After a strong several years for many merging economies, the last few months have brought some troubling signs. In Andrés Velasco 's analysis, the biggest problems of the moment seem to be large external deficits and investors in advanced economies anticipating higher interest rates, and then pulling some investment from emerging economies. Velasco, a past president and finance minister of Chile, sees some all too familiar dark clouds across Latin America. While he doesn't think the coming slowdown will be as catastrophic as past regional crises--"the question is not whether these countries’ financial sectors will explode, but whether their growth trajectories will implode"--he argues that the region's policy makers have not done enough to change basic structural weaknesses. From Project Syndicate : When commodity prices are sky-high and money is cheap and plentiful, economic growth is almost inevitable. In Latin America over the last decade, countries with sound macroeconomic policy frameworks, like Colombia, Peru, and Chile, grew rapidly. But so did Argentina, a country whose government seems to start every day wondering what more it can do to weaken economic institutions and damage long-term growth prospects. Now that nirvana is over, where will growth come from? To answer that question, it helps to note, as Harvard University’s Ricardo Hausmann has done recently, that some of the emerging economies’ recent growth was illusory. Wall Street became enamored with the rapidly rising dollar value of these countries’ national income, but that rise had more to do with strong commodity prices and appreciating exchange rates (which raised the value of their output when measured in dollars) than with sharp increases in actual output volumes. During the boom years, structural transformation in many emerging economies, particularly in Latin America, was limited. Countries like Ireland, Finland, and Singapore – and also South Korea, Malaysia, and Indonesia – export different goods (and to different markets) than they did a generation ago. By contrast, Chile’s export basket is pretty much the same as it was in 1980. There is nothing wrong with exporting copper, wine, fruit, and forest products. But economic history suggests that countries seldom – if ever – get rich by doing just that. Commodity-rich advanced economies like Canada, Norway, or Australia export lots of natural resources, of course, but they also export many other goods and services. That is not true of Chile, Peru, or Colombia – or even of Brazil, with its much larger population and more developed industrial base. To make matters worse, unlike their Asian counterparts, Latin America’s economies are not integrated into regional and global value chains. A producer in Indonesia, Malaysia, or the Philippines can easily take advantage of the local currency’s depreciation to sell more electronic components to an assembly plant in China with which it has a long-standing and well-developed supply relationship. A business in Concepción, Arequipa, or Medellín, by contrast, must seek new customers in new countries, which takes time and money – and may not succeed. Latin American governments could have used the opportunities afforded by the global commodity and liquidity booms to diversify their economies, working with local business communities to move into new products and sectors. They did not. Read Emerging Markets’ Nirvana Lost here .
Filed under: interest rates, global business, growth, emerging economies, commodities, trade balance, project syndicate, latin america, commodities curse, structural transformation, Andrés Velasco