Missed Opportunities: The Economic History of Latin America

IMF News, October 5, 2017

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Latin America is "home to about 600 million people" and is endowed with natural resources, fertile land, and vibrant cultures, yet "remains much poorer than its neighbors to the north."
Publication date: October 5, 2017.
The content summarizes arguments from the book The Economics of Contemporary Latin America by Beatriz Armendáriz and Felipe Larraín and an interview with Felipe Larraín.

Geography
- "Over 70 percent of Latin America is in the tropics," increasing exposure to disease—malaria, yellow fever, dengue, cholera—and greater distance from key markets.
Legal tradition
- Post-independence adoption of civil law (as opposed to common law) is argued to be less conducive to economic growth because common law systems give judges a more active role.
Agricultural structures
- Large-scale agricultural plantations in Latin America contrasted with the North’s mixed farming centered on grains and livestock and smaller units; the latter is associated with more democratic institutions, stronger property rights, and a larger middle class.
Institutional legacy
- Weaker institutional arrangements in the South relative to the North are part of the historical explanation.
Ethno-linguistic and cultural fragmentation
- Fragmentation dating to colonial times has held back development, though its effect is "much less important than in Africa, for example."

In the early 1960s, Latin America’s per capita income was "more than double that of East Asia."
Several East Asian economies (South Korea, Singapore, Taiwan, Hong Kong) that started from low income levels 50 years ago became developed nations; "No country in Latin America can be named developed, although a few are higher-middle income."
Causes of divergence highlighted:
- Latin America pursued import substitution industrialization starting in the 1950s with high protectionism; after three decades, these protected industries "didn’t grow" and left the region vulnerable to the 1980s debt crisis.
- East Asia emphasized export promotion, tax incentives to exporters, low trade barriers, fewer controls, and maintained stable macroeconomic environments (smaller fiscal deficits, low and stable inflation), and avoided overvalued currencies—factors Latin America largely failed to emulate.

Argentina (end of the 19th century): historically among the top 10 highest per capita incomes in the world but did not sustain performance during the 20th century.
Chile (since late 1980s): market opening to international trade, attraction of foreign direct investment, and social policy improvements; currently "the country with the highest per capita income in the region—about $23,000—and lowest poverty rate."

The 1980s were a "lost decade" in which per capita income at decade end was similar to its start; 1982–1984 were especially severe with deep recessions.
Post-crisis adjustments:
- The region became more outward looking and prioritised macroeconomic balances: low fiscal deficits, low and stable inflation, and avoiding overvalued exchange rates.
- Institutional strengthening included greater central bank independence (in the 1990s and 2000s) and adoption of fiscal rules to enable countercyclical fiscal policy (save during good times, spend more during bad).
These improvements helped Latin America be "better equipped to deal with more recent crises," such as the 2008–09 financial crisis and the euro zone troubles.

Export concentration:
- Mexico is "the only country in Latin America that has been able to diversify away from commodities." In Mexico, "about 25 percent of exports come from natural resources."
- "That figure is about 60 percent or higher for the rest of the region."
- In extreme cases, "like Venezuela, that figure is over 90 percent."
Policy recommendations to manage boom-bust cycles:
- Develop institutional frameworks to live better under commodity dependence.
- Implement strategies to transition to diversified economies: support for research and development, better education, and development of a more qualified labor force able to move into other sectors, including services.
- Upgrade institutions and regulations: autonomous central banks, fiscal rules, sovereign wealth funds, and independent fiscal councils to cushion commodity volatility.

Diversification away from commodities remains the first challenge; transition will take time and many countries will remain commodity-reliant.
Institutional upgrading is a second challenge: continuity of autonomous central banks, fiscal rules, sovereign wealth funds, independent fiscal councils.
Inequality: while the region has "made a significant dent in poverty," it has been less successful in reducing inequality; ensuring adequate institutions to continue fighting poverty and reducing inequality is a third key challenge.

International Monetary Fund