Latin America’s Second Lost Decade
Driving among the verdant parks and mountains surrounding the avenues of a tropical city, one cannot help but notice the tragic state of the millions of people, condemned by birth to live in the seemingly omnipresent slums of wood and zinc. These streets have seen more prosperous times, when dignified housing seemingly sprouted freshly from the ground and everyone claimed that a better future was imminent. One wonders how things could have gone if the country’s great opportunity to conquer its historical challenges had not been recklessly squandered.
Latin Americans remember the 1980s as “La Década Perdida,” or “The Lost Decade,” when economic growth failed to surpass population growth and deliver the improved living standards that millions desperately needed. Just a few years ago, it seemed that these conditions would never return. Pundits compared Brazil’s explosive growth to that of Russia, China, and India. Only a year after pro-market sources such as The Economist and The Financial Times announced the dawn of a prosperous Latin American decade in 2010, left-wingers like Vermont Senator Bernie Sanders touted an op-ed in The Valley News that claimed the American Dream was more achievable in places such as “Ecuador, Venezuela, and Argentina” than in the United States.
In a world marked by the economic turmoil following the Great Recession, Latin America’s prospects seemed remarkably promising. Yet since 2012, the region as a whole has scarcely seen any per-capita income growth. Historians in 2022 may well look back on a second lost decade.
Early 2000s: Pink Tide and Commodities Boom
Two broad tendencies from the early twenty-first century paved the way to the region’s present. From an economic perspective, the region benefited from massive increases in the prices of raw materials, caused predominantly by the rapid rise of an industrializing China. For example, the price per barrel of WTI oil increased continuously from $28 at the start of 2002 to $96 in mid-2007, measured in U.S. dollars adjusted for inflation. With a brief exception in the winter of 2008-2009, oil prices remained well above $80 until November 2014, granting a massive economic advantage to oil exporters such as Colombia, Venezuela, Ecuador, and Mexico.
Similar trends appeared across the commodities markets, ranging from Argentinean and Brazilian soybeans to Chilean and Peruvian copper. According to a 2014 article in The Economist, commodities prices tripled between 2000 and 2011. Latin American countries benefited not only from the increased prices of their exports on the world market, but also from the growing prosperity of their neighbors.
This economic boom coincided with a regional political movement called the Pink Tide. Starting with Venezuela’s election of Hugo Chávez in 1998, elected officials across Latin America began to reject the free-market orthodoxy that had characterized the years immediately following the fall of the Berlin Wall.
This gave rise to Pink Tide governments, so called because they represented a shift towards the left that was softer than the “red” associated with Marxism. Between 1998 and 2011, every major Latin American country other than Colombia and Mexico elected a Pink Tide president. Diverse in their impact and ambitions, some of the Pink Tide governments proved transformative due to resources that enabled them to enjoy frequent re-election. Brazil’s Workers’ Party ruled the country for fourteen years, as did Argentina’s Justicialist Party, and Venezuela’s ruling party has yet to abandon power since 1998.
Across the region, an impressive natural resource boom coincided with the arrival of emboldened, ambitious reformists who hoped, above all, to challenge the status quo. For as long as the boom lasted, the results were largely positive. In 2000, forty-five percent of Latin Americans earned less than $4 a day; by 2014, that figure had dropped to twenty-five percent, while roughly ten million Latin Americans rose to middle-class status each year between 2002 and 2012.
However, this great prosperity would not last forever. Between 2011 and 2014, commodity prices fell by a quarter, and in 2014, oil prices dropped from over $100 to $53, eventually reaching a $36 low in January 2016. The question, then, was whether the achievements of the past decade could be sustained.
The collapse of commodity prices rendered the explosive economic growth that had characterized early twenty-first century Latin America far less feasible. What’s more, a series of policy mistakes on the parts of the Pink Tide governments ultimately exacerbated, rather than mitigated, the dependency of their countries on the commodities that had enabled temporary prosperity. As a result, per-capita income growth in Latin America did not just slow down: it fell to a negligible 1.9 percent between 2012 and 2018. To better understand the roots of this regional stagnation, it is worth observing the cases of Brazil, Argentina, and Venezuela. These three economies constituted nearly half of the Latin American economy in 2012, and all three have seen per-capita incomes shrink since then.
In Brazil, the end of the commodities boom coincided with the rise of Dilma Rousseff in 2011. Rousseff was the political successor to Luiz Inácio Lula da Silva, a charismatic Workers’ Party president whose government used the booming economy to fund generous and popular social programs for Brazil’s poorest residents. While these programs did much to improve the lives of ordinary people, they were not complemented with the investments in new sources of income necessary to render them sustainable.
Consequently, when Rousseff attempted to continue Lula’s popular policies without the support of high commodity prices, she began to engage in unsustainable borrowing, fueling ever-higher levels of government spending while tax revenue decreased. Worse still, when business leaders requested that she reform the country’s economic institutions to facilitate new investment, potentially allowing for the creation of new wealth to cover the gap left by the commodities boom, she ignored their pleas, and instead further discouraged investment by implementing price controls.
A similar story began in Argentina with the rise of the Kirchner dynasty in 2003. The Pink Tide governments of Nestor Kirchner and his wife Cristina Fernández de Kirchner oversaw the commodities boom and failed to properly take advantage of the windfall by encouraging investment in the country’s productive capacity. During Fernández de Kirchner’s second term from 2011 to 2015, public debt as a percentage of GDP increased by over forty percent and household poverty increased by a quarter. Price controls and prohibitively high taxes further dissuaded investors.
Argentineans hoped that reformist Mauricio Macri, elected President in 2015, would set the country on a better path. Although he has made some gains, including the first temporary reduction in Argentina’s poverty rate since 2011, he has not been able to enact the structural reforms necessary to reverse most negative tendencies. By 2018, public debt, inflation, and poverty were all at their highest since the start of the 2010s.
Finally, a description of Latin America’s economic woes is hardly complete without an account of the situation in Venezuela, where Hugo Chávez and his successor Nicolás Maduro have governed since 1998. By expropriating steel mills, textile factories, and all other industries deemed “strategic,” the government created an environment where potential investors fear that they will arbitrarily have their businesses seized, eliminating the possibility for productive diversification. These nationalizations even failed to expand government coffers, and by 2017 they were generating net annual losses worth 481 billion bolívares. Even the oil industry on which Venezuela relied deteriorated during Chavez’s rule. Partly due to the firing of 19,000 skilled oil sector employees in 2003 and the subsequent government mismanagement of the industry, Venezuela produced twenty percent less oil in 2014 than it did in 2003, even when oil prices remained high.
These policies, alongside irrational price controls, would erode the foundations of the Venezuelan economy for two decades, provoking an economic collapse greater than those of the U.S. during the Great Depression and of Russia after the dissolution of the USSR. It has produced mass shortages, with the average citizen involuntarily losing nearly twenty pounds in 2017. That same year, only twenty percent of drugs required by doctors were available. Over the past several years, more than four million Venezuelans have fled their country in an unprecedented migrant crisis.
“By almost any socio-economic indicator, Venezuela is similar to or worse than countries that have experienced violent conflicts,” wrote Dany Bahar in an email to The Politic. Bahar is a fellow in the Global Economy and Development program at the Brookings Institution.
Among Latin America’s seven largest economies, Argentina and Brazil have seen declining incomes between 2012 and 2018, while Venezuela has seen nothing short of a disastrous collapse. However, the four remaining economies in this group—Mexico, Colombia, Chile, and Peru—have been growing at reasonably high rates during the same period. In 2012, the presidents of these four countries announced the formation of the Pacific Alliance, a trade bloc seeking unprecedented integration among Latin American economies. Perhaps more significantly, the Pacific Alliance represented an alternative model for the region.
Two key factors distinguish the Pacific Pumas, as political economist Samuel George labeled them in 2012, from other major regional players. Firstly, they remained committed to free trade. While average tariffs in 2012 were no more than six percent for any of these countries, they surpassed ten percent in Venezuela, Argentina, and Brazil, impacting virtually all industries.
“Argentina and Brazil were once pioneers in the region for the medical devices industry,” Colombian health care executive Santiago Trujillo told The Politic in a phone interview, “but their protectionist policies of the past few years have made it impossible to compete with the kinds of innovative products that have lowered costs for public hospitals and outcomes for millions of patients in nearby countries like Chile, Peru, and Colombia.”
Secondly, they have fostered business-friendly environments, keeping reasonable regulations while removing bureaucratic clutter and enabling productive diversification. While the Pacific Alliance countries all rank among the top third in the World Bank’s 2014 Ease of Doing Business report, Brazil and Argentina remained safely within the lower half, while Venezuela ranked in place 181 out of 189 economies.
The results have been unambiguous. While the Pacific Alliance countries had similar achievements concerning economic growth and poverty reduction during the commodities boom, their prosperity proved much more sustainable. While Latin America as a whole has been stagnating since 2012, the Pumas have successfully delivered continued growth. Colombia and Peru in particular have seen increases of over ten percent in their per-capita incomes between 2012 and 2018.
While Brazil, Argentina, and Venezuela have grown massively indebted, ensuring further economic troubles, the Pacific Alliance remains fiscally responsible. In 2017, these countries kept an average budget deficit worth 2.6% of GDP, while their Atlantic counterparts averaged deficits worth 17%.
While economic growth has been negligible in Latin America since 2012, institutional differences have caused sharp differences across borders, with some economies collapsing while others forge ahead.
Uncertainty Over the Future
Whatever the future holds, we should all keep an eye on the fate of this region. Not only does Latin America’s population rise beyond 600 million people but it also provides a testing ground for policies that may serve the entire developing world, and its collaboration will be indispensable towards defeating climate change.
While it is premature to declare that the years between 2012 and 2022 will be looked back upon as a second lost decade, there are reasons to believe the remaining years will be difficult. The United States and China, both major buyers of Latin American exports, are caught in a trade war with no easy way out. The United Kingdom, an essential piece of the European economy, has been trapped in the uncertainty of the Brexit process and may soon destabilize the entire region with a no-deal Brexit. An inverted yield curve has raised concerns that the next U.S. recession is coming soon. With many potential dangers threatening the world economy, it is unclear that Latin America will have the opportunity to rise from its present curse, let alone reach the prosperity it had enjoyed during the commodities boom. Nonetheless, the past few years have shown that institutional differences can have a large impact on prosperity. Even if a lost decade is underway, it need not be lost for everyone.