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Why Latin America went from boom to bust
Lucas Berti . Nov 23, 2019
Protester arrested by the Chilean riot police. Photo: Erlucho/Shutterstock
Latin America enjoyed a golden age in the 2000s, a decade defined by sustained economic growth and decreasing levels of inequality, with around 50 million people escaping poverty. At one point, experts believed Latin America would become a largely middle-class region. Now, it has once again become home to economic turmoil, social unrest, and growing disparity.
Protests have erupted in Ecuador and Chile. Argentina faces another economic collapse of its own. Bolivia is on the cusp of civil war—with tensions remaining high after former President Evo Morales left the country following a military coup. And Venezuela continues its descent into full-scale socioeconomic chaos.
The International Monetary Fund has lowered its growth projections for the region to just 0.2 percent this year and 1.8 percent in 2020. In a recent report, the Economic Commission for Latin America (CEPAL) said that the slowdown is likely to continue.
So, what went wrong?
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<h2>Behind the Latin American “miracle”</h2>
<p>The so-called “commodity supercycle” was a rare moment in the 2000s during which, for about a decade, many physical commodity prices—such as food, oil, metals, chemicals, and fuels—grew spectacularly after steady decreases in the preceding 150 years.</p>
<p>The boom began with China, a country which enjoyed double-digit growth rates in the years following its integration to the World Trade Organization. The appetite of China and other industrializing Asian countries for basic products had an instant impact on Latin America—a region home to some of the biggest reserves of natural resources.</p>
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<p>“China’s influence across global commodity markets is without parallel,” said consultancy firm Wood Mackenzie in a <a href="https://www.woodmac.com/news/feature/china-economic-slowdown-3-reasons-why-its-different-this-time/">report</a> earlier this year. Products such as Brazilian soybeans and iron ore, Chilean copper, Bolivian natural gas, and Venezuelan oil, experienced a boom.</p>
<p>In its rise to becoming the world’s second-largest economy, China started to account for 30 percent of the global consumption of soybeans, half of copper consumption, and over 40 percent of the world’s steel purchases. Its consumption of oil—while less expressive—went from around 3 to 14 percent of the global share in just 40 years.</p>
<p>That boom coincided with South America’s “<a href="https://brazilian.report/power/2018/08/19/fall-south-america-pink-tide/">Pink Tide</a>,” the name given to a wave of center-left victories in many countries around the region, following financial crises in the late 1990s. These governments used the supercycle gains to boost social policies which, combined with the rise of labor-intensive sectors such as construction, helped to lift millions out of poverty.</p>
<p>An <a href="https://www.imf.org/en/Publications/REO/WH/Issues/2018/05/09/wreo0518">IMF report</a> from 2018 revealed that the region’s poverty rate fell from 27 to 12 percent between 2000 and 2014, with an accompanying 11-percent decrease in general inequality. </p>
<p>But with China’s growth slowing in recent years, the impacts on Latin America were equally brutal. To make matters worse, major corporations and governments across the region were hit by <a href="https://brazilian.report/power/2018/04/13/operation-car-wash-latin-america/">corruption scandals</a>, sparking political turmoil. </p>
<p>In Brazil, the biggest construction companies were found guilty of corruption and now face dreadful financial situations. Widespread layoffs became the norm—and inequality levels began creeping up once more.</p>
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<h2>Dependance on external factors</h2>
<p>For Daniela Campello, a researcher at think tank Fundação Getulio Vargas, the current wave of political and social pressure is rooted in the economic downturn. “Political processes in Latin America are related to international cycles, which in turn are linked to commodity prices and fluctuations of international interest rates. Those factors determine how much capital enters or leaves emerging countries. What we see in 2019 is more the <em>consequence</em> of financial crises, rather than their <em>cause</em>.”</p>
<p>Ms. Campello points out that international investors have traditionally looked for low-risk-high-return investments in Latin America. When interest rates go up, speculative capital arrives. But as these rates go down, investors tend to look elsewhere. </p>
<p>Even if Latin America enjoys more stability than in the past, emerging countries are much riskier investments—and only high-yield returns can lure international financial investors.</p>
<h2>Not just the end of the commodity boom</h2>
<p>Country-specific dynamics also play a part in the unrest, with Evo Morales’ attempts to perpetuate himself in power in Bolivia being a notable example. But as historian Andre Pagliarini pointed out on our <em>Explaining Brazil</em> podcast, the feeling of unfulfilled potential is a common thread in recent Latin American crises.</p>
<p>Citing Albert O. Hirschman and Michael Rothschild’s <a href="https://www.jstor.org/stable/1882024?seq=1">1973 article</a> “The Changing Tolerance for Income Inequality in the Course of Economic Development,” Brazilian economist Monica de Bolle cited “frustration and a sense of alienation” as driving forces in the region’s recent problems.</p>
<p>She recently <a href="https://threadreaderapp.com/thread/1197619149679341569.html">wrote</a>:</p>
<blockquote class="wp-block-quote"><p>“When growth starts to pick up, some social mobility will inevitably happen. For those not immediately benefited by the effects of growth, positive expectations will set in—that is the essence of the tunnel effect. Eventually, they think, all boats will rise. </p><p>However, some will feel the effects immediately. Social mobility along some dimensions, say income, will improve livelihoods. As people settle into a new reality they come to understand that they do not have access to all they desire.</p><p>Perhaps they have higher incomes but discriminatory practices may keep them from having access to the best schools, the best hospitals, for example. In highly segmented societies this might be particularly true (pick any country in Latin America). [Mr.] Hirschman calls this ‘truncated mobility’. […] Eventually, however, the nonmobile will lose patience and blame the ‘system’ for being rigged against them.”</p></blockquote>
<h2>Fragile social fabric</h2>
<p>Ms. de Bolle argues that in highly segmented societies such as Latin America, there is also an additional element: “a sense [by financial elites] that social gains accrued by others (indigenous people, or the “poor”) are happening at their expense.”</p>
<p>Brazil is a textbook example of how insular elites can be. The sitting government has tried, time and time again, to erode the country’s already feeble welfare structure. Economy Minister Paulo Guedes has called out the poor for “<a href="https://brazilian.report/money/2019/11/11/spending-saving-habits-brazil-rich-poor/">not saving enough</a>,” and Brazil’s biggest newspaper published an <a href="https://www1.folha.uol.com.br/colunas/solange-srour/2019/11/crescimento-mediocre-nosso-maior-risco.shtml">op-ed</a> by an economist saying that those who earn the minimum wage (roughly USD 238 a month) are “not poor.”</p>
<p>The government recently announced a plan to reduce <a href="https://brazilian.report/newsletters/daily-briefing/2019/11/12/brazil-plan-tackle-youth-unemployment-tv-ads/">youth unemployment</a> rates, hoping to finance it by taxing unemployment insurance payments. The government backpedaled, but didn’t escape criticism of going after the struggling poor, as opposed to the wealthy.</p>
<p>Latin American leaders have focused almost exclusively on economic growth as their goal. But, as examples in Chile and Bolivia—two countries with stellar growth rates in recent years—show us, social mobility must be at the core of their agendas, also.
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