Latin America has the foundations for growth. Here's 3 ways it can build on them
The World Economic Forum meeting in Medellin in Colombia has strong symbolic connotations. Medellin used to be synonymous with guerrilla warfare, paramilitary violence and drug-related atrocities.
Not any more. Colombia and Medellin has transformed over the last decade. A strong surge to restore security, with strong support from the United States and the international community, has laid the foundations. The military and the police force are much better anchored in the local community. The guerrillas involvement in kidnapping, extortion and drug trafficking has undermined their legitimacy. At the same time, improved governance has strengthened the credibility of the democratic system and the elected governments.
Economic reforms have laid the foundations for growth. Macro-economic stability has been improved. The public debt level and inflation has been kept under control. The third component in the transformation has been an effort to improve social cohesion.
Growth in numbers
Now the global environment is challenging the progress that has been made in Colombia and Latin America. Over the last decade, growth has been averaging 4-5%, but for the coming years the IMF, OECD and others are arguing that growth is going to remain around 2-3%. Given that population growth is between 1-2% in most of Latin America, the per capita improvement is not going to be transformational in terms of poverty reduction. Without fundamental reforms, the per capita growth level will be in line with Germany and France, but with a Latin American macro-economic risk level.
There are two major factors changing the economic environment. The world economy has entered a period of slow growth. When China is shifting from investment-led growth towards a more sustainable path, demand will be weaker in the global economy. At the same time growth in advanced countries has been low. The combination of low productivity growth, demographic factors weighing on the labour supply and lack of demand in the aftermath of the Lehman-crises has reduced growth in industrial countries by at least 1 percentage point. Low global growth is hurting Latin America.
A second factor that is hurting Latin America is the rapid decline of commodity prices. To a degree this is an indirect effect of the slowdown in China. China has been contributing some 60-80% of the demand growth for various commodities over the last decade. That period now has come to an end.
Demand is no longer outrunning supply
There has also been a hefty increase in supply and production capacity for oil, iron ore, copper and soya beans. The demand is no longer outrunning supply and there has to be an adjustment period. It might be that we have passed the bottom of that cycle, but that remains to seen. The fact that shale oil has revolutionized production in the US and that Iran has re-entered the market means that production can start to increase if prices are moving upwards. The underlying conflict between Iran and Saudi Arabia also undermines OPECs ability to influence the prices.
In addition to the slow global recovery and the commodity prices, some of the Latin American countries have added substantial political uncertainty at exactly the wrong point in time. The collapse of the presidential administration of Dilma Rousseff in Brazil and downfall of Cristina Fernandez de Kirshner in Argentina has added political uncertainty. If the new administrations in Brazil and Argentina are able to rebuild credibility in the markets, that would be a step in the right direction.
If we do not see a fundamental recovery of commodity prices and if the world economy doesn't enter a strong recovery, Latin America will have to manage on its own.
To shift to a path of a 4-5% long-term growth, some deep structural reforms will be necessary. Let me outline the most important steps forward.
The World Economic Forum meeting in Medellin has a strong symbolic meaning. Security, growth and cohesion are building a new future for Medellin and Colombia. With the right political leadership and a willingness to reform, this could be a long-term transformation. The 4IR can both disrupt and transform Latin America.
SOURCE: World Economic Forum