For Latin America, a Narrow Road Ahead

If it could, Latin America would pat itself on the back. Analysts from public and private institutions, political and economic experts, all seem to agree: An unusual combination of government interventions and pro-market reforms adopted in Latin America since the mid-1990s have enabled the region to weather the worst global recession in 80 years. Not bad, considering Latin America is widely viewed as the most economically and financially volatile region in the world.

This year, the average gross domestic product growth for Latin America and the Caribbean will drop to around minus 2.5 percent, according to International Monetary Fund projections. The fall, modest in comparison to those of more industrialized nations, will be largely driven by Mexico's contraction of more than 7 percent. Next year, with Peru and Brazil leading the recovery, GDP growth is expected to rebound to 3 percent -- more than 1 percentage point above the average growth in wealthier nations.

But even if Latin America returns to the record levels of growth it has seen in recent years, prosperity is not around the corner. Such growth was high by Latin American standards, but income per capita has still not grown significantly. In fact, as compared to other regions in the world, Latin Americans are worse off now than they were 30 years ago.

Except in Chile and Brazil, individual incomes throughout Latin America in 2005 lagged behind not only the world's most advanced economies, but also the emerging market economies at similar stages of social development, according to the latest book by the Washington-based Center for Global Development, "Growing Pains in Latin America." In 1975, for instance, countries such as Argentina, Mexico and Venezuela had average incomes per capita well above those in other similarly developed countries. By 2005, Mexico's had dropped to just above the average, and Argentina's and Venezuela's to well below it.

"Latin America won't go anywhere if it doesn't grow a lot," said the book's editor and lead author, Liliana Rojas-Suarez, in an interview. "When you have a small pie, no matter how many pieces you divide it into, it remains a small pie."
In the current crisis's aftermath, trade should be one of Latin America's best options -- if not the only one -- for growing the pie faster. But even if demand for commodities such as oil, soy or copper returns to pre-crisis levels, trade will fail to deliver that growth, because the region isn't able to compete on the world stage.

Part of the problem is education. Despite record levels of investment in education in recent years, students in Latin America continue to score below the global average. This translates into less productive workers and less diverse exports.

And the region's deficient infrastructure places additional burdens on manufacturers, who must pay increased costs and endure longer times-to-market. According to the Inter-American Development Bank, if the region's ports and airports were as efficient as the United States', and if there were more competition among shipping service providers, transportation costs could be 30 percent lower. Still, investment in infrastructure in Latin America equals, on average, 2 percent of GDP -- whereas, for example, China invests 9 percent, according to Antoni Estevadeordal, manager of integration and trade at the IDB.

What's more, government efforts to improve competitiveness -- not to mention to ink new trade deals -- take considerable political will that few in the region are able to muster right now. Last month, Mexican President Felipe Calderon called on his country's Congress to pass laws that would bring radical change to several sectors, including education, public services and labor. But few believe that Calderon will find much political support for any of these measures, though Mexican industry sorely needs to become more competitive and the country's exports more diversified. Eighty percent of its exports are sold to the United States, and thus Mexico was hit harder by the global recession than any other Latin American country. But as Mexican ambassador Arturo Sarukhan recently put it, "With the exception of babies, nobody likes change."

Indeed, as Rojas-Suarez stresses in her book, Latin America is reform-averse right now, a consequence of its "unique combination of being the most democratic and the most unequal" region of the world.

With dismal income-per-capita growth and a general perception that the benefits have been unevenly distributed, discontent with economic reforms is widespread in Latin America. That only makes political conditions less hospitable to new reforms, and slows many countries to a kind of paralysis.

To be fair, this paralysis isn't limited to Latin America. Considering that the World Trade Organization's Doha Development Round for trade liberalization has been stalled for 14 months, and that the U.S.-Colombia free-trade agreement has been stalled in the U.S. Congress for nearly 16 months, the prospects for increased integration don't look very good.

Still, experts are pointing to Asia as Latin American trade's new frontier. If that is the case, Latin America has a long way to go before it can take advantage of it. For the region's leaders, the first challenge will be to convince citizens that a new round of reforms is better than no reform at all.