The good economic fortunes of the United States have been rough on Latin American economies. Steady job growth and good performance in the retail, automotive, and housing industries have lured investors from all over the world to invest in the American economy.
The Federal Reserve recently announced it would raise interest rates to facilitate transfer of assets into the US from Latin American countries like Mexico and Brazil. According to Grupo Financiero Banorte there has already been 6 billion dollars of “capital flight” (an economics term for the quick movement of liquid assets out of a country) from Latin America just this year.It’s natural for international investors to prefer investing money in more stable economies like that of the United States. However, there are other factors forcing investors to retract their money from Latin American economies: drops in commodity prices, unsafe working conditions, growth of the Chinese economy, and in some countries, political unrest. As a consequence of this new economic crisis, countries like Argentina, Brazil, and Venezuela, all of which heavily depend on Chinese exports, have fallen into recession this year. The currencies of almost all Latin American countries have lost relative value and unemployment in some countries, such as Brazil, stands at more than seven percent.
How is it possible that a region rich in natural resources, like Latin America, is again facing economic turmoil? How can these countries solve this problem?
One of the main causes of Latin American economic unrest is widespread reliance on exporting commodities like oil, grain and minerals. These commodities are essential for growing economies like those in China and industrialized regions like the US and Europe. But commodities are cheap and the majority of people that labor in the commodities market earn small wages. For example, according to journalist Andrés Oppenheimer, just one percent of the money spent on a cup of Starbucks coffee goes to coffee producers in Latin America, Asia and Africa.
The value of commodities tends to be low, and now that China’s economy is decelerating, the demand for products like oil and grain has decreased. Latin American countries need to stop relying so much on foreign commodities; the more they do, the more they are dependent on other countries. Latin America should focus on things like technology and improving service industry quality.
Other countries with minimal resources such as Japan have achieved economic prosperity exporting high-tech products like robotics, cars and digital appliances across the whole world.
Unlike commodities, the value of these products is not so volatile. Plus the working conditions for people laboring in the tech industry are better than the working conditions of plantations in Latin America. To develop its technology industry, Latin America will need to invest heavily in education and improve its legal and bureaucratic systems so businesses can grow.
In the Forbes Best Countries for Business Ranking, just one Latin American country is in the top 50 (Chile, in 29th place). The difficulty of starting a business in Latin America is a major obstacle for local entrepreneurs. It’s bad for the economy, not only because many good business ideas never come to fruition, but also because the people who decide to start businesses often do so illegally, evading taxes as a result.
It’s not all bad news for Latin America, though. The devaluation of currencies has boosted exports in many countries, and analysts expect the rise in exports to cause wage increases in some industries. Other industries like tourism have also benefited from currency devaluation. Mexico has seen a record cash influx of 16 billion dollars from tourism and expects the industry to grow by 6.1 percent this year. Cuba also saw improvement in its tourism industry. According to the National Office of Statistics of Cuba, tourism coming from abroad rose by 17.2 percent this year.
However, tourism in Latin America is still heavily dependent on the economic performances of foreign countries like the United States. To stop depending so heavily on other countries Latin America needs to diversify its economies, invest in education and facilitate the creation of business that can help the economy grow and give more economic power to such a rich region.