There is increased concern these days about the future of middle-income countries, such as those in Latin America. Some analysts now place three of the Brics economies – South Africa, Brazil and India – among the Fragile Five. Some analysts seem to have forgotten that this time last year emerging markets were stabilizing the global economy while developed markets wobbled.
But, as Albert Einstein once said, memory is deceptive because it is coloured by today’s events. And clearly today’s events are very different from those a year ago. Signs of a recovery in advanced economies are visible and there is no longer talk of a fiscal cliff in the US or of downgrades of the UK by rating agencies.
In fact, since the beginning of the year the US Federal Reserve has been tapering bond purchases that have led to sell-offs in emerging markets. Signs of a US recovery and improved conditions in the eurozone are now attenuated by new concerns over a Chinese slowdown and the end of the commodity boom central to many emerging, commodity-rich countries.
So as the global economy seems to turn back to a new normal, the question is whether the emerging economies will recede to their former secondary role. The answer will depend on how much emerging economies changed by taking advantage of the good times.
Latin America is a case in point. The region has not squandered the commodity boom, although it could have done more, for sure. But it was not a wasted bonanza. Crucially, the region’s rates of investment have caught up with those in East Asia. These investments as a percentage of GDP are around 24%, with Peru at 29%, Chile 26% and Colombia 25.5%.
This has led to improvements in education and infrastructure. In Argentina, Chile and Mexico, for instance, access to tertiary education rose by more than a third during the boom years. Also, for every 100 people in Latin America, mobile phone connections rose on average from 20 to 120, with many now having more than one cellular phone subscription.
With capital flows to the region diminishing, many countries can now ‘afford’ to let their currencies depreciate and thus cushion the blow. In addition, debt denominated in foreign currency declined as a share of GDP by nearly two thirds, from 22% to 8%. Reserves as a share of monthly imports rose during the boom years, giving significant breathing space to authorities. In Brazil, reserves went from 7% in 2000 to 19% in 2012.
Furthermore, and contrary to many assumptions, Latin American export diversification did not suffer as much as it was feared during the boom years. According to a UN measure of the potential number of products an economy can export, Argentina, Brazil, Colombia, Mexico and Peru already export more than 86% of their potential.
All this is not to say that the region can now simply sit back and relax. As global tailwinds are gradually replaced by headwinds – whose intensity is hard to predict – leaders in the region are fully aware that social progress of the recent past will require a harder push in the near future. If our focus on boosting productivity was crucial during the boom years, it is even more crucial now.
The quality of investment in education and infrastructure, for instance, is ever more critical. While Latin American adults have increased their years of schooling significantly, the region still faces a shortage of skills demanded by the global marketplace. While infrastructure investment has made a dramatic difference on some fronts, logistics remains a significant bottleneck.
Today, the level of satisfaction with the region’s railways, roads and warehousing is the lowest among all developing regions, according to the new Logistic Performance Index issued by the World Bank earlier this month. The region’s innovative capacity also remains a challenge. In part due to managerial practices, the number of new products introduced, the speed of growth of surviving firms or the levels of research and development, the regions’ firms tend to score lower than in other regions.
The commodity boom, combined with good macro and social policies has also helped to drive down poverty and inequality. The share of the region’s 600 million people living in extreme poverty (less than $2.50 a day) was cut in half between 2003 and 2012 and now is around 12%. The region’s notorious inequality has also been eroded over the last decade as the Gini measure of income inequality fell from 56 to 52.
Nonetheless, the region remains the most unequal in the world, and the decline in inequality may be stagnating. Therefore, the focus on continuing to reduce inequality is only right. And while more equal societies tend to grow faster, it is also true that the pursuit of more equal societies does not in itself result in more growth.
The good news is that it doesn’t have to be an either or. The region’s record tells us that a new balance with people at the centre is possible. This time it will require additional efforts and reforms.
Hasan Tuluy is World Bank regional vice president for Latin America and the Caribbean