Last week I was visiting Japan, and having almost a continuum of meetings with the private sector, public sector, and academics. I had more than 20 something face-to-face meetings, which was an un-valuable experience. I learned a lot, and several things struck me tremendously. First, they had an extremely negative view about their future. Second, they had an extremely positive view about Latin America’s future. You see, I’m used to people criticizing our region, not praising it. It was very disturbing.
In fact, after the first meeting when they talked so positively about the prospects of Latin America I though it was just a very confused person. However, when the 25th one was still saying nice things, such as LA is growing so much, and LA has such low inflation, and LA has so many people that know how to dance salsa, and LA here, and LA there. I mean, maybe that explains why they see their future so bad…
But my discomfort had to have an explanation. And the reason is that I feel very few countries in Latin America are outperforming their external environment. Interest rates are exceptionally low, international capital flows are exceedingly available, and commodity prices are skyrocketing. In this environment the question is, how can you not grow?
For instance, do you think you could do better in Venezuela? I mean, if you were Doctor Evil (and I’m your mini-me) could we think of better policies that could produce better outcomes? What about Argentina? Or Bolivia? Or Ecuador? I mean, I went for all the big 10 countries and it was only in Peru where I had a “Florida moment”; too close to call. For everything else (Master Card… no sorry….) for everybody else, I thought the performance is not good enough.
In fact, some of my fears have been expressed by Guillermo Calvo, who has a paper actually doing this exercise formally. Very few countries are outperforming. Furthermore, Nouriel has a blog in which he asks a similar question.
I would like to open a discussion on a simple question: who in Latin America is outperforming, and who is underperforming? I think no one is outperforming, I think Peru is just passing the exam, and I think the rest, from Argentina to Mexico are underperforming. I might be willing to convinced of the contrary…. Please, let me know where I’m missing the point.
Finally, just to finish the story about my trip… I was glad that on the way back things started to normalize. All the movies had a Latino flavor: Armageddon, Dante’s Peak, Titanic, The Poseidon Adventure, and Volcano. It was so good to see Latin American politics as usual…
6 Responses to “Underperforming Latinos”
I enjoyed your comment, but I had a few points to make regarding your question why Latin American countries are underperforming vis-a-vis the external environment. (I’m not quite as skeptical about Latam’s growth as you are.) I took your question to mean: Why are Latin American countries not growing as fast the rest of the world given the current benign economic conditions? 1. Disappointment over Latin America’s growth rate frequently results when people compare Latam’s growth with that of China and India. But I would suggest that the comparison is not fair….basically it’s comparing apples and oranges because Latin America countries’ per capita GDP (at least Brazil, Argentina, Chile) is at a higher base than China and India so Latam countries (at least the ABCs) have less growth to catch-up on. (For example, Central Europe has been growing faster than the EU, but that is expected since it is playing catch-up and started the EU integration process w/ significantly lower per-capita GDP than the rest of Europe). 2. You point out that interest rates worldwide are “exceptionally low.” Although interest rates have dropped globally, including in Latam, Brazil’s Selic rate is still sky-high at the current 12% even though it has dropped precipitously this year. So while rates are lower in Brazil than they were, there still among the highest in the world. This, of course, continues to stymie investment and consumption, hampering GDP growth. Nevertheless, I’m hopeful that rates will continue to fall and that gradually, people will be more willing to consume and invest on credit (as it gets cheaper), boosting GDP growth. 3. Latin America has a notoriously high degree of income inequality; a high proportion of the region’s population is poor with little or no access to credit. As Hernando de Soto has written about and discussed at length, this lack of access to credit makes it difficult for many of Latin America’s poor to participate in the formal economy, which hampers GDP growth. (Unlike my earlier two more optimistic points highlighting why Latam’s GDP growth is not so bad given the current conditions, this point is more my attempt to explain why, I too, am still skeptical about Latam achieving high growth in the near-future.)
indeed in spite of the highest global growth in 20 years, high commodity prices, a wall of liquidity in global financial markets and very low risk aversion of international investors growth in latin america is not as high as it should be given the best external conditions in decade. how do you explain it? it is a real puzzle
So how do you explain this underperformance of latin america? what is your favorite explanation? why for the last 30 years latin america has done worse than east asia and still does worse? it is a puzzle….
Venezuela has been growing @ 10% for the last 3 years and will probably approach that rate this year. Incomes of the bottom 60% have more than doubled in the last four years. Economic growth has far exceeded other petro states. And, as expected with high growth rates, inflation has been edging up in the past year. How much growth can you reasonably expect without blowing the lid off of inflation, historically an endemic problem in Latin America? Please define what “good” growth would look like!!! To me your criticisms sound like a bunch of sour grapes because Venezuela has moved away from the discredited, disastrous, one-size-fits-all policies of the Washington Consensus that despite its failings is still the conventional wisdom of Western economists.
Good post but I would like to know your arguments as to why Brazil is not currently overperforming at least in the economic sense. I believe that Brazil is overperforming for the following reasons in particular when compared to its past: - lower nominal and real interest rates; - lower inflation level and its volatility; - higher primary surplus, lower debt ratios (no net external debt), better composition of public debt (less foreign, more domestic at increasingly at fixed nominal rates); - record current account balance (and not just from commodity prices) – the first continued sequence of surpluses in decades; high levels of FDI; - increased affordability of consumer credit (although still at ridiculously high rates by European standards) and soon to come housing credit; - increased presence in the Latam and international diplomatic arena (finding the place it “deserves” from its weight); There are challenges of course: low levels of productivity (TFP) and growth, unbelievable inequality between the South and North, increased organised crime, fiscal vulnerabilities (a European level of taxes but poor public services and high levels of expenditure), etc. However, these pale compared to the vulnerabilities of the past. Brazil will be soon classified as “investment grade”. This would have been unthinkable 5 years ago and a reason to celebrate. The current positive mood among the business community is such that I am sometimes almost inclined to believe their claim that Deus é brasileiro…
You really should be asking “What are these Asian countries seeing that makes then so optimistic about Latin America?” and not “Why are Latin American countries not living up to my ideal of economic progress?” I’m pretty sure they are not looking for a “Florida moment”. To answer your question I think that certain Latin American countries are under performing because they have made themselves overly dependent on high interest loans from the World Bank and the IMF and their central governments are spending the majority of their resource collecting taxes to pay back the very same loans. Their private sectors are for the most part in the same predicament, living on credit trying to generate enough revenue to pay back their loans. That said what do the Asians see in Latin America? They see the huge potential for growth that has been completely over looked by the majority of American institutions that spend their time looking for a “Florida moment” rather than real agents for growth. By some calculation as much as 60% of economic activity of Latin America is “underground”, underground meaning that it does not operate under the general laws dictated by the central governments that have adopted the economic policies set by the World Bank and the IMF. It is in the “underground” or “unofficial” economy that the real growth exists. The Asians recognize this potential because they saw the same dynamics in their own economies 50 or 60 years ago. I think part of the reason that you can not see this potential is because America took too much of the credit for the economic growth in Asia after WWII. It was the Asians ability to recognize and exploit their own potential for economic development that created the “Asian Tigers” and not the policies and procedures dictated to them by the US. Your question though brings up another question that the majority of the world is asking. Why have Americans become so inept at accurately evaluating economic and political conditions in the world? I remember not to long ago the typical belief in the US was that China’s Communist Government would collapse in the same fashion as the USSR, and that Russia in contracts would prosper by adopting the economic policies dictated by the World Bank and the IMF. Also by American calculation Venezuela, Argentina, and Russia should have imploded after walking away from the same institutions and Iraq should be a model of political reform and economic prosperity by now.