Latin America, a region endowed with vast resources and a large population has the makings to be a successful world economy. However, that is far from reality. In the early 1960s, Latin America’s per capita income was more than double that of East Asia. Nowadays, however, the region lags behind with none of its countries being named developed yet. So why hasn’t the region been named “developed” yet?
The nation has long grappled with manic inflation rates, grave corruption, and torpid socioeconomic growth. In order to explain this reality, a look into the region’s history is required.
LatAm’s extreme reliance on commodities exports has diluted the region’s resistance against shocks in the economy. Currently, 14 out of 33 countries in the LatAm region are commodity-dependent, wherein more than 60% of their total merchandise export revenue is accredited to exports. Thus, the fluctuations in commodity prices heavily affect the growth rates of LatAm nations; making it an unsustainable revenue source, especially during times affected by unprecedented shocks such as COVID. Contrastingly, LatAm is a net energy importer. With increased inflationary pressures on gas prices, it has become more costly for the region to source energy to run nations.
On the other hand, LatAm’s rising inflation rates cannot be overlooked when assessing the region’s stunted economic growth. Though many Latin American nations have newly independent central banks wherein price stability is being prioritised, inflation rates are still staggeringly high as compared to most emerging markets. Known as the “curse of emerging market central banks,” nations are being forced to tighten their monetary policy despite their weak economic stature because they can’t forgo the damning consequences of heightened inflation. During a recessionary time like COVID where most nations have adopted low interest rates in hopes to ameliorate economic growth, most LatAm nations are being forced to increase interest rates; hoping to stabilise prices.
The region’s sudden jump in poverty has forced governments to adopt large social spending packages to improve socio-economic welfare. The prospects of larger budget deficits have been threatening for investors as they have become more sceptical when assessing currency expectations and inflation outlooks. As local businesses are now hedging against the expected high inflation, due to historical evidence, local businesses are increasing prices and workers, demanding greater wages; both of which are somewhat undesirable traits.
To combat the tumultuous macroeconomic history Latin America has faced over the past few decades, central banks and financial institutions alike must strengthen their policy plans with a utilitarian perspective in mind. Currently, the nation is operating with the richests’ best interests in mind, diluting the welfare of the overall nation; as seen by the awfully high corruption rates observed in the region. Once incumbents are punished and new parties voted in, the promise of reduced inequalities and controlled inflation should be on the horizon. Moreover, when the region develops its ability to diversify exports and remove its heavy reliance on commodities, will Latin America be able to withstand extreme economic shocks.
This article was written by Shrishti Khetan, currently a student at the London School of Economics and Political Science, pursuing BSc Economics.