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Shifting Terms of Trade for Latin America
15th July 2014
According to The Economist, the great commodity boom caused by the industrialisation of China and India provided an unprecedented boost to the terms of trade (defined as the ratio of the price of its exports to that of its imports). Yet now the commodities boom may be running out of steam, these countries face a challenge.
Oil and gas excluded, commodity prices are down by a quarter from their level of 2011, with prices of minerals falling by more than those of foodstuffs.
After growing by an average of 4.3% in 2004-11, the Latin America’s economies managed just 2.6% last year. Hopes of acceleration this year are being dashed. Brazil has had to raise interest rates sharply to contain inflation, and is unlikely to beat its 2013 growth of 2.3%. Mexico, although less commodity-driven than South America, is unlikely to do much better. Data suggest that Chile is growing at its slowest rate for four years. Even Peru, along with Panama the region’s star economy of the past decade, felt the cold draft: it expanded at 5% in 2013, down from an average of 7% since 2005.
The good news may be that Latin America saved and invested more of its windfall than in the past. The World Bank’s chief economist for Latin America points out that the investment rate in the region, at almost 25% of GDP, has at last caught up with that in South-East Asia. Most countries have paid down debt and accumulated reserves.
Investment as a % of GDP
Saving as a % of GDP
The authors argue that the biggest threat to financial stability is a sharp slowdown in China. Commodity prices are still above their average of the past ten years. Were China’s growth rate to dip below 7%, that would soon change.
Latin America must look more to productivity improvements to boost GDP. Productivity has improved a bit, but still lags behind Asia’s. The reasons for this shortfall are thought to be relatively poor education, a lack of innovation by Latin American firms of all sizes, poor transport networks and a lack of competition, especially in services. Another big handicap is the large informal economy.