The unfulfilled promise of the Latin American decade

LAC Trade: Priming the Pump

The title itself for the 2019 Inter-Development Bank’s (IDB) “Trade Trend Estimates” for the LAC succinctly sums up the current situation. The IDB entitled their annual report, The Export Recovery Loses Momentum in Latin America and the Caribbean.

Exports, especially exports to destinations outside the region, have been what primes the economic pump in the Latin America and the Caribbean (LAC) region. When exports boom, every sector of the economy begins to rise. Conversely, when exports fall, the entire economy of the LAC region suffers.

Entering into the 1990s, it was thought (or as the Chilean poet Pablo Neruda wrote a Continent of Hope) in many circles it would be the “Latin American Decade.”

There were many reasons for optimism. It was expected the demand for agricultural and mineral commodities would rise and investment in other commercial sectors, such as manufacturing, would follow suit. The decade hasn’t quite played out that way and LAC exports reflect the unevenness of the global demand for commodities.

Still there was a recent upswing in 2017 that spilled over into 2018 that gave rise to the hope that it was just a matter of a little more time for the LAC’s monumental decade.

According to the IDB report (the IDB is a primary source of multilateral financing in Latin America), the total value of exports from the LAC grew at around 9.9% in 2018. In 2017 exports grew a robust 12.2% and reached $1,077 billion buoyed by strong commodity prices. Equally the slowing of export growth in 2018 was largely attributed to weak pricing. It is worth noting in the period covered January-to-September global trade grew by 11.6% compared to the 9.9% notched in the LAC.

However, the export numbers for the entire LAC are a little deceptive as Mexico’s exports have continued to boom (even with contentious NAFTA-USMCA negotiations). As the IDB points out, only Mexico and Chile exports really improved in 2018. Mexico exports were up 8% in 2017 and 9% in 2018. And Chile rebounded from a -2% drop in 2017 to an increase of 7% in 2018.

As commodities represent an inordinate share of the LAC exports, global demand and pricing has a large say in the performance of many LAC economies. The LAC’s extractive industries and agriculture make up a bulk of the export mix. For example, oil, iron ore and copper are big extractive items while sugar, coffee and soybean are major agricultural exports.

Back in 2011-2012 a boom in commodity prices boosted the LAC and gave credence to the Latin American decade discussion.

But prices now are considerably lower as the IDB estimates indicate…with no immediate recovery at hand.

Iron ore (November 2018) was off 62% from the high in 2011 [August 2019, $93.07 compared to February 2011, $187.18]. Copper is also off (November 2018) 39%, compared to 2011 [September 2019, $2.63 compared to February 2011, $4.54]. Sugar also has taken a hit and is down 60% (November 2018) from the record in 2011 [Dec. 2010 $0.32 compared to Sept. 2019 $0.11]. Soybeans exports have also fallen from an August 2012 high of $17.58/bushel to an August 2019 tally of $8.43/bushel.

The exports of soybean are particularly indicative of the secondary impact of the trade war as China is a major soybean importer, the U.S. a major supplier to China and a number of LAC nations like Brazil and Argentina competitors to the U.S. in the China market.