Can exports save Latin America?

Fruits imported from Latin America are abundant in U.S. grocery stores: Chilean blueberries, bananas from Ecuador, Peruvian mangoes, cantaloupes from Guatemala, Costa Rican pineapples, Argentine Bartlett pears, the list goes on.  With all these exports to the U.S., and a solid recovery underway in the U.S. economy, will Latin America see a growth pick-up in 2015?  This would be a welcome boost to the Latin America and the Caribbean (LAC) region after a weak and disappointing 2014.  According to the latest Global Economic Prospects report, the region is estimated to have grown at 0.8 percent in 2014, less than a third of the 2.5 percent expansion seen in 2013.

The U.S. is, indeed, a major destination for Latin American exports. In 2013, around 40 percent of the region’s merchandise exports were shipped to the U.S.   In addition, of the 26 countries in the region, with available data, 22 listed the U.S. as one of the top five export destinations in 2013, and 16 of the 22 had the U.S. as the largest export destination (Figure 1).  In other words, only a handful of the region’s economies did not have the U.S. as one of their top 5 largest export destinations.  While highly visible to the U.S. consumer, agricultural exports actually only account for about one-quarter of the region’s exports of goods. Fuels and mining products constitute another quarter, while manufactures make up the majority – around half of total goods exports.  For Mexico, the largest regional exporter to the U.S., manufactures – mainly electronic equipment and automobiles – constitute three-quarters of its total goods exports.

With primary commodities (agricultural, fuels and mining exports) making up half of regional exports, the continued decline in commodity prices, and the associated dent in export values, was one of the key contributing factors to the region’s slowdown in 2014 and constitutes a headwind to activity in 2015.  The ongoing plunge in oil prices, for example, has adversely affected regional oil exporters (Colombia, Ecuador, Mexico, Venezuela) to varying degrees, while boosting real incomes of regional oil importers, such as the Central American economies.  Similarly, slumping copper prices have hurt Chile and Peru.  On the bright side, according to the latest World Bank Commodity Markets Outlook, commodity prices are expected to broadly stabilize, seeing only modest decreases in 2015.

Going forward, will regional exports be able to expand enough to support growth in 2015 and beyond? There is a substantial body of literature indicating that the business cycles of the U.S. and that of Latin America, especially Central America, tend to move together, suggesting that U.S. economic growth is very important for regional growth.  More importantly, a few studies have shown that trade is an important channel through which U.S. growth spills over into Latin America.  A quick review of monthly export data certainly looks promising – regional real merchandise exports expanded by over 7 percent in 2014, after growing nearly 9 percent in 2013. This trend is expected to persist as economic conditions in major export markets improve – the U.S. economy is clearly gathering momentum, the Eurozone recovery remains on track, while China’s growth remains robust, despite a slowdown. Moreover, Latin American exports should also increasingly benefit from a competitive boost as local currencies continue to depreciate against the U.S. dollar.

In addition, the recently announced quantitative easing of the European Central Bank and the continued monetary easing by the Bank of Japan should mitigate the tightening impact of the U.S. Fed’s first rate hike, widely anticipated in mid-2015. Global monetary conditions are, therefore, expected to remain generally loose until 2016, and should sustain capital flows into Latin America, facilitating investment and further supporting economic growth.

Thus, the continued strengthening of the U.S. economy is expected to provide a boost to exports from Latin America. Together with supportive global monetary conditions that should be investment enhancing, there are grounds to hope that Latin America will make a recovery soon.

Source: WTO

This article was first published by The World Bank Propects for Development Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Derek H. C. Chen is a macroeconomist with the Development Economics Prospects Group at the World Bank

Image: Fruits are displayed for sale at a wholesale fruit market in Lima. REUTERS.