chapter examines the performance of countries in Latin America over the past half a century against the backdrop of the behaviour of the world economy and particularly that of developing countries. It studies whether the region is catching up with the high-income countries. It also examines whether there is convergence among Latin American countries. One of features of the performance of the countries in the region is the increasing share of exports in GDP. The chapter studies what this has implied for the relationship of growth in Latin America with that in the other regions or countries. It finally tries to analyse the implications of the current situation in Latin America for the achievement of sustained stable and balanced growth of the world economy, a major objective of the G20.
Introduction
Latin America’s Comparative Economic Performance
Before 1982 only South Asia (SA) and Sub-Saharan Africa (SSA) did worse than the world average, namely worse than the high-income countries so that they were falling further behind, whereas the other regions were catching up (Table 1). The picture has changed significantly since the debt crisis as only Asia, both East Asia and Pacific (EAP) and SA, have outperformed the world, whereas all the other regions have grown slower than the world. So, most regions have not been converging to the high-income countries. But Latin American and Caribbean (LAC) countries have performed worse than the high-income countries in every period except 2001–2007. Therefore, the region has been falling behind.
The divergence was particularly large in the period 1983–2000 as the average growth rate in these three regions was very low, ranging from an average of −0.9% in SSA to 0.6% in LAC and Middle East and North Africa (MNA). However, since the turn of the century, all the developing countries have grown faster than the high-income countries. This was mainly because of the improved performance before the financial crisis of 2008. Since the crisis, the economic performance of LAC and MNA has slumped substantially. Only Asia is still performing better than the world average.
The economic performance of the countries in LAC has been very anaemic since the onset of the debt crisis in 1982, being better than only SSA. However, if we further sub-divide the period after the onset of the debt crisis, the poor economic performance of LAC becomes even clearer. Since the turn of the century, LAC has grown the slowest of all the regions.
Table 1. Growth of Per Capita GDP (Annual Average %)
Note: EAP is East Asia and Pacific, LAC is Latin America and the Caribbean, MNA is Middle East and North Africa, SA is South Asia and SSA is Sub-Saharan Africa. These regions are as defined by the World Bank.
Source: World Bank World Development Indicators.
Table 2. Gross Fixed Capital Formation (% of GDP)
Source: World Bank World Development Indicators.
Growth is significantly influenced by investment, so we next examine the behaviour of gross fixed capital formation (GFCF) in the different regions. Though investment ratios did fall in LAC because of the debt crisis and its aftermath from the early 1980s to the beginning of this century, they have since risen and have continued to rise even after the onset of the financial crisis in 2008 (Table 2).
Another constraint to growth that operates very often is the state of the current account deficit (CAD). Generally, countries with a large deficit tend to grow slowly. So, we analyse the state of CAD in these regions. The only region that has shown a consistently large CAD is SA (Table 3).
Since the onset of the debt crisis, the current account balance (CAB) has been slightly positive or slightly negative for two of the slowest growing regions, LAC and SSA. It seems that they could have run more expansionary monetary and fiscal policies without fear of running unmanageably larger deficits.1
Good export performance can prevent the possibility of large CADs. The share of exports of goods and services in GDP has increased considerably over the past 50 years in all the regions. The increase in the share in LAC, while not as spectacular as in EAP or even SA, is much larger than that in MNA or SSA (Table 4).
Table 3. External Balance (% of GDP)
Source: World Bank World Development Indicators.
Table 4. Exports of Goods and Services (% of GDP)
Source: World Bank World Development Indicators.
This performance would not support the hypothesis that poor export performance led to fears of large unsustainable CADs.2 Till the crisis reserves were increasing rapidly, share of reserves to GDP ratio was rising (Table 5).3 After the crisis, this ratio started falling. More recently, it has been rising, but in many instances, it was still lower than that in 2007. The share of reserves may not be large enough to encourage governments to follow more expansionary policies.
Ratios are net foreign assets in local currency divided by GDP in local currency from World Bank World Development Indicators.
We next studied the capital output ratios over different periods in the regions and found that all the regions had low incremental capital output ratios (ICORs) during the boom period of 2001–2007 (Table 6). Subsequently, it has increased in all the regions; it has increased particularly substantially in LAC and MNA. Of course, the ratio was always relatively high in MNA.
Table 5. Reserves as Percent of GDP
Note: R1 is the ratio of reserves in 2007 to those in 1997; R2 is the ratio of reserves in 2016 to those in 2007.
A number of explanations can be given for this increase in the ICORs. All the capacity that had been installed is not being used; therefore, there is excess capacity. Investment is being maintained despite excess capacity because demand may have shifted. Investment is going to sectors where demand has increased. In particular, demand may have shifted from export sectors to domestic sectors. Capacity in export sectors is lying idle; meanwhile, it is being created in domestic sectors where there is excess demand. Since one would expect that in labour-abundant developing countries, the domestic sectors would be more capital-intensive than the export sectors, the shift in production towards domestic sectors would raise the capital output ratio.
In brief, growth has declined substantially in LAC though GFCF as a proportion of GDP has been maintained and is actually higher since the crisis than it was in the boom years of 2001–2007. Also exports, which had declined immediately after the crisis and have recovered even if not to the levels before the crisis, are still much higher than in the two decades of the last century. Furthermore, there has been no sharp deterioration in the CAD.
