China’s rise and rising commodity prices undoubtedly contributed to the improvement economic performance and fundamentals over the past decade in the LatAm 7 – with the possible exception of Mexico. (The LatAm-7 economies comprise Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela and account for 90% of regional output.) The rise in commodity prices in the decade following 2003 was very significant: energy prices increased four-fold, metal prices three-fold and food prices doubled, while the prices of agricultural products rose 50%. Not surprisingly, real GDP growth accelerated from 2.5% to 4%.
Recently, much of the region, and especially Argentina, Brazil and Mexico, has suffered from disappointing growth. The ongoing US recovery, the return to moderate growth in the euro zone and more sustainable, if lower economic growth in China will support the outlook. Then again, analysts forecast a decline in commodity prices of around 10% over the next five years. IMF projections point to a significant decline in prices relative to their 2013 peak: food (-10%), agricultural goods (-20%), metals (-26%) and energy (-14%). prices doubled, while the prices of agricultural products rose 50%. Not surprisingly, real GDP growth accelerated from 2.5% to 4%.
Recently, much of the region, and especially Argentina, Brazil and Mexico, has suffered from disappointing growth. The ongoing US recovery, the return to moderate growth in the euro zone and more sustainable, if lower economic growth in China will support the outlook. Then again, analysts forecast a decline in commodity prices of around 10% over the next five years. IMF projections point to a significant decline in prices relative to their 2013 peak: food (-10%), agricultural goods (-20%), metals (-26%) and energy (-14%).
 |
| Source: WTO |
Recently, much of the region, and especially Argentina, Brazil and Mexico, has suffered from disappointing growth. The ongoing US recovery, the return to moderate growth in the euro zone and more sustainable, if lower economic growth in China will support the outlook. Then again, analysts forecast a decline in commodity prices of around 10% over the next five years. IMF projections point to a significant decline in prices relative to their 2013 peak: food (-10%), agricultural goods (-20%), metals (-26%) and energy (-14%).
Generally speaking, commodity dependence can be both a blessing and curse. It can prove a curse because terms-of-trade volatility risks undermining the development of a competitive, export-oriented manufacturing base, while the associated high revenue volatility often leads to over-borrowing during boom times followed by financial crises. The often capital-intensive nature of commodity extraction contributes significantly less to human capital formation (enclave effect) than export-oriented industrialisation and a relative lack of economic diversification often makes it harder to develop linkages to other higher-valued-added sectors.
Where the government relies on commodity rather than tax revenues, the curse may also help undermine democratic accountability, foster corruption and weaken governance. The resource curse is obviously not the only factor impacting the quality of institutions and economic policies. Other factors (e.g. socio-economic conflict, uneven wealth distribution, Anglo-Saxon vs Iberian colonial legacies) also matter. Importantly, too, the resource curse can be overcome (e.g. Chile). Policy-makers can take advantage of unexpected revenue windfalls to raise investment and savings and support long-term economic growth. Unfortunately, the political economy of economic policy in resource-dependent economies is rarely conducive to such an outcome. Hence: more curse than blessing.
Following the end of the Cold War, democracy spread throughout most of LatAm, even if it did not result in stable, highly-institutionalised regimes everywhere. Especially in countries with weak (or weakening) party systems, (outside) candidates often campaigning on populist platforms came to power. In spite of, in some cases, authoritarian tendencies, these countries have nonetheless not turned into fully-fledged autocracies of old. Political analysts have therefore dubbed them “competitive authoritarian regimes” (Levitsky and Way). Not surprisingly, the quality of economic policies in these countries tends to be lower than in more highly institutionalised regimes (think: Venezuela vs Mexico). Commodity windfalls result in higher revenues (commodity rents) rather than taxing voters directly, which makes it tempting to pursue policies that are politically opportunistic in the short-term and unsustainable in the longer term.
In terms of economic management, policies tend towards pro-cyclicality in commodity economies. Rising commodity revenues lead to expansionary fiscal policies, while real currency appreciation on the back of improved terms-of-trade fuels ultimately unsustainable consumption booms. It is therefore particularly desirable to institutionalise anti-cyclical macro-policies that help save at least part of the temporary revenue windfall in the form of fiscal and FX reserves. This is all the more important because commodity price increases tend to be accompanied by larger capital inflows.
But I digress. So where does all this leave the LatAm-7 in view of potentially weaker commodity going forward? Overall, the LatAm-7 economies have reduced both their external and gross government debt, again with the exception of Mexico. Gross government debt has declined, even if in some cases only minimally so (Chile, Mexico, Brazil, even if the latter has fared better in terms of net debt). External debt is lower everywhere, except in Mexico. Generally speaking, however, Brazil, Chile, Colombia, Mexico and Peru have improved their fundamentals and/ or policy regimes allowing them to withstand commodity price weakness. Due to its reliance on oil-related government revenues (1/3 of total), Mexico is arguably the country most sensitive to declining energy prices among the LatAm-5. This is somewhat offset in terms of the more limited balance-of-payments impact a sustained decline in commodity prices would have on Mexico given its low level of net commodity exports and its significantly greater export orientation towards what is almost certainly going to be the fastest-growing advanced economy, the United States. Moreover, more than 70% of total exports consist of less price-sensitive manufacturing products, as opposed to commodities.
Add to this, the rather impressive reform efforts of late and Mexico seems well-positioned to cope with lower commodity prices than most the other LatAm-7, its dependence on oil revenues notwithstanding. By the same token, tangibly higher FX reserves, lower external and public debt as well as relatively flexible exchange rates place the other LatAm-5 in a good position to deal with a commodity downturn, even if in such a scenario lower economic growth appears inevitable following the 2003-13 boom years.