The two Latin Americas – and an Achilles heel

A rising tide that lifts all boats – a mighty tide that lasted more than a decade – has propelled Latin America’s impressive GDP growth. Regardless of the economic fundamentals for each South American country, a significant portion of the growth they experienced was sustained by a resource-hungry Asia, which consumed many of the region’s commodities and natural resources, and did so at record prices.

However, the party may be over. Signs show the tide is reversing. According to the World Bank, subdued global trade, less supportive commodity markets and domestic challenges curbed growth in 2013 in the Latin America and Caribbean region. Real GDP may have grown 2.5% that year – broadly unchanged from 2012 – but sharply below preceding years. In 2013, the prices of agriculture products, minerals and precious metals (in US dollars) fell 7.2%, 5.5% and 16.9%, respectively. Given how heavily commodities feature among its exports, these price reductions have severely dented the value of the region’s exports, causing the regional current-account deficit (as a share of GDP) to widen from 1.7% in 2012 to 2.6% in 2013.

BBVA and the World Bank expect Latin America to grow 2.5% in 2014 and 2.6% in 2015. However, growth in the region will be increasingly heterogeneous. The Pacific Alliance (Chile, Colombia, Mexico, Peru and Costa Rica) is expected to grow at 3.8%, which is more than double the rate of the Mercosur countries (Argentina, Brazil, Paraguay, Uruguay and Venezuela).

Given the weakening of the commodity boom that benefited much of South America, future growth will have to come from real investment, efficiency and productivity. And these growth forecasts tell us which countries seem to be better prepared to sail on their own and beyond the subsidies of the tides.

According to the Economist magazine, Latin America´s intra-regional trade stands at a paltry 27% of total trade. Compare that with 63% in the European Union and 52% in Asia, and it’s easy to see the potential. Integration has long been talked about as a strong force for development and growth. But such integration relies on confidence and trust in order to work.

The newly formed Pacific Alliance has been described as a group of countries held together by affinities rather than proximity. Others say it’s about integration with those capable of doing it. The four founding members are fast-growing free-market economies that embrace globalization and are working on the convergence of their stock exchanges, distribution networks, border procedures and regulations – and have done so under the principles of open regionalism, rather than protectionism. Mexico has approved 16 structural reforms in the past year alone, in order to make its economy more competitive.

The contrast with some of the Mercosur and ALBA policies is stark, and could lead to the evolution of two distinct Latin Americas. However bright this may sound for the Pacific Alliance, it’s critical to remember the Achilles’ heel of Latin American development – inequality.

Latin America is the most unequal region in the world. As we have seen happen throughout the world, as citizens become increasingly connected they are no longer willing to tolerate systems perceived to be unfair and lacking in opportunities. Today’s poor are rich in information and millionaires in expectations, and will no longer be appeased by empty promises. Populist governments and policies are a symptom of this dysfunction. Until inequality is properly addressed, the whole system will be at risk.

The region must balance its growth with investments in quality education, healthcare and social security, and build its economies independently of low-tech, commodities-based manufacturing that undervalues human capital and pays low wages.

If GDP growth is not accompanied by inclusion and better opportunities for today´s poor, we will see the resurgence of a people’s revolt, even within the better-positioned Latin American countries.  No tide will change that.

Author: Leo Schlesinger CEO of Masisa Mexico, WEF Young Global Leader and Vice Chairman of the WEF Global Agenda Council on Biodiversity and Natural Capital.