Latin American economy

Latin America as a region has multiple nation-states, with varying levels of economic complexity. Latin American economy is an export-based economy consisting of countries, Central America, South America, and the Caribbean. As of 2016, the population of Latin America is 633 million people^[1] and the total gross domestic product of Latin America in 2015 was 5.3 trillion USD. The main exports from Latin America are agricultural products and natural resources such as copper, iron, and petroleum.

In 2016, the Latin American economy contracted 0.8% after a stagnant 2015.^[2] Morgan Stanley suggests that this drop in economic activity is a combination of low commodity prices, capital flight, and volatility in local currency markets.^[3] The International Monetary Fund suggests that external conditions influencing Latin America have worsened in the period from 2010-2016, but will show growth in 2017.^[4]

Historically, Latin America has been an export-based, with silver and sugar being the motors of the colonial economy. The region remains a major source of raw materials and minerals.^[5] Over time, Latin American countries have focused on efforts to integrate their products into global markets.^[5] Latin America's economy is composed of two main economic sectors: agriculture and mining. Latin America has large areas of land that are rich in minerals and other raw materials.^[5] Also, the tropical and temperate climates of Latin America makes it ideal for growing a variety of agricultural products.^[5]

Infrastructure in Latin America has been classified as subpar compared to economies with similar income levels.^[6] There is room to grow and some countries have already taken the initiative to form partnerships with the private sector to increase infrastructure spending.^[7]

The main economies of Latin America are Brazil, Argentina, Colombia, Mexico, and Chile. These economies have been given positive outlooks for 2017 by Morgan Stanley.^[3] The Latin American economy is largely based on commodity exports, therefore, the global price of commodities has a significant effect on the growth of Latin American economies. Because of its strong growth potential and wealth of natural resources, Latin America has attracted foreign investment from the United States and Europe.

History

Pre-Independence (1500-1826)

The Spanish Empire and the Portuguese Empire controlled the region now known as Latin America until the early nineteenth century.

The motor of the Spanish American economy was the extraction of silver, found in Peru, especially Potosí, and colonial Mexico, in several different regions, including Zacatecas, Guanajuato, and Parral. The silver peso was both an export commodity as well as the first global money, transforming the economies of Europe as well as China.^[8] The other major export product in the early period was cane sugar, cultivated on plantations in tropical regions of Brazil, Mexico, and islands in the Caribbean, with a labor force of African slaves.^[9] As Spain lost several Caribbean islands to the empires of the French, Dutch and English, these Caribbean islands, such as Barbados, Curaçao, and Martinique, sugar was cultivated on the model of the Brazilian plantations. Other agricultural export commodities during this early period were cochineal, a color-fast red dye made from the bodies of insects growing on nopal cactuses; cacao, a tropical product cultivated in the prehispanic era in central Mexico and Central America, in a region now called Mesoamerica; indigo, cultivated in Central America; vanilla, cultivated in tropical regions of Mexico and Central America. Cattle, sheep, horses, and donkeys imported from Europe and proliferated on haciendas and ranches in regions of sparse human settlement, and contributed to the development of regional economies. Cattle and sheep were used for food as well as leather, tallow, wool, and other products. Mules were vital to transporting goods and people, especially since roads were unpaved and virtually unpassable during therainy season.

Most manufactured goods for elite consumers were of European origin, including textiles, porcelains, and books. Local production of rough cloth for an urban mass market were turned out in small-scale textile workshops, called obrajes, which also functioned as jails.

In the early Spanish empire, trade was controlled by the crown via the Casa de Contratación, (House of Trade) based in Seville. Inter-regional trade was severely limited with merchants based in Spain and with overseas connections in the main colonial centers controlling the transatlantic trade. In the late eighteenth century, the crown instituted a series of changes in policy, known as the Bourbon Reforms, designed to bring the Spanish America under closer crown control. One innovation was comercio libre ("free commerce"), which was not free trade as generally understood, but allowed all Spanish and Spanish American ports to be accessible to each other, excluding foreign traders, in a move to stimulate economic activity yet maintain crown control. At independence, Spanish America and Brazil had no foreign investment or direct, legal contact with economic partners beyond those allowed within controlled trade.

Early Post-Independence (1830-1870)

Following the independence period (1808-1826), Latin America was disruptive in many areas and produced long term effects. In Spanish America, the disappearance of colonial-era economic restrictions (except for Cuba and Puerto Rico) did not produce immediate economic expansion "because investment, regional markets, credit and transport systems were disrupted" during the independence conflicts. Some regions faced greater continuity from colonial era economic patterns, mainly ones that were not involved in silver extraction and peripheral to the colonial economy..^[10] Many regions faced significant economic obstacles.^[11] Many areas of Latin America was less integrated and less productive than they were in the colonial period, due to political instability. The cost of the independence wars and the lack of a stable tax collection system left the new nation-states in tight financial situations. Even in places where the destruction of economic resources was less common, disruptions in financial arrangements and trading relationships caused a decline in some economic sectors.^[5]

The key feature that prevented economic expansion following political independence was the weak or absent central governments of the new nation-states that could maintain peace, collect taxes, develop infrastructure, expand commercial agriculture, restore the mining economies, and maintain the sovereignty of territory. The Spanish and Portuguese crowns had forbade foreign immigration and foreign commercial involvement, but there were structural obstacles to economic growth. These included the power of the Roman Catholic Church and its hostility to religious toleration and liberalism as a political doctrine, and continued economic power in landholding and collection of the religious tax of the tithe; the lack of power of nation-states to impose taxation, and a legacy of state monopolies, and lack of technology. ^[12] Elites were divided politically and had no experience with self-rule, a legacy of the Bourbon Reforms, which excluded American-born elite men from holding office. Independence from Spain and Portugal caused the breakdown of traditional commercial networks, which had been dominated by transatlantic trading houses based in Spain. The entrance of foreign merchants and imported goods led to competition with local producers and traders. Very few exports found world markets favorable enough to stimulate local growth, and very little capital was received from other countries, since foreign investors had little confidence in the security of their funds. Many new nation-states borrowed from foreign sources to fund the governments, causing the debt from the independence wars to increase.^[5]

British investment in Latin America began as early as the independence era, but increased in importance during the nineteenth century, and to a lesser extent, the British government was involved. The British government did seek most favored nation status in trade, but, according to British historian D.C.M. Platt, did not promote particular British commercial enterprises.^[13][14] Britain sought to end the African slave trade to Brazil and to the Spanish colonies of Cuba and Puerto Rico and to open Latin America to British merchants.^[15]

Export Booms (1870-1914)

The late 1800s represented a fundamental shift in the new developing Latin American nations. This transition was characterized by a re-orientation towards world markets,^[5] which was well underway before 1880.^[16] When Europe and the United States experienced an increase of industrialization, they realized the value of the raw materials in Latin America, which caused Latin American countries to move towards export economies. This economic growth also catalyzed social and political developments that constituted a new order. Historian Colin M. Lewis argues that "In relative terms, no other region of the world registered a similar increase in its share of world trade, finance, and population: Latin America gained relative presence in the world economy at the expense of other regions."^[17]

An early boom and bust export in Peru was guano, bird excrement that contains high amounts of nitrates used for fertilizer. Deposits on islands owned by Peru were mined industrially and exported to Europe. The extraction was facilitated by Peruvian government policy.^[18]

Sugar remained an important export commodity, but it fell in importance in Brazil, which shifted to coffee cultivation. Sugar expanded in the last Spanish colonies of Cuba and Puerto Rico with African slave labor, which was still legal in the Spanish empire.^[19][20] Sugar had previously been considered a luxury for consumers with little cash, but with its drop in price a mass market developed.^[21][22] Previously Cuba had had a mix of agricultural products, but it became a mono-crop export.^[23]

As foreign demand for coffee expanded in the nineteenth century, many areas of Latin America turned to its cultivation, where the climate was conducive. Brazil, Colombia, Guatemala, El Salvador, and Costa Rica became major coffee producers, which disrupted traditional land tenure patterns and necessitated a secure workforce. Brazil became dependent on the single crop of coffee.^[24]

A case study of a commodity boom and bust is the Amazon rubber boom.^[25] With the increasing pace of industrialization and the invention of the automobile, rubber became an important component. Found wild in Brazil and Peru, rubber trees were tapped by workers who collected the raw sap for later processing. The abuses against indigenous were chronicled by the British consul, Sir Roger Casement.^[26]

A major development facilitating the export boom in various Latin American countries was the late nineteenth-century construction of railroads. Given the lack of navigable river systems, which had facilitated that economic development of the United States, the innovation of railroad construction overcame significant topographical obstacles. Where large networks were constructed, they aided domestic economic integration as well as linking production zones to ports and borders for regional or international trade. In some cases, railway lines directly linked zones of production or extraction to ports without linkages to larger internal networks. An example is line built from the nitrate zone in northern Chile, seized during the War of the Pacific, to the coast. British capital facilitated railway construction in Argentina, Brazil, Peru, and Mexico, with significant economic impact.^[27][28]

An important aspect of economic growth was immigration from Europe as well as Asia, providing a low-wage workforce for agriculture and industry.^[29][30] In Peru, Chinese laborers were brought to work as virtual slave on coastal sugar plantations, allowing the industry to survive, but when immigration was ended in the 1870s, landowners sought domestic laborers who migrated from other areas of Peru and kept in coercive conditions.^[31][32] In Brazil, recruitment of Japanese laborers was important for the coffee industry following the abolition of black slavery.^[33]

The outbreak of World War I in 1914 disrupted British and other European investment in Latin America, and the international economic order vanished.^[34]

New Order emerging (1914-1945)

During the World War I period (1914-18), few Latin Americans identified with either side of the conflict,^[5] although German attempted to draw Mexico into an alliance with the promise of the return of territories lost to the U.S. in the U.S.-Mexico War. The only country to enter the conflict was Brazil, which followed the example of the United States and declared war on Germany. Despite the general neutrality, all areas suffered disruption of trade and capital flows, since transatlantic transport was disrupted and European countries were focused on the war rather than investing overseas. The Latin American countries that were most affected were those that developed significant trade relations with Europe. Argentina, for example, experienced a sharp decline in trade as the Allied Powers diverted their products elsewhere, and Germany became inaccessible.

With the suspension of the gold standard for currencies, movement of capital was interrupted and European banks called in loans to Latin America, provoking domestic crises. Direct foreign investment from Great Britain, the dominant European power, ended. The United States, which was neutral in World War I until 1917, sharply increased its purchases of Latin American commodities. Commodities useful for the war, such as metals, petroleum, and nitrates, increased in value, and source countries (Mexico, Peru, Bolivia, and Chile) were favored.

The United States was in an advantageous position to expand trade with Latin America, with already strong ties with Mexico, Central America, and the Caribbean. With the opening of the Panama Canal in 1914 and the disruption of the transatlantic trade, U.S. exports to Latin America increased.^[35] As transportation in the Caribbean became cheaper and more available, fragile tropical imports, especially bananas could be reach mass markets in the United States. U.S. Navy ships deemed surplus following the Spanish American War (1898) were made available to the United Fruit Company, which created its "Great White Fleet." Latin American countries dominated by U.S. interests were dubbed banana republics.

An important development in this period was the creation and expansion of the banking system, especially the establishment central banks in most Latin American countries, to regulate the money supply and implement monetary policy. In addition, a number of countries created more specialized state banks for development (industrial, agricultural,and foreign trade) in the 1930s and 1940s. The U.S. entered the private banking sector in Latin America in the Caribbean and in South America, opening branch banks.^[36] A number of Latin American countries invited prominent Princeton University professor Edwin W. Kemmerer ("the money doctor") to advise them on financial matters.^[37] He advocated financial plans based on strong currencies, the gold standard, central banks, and balanced budgets. The 1920s saw the establishment of central banks in the 1920s in the Andean region (Chile, Peru, Bolivia, Ecuador, and Colombia) as a direct result of the Kemmerer missions.^[38] In Mexico, the Banco de México was created in 1925, during the post-Mexican Revolution presidency of Plutarco Elías Calles using Mexican experts, such as Manuel Gómez Morín, rather than advisers from the U.S. As industrialization, agricultural reform, and regulated foreign commercial ties became important in Mexico, the state established a number of specialized state banks. Argentina, which has longstanding ties to Great Britain, set up its central bank, the Banco Central de la República de Argentina (1935) under the advice of Sir Otto Niemeyer of the Bank of England, with Raúl Prebisch as its first president.^[39] Private banking also began to expand.

In the post- World War I period, Germany was eclipsed from trade ties with Latin America and Great Britain had experienced significantly losses, leaving the United States in the dominant position. Changes in U.S. law that had previously prevented the opening of branch banks in foreign countries meant that branch banks were opened in places where U.S. trade ties were strong. A number of Latin American countries became not only linked to the U.S. financially, but the U.S. government pursued foreign-policy objectives.^[40] Post-war commodity prices were unstable, there was an oversupply of commodities, and some governments attempted to manipulate commodity prices, such as Brazil's attempt to raise coffee prices, which in turn caused Colombia to increase its production. Since most Latin American countries had been dependent of the commodity export sector for their economic well-being, the fall in commodity prices and the lack of increase in the non-export sector left them in a weak position.^[41]

Manufacturing for either a domestic or export market had not been a major feature of Latin American economies, but some steps had been taken in the late nineteenth and early twentieth centuries, including in Argentina, often seen as the key example of an export-dependent economy, one based on beef, wool, and wheat exports to Britain. Argentina experienced growth of domestic industry in the period 1870-1930, which responded to domestic demand for goods generally not imported (beer, biscuits, cigarettes,glass, paper, shoes).^[42]

Changing Role of the State, 1945-73

Many Latin American governments began to actively take a role in economic development in the post-World War II era, creating state-owned companies for infrastructure projects or other enterprises, which created a new type of Latin American entrepreneur.^[43] Following the Mexican Revolution (1910-20), the Mexican government could assert control over natural resources and institute labor codes protecting workers, via the 1917 Mexican Constitution, codifying the right of the government to expropriate property in the national interest. An early test of this was foreign-owned petroleum companies, with the Mexican government initially/ taking only small steps to rein in ownership. In 1938, the government of Lázaro Cárdenas expropriated U.S. and British oil interests and created the state-owned Petroleos Mexicanos (PEMEX).^[44] Mexico provided other Latin American countries with an example of a state-owned petroleum industry. Brazil established the state monopoly oil company Petrobras in 1953.^[45][46] Other governments also followed policies of economic nationalism and an expanded economic role for the state. In Argentina, the five-year plan promulgated by the government of Juan Perón sought to nationalize state services. In Bolivia, the 1952 revolution under Victor Paz Estenssoro overturned the small group of businessmen controlling tin, the country's main export, and nationalized the industry, and decreed a sweeping land reform and universal suffrage to adult Bolivians.^[47]

Increasing birth rates, falling death rates, migration of rural dwellers to urban centers, and the growth of the industrial sector began to change the profile of many Latin American countries. Population pressure in rural areas and the general lack of land reform (Mexico and Bolivia excepted) produced tension in rural areas, sometimes leading to violence in Colombia and Peru in the 1950s.^[48] Economic inequality and social tensions would come into sharper focus following the January 1959 Cuban Revolution.

With Great Britain no longer the leading foreign power in Latin America, replaced by the United States, a new framework to structure the international system emerged. In 1944, a multi-nation group forged formal institutions to structure the post-war international economy. The Bretton Woods agreements created the International Monetary Fund, to stabilize the financial system and exchange raters, and the World Bank, to supply capital for infrastructure projects. The U.S. was focused on the rebuilding of Western European economies, and Latin America did not initially benefit from these new institutions. However, the General Agreement on Tariffs and Trade (GATT), signed in 1947, did have Argentina, Chile and Cuba as signatories.^[49] GATT had a legal structure to promote international trade by reducing tariffs. The Uruguay Round of GATT talks (1986-1994) resulted in the formation of the World Trade Organization.^[50]

After World War II, the United Nations created the Economic Commission for Latin America, also known by its Spanish acronym CEPAL, to develop and promote economic strategies for the region. It includes members from Latin America as well as industrialized countries elsewhere. Under its second director, Argentine economist Raúl Prebisch (1950-1963), author of The Economic Development of Latin America and its Principal Problems (1950), CEPAL recommended import substitution industrialization, as a key strategy to overcome underdevelopment.^[51][52] Many Latin American countries died pursue strategies of inward development and attempted regional integration, following the analyses of CEPAL, but by the end of the 1960s, economic dynamism had not been restored and "Latin American policy-making elites began to pay more attention to alternative ideas on trade and development."^[53]

The lack of focus on Latin American development in the post-war period was addressed by the creation of the Inter-American Development Bank (IDB) was established in April 1959, by the U.S. and initially nineteen Latin American countries, to provide credit to Latin American governments for social and economic development projects. Earlier ideas for creating such a bank date to the 1890s, but did not come to fruition. However, in the post-World War II era, there was a renewed push, particularly since the newly established World Bank was more focused on rebuilding Europe. A report by Argentine economist Raúl Prebisch urged the creation of a fund to enable development of agriculture and industry. In Brazil, President Juscelino Kubitschek endorsed the plan to create such a bank, and the Eisenhower administration in the U.S. showed a strong interest in the plan and a negotiating commission was created to develop the framework for the bank. Since its founding the IDB has been headquartered in Washington, D.C., but unlike the World Bank whose directors have always been U.S. nationals, the IDB has had directors originally from Latin America. Most funded projects are economic and social infrastructure, including "agriculture, energy, industry, transportation, public health, the environment, education, science and technology, and urban development."^[54] The Inter-American Development Bank was established in 1959, coincidentally the year of the Cuban Revolution; however, the role of the bank expanded as many countries saw the need for development aid to Latin America. The number of partner nations has increased over the years, with an expansion of non-borrowing nations to Western Europe, Canada, and China, providing credit to the bank.

A major shock to the new order of U.S. hegemony in the hemisphere was the 1959 Cuban Revolution. It shifted quickly from reform within existing norms to the declaration that Cuba was a socialist nation. With Cuba's alliance with the Soviet Union, Cuba found an outlet for its sugar following the U.S. embargo on its longstanding purchases of Cuba's monoculture crop. Cuba expropriated holdings by foreigners, including large numbers of sugar plantations owned by U.S. and Canadian investors. For the United States, the threat that revolution could spread elsewhere in Latin America prompted U.S. President John F. Kennedy to proclaim the Alliance for Progress in 1961, designed to aid other Latin American governments with implementing programs to alleviate poverty and promote development.^[55]

A critique of this strategy emerged in the 1960s as dependency theory, articulated by scholars who saw Latin American countries' economic underdevelopment as resulting from the penetration of capitalism that trapped countries in a dependent position supplying commodities to the developed countries. Andre Gunder Frank's Latin America: Underdevelopment or Revolution (1969) made a significant impact as did Fernando Henrique Cardoso and Enzo Faletto's Dependency and Development in Latin America (1979). It has been superseded by other approaches including post-imperialism.^[56][57][58]

In 1970, Chile elected as president socialist Salvador Allende, in a plurality. This was seen as a "peaceful road to socialism," rather than armed revolution. Allende attempted to implement a number of significant reforms, some of which had already been approved but not implemented by the previous administration of Christian Democrat Eduardo Frei. Frei had defeated Allende in the previous presidential election (1964) in good part because he promised significant reform without serious structural change to Chile, while maintaining rule of law. He promised agrarian reform, tax reform, and the nationalization of the copper industry. There was rising polarization and violence in Chile and increasing hostility of the administration of U.S. President Richard Nixon. A military coup against Allende on September 11, 1973, during which he committed suicide. This marked the end of the transition to socialism and ushered in an era of political repression and economic course changes.^[59][60]

Reorientations 1970s-1990s

By the 1970s, the world economy had undergone significant changes and Latin American countries were seeing the limits of inward turning development, which had been based on pessimism about the potential of export-led growth. In the developed world, rising wages made seeking lower-wage locations to build factories more attractive. Multinational corporations (MNCs) had movable capital to invest in developing countries, particularly in Asia. Latin American countries took note as these newly industrializing countries experienced significant growth in GDP.^[61] As Latin American countries became more open to foreign investment and export-led growth in manufacturing, the stable post-war financial system of the Bretton Woods agreements, which had depended on fixed exchange rates tied to the value of the U.S. dollar was ending. In 1971, the U.S. ended the U.S. dollar's convertibility to gold, which made it difficult for Latin American countries, as well as other developing countries to make economic decisions.^[62] At the same time, there was a boom in commodity prices, particularly oil as the Organization of the Petroleum Exporting Countries OPEC limited production while demand continued to soar, resulting in world wide price rises in the price per barrel. With the rise in oil prices, oil producing countries had considerable capital to invest and international banks based in the U.S. expanded their reach, investing in Latin America.^[63]

Latin American countries took on debt to fuel the economic growth and integration into a globalizing market. The promise of export earnings using borrowed money enticed many Latin American countries to take on loans, valued in U.S. dollars, that could expand their economic capacity. Creditors were eager to invest in Latin America, since in the mid-1970s real interest rates were low and optimistic commodity forecasts made lending a rational economic decision. Foreign capital poured into Latin America, linking developed and developing countries financially. The vulnerabilities in the arrangement were initially ignored.^[64] Mexico in the early 1970s saw economic stagnation. With the discovery of huge oil reserves in the Gulf of Mexico in the mid-1970s, Mexico appeared to be able to take advantage of high oil prices to spend on industrialization as well as fund social programs. Foreign banks were eager to lend to Mexico, since it seemed to be stable, had effectively a one-party political system that had kept social unrest to a minimum. Also reassuring to international lenders was that Mexico had maintained a fixed exchange rate with the U.S. dollar since 1954. President José López Portillo (1976-82) broke with long-standing treasury practice of not taking on foreign debt, and borrowed extensively in U.S. dollars against future oil revenues. With the subsequent crash of the price of oil in 1981-82, Mexico's economy was in shambles and unable to make payments on the loans. The government devalued its currency, placed a 90-day moratorium on payment of the principal on external public debt, and finally López Portillo nationalized banking in the country and exchange controls on currency were imposed without warning. International lending institutions were themselves vulnerable when Mexico defaulted on its debt, since Mexican debt accounted for 44% of the capital of the nine largest U.S. banks..^[65][66]

Some Latin American countries did not take part in this trend toward heavy borrowing from international banks. Cuba remained dependent on the Soviet Union to prop up its economy, until the collapse of that state in the 1990s cut Cuba off, sending it into a severe economic crisis known as the Special Period. Colombia limited its borrowing and instead instituted tax reform, which raised government revenues significantly.^[67] But the general economic downturn of the 1980s plunged Latin American economies into crisis.^[68].

Latin American countries' borrowing from U.S. and other international banks exposed them to extreme risk when interest rates rose in the lending countries and commodity prices fell in the borrowing countries. Capital flows to Latin America reversed, with capital flight from Latin America immediately preceding the 1982 shock. The rise in interest rates had an impact on borrowing countries, since servicing the debt directly affected national budgets. In many cases, the national currency was devalued, which cut demand for imports that now cost more. Inflation hit new levels, with the poor acutely affected. Governments cut social spending, and overall, poverty grew, and income distribution worsened.^[69]

The economic crisis in Latin America was addressed by what came to be known as the Washington Consensus, which was articulated by John Williamson in 1989.^[70] These principles were:

1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates;
6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
10. Legal security for property rights.

These principles focused on liberalization of trade policy, reduction of the role of the state, and fiscal orthodoxy. The term "Washington Consensus" implies that "the consensus comes or is imposed from Washington."^[71]

Latin American governments undertook a series of structural reforms in the 1980s and 90s, including trade liberalization for must of Latin America and privatization. Chile, which had experienced the 1973 military coup and then years of dictatorial rule, implemented sweeping economic changes in the 1970s: stabilization (1975); privatization (1974-78); financial reform (1975); labor reform (1979); pension reform (1981). Mexico's economy had crashed in 1982, and it began shifting its long-term economic policies to reform finances in 1986, but even more significant change came under the government of Carlos Salinas de Gortari (1988-1994). Salinas sought Mexico's entry into the Canada-U.S. free trade agreement, so that liberalization of trade policies, privatization of state-owned companies, and legal security for property rights were essential if Mexico was to be successful. Changes in the 1917 Mexican Constitution were passed in 1992 that shifted the role of the Mexican state. Canada and the U.S., as well as Mexico entered into the North American Free Trade Agreement (NAFTA), which came into effect in January 1994.

Economic Cooperation and Free Trade Agreements

With the formation in 1947 of the General Agreement of Tariffs and Trade (GATT), a framework was established to lower tariffs and increase trade between member countries. It eliminated differential treatment between individual nations, such as most favored nation status, and treated all member states equally. In 1995, GATT became the World Trade Organization (WTO) to meet the growing institutional needs of a deepening globalization. Although trade barriers fell with GATT and the WTO, the requirement that all member states be treated equally and the need for all to agree on terms meant that there were several rounds of negotiations. The Doha round most recent talks, have stalled. Many countries have established bi-lateral trade agreements and there has been a proliferation of them, dubbed the Spaghetti bowl effect.^[72]

Free trade agreementss in Latin American and countries outside the region were established in the twentieth century. Some were short-lived, such as Caribbean Free Trade Association (1958-1962), which was later expanded into the Caribbean Community. Dominican Republic–Central America Free Trade Agreement initially included only Central American nations (excluding Mexico) and the U.S., but was expanded to include the Dominican Republic. The North American Free Trade Agreement (NAFTA) was an expansion of the bilateral agreement between the U.S. and Canada, to include Mexico, coming into force in January 1994. Other agreements include Mercosur was established in 1991 by the Treaty of Asunción as a customs union, with member states of Argentina; Brazil; Paraguay; Uruguay and Venezuela (suspended since December, 2016).^[73] The Andean Community (Comunidad Andina, CAN) is a customs union comprising the South American countries of Bolivia, Colombia, Ecuador, and Peru, originally established in 1969 as the Andean Pact, and then in 1996 as the Comunidad Andina. Mercosur and CAN are the two largest trade blocs in South America.

Following the 2016 election of Donald Trump in the United States, there will be negotiations on NAFTA, which will likely take into account changes in the economic situation since it came into effect in 1994. These include the "transnationalization of services and the rise of the so-called digital/data economy -- including communications, informatics, digital and platform technology, e-commerce, financial services, professional and technical work, and a host of other intangible products."^[74]

Economic sectors

Agriculture

Latin America produces and exports a diverse range of agricultural products such as coffee, cacao, bananas, soya, and beef.^[75] Latin America accounts for 16% of the world’s food and agriculture production. Brazil and Argentina lead the region in terms of net export due to high grain, oilseed, and animal protein exports.^[75] The structure of the agriculture sector is very diverse. In Brazil and Argentina large farms account for most of the commercial agriculture, but in much of Latin America, agriculture production comes from the region’s small farms.

Global demand for agricultural products is rising due to the world’s growing population and income levels. By 2050, the world’s population is expected to reach 9 billion people and the demand for food is forecast to be 60% higher than it was in 2014.^[75] Distribution of unexploited land in Latin America is very uneven, with Brazil and Argentina having the most access to additional land.^[75]

Rabobank reports that Latin American has achieved rates of agricultural productivity that are above the global average, however, there is a lot of variation in the performance of the individual countries.^[75] For large commercial farms, investment in precision agriculture and plant breeding techniques will lead to an increase in productivity, and for small-scale farms, access to basic technology and information services will lead to an increase in productivity.^[75]

Mining

Latin America produces 45% of the world’s copper, 50% of the world’s silver, 26% of the world’s molybdenum, and 21% of the world’s zinc.^[76]

Half of the participants in a BNAmerica’s mining survey believe that political and legal uncertainty will slow mining investment in Latin America in 2017.^[77] However, individual countries have implemented changes that could improve conditions for mining companies in 2017. Costs related to labor, energy, and supplies have increased for Latin American mining companies.^[77] Thus, many companies are focused on reducing costs and improving efficiency to achieve growth. Some companies are looking towards consolidation, automation, and owner-operated mines to lessen the impacts of rising costs.^[77]

Manufacturing

Although a significant proportion of production is in the mining and agricultural sectors, various countries of Latin America have significant manufacturing sectors as well. In a number of cases, governments followed policies of import substitution industrialization, setting up tariffs against foreign manufactured goods in order to encourage domestic manufacturing industries.^[78] Latin America has developed a significant automotive manufacturing, with foreign companies setting up plants in Brazil, Mexico, and elsewhere.^[79] In Mexico, for example, the Ford Motor Company set up a plant in 1925, and the automotive industry in Mexico includes most of the major car makers.^[80][81] Assembly plants known as maquiladoras or maquilas, where imported components are turned into finished products and then exported have boomed along the U.S.-Mexico border.^[82] Brazil's automotive industry played an important role in the country's industrial development.^[83] Because of the transportation challenges in Brazil, with coastal cities not easily connected by road or rail, the country took steps to develop an aircraft industry and in 1969, the company Embraer was founded, specializing in regional jets.^[84]

Financial

Latin American countries have had functioning banks and stock exchanges since the nineteenth century. Central banks have been established in most countries of Latin America to issue currency, manage flows, and implement monetary policy. In countries where there was significant commodity export activity and foreign capital presence, stock exchanges were established in the nineteenth century: Rio de Janeiro, Brazil (1845); Buenos Aires, Argentina (1854); Peru (1860); Rosario, Argentina; Mexico (1886); Uruguay (1867). Most other Latin American countries that created stock exchanges did so in the late twentieth century.

Infrastructure

In Latin America, the level of infrastructure is described as inadequate and is one of the region's main barriers to economic growth and development.^[6] The International Monetary Fund reports that there is a positive correlation between infrastructure quality and income levels in Latin American countries, however, countries in Latin America have lower quality infrastructure relative to other countries with similar income levels. This causes a loss of competitiveness due to the quality of physical infrastructure has been a significant drag on economic growth.^[6]

Governments play an important role in encouraging infrastructure investment. In Latin America, there are sectoral planning institutions in place across the region, but many key attributes can be improved. The International Monetary Fund found that Latin America performs poorly in the availability of funding for infrastructure and the availability of multiyear budgeting frameworks.

Latin America invests roughly 3% of its GDP into infrastructure projects.^[7] The Financial Times suggests that infrastructure spending should be at least 6% for Latin America to reach its infrastructure goals.^[7] This can be done by promoting private sector participation. The Private sector also plays an active role in supplying infrastructure. Governments in Latin America do a poor job of encouraging private sector participation.^[6] Developing financial markets for infrastructure bonds and other financial products can help governments mobilize resources for infrastructure projects while limiting their exposure to currency risk.

While infrastructure in Latin America still has room to grow, there are encouraging signs for investment in Latin American infrastructure.^[85] In 2013, private equity firms invested more than $3.5 billion in energy, telecom, and supply chain development. Governments are still looking for small partnerships between the public and private sectors to reduce inadequacies in the trade dynamic. Panama has taken steps in the direction to integrate its physical infrastructure for supply chain capacity. Panama completed the expansion of the Panama Canal to accommodate larger ships that exceeded Panamax size. In 2014, Panama built the new Tocumen International Airport and the Colón Free Trade Zone are major mechanisms to enhance supply chains in Panama.^[85]

China has had ambitious infrastructure project plans in Latin America, including a railway line linking the Atlantic and Pacific regions of Colombia, and an even longer one from Brazil to Peru, but plans have not translated to completed projects.^[86] A Hong Kong-financed project with the government of Nicaragua has plans to construct the Nicaragua Interoceanic Grand Canal Project through Lake Nicaragua, the largest lake in Central America, to compete with the Panama Canal. The Hong Kong-based HKND group the sole concessionaire.^[87]

A major international highway, completed in 2012, has linked Brazil with Peru via the Interoceanic Highway. It has economic benefits, but it also opens up areas of Amazonia to environmental degradation.^[88] Brazil has also funded a major upgrade of the Cuba port of Mariel, Cuba to handle large container ships.^[89]

Main economies in the current era

Brazil

In 2016, Brazil's currency appreciated by 30% and their stock market, the Bovespa, returned 70%.^[90] Investors do not expect a similar rate of return in 2017 but they are expecting modest returns. The Ibovespa is the largest stock exchange in Latin America, so it is often used by investors to study investment trends in Latin America.^[91] The economy in Brazil is recovering from its most severe recession since it began tracking economic data. Following Dilma Rousseff's impeachment, Brazil is experiencing a period of political certainty and rising consumer and business confidence.^[90] Unemployment is expected to increase in 2017 and inflation will slowly return to its target range.^[91]

A 2016 report on Brazil's economy suggests that Brazil’s fiscal stance is mildly contractionary which strikes a good balance between macroeconomic requirements and stability.^[91] This shows that the Brazilian government is committed to restoring the sustainability of public finance through a steady path.^[91] Fiscal adjustment will allow monetary policy to loosen and encourage foreign and domestic investment. Brazil’s rising productivity depends on the strengthening of its competition, improvement of infrastructure, and fewer administrative barriers.^[91]

Brazilian president Michel Termer and former governor of the central bank, Henrique Meirelles, have proposed an overhaul of Brazil’s economic governance.^[92] Under this plan, public spending, including the pension system, will be cut and regulations will be lifted, beginning in the oil and gas sector, which has suffered due to over leverage and corruption. Over the past 20 years, public spending has increased annually by 6%, which has grown the deficit to -2.3% of GDP for the year ending in April 2016. Prospects for the Brazilian economy have garnered hope among investors and entrepreneurs. The yield on the Brazilian bond has fallen from 17% in January 2016 to 13% in June 2016, showing confidence in Brazil’s financial future.^[92]

Argentina

The OECD expects Economic growth in Argentina to increase in 2017 and 2018 due to recent economic reforms.^[93] In 2016, Argentina reformed the national statistics agency, causing an upgrade in Argentina's credibility. This enabled the central bank to increase interest rates, contain inflation, and respond to exchange rate pressures.^[93]

The latest inflation data shows that the inflation rate will stabilize at a 1.5% month over month, with expectations anchored at 20% YoY.^[93] Inflation in 2017 is set to slow down due to a restrictive monetary policy and stable exchange rate.^[94] 2016 has affirmed the credibility of the Argentine central bank and its transparency efforts. The government is seeking to adjust wages at the level of inflation while unions are seeking for adjustments past inflation targets.

In mid-2016, Argentina saw a low point of economic activity with weak first and second quarters and strong third and fourth quarters. The decline in GDP reached -3.4% in the second quarter of 2016.^[93] BBVA research expects improvements in the coming year for industrial activity oriented in foreign markets, driven by the recovery of Brazil. Household consumption began improving at the end of 2015 due to higher retirement income catalyzed by the implementation of the historical reparations program.

In 2015, Argentina's top exports were oil-cake, soya beans, crude soya bean oil, maize, and diesel powered trucks.^[95]

Colombia

Colombia has a strong export sector, with petroleum, coal, coffee, and cut flowers the top commodities exported in 2015.^[96]

BBVA Research suggests that consumption and investment have undergone an adjustment and caused domestic demand to fall below total GDP.^[97] The economy is expected to grow at a rate of 2.4% in 2017.^[90]

Falling imports and lower profit repatriation caused the deficit to stand at 4.8% of the GDP at the end of 2016. This deficit is expected to stand at 3.8% of GDP in 2017.^[90] Current exchange rate levels will help the external deficit correct itself. In 2017, the Colombian Peso is expected to trade at 3,007 COP per 1 USD.

At the end of 2016, the Congress of Colombia approved a tax reform bill, with the goal of making public accounts more sustainable and replacing revenue that the government lost from the oil sector.^[90] This reform is expected to increase non-oil revenue by 0.8% of GDP in 2017 and will gradually increase in future years.^[90]

Recent economic data supports a slowdown of growth relative to previous estimates.^[97] This slow growth is occurring in all areas of domestic demand. Private consumption eased in line with a drop in consumer confidence and the slowdown was beyond the drop of spending in durable goods.

Mexico

Mexico's imports and exports reflect its membership in NAFTA, with significant trade with the U.S. and Canada. In 2015, the top export goods from Mexico were automobiles and trucks, petroleum, televisions, and digital processing units.^[98]

Scotiabank expects Mexico's economic growth to be largely influenced by the economic policy of the Trump Administration.^[90] The Mexican peso ended 2016 at 22 MXN per 1 USD. This forced the Mexican central bank to step in and intervene in the Foreign Exchange market. Expectations of shifts in trade with the United States, immigration, and monetary policy have caused the Mexican currency markets to be volatile, unlike other Latin American currencies that are appreciating.^[99]

Credit rating agencies have put Mexico’s sovereign debt into negative territory for 2017.^[90] The government responded by putting measures in place to improve public finances. These measures include reducing government spending and increasing the national price for fuel. Estimates for inflation for 2017 are 5.5%.^[90]

High levels of uncertainty have prevailed since the United States elections causing many global investors to delay their investments.^[99] The government’s reduction in spending is focused on the capital side, meaning that infrastructure spending in Mexico will be weak in 2017.

Solid consumption and stagnant production should converge next year as consumer spending lowers.^[99] The unemployment rate at pre-crisis levels, rising bank credit, and rising real wages indicate that consumption will cool down gradually rather than a drop sharply.

Mexico is a major producer of crude oil and natural gas.^[100] Mining is an important sector of the Mexican economy, with production of silver (world rank:1); fluorspar (world rank:2); strontium (world rank:3); bismuth (world rank:3); lead (world rank:5); cadmium (world rank:5); and zinc (world rank:7).^[101]

Tourism in Mexico is a major economic sector, with the 2017 Travel and Tourism Competitiveness Report placing Mexico at 22 of the top 30 tourist destinations in the world.

Chile

Growth in Chile's economy is projected to increase in 2017 and 2018 due to high demand for Chilean exports and an increase in investment and private consumption.^[102] In 2016, economic activity was driven by the services sector and dampened by mining and manufacturing.^[102]

An increase in unemployment is expected from 6.5% to 7.1%. the investment environment in Chile is expected to see a positive shift and will be realized by lower investments in mining, and a rebound in other sectors.^[102] Measures to increase productivity and investment will help diversify the economy and support sustainable growth. In 2016, inflation receded to 2.7%, .3% lower than the central bank’s target.^[102]

Chile is most closely associated with the mining industry, though it is not the only important industry in Chile. An eighth of the working population is employed in this industry.^[102] Codelco is the world’s biggest copper exporting company. In addition to copper, Chile also mines gold, silver, and cement materials. While Chilean administrations have been trying to diversify the economy, a strong mining industry has been the basis for financial stability.^[102]

Foreign investment

Brazil

Brazil has seen a slowdown in foreign investment after reaching a zenith of $64 billion dollars of foreign investment in 2013.^[103] Foreign investment in Brazil declined in 2016, however, Brazil is still the largest recipient of foreign investment in Latin America. Investors are attracted to Brazil because of its market of 210 million inhabitants, easy access to raw materials, and a strategic geographic position. The main investors in Brazil are the United States, Spain, and Belgium. With the impeachment of Dilma Rousseff and the embezzlement scandal behind them, Brazil is set to benefit from stronger commodity prices and attract more foreign investment.^[103] Brazil's top exports in 2015 were soya, petroleum, iron ore, raw cane sugar, and oil-cake.^[104]

Argentina

Argentina ranks fourth in South America in terms of foreign investment and sixth in terms of foreign investment influx.^[105] Argentina has access to natural resources (copper, oil, and gas) and a highly skilled workforce. In the past, Argentina has suffered from restrictions that were placed on foreign investment in agriculture, which is important for the country’s food security.^[105] Santander Bank expects Argentina to receive an influx of foreign investment thanks to the favorable business environment set by President Mauricio Macri.^[105]

Colombia

The improving security environment in has restored investor sentiment in Colombia.^[106] This has caused a growth in foreign investments, mostly in mining and energy projects. Over the past 10 years, Bogotá has received 16.7 billion in direct foreign investment in financial services and communications, allowing it to emerge as a leading business center in Latin America.^[106] BBVA Continental expects investors in Colombia will also benefit from a strong legislative framework.^[97]

Mexico

Mexico is one of the world’s main destinations for foreign investments (#10 in 2016), however, Mexico is also the country that will be most affected by protectionist American trade policies.^[107] In recent years, investments in Mexico have been hampered by the growth of organized crime, corruption, and administrative inefficiencies.^[107] In 2014, the government planned new industrial centers which would require foreign investment. Additionally, the IMF reports that the exploitation of Mexico’s Hydrocarbon reserves will require an annual investment of $40 billion from 2015-2019.^[107]

Chile

The influx of foreign investments in Chile has grown every year from 2010-2015.^[108] In terms of foreign investment, Chile is the region’s second most attractive country, after Brazil, however, the investment cycle in Chile is variable because it is linked to mining projects.^[108] Chilean economics are founded on the principles of transparency and non-discrimination against foreign investors. Investors are attracted to Chile due to its natural resources, macroeconomic stability, security, and growth potential.^[108]

Regional risks

Currency risks

Over the past five years, dollar-based investors in Latin America have experienced losses driven by a depreciation of local exchange rates.^[109] Looking forward to 2017, several factors suggest that current exchange rates will provide positive tailwinds to dollar-based investors over the next several years.:^[109]

• Local Currencies appear undervalued on a PPP basis: Latin American currencies are seeing an increase in purchasing power. Cheaper goods and services in Latin America will stimulate an appreciation in local currencies.^[109]
• Real exchange rates have declined enough to resolve Current Accounts Deficits: Low currencies are resulting in a decreased demand for imported goods and stimulus for foreign demand for exports. Cheap exchange rates have set the stage for strong trade dynamics moving forward which should increase demand for Latin American currencies.^[109]
• Commodity Prices are Rising: Commodity prices are trading at 64% below their peak in 2007.^[109]
• Interest Rate Differentials are Stimulating Capital Flows in Latin America: The monetary policies of central banks in the region are supportive of strong currency levels. Central banks have acted and raised interest rates to maintain price stability. With decreasing inflation, the real return differentials between the Dollar and Latin American currencies are attractive enough to carry trade into these local currencies and support appreciation.^[109]

Trade uncertainty

Potential import tariffs from the United States and limits on trade present significant risks for Latin American economies.^[110] Uneasiness over a United States' shift away from a free trade policy was manifested on November 9, 2016, where the Mexican Peso lost 15% of its value.^[110] The Economist warns that this knock on confidence will produce unwanted effects on the Mexican economy in the form of weak private consumption and foreign investment.^[110]

The context of potential U.S. policy shifts affecting trade will cause diplomatic relations between the United States and Latin America to be more volatile.^[110] Latin America stands to suffer from global economic repercussions of such as fluctuations in the stock and commodities market.^[110] Volatility in commodity prices, to which Latin American economies are highly exposed, could be a big shock to the Latin America's economic growth.^[110]

See also

Further reading

References