Editor’s Note: In this article, Ernesto Talvi offers his insights on the economic trends shaping Latin America. Read the full piece on the various trends in different regions »
Latin America, particularly countries such as Brazil and Argentina that are commodity-exporting and less dependent on the U.S. economic cycle, have had close to a decade of exceptional growth, doubling the region’s long-run average. This period of exuberance was underpinned by sound macroeconomic policies, but largely propelled by cheap and abundant inflows of foreign capital and high commodity prices. High growth and active redistribution policies made possible by plentiful fiscal resources led to a 13 percentage point decline in poverty rates in Latin America, a 5 percentage point decline in extreme poverty rates, and the emergence of an incipient middle class.
Since mid- to late 2011, however, Latin America’s growth rates have cooled substantially as growth in important emerging economies lost steam (in particular, China’s growth rate declined from previous skyrocketing levels of 12 to 7 percent) and commodity prices weakened. More recently, international financial conditions have tightened—sending shivers through emerging markets—since the Federal Reserve announced the possibility of a gradual withdrawal of monetary stimulus. As a result, international financial and capital resources are expected to become scarcer and more expensive.
Countries that are less well-managed economically, such as Argentina and Venezuela, are already in crisis mode.
Less abundant and more expensive foreign capital and financial resources imply that countries such as Brazil—which are spending in excess of their income and financing that excess with inflows of cheap foreign capital—are soon due for an adjustment in the growth rates of consumption, investment, and public spending that will keep growth rates of the economy in check. Countries that are less well-managed economically, such as Argentina and Venezuela, are already in crisis mode.
Policymakers in the well-managed countries of the region will have to face significant economic challenges stemming from a more adverse external environment and stricter financial constraints. These challenges, especially reigniting growth through domestic transformations, are politically complex and take time to produce effects (e.g., education reform in Mexico). Preserving macroeconomic stability and fiscal probity at a time when a dissatisfied electorate (with high expectations due to a decade of very high growth) will pressure governments to accommodate immediate popular demands at the expense of sound policies. How these tensions are resolved will be crucial in determining the economic prospects of the region in the coming years. For better or worse, in the next decade we will witness the emergence of a very different Latin America.