The cash windfall from once-in-a-generation favourable terms of trade was good while it lasted, but it is now dead and buried with only a fond epitaph to remember it by.
Australia needs better strategies to face this bleak new world. And our next policy steps could be informed by Latin America economic performance in the post-mining boom era. For one, disparate levels of resilience among Latin American countries show policy decisions matter.
Like Australia, the large continent is a big producer of commodities, which immensely benefited from the rise of China’s global appetite for energy, food and metals. Between 2004 and 2008, a substantial increase in Latin America’s export prices led to a complete socioeconomic transformation.
During this golden period in the years preceding the GFC, Latin American GDP grew at its fastest rate since the 1970s; net foreign debt in the region contracted from an average of 28.6% of GDP to 5.7% in 2008; extreme poverty was halved; job creation thrived, enriching a better educated workforce and lowering social inequality levels.
But, as Warren Buffet quipped, it is only when the tide goes out that one discovers who’s been swimming naked.
As happened in Australia, the (not-so) soft landing of the Chinese economy in recent years, and consequent decline in commodity prices, has put further pressure in the Latin American economy. The region has been in deceleration mode for the fifth successive year.
Moreover, recent prospects of rising US interest rates have inflamed widespread currency depreciation, fuelling inflation expectations and risking the region becoming trapped in a prolonged weak growth environment.
But it is a mistake to package all Latin American countries in the same parcel. Whereas some have resorted to the same old populist, pro-interventionist government policies that pervades Latin America’s history, others have learnt that a good economic policy set pays out despite short-term political costs.
For instance, let’s look at the top seven Latin American economies — Brazil, Mexico, Argentina, Venezuela, Colombia, Chile and Peru — which combined represent 90% of the region’s income.
In 2011, Chile, Colombia, Mexico and Peru established the Pacific Alliance —of which Australia is an observer member country — in recognition of their common vision for free trade movements and business-oriented reforms. These Latin America countries have been committed in past years to the establishment of the rule of law and a conducive environment for private investments, reinforced by restrained use of monetary and fiscal instruments.
Not surprisingly, even under depressing commodity prices and looming US monetary squeeze, the Pacific Alliance countries are boasting healthy growth rates, controlled inflation and minimal cyclical budget deficits.
On the other hand, Brazil, Argentina and Venezuela are reaping a tough harvest after years of bad policies.
Brazil, by far the biggest economy in Latin America, is mired in political and economic despair amid the largest corruption scandal in its republican history — with presidential approval ratings falling below the inflation rate.
In Argentina, a divided country fights a losing battle against inflation and foreign currency black market, after years of government interference in the official statistics.
In Venezuela, the incumbent government’s self-proclaimed Bolivarian Revolution to establish a twenty-first century socialist society has produced misery and authoritarian idiosyncrasies; its economy is in tatters, expected to shrink 4.5% this year with a ballooning inflation above 80% and an alarming 17% budget deficit.
These contrasting outcomes in Latin America should provide valuable lessons to Australia. The Lucky Country needs to understand that, in a world of low commodity prices, political brinkmanship and complacency towards structural reforms can erode years of good economic performance.
In order to extend our 24 years of uninterrupted economic growth, we need to advance the institutional enablers and incentives of high productivity, such as a rational tax system, competitive market environment and productive workplace laws.
For Latin America — as for Australia — this means accepting the era of high commodity prices are not going to return in the foreseeable future, but much can still be achieved through productivity-enhancing policy reforms.
Dr Patrick Carvalho is a Research Fellow at the Centre for Independent Studies and co-author of the book Great Southern Lands: Building Ties between Australia and Brazil.
Home > Commentary > Opinion > The Latin America experiment: when the tide goes out
The Latin America experiment: when the tide goes out
The cash windfall from once-in-a-generation favourable terms of trade was good while it lasted, but it is now dead and buried with only a fond epitaph to remember it by.
Australia needs better strategies to face this bleak new world. And our next policy steps could be informed by Latin America economic performance in the post-mining boom era. For one, disparate levels of resilience among Latin American countries show policy decisions matter.
Like Australia, the large continent is a big producer of commodities, which immensely benefited from the rise of China’s global appetite for energy, food and metals. Between 2004 and 2008, a substantial increase in Latin America’s export prices led to a complete socioeconomic transformation.
During this golden period in the years preceding the GFC, Latin American GDP grew at its fastest rate since the 1970s; net foreign debt in the region contracted from an average of 28.6% of GDP to 5.7% in 2008; extreme poverty was halved; job creation thrived, enriching a better educated workforce and lowering social inequality levels.
But, as Warren Buffet quipped, it is only when the tide goes out that one discovers who’s been swimming naked.
As happened in Australia, the (not-so) soft landing of the Chinese economy in recent years, and consequent decline in commodity prices, has put further pressure in the Latin American economy. The region has been in deceleration mode for the fifth successive year.
Moreover, recent prospects of rising US interest rates have inflamed widespread currency depreciation, fuelling inflation expectations and risking the region becoming trapped in a prolonged weak growth environment.
But it is a mistake to package all Latin American countries in the same parcel. Whereas some have resorted to the same old populist, pro-interventionist government policies that pervades Latin America’s history, others have learnt that a good economic policy set pays out despite short-term political costs.
For instance, let’s look at the top seven Latin American economies — Brazil, Mexico, Argentina, Venezuela, Colombia, Chile and Peru — which combined represent 90% of the region’s income.
In 2011, Chile, Colombia, Mexico and Peru established the Pacific Alliance —of which Australia is an observer member country — in recognition of their common vision for free trade movements and business-oriented reforms. These Latin America countries have been committed in past years to the establishment of the rule of law and a conducive environment for private investments, reinforced by restrained use of monetary and fiscal instruments.
Not surprisingly, even under depressing commodity prices and looming US monetary squeeze, the Pacific Alliance countries are boasting healthy growth rates, controlled inflation and minimal cyclical budget deficits.
On the other hand, Brazil, Argentina and Venezuela are reaping a tough harvest after years of bad policies.
Brazil, by far the biggest economy in Latin America, is mired in political and economic despair amid the largest corruption scandal in its republican history — with presidential approval ratings falling below the inflation rate.
In Argentina, a divided country fights a losing battle against inflation and foreign currency black market, after years of government interference in the official statistics.
In Venezuela, the incumbent government’s self-proclaimed Bolivarian Revolution to establish a twenty-first century socialist society has produced misery and authoritarian idiosyncrasies; its economy is in tatters, expected to shrink 4.5% this year with a ballooning inflation above 80% and an alarming 17% budget deficit.
These contrasting outcomes in Latin America should provide valuable lessons to Australia. The Lucky Country needs to understand that, in a world of low commodity prices, political brinkmanship and complacency towards structural reforms can erode years of good economic performance.
In order to extend our 24 years of uninterrupted economic growth, we need to advance the institutional enablers and incentives of high productivity, such as a rational tax system, competitive market environment and productive workplace laws.
For Latin America — as for Australia — this means accepting the era of high commodity prices are not going to return in the foreseeable future, but much can still be achieved through productivity-enhancing policy reforms.
Dr Patrick Carvalho is a Research Fellow at the Centre for Independent Studies and co-author of the book Great Southern Lands: Building Ties between Australia and Brazil.
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