Friday, September 4, 2015

The Economies of Latin America: Fade or Pause?

Five years ago in September 2010, the Economist magazine ran a lengthy article titled: "A Latin American decade? The reformers have won, but they have yet to consolidate their success." Now, the September 2015 issue of Finance & Development (published by the IMF) has a seven-paper symposium titled "Latin America: Finding its Footing. The tone of the discussion is about "the many challenges facing the region today" and how to go about "avoiding a prolonged slowdown."  What's happening in that region?

The lead essay by José Antonio Ocampo sets the stage: "But this positive picture has changed dramatically. Growth per capita ground to a halt in 2014 and much of the region is again viewed with a sense of forgone promise. ... In contrast to the halcyon decade that ended in 2013, the recent economic performance of Latin America has been poor. Growth fell sharply in 2014 to just 1.1 percent—barely above the region’s current low population growth of 1.0 percent—and will continue at a similar or even lower rate in 2015 ... Investment also declined in 2014, and will continue to do
so in 2015. Poverty ratios have stagnated at 2012 levels ... and, although no hard data are yet available, this seems also true of income distribution."

Here's a figure showing annual growth rates of GDP for the region. Notice that from the 1950s through 1970s, annual growth of GDP tended to be in the range of 4-7% per year, with some exceptions. During what's called in Latin America the "lost decade" of the 1980, annual growth rates were more likely to be in the range of 0-2%. and sometimes negative for the region as a whole. Growth rates of GDP rebounded around 2004, but now seem to be sagging again.

Ocampo explains the underlying factors:

"The change in Latin America’s fortunes results in large part from a reversal of the benevolent external conditions that fostered the boom. The excellent performance from 2004 until the middle of 2008 reflected the extraordinary coincidence of four positive external factors: rapid growth of international trade, booming commodity prices, ample access to external financing, and migration opportunities and the burgeoning remittances that migrants sent home.Two of these positive factors—migration opportunities and rapid world trade expansion—have disappeared, probably permanently, as a result of the financial crisis in advanced economies. Migration opportunities to the United States are more limited than before the crisis, and high unemployment in Spain has prompted many South American migrants to return home. Remittances, which help prop up demand in recipient countries, have recovered but are still below the 2008 peak. Likewise, world trade experienced the worst peacetime contraction in history after the September 2008 collapse of the Wall Street investment firm Lehman Brothers. Although trade swiftly recovered, since 2011 it has settled in at a slow rate of growth. ... [R]eal commodity prices have followed long-term cycles since the late 19th century. If this continues to be the pattern, the world is at the beginning of a long period of weakening commodity prices.
"Therefore, of the four conditions that fed the 2004 to mid-2008 boom, only one remains in place: good access to external financing.  ...  Annual bond issues by Latin America have almost tripled— to $9.6 billion a month in 2010–14 compared with $3.5 billion in 2004–07—and the costs of financing have remained low for countries that issued bonds in international private capital markets. ...  Global financial conditions may, of course, change given new uncertainties surrounding the euro area in the face of the Greek crisis or if a reversal of U.S. monetary policy draws away investment funds from the region. But at the time of writing, Latin America’s access to global capital markets remained favorable." 
This explanation seems sensible to me, but it contains a disagreeable underlying message: both Latin America's growth after about 2004 and its slowdown in the last few years were mostly about external factors. What steps should Latin America itself be taking so that at least over the long-run (setting aside inevitable short-run fluctuations)  it can do more to shape its own economic future and raise the standard of living? Here, the policy agenda seems less clear-cut to me, in the sense that there are lots of goals, but it's less clear what the practical steps and top priorities should be. For example, Ocampo says in the course of a few paragraphs that all Latin America needs is new methods of production, new technology, new trade patterns, lower and less volatile exchange rates, and better education and infrastructure.

"It is essential, then, that the region invest in diversifying its production structure and place technological change at the center of long-term development strategies. This should include not only reindustrialization but, equally important, the upgrading of natural-resource-production technology and the development of modern services. Diversifying trade with China away from commodities is another essential element of this policy. ... The best way to exploit richer domestic markets is through regional integration. But this requires, in turn, overcoming the significant political divisions that have blocked the advance of regional integration over the past decade. ... In macroeconomic terms, the most important condition for more dynamic production diversification is more competitive and less volatile real exchange rates. ... The region also needs to make major advances in two other areas: the quality of education and infrastructure investment."
Other papers in the symposium focus in on specific elements.  For example, Daniel Kaufmann writes on "Corruption Matters." His research looks at difference measures of governance across countries. For Latin America as a whole he writes "that on average, government effectiveness, control of corruption, and voice and accountability stagnated in the region, and overall regulatory quality and rule of law deteriorated. At the end of 2013, Latin America’s governance quality trailed that of other predominantly middle-income regions, such as central and eastern Europe ...Similarly, except in voice and accountability (a relative strength of Latin America), east Asia, with its focus on a long-term strategy and independent merit-based bureaucracies, surpassed Latin America on many governance dimensions, including government effectiveness, rule of law, and corruption control. ...
Latin America’s average score is below the world median in all governance indicators except voice and accountability, which barely tops the median. It rates particularly poorly on (implementation of) rule of law. And on personal security and common crime, the region is at the very bottom."

As another example, Augusto de la Torre, Daniel Lederman, and Samuel Pienknagura offer a more detailed trade agenda for Latin America in "Doing It Right," suggesting that the goal for Latin America shouldn't just be more trade within the region, but greater connection with the global value chains of production:
We found that once endemic structural factors-such as geography, economic size, and natural resource abundance-are taken into account, Latin America fares relatively well compared with east Asia merely in terms of intraregional trade volume and connectivity among regional trade partners. Where Latin America differs markedly from east Asia is in those key features of trade-intra-industry trade and participation in global value chains. This suggests that policies aimed at simply boosting intraregional trade connections and volumes in Latin America are unlikely to do much to boost growth. Latin American authorities should design policies that favor a more vigorous participation in intra-industry trade and in global value chains.
Nora Lustig points out in "Most Unequal on Earth" that the distribution of income in Latin America remains more unequal than in other regions, despite some modest progress in the last few years. Lustig offers two main causes for the decline in inequality. One is a rise in "conditional cash transfers," but by her calculations this accounts for only about 20% of the reduction in inequality. The bigger changes, she argues, is that improvements in education have tended to lead to reduction in the supply of workers with less education--and thus boosted the wages of this group.
More equal distribution of labor earnings among wage earners and the self-employed is the most important factor, accounting for 60 percent of the region’s decline in inequality. This is because wages of workers with very little education rose faster than those of more educated workers, especially those with tertiary—college or other postsecondary—education. ...Government transfers have increased in size and are better targeted to the poor. Almost every country in the region runs a flagship cash transfer program that requires families to keep their children in school and receive regular health checkups as a condition for benefits. ... Since they were first implemented in Brazil and Mexico in the second half of the 1990s, conditional cash transfers have constituted one of the most important innovations in social policy to benefit the poor. Today, about 27 million households in the region—most of them poor—are beneficiaries of so-called conditional cash transfers. In addition to improving the living standards of the poor, cash transfers have helped improve the health, education, and nutrition of children living in poverty and therefore carry the promise of better employment opportunities in the future. ... 
There is a lot of useful information about recent developments in the economies of Latin America in this issue of F&D, but less about long-run perspective.  Ernesto Talvi offers some perspective in an essay on "Latin America's Decade of Development-less Growth" that appeared as a chapter of a report written for a meeting of the G-20 (a group of leaders from the largest world economies) in November 2014. Talvi points out that over time, per capita GDP in Latin America relative to the US level rose a bit from the 1950s to the 1970s, fell in the 1980s and 1990s, and how has rebounded a bit. Thus, there is a lack of catch-up convergence over the last six decades

Talvi's view (similar to Ocampo) is that Latin America's growth after about 2004 was mainly from external forces, but he draws a more discouraging lesson: that Latin America has largely not made progress in the internal factors that should be the basis for its own organic economic development. Here's Talvi: 
"Latin America had a decade of uninterrupted high growth rates—with the sole exception of 2009 in the aftermath of the Lehman crisis—that put an end to a quarter of a century of relative decline in income per capita levels vis-à-vis advanced economies. However, high growth and income convergence were largely the result of an unusually favorable external environment, rather than the result of convergence to advanced country levels in the key drivers of growth. Moreover, income convergence was not associated either with a comparable convergence in key indicators of development. Fundamentally, the last was a decade of “development- less growth” in Latin America."
For illustration, Talvi offers some graphs. In these two figures, the blue lines are all set to 100, showing the level in 2004. The green bars then show a comparable level in 2013. In each figure, the first two bars sh ow the rise in income levels from 2004 to 2013,. The point is that on many other important measures for long run economic health, Latin America has not seen similar growth: that is, not on  measures of human capital, infrastructure, public services, trade integration, innovation, equality of opportunity by income, environmental protection, gender equity, or personal security.

My own experience is that in discussions of economic reform in Latin America, there often seems to be a reflexive need for speakers to dissociate themselves from any suggestion that they favor market-oriented reform or capitalism. Of course, the history of Latin America in the last century is  full of populist political leaders who argued that the the problems and inequalities of society and the economy were due to big business and capitalists. The actual policies of most of these populist leaders, once in office, mostly tended to reinforce the pre-existing inequalities. However, the political strategy of  perpetually blaming free markets and capitalism often seems to keep working in Latin American politics and society, even while the actual governments operate in a way that is quite far from what a US-based economist would think of as a freer-market agenda. From my outsider perspective, many governments in Latin America practice policies of government planning and interventionism, along with favoritism for politically well-connected large corporations, and then blame free markets for the result.

These arguments took on a new edge a few decades ago. Those who tend to downplay market reforms look back at the long-run history of the Latin American region and argue that there approach was going pretty well from the 1950s through the 1970s--as shown by the convergence at that time--and that a wave of market-oriented reforms are mostly to blame for the relative decline in Latin America's economies in the 1980s and 1990s. The other side points out that the convergence in per capita incomes from the the 1950s to the 1970s wasn't all that large, and argue that it was  driven by a series of unsustainable government policies that crashed and burned in the 1980s, leading to a need for market-oriented reforms in the 1990s. They argue that in Latin America, market-oriented reforms have worked pretty well in the countries that gave them a try, even though they have had to fight the tide of economic populism.

About 10 years ago,we offered a pro-and-con example of this dispute in the Spring 2004 issue of Journal of Economic Perspectives (where I work as Managing Editor).  José Antonio Ocampo made the case that market-oriented reforms had not much helped in Latin America in "Latin America's Growth and Equity Frustrations During Structural Reforms." On the other side, Arminio Fraga argued that the market-oriented reforms had started working and needed to be strengthened in "Latin America since the 1990s: Rising from the Sickbed?"