Abstract

Latin America and the Caribbean is a large world region with a mixture of countries. They are currently experiencing subdued recovery after the 2011 deacceleration. The current economic growth is insufficient to defend the socio-economic accolades of the last decade. Such a performance of the socio-economic trajectory highlights the new and persistent structural challenges. There have been multiple indicators towards the existence of a development trap. The idea is to explore the different reasons for the same and at the hope is to understand if natural resources is a curse for LAC.

Keywords:  development traps, external shocks, limited policy space

Latin America and Caribbean Economy

The relationship between the natural resource endowment and development is not a direct one. Long-run empirical evidence shows that the availability of natural resources is not a decisive factor in economic development (Hofman, 2000) As a region, Latin America has made large strides in bringing about very notable economic, social and political changes over the last decades whilst managing to bag a middle-income status on a global scale. But the issue is that the countries have not been able to leave their natural resource-based production patterns completely behind them. The paper will explore the reasons for the same whilst analyzing the economic development of LAC over the last decade.

Constraining structural factors

LAC has experienced a subdued growth and a lot of it can be credited to the challenges faced due to structural factors. Some facts that will enunciate the same are; the gap between average GDP per capita of G7 countries and that of LAC has stayed the same since 2007 ( G7 countries GDP per capita has been three times higher), bad economic performance has dramatically affected poverty and LAC’s GINI index of family income remains high compared to other regions like Asia and Africa

SOURCE: https://ourworldindata.org/grapher/income-inequality-in-latin-america?time=1974..2017

GINI index is an index that measures the difference in income across different income percentiles in a given set of population. The fact that the GINI index for LAC has been on a stable high tells us that the inequality prevalent in that region is on the higher end of the scale.

Even on an international level, the global context is extremely complicated. The commodity prices increased in 2018 and that induced solid global activity. For 2019 and 2020 there is an expected soft landing in the world’s gross domestic product and the trade growth. What this means is that the economy is shifting from growth to slow-growth to potentially flat. This cyclical downturn is done to avoid recession and it is usually caused by the governments attempt to slow down inflation

Bolivia and Paraguay are land locked economies. This is essential information because there is a risk of escalating trade tensions and disruptive financial tightening from the key partners of the region. That includes the United States and China. LAC has been a closed off region and such issues can cloud their outlook and disrupt their external adjustment.

All these factors coupled with the new and ongoing structuring challenges have resulted in low economic growth, persistent inequality rates and citizen discontent. These are symptoms of development traps.

Development traps1

In his book, ‘The bottom billion’ Paul Collier puts forward four different development traps. They are conflict, reliance on natural resources, being landlocked with bad neighbors, and bad governance. LAC has identified four different types of development traps; productivity trap (the productivity levels and performance has been consistently low and has pushed the region into a productivity trap), social vulnerability trap (this works on an individual level, the people in this group usually have low-quality jobs with low social protection and unstable income. This means that they don’t invest in human capital and limit their access to low quality jobs and a low-quality life.), the institutional trap (with the expansion of the middle class, aspirations for better institutions and better quality of social service is on a rise. Because the response to the same has been ineffective the people are losing hope and are more disengaged with the government. They don’t wish to pay taxes and this furthers the limitation on the quality of social service and the betterment of institutions), and the last type of trap that LAC has identified is the environmental trap (LAC is heavily dependent on natural resource-intensive activities. This concentration is leading towards an environmentally and economically unstable setting. Such a system is costly to abandon and the natural resources are perishable and that makes it unsustainable.)

Natural resources in abundance.

Classical economists assigned an important role to natural resources on the growth potential of an economy. Even Adam Smith stressed on the availability of land as a factor in economic growth. Though Ricardo and Malthus were quite pessimistic about the availability of natural resources for growth (Hofman, 2000). It has become clear that technological advances increase agricultural productivity and that LAC has not made optimum use of their resources because they utilize their traditional methods to cultivate and produce.

In a comparative perspective the Latin American advantage in natural resources is overwhelming. Total land area per head in 1950 in Latin America was two or three times the level in the United States (which is the best endowed developed country among those considered), and more than 20 times that of South East Asia (Hofman,2000)  This just goes to show that an abundance of resources is not an assurance for economic development. The hypothesis of the ‘curse of natural resources’ suggests that countries that are overly abundant in natural resources are on an average rather unsuccessful in terms of growth, as it was the case in Venezuela during the early twenty-first century. Currently in all countries the single most important export product is a primary product. Several countries have added manufactures to their exports, but only in Mexico and Brazil do these represent more than 50 per cent of total exports. Recently, since the debt crisis of the 1980s, there has been some indication of change in Latin America’s development strategy (Hofman, 2000).

Policy.

The policies that LAC can adopt or implement are limited. This is due to the debt crises of 1980. During the 1980s, Latin America faced strong pressures to avoid default and rather faced a creditors’ cartel supported by the U.S. What this means is that the lost decade must be a result of the way the U.S. banking crisis was managed, which clearly benefited U.S. banks at the cost of Latin America

http://policydialogue.org/files/publications/papers/The_Latin_American_Debt_Crisis_in_Historical_Perspective_Jos_Antonio_Ocampo.pdf. The primary balances were below the necessary level because the debt needed to be stabilized. This meant that the fiscal space was restricted. Both fiscal policy and monetary policy were either low or non-existent. The little space for monetary easing is also ending in countries where output gaps are closing and inflation is bottoming. That just means that a commodity that would have cost 3 rupees will now cost 3.04 rupees next year. If it continues and the inflation rate is more than 50 percent, it would be called hyperinflation. Central banks are likely to start increasing rates in 2019, particularly in the face of further currency depreciation that would affect expectations and have second-round effects on the price-setting process. The product cost is one important factor in the price-setting process and that would be disrupted due to inflation.

Conclusion.

LAC’s goal is sustainable development by 2030. The program is called “Development in transition”. The idea is that they want to rethink the concept of development, the strategies countries should pursue and the role of international co-operation in facilitating these efforts. (Hoffman, 2000) . Because the governments aim has been towards increasing the income level, there has been an emergence of new development traps that are now posing a problem for the citizens of LAC. What adds to the problem is the complexity of the global context. All the previous policies will have little effect on the ever-changing factors in the global scenario. This is in relation to the present, there are also the economic history of the land that need not be forgotten. There is a potential risk of debt accumulation by non-financial corporate. This can happen because while the government and financial sector largely resorts to domestic currency debt, corporate issue more foreign exchange liabilities. This makes corporate more vulnerable to increases in borrowing costs and US dollar appreciation. After the debt crises or the twin crises, LAC has to be vigilant about their policies. LAC should improve the policy making process for development; they should include the building of technical capacity to better their production rate whilst keeping in mind the complexities of the political scenario and unrest that is prevalent there. There should be political consensus and mandatory citizen support to go ahead with the development plans. Efforts should be made to gradually shift a little weight to the secondary and tertiary sectors so that the economy can get out of the environmental development trap. The economy should be open to other countries participating in policy partnership and have activities like knowledge sharing and access to technology. LAC has an immense amount of potential, but it has diverged from the developed nations because of restrictive policy and over dependence on natural resources. This has resulted in development traps and the debt crises has led to the shrinking of policy space. The LAC’s economy experiencing subdued growth in the last decade is a major concern.