large companies with ESG principles indicate fragmented and uncoordinated actions in the old style of free-rider behavior and signal that we are quite far from the agenda of common interest.
Due to these major changes, geography is likely to return to the center of the economic agenda, which will have important and profound social, political and even geopolitical implications. After all, water, food or minerals are not produced in the laboratory and everything that depends too much on natural resources will experience a significant increase in relative prices over the coming years and decades.
With unique geographic conditions, Latin America and Caribbean (LAC) has enormous comparative and scalable competitive advantages associated with natural resources that can greatly contribute to global agendas. The region has vast areas for expanding agricultural production and enjoys large water resources, which enables it to increase food production for the world's table. Furthermore, the region has several countries with already green or very green electrical matrices, which enables it, like no other, to powershoring, or to receive energy-intensive plants and industrial chains that need to decarbonize their operations. This strategy, on the one hand, accelerates the time of decarbonization at a global level and, on the other, reduces its costs, while allowing a rapid increase in the supply of green manufactured goods.
LAC also has large reserves of many of the most important minerals needed for the climate transition, including lithium, copper, cobalt, nickel, niobium, rare earths, graphite and high-grade iron ore, which also enables it to develop industrial value chains for sustainability. The region's rich forests and biomes, unparalleled biodiversity and bioeconomy also mean that the region can make a fundamental contribution to decarbonizing and balancing the climate and providing sophisticated biological solutions to new and old problems. And the region also leads many of the most modern biofuel solutions. All of this suggests that the fight against decarbonization will necessarily involve LAC.
But for the region to serve the planet, markets and the price system will need to work. The growing tariff and non-tariff barriers and protection measures, especially for industry, do nothing in a context in which, more than ever, a more efficient and rational use of natural resources will be necessary in order to reduce transition costs and the impacts of climate change. This will be especially important for the most vulnerable groups.
In this sense, it will be necessary to eliminate artificial disturbances to geography and comparative and competitive advantages and review obstacles that distort prices and the allocation of resources in favor of more efficient and beneficial industrial and non-industrial energy projects. This agenda offers gigantic business opportunities that combine profitability, climate challenges and SDGs.
LAC has plenty of reasons to double down on sustainability policies and investments, become a reference for the green and fair transition and be an important provider of solutions in the interest of everyone.
