Latin American economies seem doomed to economic stagnation, face another ‘lost decade’

Dec 2, 2022 | 4 comments

By Michael Morgan

Weak investment, low productivity and inadequate education have doomed Latin America to a period of economic failure worse than the “lost decade” of the 1980s, according to the region’s top UN economic official.

José Manuel Salazar-Xirinachs, the new head of the UN Economic Commission for Latin America and the Caribbean (ECLAC), said the stagnation of the past decade not only contrasted with the annual growth of 5.9 percent in the 1970s, but also with the 2 percent reached in the 1980s, a turbulent decade for Latin America, marked by a wave of debt crises.

“This is terrible, this really should be a huge red light,” he said of the descent into stagnation, with average annual economic growth over the decade to 2023 of just 0.8 percent. “The challenge is getting back to this 5.9 percent per year mark,” he said.

Speaking to the Financial Times from the ECLAC base in Chile, Salazar-Xirinachs also called on the region’s three newest leftist leaders to prioritize growth over the desire to share the spoils of wealth. Brazil, Colombia and Chile have all elected leftist presidents in the past year.

José Manuel Salazar-Xirinachs, UN Economic Commission chief

“In general, the progressives in Latin America are concerned with distribution, but not with wealth creation,” said the Costa Rican economist. “We need both and they go hand in hand.”

Latin America has grown more slowly than almost any other part of the world over the past decade. The region was hit hard by the pandemic, suffering more than a quarter of all recorded coronavirus deaths, despite being home to only 8.4 percent of the world’s population.

Salazar-Xirinachs said the underperformance was due to a lack of investment and poor education, both of which had hurt productivity. “We underinvest in infrastructure and we have an education system that is not delivering the talent we need in terms of numbers and quality,” he said.

Yet he also stressed that spending more on education was not necessarily the solution, noting how his native Costa Rica had significantly increased education spending but had not seen the expected results.

“Were . . . at about 7 percent of GDP, but the Pisa scores are very poor,” he said, referring to the OECD benchmark for educational attainment. [spending] 4.5 percent with much better education systems. The problem is that quality is ignored in education.”

ECLAC, often known by its Spanish initials CEPAL, has long been associated with “dependency theory” – the idea that commodity producers are trapped in an unfair global economic system that prevents them from moving up the value chain – and has historically advocated for state-led industrialization in response.

But Salazar-Xirinachs, who previously worked at the International Labor Organization and the Organization of American States, said he was keen to see the region escape economic stagnation by adopting what he called “productive development.”

This meant using public and private money to develop high value-added goods and technology-based services in sectors such as medical devices, electric vehicles, green energy and pharmaceuticals. This was best achieved by creating ‘clusters’ close to universities and research institutes.

Salazar-Xirinachs said Spain’s Basque region had used the model successfully, but it had only been used sporadically in Latin America, for example in Colombia’s Bogotá region or in Mexico’s automotive sector.

“It must become a more coherent policy. . . and to leave aside those discussions of whether it is the state or the market. What’s good about the [cluster] focus is that it is a very pragmatic way of working together.”

William Maloney, chief economist for Latin America and the Caribbean at the World Bank, agreed that low investment and poor productivity were at the heart of the economic problems. “The region is trying to crack this nut of low job and productivity growth and there is a lot of common ground to work on with CEPAL,” he said.

Other priorities included improving the efficiency of government spending, making tax systems more progressive and increasing the supply of trained middle-level technicians, engineers and managers, Maloney added. “The region has been very weak in technical capabilities,” he said.

Latin American countries trade less with each other than any other region, with their economies focused instead on commodity exports to the US, Europe and China.

Salazar-Xirinachs wants more focus on practical measures to facilitate trade between regions, including trade in services, rather than the grand political declarations that have characterized previous Latin American integration efforts.

Trade talks have resulted in sophisticated deals with the US or Europe, but no good regional deals.

“In the past, regional integration was seen as an alternative to integration into the global economy,” he said. “Now it is clear that it is more complementary. To successfully integrate Latin America into global value chains, it needs regional supply chains.”
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Credit: The New York Daily Paper