March 29, 2017    5 minute read

Changes in Latin America: The Continent’s Outlook This Year

   March 29, 2017    5 minute read

Changes in Latin America: The Continent’s Outlook This Year

After nearly ten years of great economic performance thanks to its attractive commodity market, Latin America has lost its potential: economic growth is close to 0%, equality gains have slowed down, and the political landscape is being forced to change. Even though each nation in the region is different, all Latin American countries are currently facing a common economic climate. The graph below illustrates this poor performance.

This is represented as a constant decrease in the GDP over the last five years. On the other hand, other major emerging economies like China and India have maintained stable overall GDP growth over the years. This is in part thanks to increasing trade partnerships with countries around Europe and the Middle East.

Fixing a Continent

In order to build change it is important to first understand the main influences of the deterioration in Latin America, which are the economic situations in Argentina, Brazil and Venezuela:

In Argentina, growing inequality and unprecedented macroeconomic change that occurred as a result of the unprofessional policy management of the previous administration has resulted in negative consequences for the country – an increase in unemployment in particular. Fortunately, this is now being slowly fixed by the new administration under Mauricio Marci.

For Brazil, 2016 saw one of the largest and most harmful recessions that the country had to go through in years. The country’s downturn was due to the political crisis and corruption the country had gone through. This paralysed policymaking and thereby left the government with limited possibilities to develop stability and growth. Moreover, this revolt caused an increasing lack of confidence from neighbouring countries.

The economic decline in Venezuela sped up in 2016 as a result of the constant fall in oil production, shortages of consumer goods and services, and increasing currency monitoring actions. This further increased the country’s inflation rate and therefore caused a broader deterioration of social conditions in Venezuela.

Finally, it is important to mention the key role that China played in Latin America’s downturn. The China-led commodity boom powered South America’s economic growth and overall GDP growth rate during the 2000s. Unfortunately, this has now been slowing sharply at a constant rate since 2012 as a result of a longer-term decrease in value of oil, coal and iron. A combination of this has negatively harmed Latin American countries and caused an increase in inflation and unemployment rates.
It is definitely true that bad government administration and corruption made an important contribution to the deterioration of the Latin American economy. Unfortunately getting rid of corruption on the government is a very challenging task as it cannot be tackled directly. The most efficient solution would be to first, build a more stable system that can join the divided Latin American social classes. Second, it is crucial to provide future generations from all economic backgrounds with a higher quality education. A combination of these two measures would definitely help eradicate corruption and mismanagement in future Latin American administrations.

What Must Change in 2017?

The following issues need to be addressed in order to ensure a better development of the Latin American economy in the long term:

First, inequality. The reason for this issue relates to historical conflicts between ethnic groups of European, indigenous and African origins respectively. This was reinforced in 2016 through the continuing division between the formal and informal sectors because of increasing economic instability. A collaborative interaction between these demographics would increase the efficient production and manufacturing of domestic products. Moreover, it would help expand the consumer market among the poorer classes of Latin America.

Second, education, where the continent suffers from a serious deficit. Weak quality of education continue to hold back the continent’s economy as future generations will find it more difficult to adapt to the new technological advancements in manufacturing and other sectors of the labour force. The adoption of highly successful systems of education from developed countries would be the first step towards solving this systemic problem. This strategy has proved to be successful in other developing countries like India and Georgia.

Third, the business climate in the most undeveloped Latin American regions, which exhibit continuing problems with inappropriate regulation, has constantly created big deficits in project development. Learning to develop and implement business models that have been successful in the construction of projects for important countries on the continent, like Uruguay or Colombia, would be a stepping stone for the better development of the poorest countries in Latin America like Honduras or El Salvador.

The Need for Commitment

The continuous economic downturn requires a constant commitment to maintain and further develop the most vulnerable classes within Latin America. Moreover, it is important to safeguard the gains made by citizens who manage to escalate from the poorer classes and become part of the middle class, which now represents 35% of the total Latin American continent.

Finally, helping countries get back to a healthy economic atmosphere for growth, and modernising social protection and healthcare systems would be key to maintaining the economic and social level of Latin American countries to a sustainable level of stability.

Fortunately, Latin American countries generally have lower debt ratios and more extensive international reserves than other countries. This will give flexibility when it comes to monetary policy interaction and eases access to capital markets, reducing the need to request international loans. With this advantage, it would be easier to enact high-cost projects with the purpose of boosting the Latin American economy.
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