Why the Sharp Cooloff in Latin America?

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A lengthy, new report from the Brookings Institution and Ceres of Uruguay identifies a troubling trend across Latin America.

In contrast with the 6.6 percent average growth rates prevailing between [the “Golden Years” of] September 2003 and September 2008 . . . LAC-7* GDP growth rates in 2012-2013 are decelerating significantly and reverting back to their historical average of 3.7 percent displayed over the last 20 years. Moreover, growth rates are cooling off in almost every major country in the region with the notable exception of Mexico.

cooling offThis trend is particularly difficult to explain, because economic conditions such as higher foreign investment, higher commodity prices, and lower borrowing costs are on the side of these nations rather than against them.

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The authors of the report, Ernesto Talvi and Ignacio Munyo, believe a form of diminishing marginal returns has set in. The incremental benefits from foreign investment, for example, have waned, and perhaps “production possibilities are being exhausted” on account of limited or deficient “physical and technological infrastructure and human capital.”

[T]he cooling-off we are seeing today is the natural and predictable outcome of external conditions that remain very favorable for the region, even more favorable than those of the Golden Years, but that have ceased to improve. Given the complex dynamics that link external factors with regional growth rates, the effect of past improvements in external conditions is fading away.

The implication from this finding is less than pleasant. Given that the region’s growth rates are slowing down significantly in spite of a favorable external environment, the authors foresee the lower rate of growth as a “new normal,” even if external conditions remain favorable.

My own take is that their analysis suggests at very least a catch-up or lag period, as particular elements of the economy adapt to greater production needs. There are, however, very positive developments to suggest people are recognizing the gaps, from the promise of a new canal across Central America to heightened immigration and new startup hubs.

* LAC-7: Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.

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