Latin America, a region maligned by recent crises that nonetheless boasts a $4.6 trillion economy, needs urgent policy shifts to bring growth rates back to where they were during years of high commodity prices. Time is running out because its demographic advantage — when active workers outnumber retirees — will peak in 2020, according to a report from the Inter-American Development Bank.
This leaves governments squeezed on both sides — forced to cover swelling costs of social security and healthcare for the elderly while the working-age population becomes proportionally smaller. Even if new policies were adopted today, it would still take years to build out the needed infrastructure, and at least a generation to educate the labor force.
The urgency of that policy shift was easier to ignore during the commodities bonanza. In those years exports of soy, iron and oil, largely to feed the voracious appetite of a rising China, pushed Latin American growth to more than double the developed-economy average. One of the region’s problems is that since the global financial crisis it has relied on private consumption and government spending to grow, the United Nation’s Latin America and the Caribbean economic commission said in an August report. Private investment, which is needed to sustain long-term growth, has consistently lagged that of other emerging market countries.
The challenge of luring investment largely explains why Brazil has struggled this year to come free from its worst-ever recession, and why Argentina’s bounce back from contraction will be smaller than the government originally hoped.
“We don’t invest enough, don’t save enough, don’t trade enough, don’t educate enough. What do you expect? You’re not going to grow enough,’’ says Alberto Ramos, Goldman Sachs’ chief Latin America economist. “It’s not an economic puzzle, we know what needs to be done, but I’m not optimistic it will be done. If it isn’t, the region will continue to lose decade after decade, and continue to fall behind.’’
The International Monetary Fund is also sounding the alarm. Latin America’s per-capita growth will average 1.6 percent in the medium term, the same rate recorded in the past quarter-century, and well below the 2.6 percent growth estimated for developing countries in general, the IMF said in a July report titled “Back on Cruise Control, but Stuck in Low-Gear.’
“Prospects for strong long-term growth in Latin America look dimmer now than they did a few years ago at the height of the commodity price boom,’’ Alejandro Werner, the IMF’s Western Hemisphere director, wrote in the report. “Worryingly, these growth rates are essentially equal to that of advanced economies.’’
Shelly Shetty, head of Latin America sovereigns for Fitch Ratings, says the region’s low growth also stems from difficult business environments in some countries, limited trade openness, lagging productivity improvement, and general delays in structural reforms. The good news, she says, is that nations have achieved progress on macroeconomic stability and now, finally, some countries have begun to heed the wake-up call.
“Now that growth prospects have diminished in several of the countries, we are seeing that governments are increasingly focusing on issues to boost potential growth,’’ Shetty said. “Structural reforms which weren’t really getting any traction in the commodity super cycle years are finally being discussed. But, at the end of the day, passing the reforms is one thing; executing them well will be the other challenge.’’