The Booming Latin American Economy, Part Three

Latin America’s economy has been booming for more than a decade, averaging 3.7% annual growth over the last ten years . 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.

The region is coming off of an economically impressive decade, but the coming decade presents a variety of challenges to that strength and growth.

Challenge to Latin America’s Economic Growth: Education

The Latin American regional economy faces several challenges to its continued growth. Perhaps the biggest roadblock is education.

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A mature economy—one that is national, regional and global—requires an educated workforce for the twenty-first century industries that will drive economic expansion. It needs managers, IT personnel, scientists, engineers, and workers to fill biotechnology, nanotechnology, and robotics positions. It needs lawyers, doctors, nurses, bankers, utility workers, and cell phone technicians.

Most Latin American workers don’t have the education and skills they need to enter, let alone succeed, in those industries. And most of the workers entering the labor force this year and next year and the decade after that don’t have them either. That is why the number of foreign workers from developed nations is growing rapidly throughout Latin America.

Not only does that hurt a country’s economy, it hurts domestic consumption which is such a vital driver of economic growth. When workers are relegated to lower income jobs, or the unemployment line, because they lack the education they need to get the higher-paying jobs and advance through the economy, they don’t have the money they need to buy the country’s goods and services. Revenues for the producers of those goods and services stagnate or fall.

The nascent middle class cannot grow without a strong education system.

Venezuela has one of the best educated populations in Latin America. In 2005, the U.N. declared that Venezuela had essentially wiped out illiteracy. In Latin America, the rate of university enrollment is just 29.6%. In Venezuela, it is 83%. Enrollment in Venezuela’s universities rose from 785,285 in 1998 to over 2.12 million in 2009. In 2010, nine new universities opened in the country. image002

Understanding the importance of technological literacy, the national government has also distributed 1.5 million laptop computers and software to schoolchildren and established more than 2,600 computer and information technology centers (CEBITs) to spread computer access and training across the nation.

On the other hand, UNESCO and the World Forum rank the Dominican Republic’s primary education dead last in the Central American-Caribbean region. The Dominican Republic requires all children to attend school through Grade Eight, and it claims an 85% literacy rate. Public schools are free, but the poor do not attend school, because they cannot afford to buy the necessary school uniforms and school supplies. The national government is required by law to allocate 4% of its GDP annually to education. It hasn’t done so yet. The 2012 budget allocated just 1.9% to education. The result is too few schools for too many students, leading to over-crowding and poor quality education worsened by the low educational levels of the teachers in those classrooms.

In 2008, students in Grades Three through Six who were tested in reading, math, and science came in last compared to 15 other Latin American countries. The Dominican Republic’s educational system is also rigged to encourage higher income students to attend college, shunting the poor aside. In rural areas, for example, compulsory education stops at Grade Five.

Challenges to Latin America’s Economic Growth:

Poverty, Commodities, and the EU and U.S. Economies

This problem of education is also a key contributor to the second roadblock standing in the way of Latin America’s economic growth: poverty. Without education and training and jobs, the poor can’t lift themselves out of poverty. Tied to poverty is income inequality. Latin America has the worst rates in the world. That income inequality both stalls economic growth and increases social unrest, which can further hurt economies.

Commodity-dependence is another regional challenge. With a decade theme of Risk, commodity prices are expected to stall over the near-term, which means commodity-dependent economies will slow or stall as well.

The U.S. and the European Union are also roadblocks to Latin America’s success—at least, their economies are.

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Both the U.S. and the EU are the primary markets for Latin American commodities and goods and their sluggish (U.S.) and crippled (EU) economies mean Latin American exports and revenues are down. The European Union’s ongoing economic crisis,for example, which is rooted in the EU’s austerity policies, means it is consuming and investing significantly less, which is slowing Latin America’s economic growth and hurting its employment rates.

Chile’s exports fell 3.2% in 2012, and its trade surplus plummeted 61%.

Brazil has been hit hard. The EU is now its main trading partner, responsible for 21.7% of that country’s total trade. The U.S. is Brazil’s largest foreign investor. With both regions struggling, Brazil has struggled, too.

For more than a decade, however, several Latin American countrieshave made a concerted effort to expand their markets and economic ties beyond the U.S. and Europe to Asia (particularly China), India, and the Middle East.image004

They are both trading with and investing in these new markets.Some economists worry that some of these countries are beginning to rely too heavily on their new partners, particularly on China. Shifting dependence from one country or region to another simply means shifting risk from one country or region to another.

Many Latin American nations and businesses are also accelerating and strengthening their regional economic and commercial relationships, which is helping them to further diversify and grow their economies. In contrast, regional trade ties are hurting Brazil. Its two major regional partners are Argentina and Venezuela, and their state-controlled economies are slowing.

Other challenges to Latin America’s economic growth include minimal regional supply chains exacerbated by poor transportation connections and a large part of the labor force in many countries that works outside of the tax system (70% in Peru) , which means a loss of tax revenues for those national governments.

Finally, while Foreign Direct Investment in Latin America grew in the previous Commodity-themed decade—it rose by approximately 6% in 2012—that doesn’t actually help the region’s economy, because it does not create new economic sectors, generate high-tech activities, or providelarge numbers of high-paying jobs.

Predicting Latin America’s Economic Future

Latin America’s economic future is tied directly to two coming changes in the United States economy that the region will have to watch closely and use strategically to wring the maximum benefits out of them.

The first change is the coming U.S. Oil Revolution. In this decade, the U.S. will become a net exporter of oil, rather than a net importer. This change will impact significantly oil revenue-dependent Latin American countries unless they can quickly find other markets, make their oil industries more efficient and productive to better compete with the U.S., and diversify and strengthen their economies. [This subject will be discussed in-depth in a future article coming soon.]image005

The second change is the transformation of the U.S. economy into an advanced manufacturing economy. Over the next decade, manufacturing will once again become an important part of the United States’ GDP, which will help the U.S. regain its economic dominance internationally.

These two changes will grow the U.S. economy significantly, and that means Americans and American businesses will have  much more disposable income. They will be poised to consume much higher levels of Latin American goods if Latin American countries have positioned themselves and their economies to take the fullest advantage of these changes.

Overall, expect generally good economic news across Latin America for the next decade. Mexico’s per capita income, for example, is projected to rise for at least the next 30 years. One reason for that rise will be the shift of off-shore jobs from China back to Latin America, especially to Mexico. The country’s status as a regional economic powerhouse will only strengthen.image006

Latin America’s new middle class will solidify and grow, spurring further domestic consumption and making many countries less dependent on foreign assistance and less willing to bow to foreign pressure, be it from a another country or an international financial group.

It gets better. By 2025, many economists predict that Latin America’s consumers will become the dominant force in their countries’ economies , which means much greater demand for a wide variety of those countries’ agricultural and manufactured products.

This new consuming class will also have a greater and greater impact on the global economy, particularly on the products and services that companies provide. U.S., EU, and Asian companies will have to transform their supplies to meet Latin America’s demands.

At the same time, Latin America’s multilatinas will become a more important force in several regions around the world, including Africa and the Middle East.

Strengthening that trend is this decade’s theme of Risk. As Latin America invests internationally, foreign investment money will continue to move away from Latin America and Asia toward the U.S. dollar, which will put a lot of pressure on the region’s commodities, like crude oil and copper, and on the region’s commodity producers from Chevron andTexaco to entire nations like Brazil and Venezuela. It has happened before, most recently in the 1990s. Because they did not understand the cyclical decade theme, many countries did not see the outflow of capital that began in 1995 as the U.S. dollar moved higher and copper and other commodity prices sank lower. That lack of understanding and preparation for that decade’s Technology themeculminated in the Asia-Russia-Brazil currency crisis of 1998.image007

It could happen again in this decade as the Canadian and Australian dollars continue to go down and their commodity prices fall further and stay down. Because these are very strong commodity countries—in fact, they lead the pack—when their prices fall, commodity prices around the world also fall, and that includes Latin America’s commodity prices.

To protect themselves and grow their economies, Latin American nations must focus on efficiency, productivity, and diversification by, for example, investing more in manufacturing and technology, which will strengthen their economies and provide an outlet for money seeking Risk—the theme of this decade. The importance of commodity exports should continue to decline as productivity, national investment in public works, and private investment grows.

In the last decade, a lot of U.S. dollars went into the world’s oil and natural gas sector. Now, those dollars are moving into other sectors, especially cyclical sectors like Autos, Construction, Housing, Retail, Capital Goods, and Transportation, which will expand the economies of developed countries, particularly the U.S. and Japan. These are the sectors that Latin American nations must also develop to reap the most benefits of this decade’s theme.

Butdon’t think Latin American commodities are down for the count. Their prices and export volume won’t rise to the heights of the previous decade, but they won’t fall into a pit either. Why not?

China, India, and the coming expansion of developed countries’ economies.

China, for example, is a huge consumer of the world’s commodities. Yes, its economy is a little shaky and uncertain right now which is impacting its imports and investments, but that won’t last. Expect China’s economy to stabilize and resume growing at its historical 10%+ strength in the Summer of 2014.

Thus, Latin America will still havemarkets for its commodity exports. While they won’t enjoy the high volume and prices of the previous decade, commodity exports will help grow the regional economy while it is maturing and diversifying with strengthened manufacturing and technology sectors.image008

The next ten years are crucial. In this decade, Japan and the U.S. will become significantly stronger economies, which will make them vital Latin American importers of the region’s goods. The EU economy, which has bottomed, will soon stabilize and begin to grow again. Latin America needs to act now to take advantage of these increasingly robust trading partners.

 

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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