Until recently, Latin America was a model of successful economic development. Following a rocky period of widespread reforms, Latin America established itself as a leading economic force in the world. Average growth exceeded 5%, over 70 million people were lifted from poverty, and many more found themselves attaining middle class status. However, the golden age seems to have ended rather abruptly. Dean Hochlaf (@) explores this.
Stagnation is becoming a worrying problem for many Latin American nations and an increasingly gloomy outlook for the global economy has only added to the concerns of policy makers. It is important to assess why Latin America has failed to achieve sustained growth, and why productivity gains remain stifled. Personally I believe that there are three main reasons as to why this is happening in Latin America, and consequently three challenges that the region must overcome in order to achieve its development goals, and escape the “middle income trap”.
The first is “premature deindustrialisation”. Due to the Brazilian manufacturing sector in particular finding itself in deep recession, the manufacturing outlook for the region has been revised downwards. To understand the significance, we must understand the role manufacturing plays in development. Known as Kaldor’s growth laws in academic literature, manufacturing has important features which stimulates growth in the economy, as well as productivity growth in the sector and other non-manufacturing sectors. With a manufacturing sector in decline, it is becoming increasingly difficult for Latin America to continue on the path to development. The stagnation in this crucial sector is therefore have direct repercussions on wider economic growth. Although there is no clear consensus as to why this is happening, there are some prominent theories. One I am particularly interested in revolves around the trade reforms which were brought in around two decades ago. Many nations in the region simply did not have a comparative advantage in manufacturing and ended up faltering in the face of global competition. Prior to the current period of stagnation, Latin America benefited from high commodity demand, especially from China and South East Asia, but as these economies slow and demand dries up, Latin America finds itself in a situation without a developed manufacturing base to fall back on. Unless Latin America confronts this “premature deindustrialisation” problem, they will be dependent on global economic conditions and unable to sustain productivity improvements necessary for growth.
The second issue is the perennial development problem of inequality. This is a common challenge faced by virtually all developing nations, but for Latin America it is an unfortunate reminder of the current economic state. Latin America in particular made great strides to combat inequality during their boom period, but now, in addition to stagnating growth, they face stagnation in the trend of inequality reduction. Latin America, ranks alongside Sub-Saharan Africa as the two most unequal regions in the world. Inequality can be a hindrance to growth, simply because it entraps large sections of the population in poverty. With millions across the continent facing chronic poverty, they are unable to access the basic means to improving their conditions. Without access to education, healthcare and other vital services, the majority of these people are in effect, trapped, unable to improve their conditions due to being unable to access these services, and unable to access these services due to being unable to improve their conditions. It becomes a vicious cycle of poverty. Furthermore, a wealth of human capital gets ignored when governments fail to confront inequality, and this will have a negative impact on the wider economy. At the root of reducing inequality is education. Improving the productive potential of the citizens of Latin America is imperative to helping them increase incomes and drive growth for the region. Of course productivity aside, it is important to remember the purpose of development. Growth is crucial in order to improve the lives of millions in poverty, and should be pursued with this in mind. It is just important to remember that this section of society doesn’t only benefit from economic growth, but will also drive it.
The final point is in regards to improving Latin American infrastructure. This is closely linked to the other two points, as infrastructure improvements are likely to reap gains for the manufacturing sector and reduce the level of inequality. Nevertheless, this is still crucial on its own. Latin America has made massive improvements over the last two decades, but more is still needed to be done in order for Latin America to sustain development in an increasingly globalized world. Improved transportation links for example can have a large impact on potential prosperity. Better paved roads, airports and ports can lower transportation costs making it cheaper to purchase Latin American goods. Innovation and technology are other areas which can improve lives and productivity. If Latin America is to succeed in the future and achieve sustained economic prosperity, it needs to ensure investment, from both the public and private sector, is being aimed at areas that will lead to the infrastructure improvements necessary for sustained growth. Another possible avenue for the Latin American regions to explore is greater unity. We already have MERCOSUR, the sub-regional trading bloc comprising of six major nations and additional five observer nations from the region, but a united Latin America, intent on improving links across the continent could help Latin America develop into a unified force, with a sizeable internal market place that can be easily accessed and that is constantly developing.
Industry and infrastructure are in need of further development and inequality is something that must be dealt with for Latin America to continue on its path of progression. Identification of these issues is only a small thing though, relative to implementing policies that will effectively deal with them. The main solution lies with investment. Latin America must facilitate investment at home and from abroad to these areas. Governments across the region must allocate resources more effectively, encourage export growth and invest in the people. This is a bit vague, but as a general direction, I feel that these are the areas Latin America must concentrate on, if it is to overcome stagnation and achieve sustained economic development.
Dean Hochlaf has a Masters in International Finance and Economic Development from the University of Kent. He takes interest in the development of Latin America. He tweets @DHochlaf.
The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.
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