In large part due to the slowdown of the Chinese economy, economic growth in the commodity-driven economies of Latin America has fallen off about half from its high point. Exports make up the bulk of GDP in the region; over the past decade, rising commodity prices in Latin America lifted millions of people out of poverty. Currently, the situation is not dire, just dimmer. The region has not fallen into recession as a whole, although a few countries are facing such stagnation. Growth is still slow to moderate—a situation that Europeans might envy—but the boom period of recent years is definitely over.
Most of the wealth in Latin America has traditionally gone to oligarchs and large landholders who hold vast acreage in agriculture and mining companies. The majority of mines are now foreign-owned. You could say that there is a “miner’s mentality” here. If you can catch it, cut it down, or dig it up and make yourself rich then why would you invest money in something value-added that might diversify the economy, like manufacturing? Bolivia and Chile export lithium, but do not make batteries. And Peru and Chile export copper, but do not make wire. One reason for that is much of Latin America is geographically challenged.
Many of the major cities in the region—Bogota, Lima, Santiago—are ringed in by mountains that would make hauling components to a manufacturing plant difficult. Drive off the road in Panama City and you will sink into the mud. Buenos Aires is a port city, but Argentina has had currency controls and a shifting political landscape that would make anyone with long term plans to build a plant hesitate. Brazil builds Chinese cars and other products for the domestic and continental market. But their once-roaring economy now faces corruption as the falling price of petroleum and other commodities have seen the troubled nation slide into recession.
Harvard International Review is absolutely right when it says that, “The problem is that Latin American economies are commodity-based,” and, “China’s slowdown has not only brought down commodity prices, but has reduced demand for Latin American exports, drastically straining Latin American economies.”
HIR says that commodity markets underwent a “boom” starting in 2000 that was “…partly triggered by China’s unprecedented demand for raw materials, such as steel and copper, to complete its development projects.”
The rising price of everything from gold, iron, and emeralds to oil definitely changed the region. Growth was an anemic 0.3% from 1980 to 2000. It then averaged out to 1.9% with commodities surging to 55% of exports. Now Latin America as a whole is expected to contract 0.3%. That number is no doubt skewed by Brazil and Argentina’s large population as most countries are growing and some, particularly Peru, are surging ahead nicely. Argentina is turning around its situation as well.
These countries are all resource rich. Venezuela, Argentina, Brazil, Peru, Bolivia, and Ecuador have natural gas and oil. Chile has orchards, vineyards and farm salmon. On the Atlantic side of the continent, agriculture and ranching are dominant because there is so much arable, flat land.
The United States, Brazil, Argentina and Paraguay are the largest producers of soybeans in the world. China vacuums up 60% of the world’s soybean imports according to Trading Economics. But prices for agricultural goods, like mineral ones, have fallen, too. Soybean prices have fallen from $1,800 metric ton in 2012 to under $1,000 today. Corn has fallen 160% in the same time period.
Anyone who reads a newspaper knows about the plunging price of oil and natural gas. Copper, too, is off. It has dropped steadily from a high of almost $4 per pound in 2012 to below the psychologically significant $2 price point briefly in 2015 only to hover slightly above that since.
The Economist protects growth rates. For 2016 and 2017, their projections are: Argentina -1.2, +3.0; Brazil -3.3, +1.1; Chile +1.6, +2.1; Colombia +2.0, +2.7; Mexico +2.1, +2.5; and Peru +3.8, +4.2. That’s a far drop for Brazil, who grew 7.5% in 2010.
Chile’s envious growth of 5.75% in 2010 has also slowed. Chile’s economy shrank 0.4% in the first quarter of 2016. That was first time that has happened since 2010. But that was a one-time event as GDP growth is pointed up with no significant slowdown in sight. Trading Economics says the Chilean economy was “dragged down mainly by a 6 percent decline in copper production as lower international prices keep hurting the sector.” China gobbled up 28.5% of world copper exports in 2015.
Trading Economics quotes iron-ore prices for the spot market at the Chinese port of Tianjin, showing how important China is to that market. Iron-ore has shrunk in the past 5 years from almost $200 per ton to just over $50, further impacting Brazil’s economy.
Mexico has iron-ore as well. But the situation there is different. The Wall Street Journal reported in 2014, “Mexico's exports of iron ore have plunged following a crackdown this year by authorities on China-bound shipments linked to drug cartels.” The army had to move in and take back control of a port that the cartels had taken over.
More often than not, Latin America’s politics and security situation resembles one long running telenovela. But the truth is there is stability in the region. While there might be dictators or quasi dictators in Nicaragua, Bolivia, and Ecuador, no one’s currency is collapsing anymore—with the exception of Venezuela. But unless they find a new market, like perhaps some growth in India, these commodity-driven economies are in for a prolonged period of slower growth.
