A few weeks ago I had the pleasure of sharing the lectern in Bogota with Dr. Augusto de la Torre, the World Bank’s chief economist for Latin America, at the Universidad de los Andes’ School of Government, which is led by Colombia’s former energy minister Carlos Caballero Argáez.
As always, and as was to be expected, Dr. de la Torre presented clear and incontrovertible ideas on the current situation — and the future — of Latin America.
The current economic and social situation of Latin America, certainly one of the most benevolent in the region’s recent history, is based on great advances made in two of the three vertices of a hypothetical triangle, Dr. de la Torre said. The first vertex is macroeconomic stability. The countries of Latin America, perhaps with the exception of Venezuela and, to some extent, Argentina, subscribe to the basic concept that without the implementation of strong macroeconomic policies, economies — and therefore countries — simply cannot move forward, Dr. de la Torre explained. Low inflation and the control of public-sector deficits, tied to more flexible management of the exchange rate and monetary policy, have without question helped increase the region’s growth potential.
The second vertex is the social situation. With few exceptions, the region has reduced poverty in a concrete way over the past 10 years. The World Bank estimates that 60 million Latin Americans moved out of poverty during the decade. This decrease in the ranks of the poor is largely because of higher raw-material prices, the implementation of better macroeconomic policies, and the adoption of public policies focused on reducing abject poverty, such as “Families in Action,” the “Head of Household Plan” or the famous “Bolsa Familia” in Brazil.
The third vertex of the triangle is the growth potential. This is where Latin America has failed to make the “leap” that emerging Asia, for example, already has. This is the most important barometer that supports the World Bank’s analysis. Brazil’s economy is currently overheated, even though the country’s GDP grew by an annual average of only 4 percent over the past eight years. Argentina suffers from the same problem as Brazil, with wages increasing by 30 percent year over year. Venezuela clearly is in a total state of stagflation.
Dr. de la Torre describes the concept of low potential growth in colloquial terms as: “Latin America is like a Lada, while Asia is like a BMW.” The Lada is overheating at 80 kilometers an hour while the BMW can go as fast as 230 kilometers an hour without problem. The BMW is a better car. And Asia’s economic system is better than Latin America.
What is the main reason behind this incontrovertible fact, according to the World Bank? Simple: The quality of education is very poor. Children do not learn enough math, and therefore the region does not graduate enough engineers. The second reason is the bureaucracy, with many processes greatly increasing the cost of doing business. To change the “Lada” to a “BMW,” the region needs to grow at least 2 percentage points faster (on average). It needs to increase the rate from 4 percent to 6 percent, at least. Those two additional percentage points are worth gold.
Suffice it to say that in the game of numbers, if a country grows by 4 percent, it will take 18 years to double real GDP. If it grows at an average of 6 percent, GDP will double every 12 years. Achieving such a growth acceleration will depend on the political will of the current leaders.
It’s not so hard. More and better math. More international trade. And a lot less red tape and bureaucracy. Simple, really…
Alberto J. Bernal-León is head of research at Bulltick Capital Markets. Follow him on Twitter
About the Author: Alberto J. Bernal-León is head of research at Bulltick Capital Markets. Follow him on Twitter @AlbertoBernalLe.