Musical Chairs in Latin America

Comparing Latin America’s economic growth with that of other emerging regions leaves us in a somewhat awkward position. This is because the region has grown at a relatively slower pace than the average of emerging countries in recent decades, leaving us lagging behind in the global economy.

A more detailed look, however, suggests diversity of growth. While some countries have experienced modest growth rates, others have shown very reasonable rates even for emerging countries.

Although average growth is a distinguishing feature, the most differentiating factor of the growth pattern of countries in the region was volatility. A group of countries grew not only at relatively high rates, but above all, persistently. These countries include Bolivia, Chile, Costa Rica, Panama, Peru and the Dominican Republic, which have recorded average rates of more than 4% since 1990.

On the other hand, other economies showed growth patterns characterized by high volatility at a relatively low average, such as Argentina, Brazil and Mexico, among others. Venezuela also shared these characteristics, albeit much more intensively. There is also a third group of countries that were generally characterized by a combination of features of the other groups.

The first group of countries has also experienced a period of long and almost continuous growth that has enabled a cumulative and virtuous process of income and wealth expansion that has proved decisive in laying stronger economic foundations.

The second group has been growing sporadically at satisfactory rates, but following erratic trends that have ultimately contributed little to countries realizing their enormous potential to raise prosperity. Due to the size of the economies in this group, the stop-and-go pattern that characterizes the region’s international growth could be attributed, at least in part, to those countries.

The heterogeneity of growth patterns has implications for countries but also for the region as a whole. One of them is associated with the musical chairs model in contributions to regional GDP. Latin America’s share of economies with sustained growth nearly doubled between the early 1990s and the end of 2010. In the case of Chile and Peru, for instance, contributions to regional GDP rose from 2.7% to almost 5%, and from 2% to 3.5%, respectively. The share of the four largest economies, on the other hand, dropped about 7%, and not only due to Venezuela’s economic downturn.

Other implication is associated with the musical chairs model in terms of GDP per capita. While in the early 1990s the region’s largest economies boasted the highest per capita income, three decades later many of the largest figures were recorded in countries with sustained growth. In fact, there has been a noticeable change in the intra-regional distribution of per capita wealth.

Although we must recognize the influence of economic, political and social peculiarities of growth patterns, we also have to acknowledge that some similarities are present in virtually the entire region. These include, to varying degrees, weaknesses in institutions and public administration, low investments in infrastructure, low productivity, poor public services and a discouraging environment for doing business.

Another similarity is the relatively high influence of commodities on the economies. However, the end of the commodity super-cycle had different repercussions, and while some recovered and improved their previous growth trend, others began to face difficulties.

What policies should countries in the region follow in order to improve economic performance and increase the role of the global economy? At least two sets of policies. The first relates to measures that boost average growth. This will require the promotion of sectoral policies that foster new sources of growth, economic dynamism and competitiveness, which requires diversifying and adding more value, and promoting innovation and technology and, of course, addressing the weaknesses described above. The industrialization of comparative advantages and developing knowledge in sectors where the region already has or may have a leading role, such as agriculture, mining, biodiversity, new energies, forestry, water, healthcare, certain industries, among other areas, is a sure path that can lead to new business opportunities and even leadership in global value chains.

The second set is associated with measures that promote sustained growth. After all, we already know that just as important as high growth rates are persistent growth rates, which prevent efforts and sacrifices from being lost during growth collapses. This will require consistent and coherent fiscal, monetary and sectoral policies.

Lastly, however important the growth of each country, it is the growth and greater regional integration of large economies that could make a special difference for the region in creating more jobs, investment and trade opportunities.