Table of Contents
Key Takeaways
- Explore the intricate reasons behind Latin America’s economic underperformance in this detailed report by the Group of Thirty.
- Gain a deeper understanding of the challenges and opportunities facing Latin America by delving into this insightful analysis.
Recommendation
Latin American economies’ failure to converge with the performance of more developed economies is due to a complex set of circumstances, concludes this authoritative report from the Group of Thirty nations. Latin America is not a geopolitical or macroeconomic monolith, but flawed governance, misallocation of resources, and ineffective fiscal and monetary policies contribute to every Latin American government’s economic malaise. Thus policy responses must align with the specific conditions in each country. Investors and executives with an interest in the region will find this an important reference work.
Take-Aways
- The COVID-19 pandemic exposed the many problems afflicting Latin American economies.
- Four models of sluggish growth characterize countries in the region.
- Democratic governance in the area has waxed and waned.
Summary
The COVID-19 pandemic exposed the many problems afflicting Latin America’s economies.
Since 2013, both headline and trend growth have contracted in Latin America. The commodity boom that had long sustained the area’s economies will likely not continue, due to a decline in Chinese demand. Low productivity, insufficient domestic saving and a reliance on precarious overseas money – which can vanish in response to changes in global macroeconomic conditions – plague these economies. Inefficient resource allocation and a dearth of fungible skills and knowledge forestall a more varied export market, resulting in subpar growth.
“The problem has worsened recently because of a succession of recent global shocks: the COVID-19 pandemic, the return of inflation, higher interest rates and slowing growth.”
Against this backdrop, the impact of the coronavirus on the region was extreme. Most countries failed to stop the proliferation of the virus. Preexisting health conditions, multigenerational cohabitation, a less educated workforce, and informal labor market conditions, which didn’t allow for remote employment opportunities, all fueled the pandemic’s spread. Regional health systems could not bear the burden.
“It is tempting to lump all Latin American growth failures into one general-purpose narrative: macroeconomic and political instability, low institutional quality, insufficient investment in physical and human capital, poor contract and law enforcement, and corruption.”
The results were disastrous. Exports plummeted, remittance and tourism inflows dried up, demand shrank, and many businesses shuttered. In some nations, fiscal and monetary measures eased the pain, but the economic recovery overall was brief and not robust. Interest rate increases and inflationary pressure exacerbated the economic problems.
Four models of sluggish growth characterize countries in the region.
Latin America is not one macroeconomic and geopolitical entity. Factors explaining the region’s sluggish economies vary:
- Localized macroeconomic volatility plagues Venezuela, whose GDP declined by two-thirds between 2014 and 2020 and which recently suffered a period of hyperinflation. Similarly, Argentina’s economy experienced rampant inflation and feeble growth. Ecuador has struggled to sustain rising public debt.
- Several countries have seen macroeconomic durability and declining growth at the same time. Peru, Colombia, Paraguay and Chile, for example, endured weak policy environments and rapid drops in return on investment. Inadequate public goods and services, along with a lack of decent infrastructure, are hallmarks of low-growth economies.
- Mexico has an open, reformed and export-heavy economy, yet it suffers from tepid growth due to resource misallocation. More resources flow to the affluent north and central regions than to the rest of the nation. Drug violence is a drag on the economy. Budget reductions and poor public administration worsen Mexico’s economic outlook.
- Brazil exemplifies the effects of state capture, bureaucracy and corruption. Ongoing budget shortfalls, insufficient national saving and high interest rates constrain growth. So, too, do inequality and populism.
Democratic governance in the area has waxed and waned.
Notwithstanding certain governments’ autocratic and repressive tendencies, several recent events would suggest positive developments in democratic governance, such as the Peruvian congress’s peacefully removing the president who attempted to close it down, Brazilian voters’ ousting of the autocratic Jair Bolsonaro and Argentinian judges bringing corrupt officials to justice.
“The ‘governance deficit’ many Latin American countries display is plausibly connected to the unique political arrangements the region has developed. This would seem to be an area ripe for further research and, more importantly, eventual reform.”
The character and make-up of democratic institutions in the region varies. In some places, trust in institutions and between individuals is lacking. And inclinations toward presidentialism and proportional electoral systems hinder a government’s ability to build majorities and consensus.
Genres
Economics, Political Science, International Relations, Development Studies, Sociology, History, Public Policy, Latin American Studies, Finance, Global Studies
About the Author
The Group of Thirty is a global organization that seeks to broaden understanding of economics and finance.
Review
“Why Does Latin America Underperform?” by the Group of Thirty is a comprehensive report that examines the reasons behind Latin America’s failure to converge to the income levels of advanced economies. The report, published in 2023, provides an overview and analysis of the various interlinked factors contributing to the region’s economic stagnation. It highlights the impact of global shocks such as the COVID-19 pandemic, inflation, higher interest rates, and slowing growth on Latin America’s performance.
The Group of Thirty’s report compares Latin America’s performance in a set of indicators to that of extraregional peers with similar income per capita levels. It reveals that since the 1970s, economic growth in the peer group has been double that of Latin America. The report also addresses issues beyond economic growth, such as inequality, citizen discontent, and the rise of populism. It identifies the sources of stagnation, the main distortions and constraints hindering economic development, and potential solutions to overcome ongoing challenges.
The report “Why Does Latin America Underperform?” is a critical and insightful analysis of the structural, financial, and political drivers that result in Latin America’s underperformance compared to other similar countries. It is a valuable resource for policymakers, economists, and anyone interested in understanding the complex realities of Latin America’s economy and the steps needed to foster sustainable growth and development.