Latin America: Headwinds Challenging Progress

By J C Suresh | IDN-InDepth NewsReport

TORONTO (IDN) – Latin America has achieved economic growth and made significant progress in poverty reduction over the course of the last decade. But it is now facing headwinds, according to the latest Latin American Economic Outlook.

Jointly produced by the OECD Development Centre, the UN Economic Commission for Latin America and the Caribbean (UN ECLAC) and CAF – Development Bank of Latin America, the report was released in Panama City during the XXIII Ibero-American summit on October 18-19, 2013.

“Between 2003 and 2012, the region grew at an average annual rate of 4% thanks to the rapid rise of global trade and increasing commodity prices, and this despite the contraction brought about by the international financial crisis,” states the report.

Now the global economic and financial turbulences such as the euro area’s weak performance, the slowdown in China’s economy and uncertainty over U.S. monetary policy have caught up with Latin America and have resulted in declining trade, falling commodity prices and increasing unease about external financing, says the report.

Commodities make up 60% of the region’s exports. While the value of these goods rose over the past decade, half this increase was accounted for by rising prices and not, as in the 1990s, by rising volumes. Moreover, income from rising commodity exports has allowed Latin American countries economies to substitute locally-made goods with imports, contributing to a slowdown in regional manufacturing.

“This also has stifled innovation and growth in value-added production in Latin America, which still relies heavily on exports of raw materials rather than more sophisticated finished goods,” avers the report.

The study points out that the growing “middle class” is also bringing a number of challenges as evidenced by the social unrest that gripped Brazil earlier this year. In fact despite recent gains, Latin America still contains some of the least equitable countries in the world, it notes. Subsequently, Government policy must meet a rising demand for public services and promote growth that improves the market distribution of income over the long run.

“Consolidating the economic position of this part of the population will also mean creating more and better jobs and improving productivity. There is also much to be done in areas such as education, tax policy, investment in innovation and logistics,” says the report.

The study notes that many countries in the region are willingness to play a leading and integrated role in the world economy. Chile joined the OECD in 2010, relieving Mexico of its status as the Organisation’s sole Latin American member, and earlier this year Colombia opened membership talks. In October, Costa Rica adhered to OECD legal instruments on Internet governance and international business conduct, demonstrating its willingness to also join the Organisation.

Sustainable and inclusive growth

“Latin America can still achieve sustainable and inclusive growth, but the window is narrowing,” said OECD Secretary General Angel Gurría. “To meet the new challenges and opportunities posed by an increasingly interconnected global economy, countries across the region need to boost competitiveness, through economic diversification, improved logistics performance and a move up the value chain towards higher value-added activities,” Gurría told the summiteers in Panama City.

Alicia Bárcena, ECLAC Executive Secretary said: “It is necessary to adopt reforms to enhance productivity and reinforce the capacity of governments to respond to the demands of an ‘emerging middle class,’ while redoubling their efforts to reduce the levels of poverty and inequality.”

The Latin American Economic Outlook says technological innovation and economic diversification will be key to boosting productivity and potential growth, which remain low when compared to other regions. Latin America’s contribution to global GDP growth has remained virtually unchanged (i.e., between 7% and 9%) since the early 1990s, while that of emerging Asia has more than doubled in the same period.

Many Latin America economies remain heavily focused on natural resources – commodities make up 60% of the region’s goods exports, up from 40% at the beginning to the last decade.

The report encourages countries to use their natural wealth as a foundation for transitioning to production processes that use technology and knowledge. It also advocates that Latin American economies diversify exports, particularly toward the services sector, which offers greater opportunities over the medium and long-term future. Deepening the regional market would offer additional room for the services sector to grow and diversification to flourish.

“Further investment in transport infrastructure, and better logistics performance in general, is needed.” said Enrique García, President and Chief Executive Officer of CAF. “Latin America’s production structure is more sensitive to logistics than that of the OECD countries. The share of time-sensitive exports in Latin America is three times that of the OECD countries, which underlines the importance of improving logistics to strengthen overall economic performance”, García, added.

According to the report, transport infrastructure remains deficient, with an urgent need for investment in roads, railways, ports and airports. Investing 5.2% of regional GDP per year in infrastructure projects would help Latin America close the infrastructure gap with other emerging regions and could increase GDP growth by an estimated 2 percentage points per year. Much can also be done in the short term to improve the transport of goods and services using existing infrastructure, through integrated logistics policies, modern storage facilities, efficient customs and certification procedures, and promoting competition in transport. [IDN-InDepthNews – October 22, 2013]

Image credit: OECD

2013 IDN-InDepthNews | Analysis That Matters

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