The Booming Latin American Economy, Part One

As the United States slowly pulls itself further into economic recovery and the European Union continues to struggle with austerity and recession, most people look to Asia, particularly China, for economic strength and growth.

They should be looking closer to home.

Latin America’s economy has been booming for more than a decade, averaging 3.7% annual growth over the last ten years[i]. It weathered the 2008-2009 economic crisis and Great Recession far better than developed nations and returned to growth faster, enjoying a 5.9% rise in economic growth in 2010 and 4.3% in 2011.[ii]

Economists expect Latin America’s GDP to expand by 3.2%to 4.0% this year[iii]. Many countries will do even better.

Economy Envy

Most people think of Brazil as Latin America’s economic juggernaut. After all, it supplanted the U.K. as the world’s sixth largest economy in 2011[iv]. But it is the smaller nations like Chile, Panama, and Peru that are the true economic stars of Latin America.

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For the last decade, Colombia has enjoyed a 4.5% annual growth rate[v].

Panama’s economy grew 10.7% in 2012. The U.S. economy, in contrast, grew by just 1.5%. Even El Salvador did better than that with a 1.6% growth rate.[vi]

The U.S. economy is expected to grow by 2.4% in 2013[vii]. Brazil’s economy will do better, growing by 2.5% this year.[viii]

Mexico will expand by 3.5%. Colombia’s and Uruguay’s GDPsshould grow by at least 4% this year.[ix]

The economies of Peru and Haiti—yes, Haiti—are expected to grow by 6% this year.[x] In fact, Bloomberg Markets has declared that Peru is the world’s fourth best emerging country in which to invest.[xi]

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Meanwhile, Panama’s economy is expected to expand another 8% in 2013, and Paraguay’s economy will grow by a whopping 10%.[xii] That’s even better than China’s predicted 8% growth rate this year.

Want further proof of Latin America’s economic strength? In April 2013, the U.S. unemployment rate fell to 7.5%. Chile, however, has reached a 40-year low unemployment rate of 6.1%.[xiii]Both Mexico and Ecuador are doing even better with a 5% unemployment rate.[xiv]

The word “deficit” appears in a lot of headlines in the U.S. and European Union. In 2011, the U.S. had an 8.7% of GDP deficit and the EU had an average deficit of 4.1%. Within the EU,Spain had an 8.5% deficit, the U.K. had 8.3%, and Ireland had a troubling 13.1% deficit.[xv]

Latin America’s average deficit in 2010 stood at just 2.9%, an increase over 2009 due primarily to national economic stimulus programs. In 2011, the region’s deficit dropped to1.5%[xvi], nearly six times less than the U.S. deficit.

What Does the Decade Theme Have to Do With Latin America’s Strong Economy?

What is driving this economic strength and growth? It starts with the “decade theme”—the dominant international economic and stock market trend of a particular decade.

The governments of most countries don’t seem to be aware of the decade theme, its importance to their economies, or how to use the decade theme to grow their nations into regional, even global, economic powerhouses. [Look for a future article on this subject soon.]

What is the decade theme? It is an international money cycle. Essentially,it indicates where investment money is going. Helping us to identify what the theme has been in the past and what it is today is the price action of four currencies: the U.S. dollar, the Canadian dollar, the Australian dollar, and the Swiss Franc.

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Money never stays in the same place from decade to decade, and the price trend of those four currencies changes each decade, too. That is why each decade has its own theme:

1960s—Money moved into large cap companies with high dividends. Those companies dominated the stock market.

1970s—In a decade beset by runaway inflation, money moved into hard assets, which meant high gold and commodity prices.

1980s—The “Japanese Miracle” decade, which drove the Japanese stock market and the world’s (particularly America’s) real estate prices sky high. It seemed as if Japan’s economy would conquer the world.

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1990s—Money poured into the Technology sector, which experienced phenomenal growth.

2000s—The “Chinese Miracle” decade, which saw China’s economic ascendance as the dollar left the U.S. (investment money moved abroad, particularly into Asia, which helped to drive the Chinese Miracle). This was also a Commodity-theme decade that saw a boom in commodity demand and prices with a concomitant boom in the economies of emerging commodity-driven markets, like Latin America.

2010s—The dollar has returned to the U.S. and money has moved into Risk. Commodity prices are down and will stay down, because the Commodity theme ended in 2012.

Why is the decade theme important? It has been a major factor driving Latin America’s strong economic growth.

Up until this decade, Latin America’s economy was primarily commodity-based. The global market’s hunger for commodities in the 2000s, particularly China’s demand,was the foundation for Latin America’s economic boom. In addition, the dollar left the U.S. in the 2000s in search of growth. It had to go somewhere and where it went was Asia and into hard asset countries in Latin America, as well as Australia and Canada, both of whose commodity-based economies also did extremely well in the 2000s.

Now that the dollar is returning to the U.S. and this decade’s theme is focused on Risk, money won’t be flowing into Asia and hard asset countries as much as it did in the previous decade. Latin American nations (and Australia and Canada) are commodity-rich and unfortunately they will continue to rely on those commodities. What they should do instead to manage their economic growth is todevelop their other economic sectors and expandtheir own internal consuming economies, as China and India have been doing.

This change in theme also means that Foreign Direct Investment (FDI)—particularly the U.S. dollar—will be shifting from developing countries to developedcountries in this decade. Reduced FDI in Latin America means that, to continue to grow economically, these countriesmust focus on investing in themselves—in public infrastructure, education, health care, economic diversification, increased exports, and stronger tourism.

Latin America Eats Its Spinach

The decade theme wasn’t the only driver of Latin America’s economic boom over the last 10 to 15 years. How else did Latin America turn into an economic Popeye, and why is the region’s economy expected to only get stronger in the coming years?

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First and foremost it is because of accelerating domestic consumption. Latin Americans in greater and greater numbers are buying the goods and services their countries’ companies are producing and the food their farmers are growing, in contrast to the European Union where per capita consumption has been stagnant for more than 25 years[xvii]—yes, since well before the onset of the Great Recession.

Driving this domestic consumption is a growing labor force comprised of Latin America’s X, Y, and Millennial Generations, people in their teens, twenties, and thirtieswhose incomes are rising along with their expectations of even greater earnings and a middle class lifestyle.[xviii]

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Feeding those expectations is telecommunications, courtesy of both foreign and home-grown companies. According to a study by the McKinsey Global Institute, the second highest social-network penetration in the worldin 2010 was in Brazil.[xix]The world is coming to Latin America—even to remote villages—via cell phones and the Internet, and Latin Americans want the best of what they see, from better educations to a new refrigerator or car.

The second force driving Latin America’s economic growth and both feeding and building on its growing domestic consumption is the transformation of several countries—particularly Brazil, Mexico, Chile, and Peru—into mature markets.[xx]While commodities—agricultural products, oil, minerals, etc.—are still a strong aspect of their economies, these countries are also manufacturing, selling at home, and exporting products. Industries like construction, telecommunications, chemicals, and steel are growing within their borders. Latin American multinationals, known as “multilatinas,” are expanding in both numbers and financial strength. They are investing outside of Latin America in Africa and Asia. Banco BTG Pactual, which is Brazil’s investment bank, is pumping $1 billion into an African investment fund. That $1 billion was capitalized by regional investors.[xxi]In fact, the amount of Latin America’s outward Foreign Direct Investment has more than quadrupled in the last thirteen years.[xxii]

Hand in hand with that market maturity, and providing the third catalyst for Latin America’s economic growth, is globalization, which has spear-headed market capitalism in many nations and enabled the spread of the region’s goods to countries around the world. The U.S. and European Union are no longer Latin America’s only markets. Asia, for example, is a growing consumer of Latin American commodities and products. China, not the U.S., is now Brazil’s Number One trading partner, and it is Number Two for Colombia and Venezuela.[xxiii]

Fourth, Latin American nations are investing regionally and enacting trade and government policies to further regional market integration. The Pacific Alliance, for example, is a business-driven organization with Chile, Colombia, Mexico, Peru as founding members and Costa Rica and Panama waiting in the wings. Its mission is to establish a common market, support and accelerate regional integration, and spur inter-regional trade, which stands now at just 27%. These member countries may not be as large as Brazil, but together they are a powerful force. Their GDP growth between 2011 and 2012 was 4.6% compared to Brazil’s 1.8%. They exported $545 billion of merchandise to the world in 2012, while Brazil sent just $243 billion worth of goods.[xxiv]

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While Brazil is looking more inward economically, Pacific Alliance members arerevamping and creating new regional trade agreements and standardizing market and trade rules. Chile, Colombia, and Peruhave created a regional stock market. The Pacific Alliance should also drive the development of what is now minimal regional infrastructure, from roads to railways and ports, to better expand regional trade. Member countries are also firmly entrenched in globalization, removing barriers to world trade and actively strengthening and widening their ties to foreign markets.[xxv]

A fifth Latin American economic driver is government. In many countries in the region, government has adopted market-oriented policies, changed unsuccessful trade programs, and enacted policies to control national deficits and keep inflation rates and interest rates low which have strengthened their economies and attracted national, regional, and international investment in those countries.[xxvi]

Sixth, unlike the European Union and the U.S., in most Latin American countries, banks are lending to private households, which is furthering domestic consumption.[xxvii]

 

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Seventh, in many countries, unemployment rates are relatively low, particularly when compared to developed nations.

Latin America’s strong economic growth is, in turn, driving two momentous economic changes throughout the region.

Plummeting Poverty and a Growing Middle Class

According to the World Bank, between 2002 and 2008 the number of Latin Americans living in extreme poverty—defined as someone living on less than $4 a day—fell from 243 million to 179 million. For the first time in Latin American history, the very poor comprise less than one-third of the total population.[xxviii] The number of people in the region living in extreme poverty should fall even further in the next decade.

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Latin America has never had a middle class, which isdefined by the World Bank as a daily income of $10 to $50 per person. Now, approximately 30% of Latin Americans—50 million people—have reached that once inconceivable status thanks to changing social policies and the region’s economic growth.“Most countries in the region are on their way to becoming middle-class societies,” the World Bank declared in a November 2012 study.[xxix]That is why domestic consumption has become so strong in so many Latin American countries.

The region’s economic growth and rising middle class have done something equally remarkable: Latin America is the only region in the world where income inequality is narrowing, according to the World Bank report. Between 1995 and 2010, more than 40% of Latin Americans moved into a higher economic class.[xxx]

In Part Two, we’ll look at the region’s economy country-by-country, and in Part Three we’ll discuss the challenges Latin America’s economy faces and give you predictions about the region’s economic future.

Author Bio: Frank Liz is the founder of the Adimir Institute of Financial Education, a futurist, an entrepreneur, a teacher, and an author. He wrote the best-selling book The Millionaire Within You and the forthcoming Starving For Answers: How Climate Change, Ignorance, and Greed Are Creating a Century of Hunger . . . and What We Can Do About It Now. He has taught 30,000 people around the world how to invest successfully in the stock market.

 

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