The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’
For all the Marquezian dramas of civil and class war, colonialism and corruption that have wracked Latin America, history shows that its economic fate rises and falls with just one thing: the prices of oil, iron ore, copper and other commodities.
Now, despite a recent dip, commodity prices are up sharply since early last year, but Latin economies are not. They are expected to shrink by 1 per cent this quarter as the global economy expands by 5 per cent. Plot commodity prices against Latin American GDP growth and lines that moved together for decades have suddenly parted ways. Why? The pandemic and populism.
Seven of the world’s 10 highest Covid-19 death rates are in Latin America. The toll is fuelling support for anti-establishment politicians in an unusually busy campaign period, with 11 Latin countries holding elections this year. Brazil and Colombia follow next year. In many cases, the right was in power when the pandemic hit, so rising discontent is benefiting candidates on the left or the far left.
A Marxist-Leninist is poised to become Peru’s next president. A communist is among the frontrunners to replace right-of-centre Sebastián Piñera in Chile. Violent protests against Colombia’s government are improving prospects for its leftwing rivals. In Brazil the posturing of rightwing populist Jair Bolsonaro is helping his radical alter ego, ex-president Luiz Inácio Lula da Silva, establish a lead in the polls.
Fear of what comes next is holding back investment at a vulnerable time. The 2010s were a lost decade. Growth was undermined by falling prices for commodities, which make up more than half of exports in most of the region’s economies. Foreign investors started to shy away from Latin American stocks and bonds when commodity prices collapsed, and have yet to return. Pessimism shrouds the continent.
Over the long term, commodity prices rise no faster than inflation, and that has left resource-dependent Latin America essentially dead in the water. My research shows that Brazil, Chile, Mexico and Colombia are no richer in per capita income, relative to the US, than they were in 1850 (when comparative records begin). Argentina, Peru and Uruguay are significantly poorer. The average Argentine income is now 33 per cent of the average American income, down from 55 per cent in 1850.
Nonetheless, in decades when commodity prices boomed, so did Latin America. When prices rose sharply in the 1970s and 2000s, so did the pace of growth, and the number of the region’s economies growing fast enough to see their average incomes converge with the US. In decades when commodity prices stumbled, so did Latin America, most recently in the 2010s.
Given the cyclical nature of commodity prices, however, a bad decade was often the harbinger of a better one to come. In the 2010s weak prices discouraged investment in oilfields, mines and other raw material production worldwide. Supplies are tight, inventories are low. As the global economy rebounds, demand is rising for commodities of all kinds, particularly those required in electric cars and greener homes and buildings.
Recent wobbles aside, commodities appear to be entering a new “supercycle” of rising prices. Latin American countries, as major exporters of soyabeans, green metals and other commodities, should benefit more than most. Peru and Chile alone supply 40 per cent of the world’s copper.
The hope for the region is that the commodity boom proves strong and long enough to overcome doubts about the new wave of populists. Financial crises have a way of moderating the behaviour of even the most committed radicals.
Lula took office after the crises of the 1990s and surprised many by focusing, at least in his early years, on keeping inflation in check and controlling his spending impulses. In Mexico, President Andrés Manuel López Obrador has borne out investor fears in many ways save for a critical one: budget discipline. His refusal to spend heavily on pandemic relief has alarmed some but left Mexico less indebted than many other emerging nations.
The current crop of socialists and communists could prove less successful at the polls or less radical in office than widely feared. If the political dramas do recede, Latin America would be free to be itself; a region of commodity dependent economies, rising with global prices, so long as the upward swing lasts.