Escaping Latin America’s commodities inequality trap

It’s no coincidence that the continent with the worst levels of inequality – Latin America – is also the most dependent on commodities. However, while the general economic dangers of over reliance on commodities are well documented, from Dutch disease to the natural resources curse, not enough attention is paid to the way a glut of commodities can feed social inequality.

While governments cheer the record price of commodities because the income tops up the public coffers, they do not fully realize that relying too heavily on commodities is a simmering and unsustainable recipe for unrest. Commodities are well suited for a low-cost labour force, comprising many low skilled people picking fruits, collecting vegetables, mining copper or fishing at sea, with just a few highly skilled owners or managers. It’s easy to visualize the income distribution that this market will generate.

A commodity-based economy is inherently and structurally unequal. Seeing the labour market in this way has become a disincentive for investing in human capital. If our economies require a low skill workforce, why bother with education? Thus, it comes as no surprise that Latin America’s educational system ranks among the worst. And given that the educational level is the number one predictor of income, in doing so, we are dooming our population.

Another factor that reinforces Latin America’s reliance on commodities is a Ricardian world view. In making the case for free trade among countries and specialization among individuals,18th-century British economist David Ricardo argued that there is mutual benefit from trade or exchange even if one party (e.g. a resource-rich country, or a highly skilled artisan) is more productive in every possible area than its trading counterpart (e.g. a resource-poor country, or unskilled labourer), as long as each concentrates on the activities where it has a relative productivity advantage.

So far, so good. But by assuming that Latin America’s competitive advantage lies mainly, if not solely, in producing commodities and in the expectation that this is enough to sustain our economies, we have focused our efforts, quite successfully I must say, in becoming the most efficient commodities producer. In doing so, we have paid little attention to investing in human capital dependent sectors, such as advanced manufacturing and services; thus becoming a world laggard in both.

There is much talk right now, and it is on virtually every other Latin American government agenda, about the need for educational reform which will significantly improve both access and quality. However, that should also come paired with a proactive private sector that innovates and provides more high-value activities, so that it will ultimately be able to provide better manufacturing jobs and higher wages, creating a more equal and sustainable economic base.

To address inequality we must have an educational system that produces and the businesses that require highly skilled people. Inequality is the source of most of Latin America’s instability. It is the feeding ground for angry social movements that put so much pressure on our governments and endanger our development. We must tackle it because it makes economic and social sense. We must start by understanding that the very nature of our economic base must move beyond simple commodities to be able to provide a more sustainable and a fairer income distribution.

The status quo is no longer an alternative.

Author: Leo Schlesinger is Chief Executive Officer of the Masisa Mexico Organization, a 2010 World Economic Forum Young Global Leader and Chairs the Global Agenda Council on Natural Resources and Biodiversity.