In search of lost growth

Years ago, we published in this same space a text on the challenges and prospects for economic growth in Latin America and the Caribbean (LAC). Much has happened in the global economy since then, significantly altering many fundamental economic parameters and, thus, the growth that would be observed.

Unexpected changes include a devastating pandemic, a war in Europe, rising geopolitical tensions, the process of deglobalization, rising tariff and non-tariff trade barriers, and interventions in capital flows and mergers and acquisitions. Also, the economic growth rate at the global level would plummet and it is likely that we have entered a new pattern of growth, which is lower and with more poverty and inequality. But it didn't stop there. Volatility has become part of everyday life in the markets, in prices and in the lives of people and companies, the time horizon has shortened and the perception of uncertainty and risk has become widespread. Inflation would reach levels not seen for a long time and we would enter an environment of threat of stagflation. Performance and market monitoring indicators would lose power to guide decisions, which gives an idea of how the markets have become disorganized.

In an environment like this, investments with greater impact – normally those that require long-term capital and a more favorable cost of capital, such as infrastructure – withdraw and give way to speculative movements. For LAC, which was already experiencing growth below the world average, this environment would be especially harmful. The region desperately needs to catch up on growth and make up for lost time if it is to maintain social peace and political stability. After all, shared prosperity is a great ally of democracies.

But the biggest challenge for the region is not to grow in a punctually fast way, but to grow in a sustained way. Sustained growth refers to a growth pattern characterized by a persistent and low-volatile rate of growth. And it's no minor concern. Empirical evidence shows that the great leap of countries that are now advanced economies resulted from long periods of economic growth at moderate rates, but persistent in time, and not at high, but erratic rates, thus enabling a cumulative and permanent process of economic and social transformation. After all, sustained growth comes with a more predictable economic environment and less uncertainty, fundamental requirements for planning, saving, investing and allocating resources more efficiently.

In this very complex global context, where should we place our bets to promote sustained growth in LAC? Preferably, in activities that will occupy a privileged place in the world demand structure over the coming decades and that are anchored in sectors in which the region already has comparative and competitive advantages. And we should also bet on the huge growth potential of the domestic and regional markets.

As for the international part, the demands of sectors such as food, mining and climate change are included there. As an example, the International Energy Agency estimates that annual investments in the energy sector of at least US$ 4 trillion will be necessary in order to reach carbon neutrality on the globe by 2050. The increase of the middle class in Asia will imply disproportionate increase in per capita consumption of grains, proteins, fruits and many other foods.

LAC occupies a prominent place in agricultural production and is already one of the largest exporters in the world. But the conditions for increasing sustainable production are unparalleled, which gives the region room for maneuver to be much more ambitious and aim to add value and export processed foods, which employ many more people, generate much more income and foster local and regional value chains.

With regard to mining, the region is also very well endowed and the future passes through here. After all, in LAC much of the highest quality iron ore is found, essential for green steel, and many of the largest reserves of lithium, nickel and many other critical and even decisive ores for world economic growth, which also supports industrialization and export of added value.

And finally, LAC is in an enviable position to enjoy the many benefits of powershoring. The region is a gigantic energy powerhouse with a major role in clean and renewable energy and biofuels and is developing new technologies and new solutions to support the climate transition. The great capacity to produce green, safe, cheap and abundant energy, the distancing from geopolitical issues and the increase in global environmental compliance puts the region in a privileged position to receive energy-intensive foreign industrial plants that seek to protect their corporate interests, thus contributing to accelerate the transition and reduce the costs of decarbonisation in the countries of origin of those plants, such as European countries.

Despite the difficulties, there are reasons for optimism. From different indicators, the region has shown that it is resilient to crises and that it enjoys the confidence of investors. In fact, LAC is the world's largest net recipient of foreign direct investment, and that says a lot. Realizing the full growth potential requires an important public and private capacity to mobilize financial and non-financial resources and well-developed, articulated and well-implemented public policies.

LAC will be able to play a major role in the global arena and be a source of solutions and sustained and sustainable growth that benefits its own population and the world population. For this, it will be necessary to know how to recognize, value and take advantage of the immense potential that we have in our hands.