Foreign Policy Blogs

Is Latin America Confident for All the Wrong Reasons?

Guillermo Ortiz

Latin America’s technocrats spent the second half of 2011 on mushy footing, unsure what effect the euro zone crisis might have on the region and afraid that China might experience a “hard landing.”

Now some of the region’s wonks are expressing more confidence. “Latin America has never been better equipped to move forward,” said Guillermo Ortiz, a former central banker of Mexico, at Davos. He went on: “This is really the decade for Latin America.”

Two points: First, now it is the Mexicans who are cooing over growth and international clout, not the Brazilians. Fair enough. Brazil’s economy braked fast last year, recording nil growth in the third quarter, while Mexico did an impressive head fake by experiencing a growth spurt just as the region below went into slow-mo.

Second, whatever confidence leaders have recovered since last summer is premature. In his remarks, Ortiz suggested that the region had moved beyond the headwind of Europe’s crisis, and structural adjustments over the past decade ensure that Latin America will be sitting pretty to 2020.

Maybe this will be case for Mexico, which relies more on US consumers rather than European ones. But while forecast growth of 3.5 percent for Latin America in 2012 surpasses Mexico’s trend rate, elsewhere it signals a dangerous slowdown. Inflation will be higher than economic growth across most of South America; in turn, slower growth will increase unemployment, feeding informal sectors that already threaten socioeconomic development. Lower commodity prices could metastasize the bad news.

By now, anyone who’s been watching Latin America is well aware of the red flags raised over the region’s reliance on commodities for economic growth, so I’ll review by way of hyperlink and move on.

What troubles me are recent signs of Latin America’s inability to harvest commodities. A week ago a UN report concluded that a drought in northern Argentina means the world’s second-largest corn exporter will ship about 1.6 million tons of corn less this year than in 2011. A clear-cut case of nature’s wrath no doubt, but it shouldn’t be dismissed given the context of underproduction elsewhere.

Brazil produces over half of the world’s ethanol; the country’s cane-based brew is to biofuel what the bikini is to fashion. Last year though, Brazil was forced to import 1.1 billion liters of ethanol. And Mexico, which counts oil as its second-largest source of tax revenue and sits atop the world’s fourth-largest shale reserves, is importing record levels of natural gas.

Here’s the kicker: the United States is taking up the slack. Despite Argentina’s weak harvest, corn prices are expected to decrease this year because of strong exports from the US. Nearly all of Brazil’s ethanol imports last year came from the USA, as did most of Mexico’s imported natural gas.

Brazil and Mexico are in this situation because of inept government policy. Mexico’s Pemex has said it plans to operate 175 shale gas sites by 2015; to date, it is drilling at one site in the northern state of Coahuila.

Meanwhile, Brazil’s government has dis-incentivized ethanol production in recent years by capping domestic prices and by cutting taxes on oil–but not ethanol– production. The result? Brazil had some 150 million tons of spare mill capacity for ethanol production last year.

Just back from the Davos shindig, Moises Naim chided big talking officials from developing nations for their hubris. Poor management of hallmark commodities in Latin America leads me to agree.

 
  • Ms. McLellanville

    What about Lithium in Bolivia?

Author

Sean Goforth
Sean Goforth

Sean H. Goforth is a graduate of the University of North Carolina-Chapel Hill and the School of Foreign Service at Georgetown University. His research focuses on Latin American political economy and international trade. Sean is the author of Axis of Unity: Venezuela, Iran & the Threat to America.

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