Suffering through a five-year economic decline, Latin America is ripe for pervasive and lasting change. Key economic indicators are not all bad, however, as some countries shine while others sink. Innovation, diversification, and education are the keys to increased productivity and more foreign investment.
According to the International Monetary Fund (IMF), growth in Latin America has declined for the fifth straight year. Although there are distinctions among the various regions and individual countries, the main factors for the sluggish Latin American economy are lowered commodity prices (driven largely by a decline in exports to China), a higher cost of external financing, less capital flowing into the region, a workforce deficient in many of the skills necessary for maximum productivity, and a lack of innovation. Critical to economic growth in the region will be a shift in how Latin America prepares its workforce, which includes significant changes in its educational system, and a new focus on research and development (R&D) expenditures to raise the level of innovation, which will improve external financing and capital inflow.
NEGATIVE NUMBERS PERSIST
When viewing performance across the globe, the United Nations Department for Economic and Social Affairs notes that “four fifths of the world’s economies have seen average growth in 2011–2014 that was lower than the average growth in 2004–2007.” Most of the world, including Latin America and the Caribbean (LAC), still has not fully recovered from the financial crisis of 2008, but there are signs of improvement, such as increased export activity in Mexico, rising consumer confidence in some South American countries, and positive foreign direct investment (FDI) into Central America.
After small increases in GDP over the first two quarters of 2016, Latin America’s economy shrank in the third quarter by an estimated 0.6 percent, due in large part to a contraction in Brazil. Projections for 2016 show negative growth for Brazil and Venezuela, and near-zero growth for Argentina. On the bright side, Panama (at 6.2 percent), the Dominican Republic (at 4.7 percent), and Bolivia (at 4.5 percent) will exhibit above-average growth for the region.
Among other key economic indicators, unemployment across the region was slightly higher in 2015, at 6.2 percent, compared to 2014’s 6.0 percent. It is projected to remain at roughly the same level for 2016. Consumer prices are skewed by runaway inflation in Venezuela, but inflation is generally low and stable. External current account deficits are increasing in commodity-producing countries, but net importers of oil are benefiting from low crude prices.
POLITICAL AND ECONOMIC STRIFE
Of the South American countries, the smaller economies of Chile, Colombia, and Peru are expected to experience lowering commodities prices and declines in corporate investment, but it is the larger countries of Brazil, Argentina, and Venezuela that are affecting the economic forecasts for Latin America. Brazil’s 2015 growth was estimated to be -1.30 percent by the World Bank due to decreased domestic demand. Private consumption in 2014 was the worst since 2008, a marker of declining consumer confidence, which may be worsened by the Brazilian government’s decision to freeze US $22.6 billion in 2015 budget spending.
The government further hiked tax rates for banks, brokerages, and credit card processors from 15 to 20 percent. In its worst downturn in two decades, Brazil’s industrial production fell in November 2015 by more than 12 percent over the same period in 2014.
Unlike Brazil, Argentina’s consumer confidence reached a three-year high in May 2015, and it experienced its mildest decrease in industrial production in nine months—a positive outlook for the country had Argentina not recently been ordered to pay US $5.4 billion to more than 500 bondholders for defaulted debt—debt which now totals US $7.0 billion. On the positive side, the United Nations notes that Argentina showed some signs of recovery in 2015 by recording a higher rate of employment through the middle of the year, especially as measured against the pre-financial crisis rate in the fourth quarter of 2007. Although Brazil and Argentina are experiencing strained economic conditions, they are faring far better than Venezuela, whose government has refused to release official data since the third quarter of 2014. As it stands, the IMF forecasts that Venezuela’s economy will continue its steep decline. The last year that the country had GDP growth was in 2013, and that was minimal at 1.3 percent. By 2014, it had dropped to -4.0 percent, and in 2015, it dropped a projected -8.0 percent. Experts see that number rising to -4.5 percent for 2016.
CENTRAL AMERICA EXCEEDING EXPECTATIONS
Unlike South America, growth is expected to be steady for Central America, partly because the region is so closely tied to the rebounding U.S. economy. The resulting increase in demand for Central American exports means that growth for the region reach a projected 3.0 percent in 2015, and the IMF forecasts that by 2016, Panama will have the highest GDP growth of the region, reaching 6.4 percent. Other countries expected to have real GDP growth in 2016 are Belize (2.5 percent), Costa Rica (4.0 percent), El Salvador (2.5 percent), and Honduras (3.4 percent). The World Bank projects that Guatemala will experience a minimal contraction from 3.7 percent in 2015 to 3.6 percent in 2016.
The IMF projected growth for Latin America and the Caribbean (LAC) at 0.9 percent for 2015, down from growth of 1.3 percent in 2014. Economic contractions in Brazil, Argentina, and Venezuela are contributing to the decline in the overall region, with only a handful of countries expected to experience GDP growth above 3 percent in 2015.
Like other Latin American countries, Guatemala is experiencing weak commodity prices, particularly with regard to oil and food prices, but these are helping to curb inflation, which should stay in the low single digits. Year-end inflation for 2015 was projected at 2.7 percent. Growth in 2015 was driven by lower oil prices and an increase in private consumption. It is, however, expected that the exchange rate will increase in volatility but that the Guatemalan quetzal will remain stable. Similarly, interest rates are expected to remain stable, in a low-to-moderate range. Dropping from 5.0 percent in 2013 to 4.0 percent in 2014, Guatemala policy interest rates dipped as low as 3.0 percent in early 2016, but are expected to climb back to 4.0 percent in 2017. Finally, the Guatemalan government’s deficit has been decreasing since 2010 and continued to decline from 4.8 percent in 2014 to 3.8 percent in 2015. Experts predict that it will fall under 1 percent in 2019, provided that the Guatemalan government maintains a strict fiscal policy, cuts spending on government employee salaries, and raises its tax revenue base, which at 10.8 percent of GDP is close to the 12 percent target rate set by the 1996 UN-brokered peace accords.
EXPORT UNCERTAINTY
Thanks to their long-standing ties with the United States, Mexico and the countries of Central America are expected to undergo growth in exports. The increase in output, however, could be met with an increase in interest rates, which the IMF believes would happen faster and more sharply than anticipated, further reducing capital inflow. The United Nations notes that exports from the LAC region grew by 2.2 percent in 2014 and forecasts a growth in exports to 4.3 percent in 2016, although if China’s economic woes continue, these numbers may suffer.
In 2014, China’s reduced demand for commodities negatively affected the many Latin American economies, and if the Asian giant continues to restrict imports, then South America in particular could see an ongoing decline in both the price and quantity of exports. Although commodity prices dropped in 2014 due to weakened demand worldwide, they are expected to stabilize, with the IMF predicting only small price corrections in metals and crude oil.
Overall, however, projections for GDP growth foresee a positive trend by 2016, with exports following that curve. According to Harvard University’s Center for International Development (CID), Mexico and Central America will lead the way, thanks to economies that are diversifying away from commodities and toward more sophisticated manufacturing. Professor Ricardo Hausmann, director of the CID, sees a “tough road ahead [for exports] for commodity-driven economies.” The center notes that Latin American countries are increasingly dependent on the ability to produce goods that are both more diverse and more complex, and that Mexico, Paraguay, and Costa Rica in particular are succeeding in this regard.
EDUCATIONAL REFORM IS KEY
Increased attention to workforce skills is vital in order to create long-standing economic improvement in Latin American countries. The Organisation for Economic Co-operation and Development (OECD) stated in a 2015 report that “Latin American firms in the formal economy are three times more likely than South Asian firms and 13 times more likely than Pacific Asian firms to face serious operational problems due to a shortage of human capital.”
Businesses in Latin America report that in addition to needing technical and professional training, the workforce is largely lacking in general and soft skills. They mention issues with dependability, determination, and interpersonal skills, which makes it difficult for employers to maintain a stable, productive workforce. The OECD believes that shifts in education are critical to raising productivity levels of Latin American countries. Public spending on secondary education for Latin American countries accounts for 18 percent of GDP per capita, whereas the average number for OECD countries is 26 percent per capita. Even though Latin American countries have increased spending and provided educational access to all but the most remote areas, enrollment at all educational levels must remain a strategic economic goal.
Pulled down by deep recessions in Brazil and Venezuela, as well as falling commodities prices and uncertainty in China, Latin America is likely headed for recession in 2016, according to the IMF.
INNOVATION IS ESSENTIAL
As important as education is innovation to LAC countries, particularly within the fields of science and technology. Innovation capital is significantly lower in Latin American countries, averaging 13 percent of GDP, compared to 30 percent of average GDP in OECD nations. Most innovation capital in Latin America goes into higher education rather than investments in applied R&D. Unfortunately, tertiary education does not help businesses solve their productivity issues, since it does not provide the technically skilled workers they need. In order to foster innovation, there must be buy-in from the business sector to support R&D efforts, and Latin America and the Caribbean need to attract foreign direct investment (FDI) that is directed toward both innovation and structural change.
WHO’S ATTRACTING FDI?
According to the United Nations, the LAC region experienced economic growth in 2013 of 2.67 percent before dropping to 1.4 percent in 2014 and -0.2 percent in 2015. One contributor to this decline is weakened investment demand along with “sluggish external demand and deteriorating terms of trade.” Although Mexico’s economy has been improving, it experienced a considerable drop in FDI in 2014, although that number was dragged down by the significant acquisition of Mexican company Grupo Modelo in the prior year. In 2015, Brazil’s FDI, consistently the largest in the region, lagged appreciably, having lost 36 percent over the same period in 2014. Peru, which attracted 28 percent of GDP from FDI in 2014— the highest in the LAC region—was down 11 percent in 2015.
LONG-TERM IMPROVEMENTS
In 2010, global growth was recorded at 5.2 percent. The IMF originally forecasted global growth for 2015 at 3.8 percent but has revised that prediction multiple times, now believing that for the next five years, growth will not exceed 4 percent. That is not good news for Latin America, since many nations are heavily dependent upon global demand for their commodities.
This ever-changing region is seeing long-term structural, political, and social improvement, however. Political change is largely peaceful and structured; banking and financial systems are stable; and macroeconomic strategies are generally sound, with glaring exceptions like Venezuela. Most LAC countries have strong democracies and governments devoted to transparency. Active social programs enforce economic growth among the region’s poorest citizens, and entrepreneurism is at an all-time high. As noted international attorney Luis Moreno Ocampo put it, “The reality is that Latin America will not go backwards. It can be a shining star of growth, opportunity, and hope in our hemisphere.”
