Latin America: The loss of El Dorado (The Economist – June 27, 2015)

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After the commodity boom, the region needs a new formula for growth

IT WAS wonderful while it lasted. For much of this century Latin America saw robust economic growth, a big fall in poverty and a swelling of the middle classes. Now the good times are over. Emerging markets everywhere are subsiding like a cooling soufflé.

But Latin America has gone stone cold. The IMF expects growth of just 0.9% in 2015, which would be the fifth successive year of deceleration. Many economists are talking of a new normal of growth of only 2% or so a year—less than half the region’s pace during the boom.

What has gone wrong? The short answer is that the great commodity supercycle triggered by the industrialisation of China is over. Rising exports of minerals, soya beans and fuels lifted many South American economies. Without that fillip the region has converged downwards to the 2.4% long-term growth rate of Mexico, which is not a big commodity exporter.

Worse, the commodity bonanza prompted distortions that may limit new sources of growth. Many Latin currencies became overvalued, wounding the competitiveness of non-commodity firms. Consumption soared; investment sagged. While Asia built factories, Latin America erected shopping centres.

The net result is not wholly negative. Past Latin American commodity booms ineluctably ended in financial busts. This time only countries, such as Venezuela, that have repeated old mistakes—fiscal populism, protectionism and government meddling—face a crisis. Most of the region has become more resilient after years of responsible macroeconomic policies, with stronger banks and lower public debt.

For a boom-bust continent, resilience is not to be sniffed at. But it will not ensure faster growth that endures. To get rich, Latin America must boost its abysmally low rate of productivity growth and diversify its economies (see article). That, in turn, means moving beyond the tired ideological debate between market and state that still bedevils the region’s politics. Latin America needs both better-functioning markets, with more competition, and much smarter government.

Start with productivity. In 1960 the efficiency with which Latin America combined capital and labour was three-quarters that of the United States. Now it is just over half. The obvious causes of this gap are the lack of transport, the paucity of innovation and of skills; and a swollen informal sector.

For the rest of this article, click here: http://www.economist.com/news/leaders/21656185-after-commodity-boom-region-needs-new-formula-growth-loss-el-dorado

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