With abundant natural resources, proximity to the US and trade ties to Asia via the Trans-Pacific Partnership (TPP), Latin America has the formula to become a powerhouse exporter. Yet as other emerging markets are flourishing, its growth remains sluggish, as its exporters’ efforts to make a mark on the global stage fall flat. Maddy White reports.
New research has revealed the 20 markets with the greatest potential for future trade growth: Latin America didn’t score so well. Out of the 20 markets, Chile was the only American country to achieve a place in Standard Chartered’s Trade20 index, sitting at a lowly 18th.
The index shows that while existing trade powers like China and India continue to improve their potential, emerging trading nations such as Côte d’Ivoire, which came in at first, and Kenya, a country that nabbed third, are also making swift progress towards increased trade growth. Meanwhile, Latin America’s nations drag their heels because of an inability to diversify exports away from raw materials, according to the research.
The region’s overall economic growth this year is estimated to reach just 0.5%, nearly half of last year’s 0.9%, but this remains a sizeable improvement on the -0.2% and -1% growth in 2015 and 2016 respectively. Global growth in 2019 is forecast to be five times more than that of Latin America at 2.6%, according to the Economic Commission for Latin America (ECLA) – one of the five regional commissions of the United Nations.
Why the struggle?
President of Latin American development bank, Corporación Andina de Fomento (CAF), Luiz Carranza said earlier this year that he believes the region’s glacial growth is down to its comparatively low output. “Regardless of its causes – infrastructure, lack of adequacy and inequality, among others – the main feature of Latin America is low productivity. Compared to different regions, we’ve been lagging behind since the 1950s.”
Almost three-quarters of Latin America’s 2.8% GDP average annual growth between 2000-16 came from a growing workforce rather than through productivity gains, which hovered around 0.8% annually, a recent report from consulting firm McKinsey found. It adds that the working population boom as a share of total population will soon reverse, meaning that growth will depend on finding productivity gains.
To this, Simon Coote, head of risk analysis at Oxford Analytica and former credit risk specialist for Latin America at Citi, tells GTR: “Trade growth in Latin America is slow moving. When you begin to look at the structure of the corporate sector, there are few companies which are regional or global-looking.”
This aligns with the McKinsey report, which found that Latin America has only about one half to three-quarters as many mid-sized and large firms as the report’s 10 benchmark countries for the size of the economy, with benchmark countries chosen based on geographic variation and similar levels of development.
Latin American countries are also lagging in international trade “for structural reasons”, making them less competitive, Ana Maria Palacio, who was part of the Colombian legal team for the Pacific Alliance trade bloc, tells GTR: “Structural weaknesses include low national productivity levels, deficient physical and logistic infrastructure and low levels of entrepreneurial innovation.”
Infrastructure, such as transport networks, is essential for the development of efficient supply chains, which enable trade facilitation between borders. The World Economic Forum (WEF) says that without good infrastructure, firms are forced to build up more stock reserves and working capital, strongly affecting national and regional competitiveness because of high costs. A World Bank report reveals average public and private investment in infrastructure as a percentage of GDP was low in Latin America and the Caribbean at 3.9% between 2000-16. East Asia and the Pacific infrastructure investment sat at 15.1% of GDP, Mena spent 7.8%, South Asia invested 6.7% and for Sub-Saharan Africa the figure was 5.4%. Latin America’s infrastructure is of low quality; over the last 10 years, the region’s roads and ports have improved only marginally, and railroads and airports have not improved at all, the report says.
Trade policy in Latin America is also hit and miss; in Brazil, policy focus has relied on the country’s large domestic market to expand jobs and raise wages. While this approach helped boost the country during the commodity boom, Brazil’s growth has been stunted – 1.1% in 2018 – because of its inability to produce value-added goods. Meanwhile, Chilean exports have been boosted by a pro-trade policy approach that includes free trade agreements with major economies, such as the Trans-Pacific Partnership, leading to its success – Chile’s GDP grew 4% last year. What’s more, Latin American and Caribbean nations do not rank well on the World Bank’s ease of doing business report; the highest-ranking country in Latin America and the Caribbean – Mexico – failed to make the top 50.
Make a move
Standard Chartered’s Trade20 index believes the reason Latin America trails behind is its inability to shake up its export offering, struggling to move away from solely selling its raw materials, which has left it unable to move up the value chain – something the world has witnessed Asia do well. The index notes the stellar performance from emerging Asian markets such as Vietnam, Indonesia and Thailand for their “trade readiness”.
Jill Hedges, deputy director of analysis at Oxford Analytica, tells GTR: “Latin America has an issue of not being able to move up the value chain. It has been partly trapped by commodity prices, but it hasn’t been very effective in pushing its way out of that. There are pockets where that is not true, but in terms of technological innovation it has not been efficient.”
She says it is difficult to compare Latin America with Asia’s progress up the value chain, as many might argue there are social costs in Latin America that aren’t comparable in Southeast Asian countries. “Latin American countries have been developed for much longer than Asia, but they have reached a point where they are stuck. Whereas many of the Southeast Asian countries have been very under-developed and there have now been these bigger growth spurts. Whether they will begin to plateau as Latin America has, is yet to be seen,” she says.
Linking up Latin America
Latin America has two development banks aimed at supporting its exporters’ growth. the Inter-American Development Bank (IADB) and CAF. IADB is the older of the two and owned by 48 member countries, including 26 from Latin America and the Caribbean. The remainder are from North America, Europe and Asia. CAF is made up of 19 countries, 17 from Latin America and the Caribbean, as well as Spain and Portugal.
The main differences between the two are size and shareholder structure. IADB has 22 member countries from outside of Latin America, while CAF has two. The balance sheet of IADB is larger, with total assets standing at US$129.5bn (2018), while CAF had US$40bn in total assets last year.
Latin America is part of two major trading blocs: the Pacific Alliance and Mercosur. The Pacific Alliance trade bloc was created in 2011 and includes Chile, Columbia, Peru and Mexico. The Southern Common Market, or Mercosur, was established in the early 1990s by Argentina, Brazil, Paraguay and Uruguay, and subsequently joined by Venezuela and Bolivia, although Venezuela is currently suspended, and Bolivia is still complying with agreement details.
Many experts believe Mercosur has failed to live up to expectations: 25 years after its launch, it has struggled to facilitate deals – most recently Austria blocked an EU-Mercosur deal that took two decades to draft; the bloc is dominated by Brazil and Argentina; and countries in the bloc have faced much political change causing instability. “It has never been very good at integration,” says Hedges. “There are many weaknesses. Of the four prominent members, two make up over 90% of GDP. There is also a fair amount of competition between Brazilian and Argentinean industries, despite Mercosur supposedly being a trading bloc. It has never really gelled well.”
Meanwhile, the Pacific Alliance bloc is seen as more successful as it is a “much looser association”, and focused more on free trade, says Hedges. “The Pacific Alliance economies have been more dynamic than the Mercosur economies. But in the global context, Latin American nations are not big economies and are very vulnerable to changes in global trade.”
Latin America’s growth issues are triggered by many factors: productivity problems, corporate sector size, policy approach, poor infrastructure development and below-par trade bloc integration. If it is to catch up with its emerging market peers and drive up productivity, the region needs to focus its attention on infrastructure investment and pro-trade policy approaches, as well as moving up the value chain, and away from its commodity-dominated offering.