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Will Commodity Fall Hit Latin America?

Would falling commodity prices sink Latin America's economies?

Inter-American Dialogue 

According to ECLAC, a decade of economic growth, on average, has helped lift 56 million Latin Americans into the middle class since 1999. However, some economists worry that a decline in demand for commodities, which have risen from 27 percent to 39 percent of exports over the past decade, could reverse those gains. What effect would a decrease in commodities prices have on the region? Will the newly emergent middle class slide back into poverty, or are the gains sustainable? Has deindustrialization become an urgent policy concern for some Latin American countries?   

Graciana del Castillo, managing partner of Macroeconomics Advisory Group: I am not sure whether deindustrialization has become an urgent policy concern, but it should. The sharp rise in the percentage of commodity exports is indicative of an increasing dependency on commodity prices, which are often volatile. More worrisome, commodity-related jobs, in contrast to many in the manufacturing or services sectors, are largely unskilled and badly paid. As ECLAC has also shown, since the beginning of this century, the share of medium- and high-technology manufacturing exports of the region has fallen from 44 to 34 percent. My third concern with regard to the shift toward commodity exports relates to environmental sustainability and the loss of biodiversity in the region. Having said that, commodity prices and demand for exports would collapse only if China, India and other commodity importers have a hard landing, which is not anticipated at the present time. These countries, however, will grow at lower rates in the near future. China's exports to Europe are about 20 percent, so it will obviously be affected by Europe's recession and the uncertainty with respect to the euro's future. I do not believe that the present situation has reached a point that could result in a sharp deterioration of many of the gains made against poverty in Latin America. But we need to be vigilant, given that the region still has a large percentage of the population just above the poverty line and that youth unemployment is extremely high. 

Alfredo Coutiño, director for Latin America at Moody's Economy.com: Commodities have certainly played an important role in Latin America's expansion in the last decade. However, the increasing demand for commodities only explains the region's growth above its potential rate, since the main factors propelling growth have been the increase in investment combined with some gains in productivity. Latin America has made important progress in correcting chronic economic imbalances, reinforcing macroeconomic discipline and implementing structural changes, which are the main factors explaining the strong fundamentals. In this sense, commodities have been only an addition to the region's stellar performance of the last decade. Therefore, the region's economic expansion, mostly based on the strength of its domestic market, combined with more public policies with social content, are the reasons behind the emerging Latin American middle class. Undoubtedly, a fall in commodity prices will have an impact on the region's performance, since it will restrain the availability of foreign resources. However, it will not derail Latin America's economy since its expansion is well grounded in healthier macroeconomic fundamentals. The only way people can go back into poverty is if the economy persistently performs below potential and governments fail in promoting social development through the use of public policies. Hence, the emergence of the new middle class is mostly the result of a solid expansion based on fundamentals, not on commodities. Indeed, the region needs to pay more attention to its national industry in order to avoid the risk of a deindustrialization generated not only by the commodity euphoria but also by currency misalignments. The free-market model has worked for the region, but it needs to be reinforced with more social content. 

Alicia Bárcena, executive secretary of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and member of the Inter-American Dialogue: The recent re-commoditization of Latin American exports brings many benefits. Following buoyant demand from Asia after the turn of the century, commodity prices increased sharply, which boosted regional commodity sales and raised the share of these products in total exports from 28 percent in 2000-01 to 42 percent in 2010. The price hike improved the region's terms of trade and national income, which helped to reduce poverty together with targeted public income transfers. Dynamic commodity exports to China also facilitated the region's recovery from the recent crisis. But the export re-commoditization also poses significant challenges. Besides increasing vulnerability to commodity price shocks, due both to real and speculative factors, hurting the economy and impacting the vulnerable social sectors the most, the economies' growth potential could be reduced, as productivity gains in commodity sectors may be smaller than in manufacturing. The economies' deindustrialization, linked partly to export re-commoditization, is a concern for governments in the region. Productive convergence requires efforts to strengthen a proactive industrial policy with a sectoral focus and a price structure that redirects the predominant investment patterns, and promote public investment to foster production linkages with new, more knowledge-intensive sectors. The challenge is to add value to all types of exports, including commodities. This requires active national policies, embedded in strong regional cooperation and integration schemes, to promote innovation, linkages between the export sector and rest of the economy, upgrading of small- and medium-sized firms and insertion in global value chains.

Alberto Pfeifer, president of the Fletcher Cub in Brazil and member of the Group of International Analysis at the University of São Paulo: A sudden impoverishment of the nouveau Latin American middle class is a remote possibility. Commodities prices have risen steadily in the past 20 years. Taking aside the speculative drive upwards from the first half of 2008, current figures fit very well in a stable growth path. In aggregate, according to calculations from the IMF, commodities prices doubled from 2005 to 2011. A decrease in coming months may signify an adjustment that, on average, won't significantly deteriorate the income of producers and related beneficiaries. It is hard to see a negative demand shock, since consumption of most raw materials does not seem to show signs of retreating in emerging economies and demand for these goods is basically inelastic in developed countries. The only real fear on the horizon would be a speculative run against commodities-a bet that would be counter-factual and short-lived, but could harm uninsured producers. The two other sources of maladies for agricultural producers in Latin America are natural disasters and a supply bubble, like the one that took a toll on coffee growers in the early 2000s. But regardless if commodities prices go down by 20 or 30 percent, Latin America is more resilient to deal with bearish markets for three main reasons. First, families have fewer people to take care of-demographic growth has fallen dramatically in the past 10 years. Second, families who entered middle class now know how and where look for support, either governmental or through private credit. Third, the recent income wave has given birth to new businesses and jobs that a temporary reduction in money influxes won't reverse.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter


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