How will Latin America end its dependence on commodities?

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Low demand and higher prices of commodities are constantly damaging Latin American economy. What steps should it take to end this dependence?

History has shown that Latin America is strongly dependent on commodities –raw materials such as corn, beans and oil–. This kind of economy, while it can be highly profitable, it’s also increasingly volatile. During times of high prices, countries such as Brazil, Peru, Argentina, Bolivia, and Colombia enjoy economic growth and, moreover, stability.

However, when there’s an excess of supply and prices decrease, these same countries suffer. As the dependence is too ingrained in the social and economic landscape of each of these countries, a decrease in prices not only echoes in profits. but also in inflation, unemployment, and investors’ trust.

The behavior of a commodity-based economy has made Latin America too vulnerable during budgetary cycles and too dependent on major economies. In fact, in the last few years, this situation has been especially hard on the economy.

While economists and Latin American governments have, for years, noticed this dependence, a transition to another kind of economy –such a manufacturing one– hasn’t been easy. According to Mauro Guillen, professor at the Wharton School of the University of Pennsylvania, during the 1950’s, 60’s, and 70’s, in an attempt to separate itself from a commodity-based economy, various Hispanic countries invested on manufacturing. However, it wasn’t successful. It seems that the economic crisis that followed during the 1980’s was a consequence of a lack of reliable trade treaties.

Right now, Latin America is in a tough spot. Oil prices are low and most of commodities are in an excess of supply. As such, economic growth is slow, unemployment is increasing, inflation is difficult to keep low and, in consequence, people are growing more and more dissatisfied.

Countries such as Colombia and Argentina are witnessing more popular uprising caused by low wages and unemployment. While Argentina is implementing reforms and it’s starting to see positive results, Colombia is stuck. During the recent teacher’s protests –provoked by low wages–, Colombian president Juan Manuel Santos publicly stated, “We don’t have the resources”.

What must be done? Alejandro Werner, International Monetary Fund director for the Western Hemisphere, has clear concerns and suggestions. According to Werner, Latin America needs to think about the levels of efficiency of their expenditures. Due to the past comfort of high commodity prices, previous Hispanic governments weren’t so concerned about the efficiency of their expenses.
Werner also suggests structural reforms. Brazil and Argentina are, clearly, following this suggestion and are on their way to apply major social, political, and economic reforms.

Furthermore, Mauro Guillen has stated his views on long-term thinking. Aside from Werner suggestions, Guillen argues that Latin American governments need to worry about investment in education and infrastructure. Due to the short time of each political cycle –they usually last four years–, it’s hard to think long term. Guillen has a clear opinion, “It’s always been easier for any government in the world –not just in Latin America– to try to capitalize on the windfalls and not to invest for the long run. Unfortunately, there’s no magical solution to this”.

While 2017 has opened chances for Latin American governments –the trade treaties with Europe and Asia have come closer–, low commodity prices are reducing investment opportunities. However, analysts and experts’ suggestions are clear about what the Western Hemisphere needs –better education and infrastructure– and countries that have followed the advice are seeing results. Some probably won’t be happy, but they’re in need of a major economic overhaul.

LatinAmerican Post | Juan Sebastian Torres
Copy edited by Susana Cicchetto