It is a fact that Latin American economies have reached unprecedented levels of growth during the last decade. Good macroeconomic policies played a role, but the most significant factor is the “commodity boom” that preceded the global recession of 2008: China, India, and other global up-and-comers needed raw materials to keep their economic engines humming and Latin America was happy to oblige, with significant benefits for the latter. The recession did leave a mark in Latin American economies, but the Economic Commission for Latin America and the Caribbean (ECLAC) declared on January 2009 that the years of growth allowed for diminished debt and increased social spending, giving Latin American economies a more solid foundation to weather the downturn than in the past. By and large, the region survived the recession, but there is always that little element outside anyone’s control that could throw a knuckleball in the future. In that regard, ECLAC forecasted that the current fragility of the global economy will result in a small increase in exports, a larger increase in imports, and an overall pace of growth of only 3% by the end of this year.
That said, Latin American economies are working hard to catch the attention of global investors. Three recent pitches show how diverse are the current approaches. First, the governments of Mexico, Colombia, Peru, and Chile have come up with Latin America’s newest integration platform: the Pacific Alliance. Formalized two years ago, it made its public debut last Wednesday in the US and invited American firms to invest in member countries. Added to the usual issues surrounding Latin American integration schemes (i.e. balancing national interest and genuine cooperation), convincing US businesses to invest in Latin America is very tricky because of the expected negative economic effects of both the government shutdown and the default on US debt. Indeed, they have been very queasy about the current recovery because they think it will go downhill in a heartbeat (and current events may prove them right), so they should not be exactly in the mood for big investments abroad.
Pitch #2 was made by Brazil, coinciding with its presence last week at the United Nations General Assembly: Private businesses are welcome in Brazil because it has space for all, never breaks contracts, and will offer opportunities like no other country, said President Rousseff. She, however, admitted that Brazil has serious issues with infrastructure, something I mentioned in past posts regarding mass transit and health care. As I said before, one thing is to call yourself the country of tomorrow and another, very different, is to have the physical capabilities for it, and last summer’s demonstrations (as well as the misgivings from the International Olympic Committee and FIFA about Brazil’s ability to host the 2014 World Cup and the 2016 Olympics) have shown that lofty rhetoric is not a substitute for will and elbow grease. In addition, Brazil’s record with rule of law (upon which business contracts depend) is not spotless: On the one hand, there are accountability mechanisms and entities; on the other, the Brazilian judiciary is notoriously slow and weak. If investing is a gamble, then Brazil is not exactly a sure thing to bet on.
The final pitch has come from Bolivarian Venezuela with the visit of President Maduro to China two weeks ago and the announcement of an aid agreement with the Chinese government: $50 billion in exchange for oil shipments. For Maduro, it makes sense: The IMF attaches strings to its loans (i.e. less government spending) and the money never makes it to borrowers; in turn, Chinese loans have no such strings attached. Segments of public opinion think Maduro has just mortgaged Venezuela to China, an accusation he denies. Yet this case should make us wonder if history is repeating itself, for Latin America paid a heavy price in the 1930s by relying too much on global demand for its raw materials. If and when the Chinese bubble bursts, the effects in Venezuela can be shattering if it does not have a fall-back plan. In general, the increasing literature on Latin America-China relations has revealed that Chinese investments have been a significant element in Latin America’s “commodity boom”, which makes us wonder whether the region is going back to what it used to be between the 1870s and the 1930s: the subservient provider of raw materials to more developed economies.
It is obvious that Latin America wants to be taken seriously by the rest of the interconnected global economy. It is also obvious that the terms of that relationship are not entirely within the control of Latin American economies. Besides the continuing issue of how to achieve growth and equity at the same time (something ECLAC has also recognized), these kernels of truth are essential to understand Latin American political economy in the 21st century.