For my english project, I will edit the article on "Latin America". The section on the economies of Latin America is very short and doesn't talk about the political, fiscal, and monetary factors that influence Latin American economies. This article only talks about the economy during the cold war. I would like to add a whole subsection titled "Economy" and then include subsections for every country, since every country is subject to different macro environments.
What is currently there
Currently, there is a short paragraph stating what Goldman Sach's forecasts for the economy are along with numerical data for population and GDP. There is also a paragraph about how the economy has developed and what the standard of living is.
What I want to do
The information currently on the article is good, but I want to add and expand on it. I want to go into the specifics for the region's major economies (Colombia, Brazil, Mexico, Argentina, CHile) and include forecasts for where the economies are headed. I would make sure to include strong sources such as reports from banks, reports from government organizations, and quotes from experts in the field. I also want to study economic indicators such as GDP, unemployment, and inflation over a period of time and understand what macro factors are responsible for changes in these indicators.
Bibliography
- Breard, Pablo, Mario Correa, Guillermo Arbe, and Benjamin Sierra. "Latin America Capital Flows." ScotiaBank's Global Outlook.
- Faruqee, Hamid. Regional Economic Outlook Western Hemisphere . Place of publication not identified: Intl Monetary Fund, 2016.
- Tellez, Juana . "Colombia Economic Outlook." BBVA Research, June 1, 2016.
- "Mexico Economic Overview." The World Bank. September 16, 2016. Accessed February 6, 2017. http://www.worldbank.org/en/country/mexico/overview.
- "Chile Economic Forecast ." Organization for Economic Cooperation and Development. November 1, 2016. http://www.oecd.org/economy/chile-economic-forecast-summary.htm.
- “Brazil Economic Overview." Organization for Economic Cooperation and Development. November 1, 2016. http://www.oecd.org/eco/outlook/brazil-economic-forecast-summary.htm.
- Breard, Pablo. "Peru Executive Briefing." ScotiaBank's Global Outlook, November 1, 2016.
- Parodi, Edda. "Latin America and Caribbean Overview ." World Bank. October 14, 2016. Accessed February 6, 2017. http://www.worldbank.org/en/region/lac/overview.
Update: I will be creating a new article titled "Latin American Economy"
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The Latin American Economy is largely an export based economy that comprises 12 nations and 633 million people[1]. The total Gross domestic product of Latin America in 2015 was 5.3 trillion USD. The main exports from Latin America are agricultural products and natural resources such as copper, iron, and petroleum.
The Latin American economy contracted 0.7% in 2016[2]. Morgan Stanley suggests that this drop in economic activity is a combination of low commodity prices, capital flight, and volatility in local currency markets[3]. Analysts are expecting Latin American economies to grow substantially in 2017.Credit agencies have been cautious in Latin America and have maintained negative outlooks on Brazil, Mexico, and Colombia. The International Monetary Fund suggests that External conditions influencing Latin America have worsened in the period from 2010-2016, but will show growth in 2017[4].
Historically, Latin America has been an export based economy and seen as a good source of raw materials and minerals[5]. Over time, Latin American countries have focused their economies on export and made efforts to integrate their products into global markets. Latin America's economy is composed of 2 main economic sectors: Agriculture and Mining. Latin America has large areas of unexploited land that are rich in minerals and other raw materials. Also, the temperate climate of Latin America makes it ideal for growing a variety of agricultural products.
Infrastructure in Latin America has been classified as subpar compared to economies with similar income levels[6]. That being said, there is room to grow and some countries have already taken the initiative to form partnerships with the private sector to increase infrastructure spending[7].
The main economies of Latin America are Brazil, Argentina, Colombia, Mexico, and Chile. These economies have been given positive outlooks for 2017 by Morgan Stanley researchers[3]. The Latin American economy is largely based on commodity exports, therefore, the global price of commodities has a significant effect on the growth of Latin American economies. Because of its strong growth potential and wealth of natural resources, Latin America has attracted foreign investment from the United States and Europe.
History
editPre-Independence (1700-1826)
editBeginning in the early 1800's, Latin America was exploited for its resources by the Spaniards and the Portuguese. Any economic growth and development of industries was the direct result of foreign investment by other world powers[8].
Post-Independence (1826-1850)
editFollowing the independence period (1826-1850), Latin America faced many economic obstacles[5]. Creoles in Latin America expected the lack of colonial constraints to stimulate the Latin American economy, however, the economies were less integrated and less productive than they were in the colonial period. Political instability was the cause of this situation in Latin America. The cost of the independence wars and the lack of a stable tax collection system left the new countries in tight financial situations. Even in places where the destruction of economic resources was less common, disruptions in financial arrangements and trading relationships caused a decline in some economic sectors[5].
Following the independence battles, Latin America encountered other difficulties. The independence from Spain and Portugal caused the breakdown of traditional commercial networks. The entrance of foreign Merchants and imported goods led to competition with local producers and traders. Very few Latin American exports found world markets favorable enough to stimulate local growth. Latin America also received very little capital from other countries which caused the debt from the independence wars to increase.
The New Order (1850-1910)
editThe second half of the 1800s represented a fundamental shift in the new developing Latin American nations. This transition was characterized by a re-orientation towards world markets[5]. When Europe and North America experienced an increase of industrialization, they realized the value of the raw materials in Latin America. This shift caused Latin American countries to move towards export economies. This economic growth also catalyzed social and political developments that constituted a new order in Latin America.
New Order Emerging (1910-1945)
editDuring the World War I period, few Latin Americans identified with either side of the conflict[5]. The only country to enter the conflict was Brazil, which followed the example of the United States and declared war on Germany. Despite the general neutrality towards the conflict, the war affected all of Latin America due to the disruption of trade and capital flows. The countries that were most affected were those that developed significant trade relations with Europe. Argentina, for example, experienced a sharp decline in trade as the Allied Powers diverted their products elsewhere and Germany became inaccessible.
These disruptions were temporary and set Latin America for strong growth following World War I. Many countries capitalized on the demand for their products in the warring countries. Postwar booms and busts occurred all over the region. For example, in Cuba the price of sugar reached 23 cents per pound in 1920, and then fell back to 3.5 cents per pound as the production of European sugar returned to normal[5]. These booms and busts demonstrated the implications of an economy that is highly dependent on global markets.
The 1920s were a period of growth and optimism for Latin America. Countries in Latin America continued to pursue export-oriented growth strategies and foreign investment increased on a massive scale, coming mainly from the United States, whose investments in Latin America rose from $1.6 billion in 1914 to $5.4 billion in 1929.
Economic Sectors
editAgriculture
editLatin America produces and exports a diverse range of agricultural products such as Coffee, Bananas, and Beef[9]. Latin America accounts for 16% of the world’s food and agriculture production. Brazil and Argentina lead the region in terms of net export due to high grain, oilseed, and animal protein exports[9]. The structure of the agriculture sector is very diverse. In Brazil and Argentina large farms account for most of the commercial agriculture, but in the rest of Latin America, more than 50% of production comes from the region’s small farms.
Global demand for agricultural products is rising with the world’s growing population and income levels. By 2050, the world’s population is expected to reach 9 billion people and the demand for food is forecast to be 60% higher than it was in 2014[9]. Distribution of unexploited land in Latin America is very uneven, with Brazil and Argentina having the most access to additional land[9].
Rabobank reports that Latin American has achieved rates of agricultural productivity that are above the global average, however, there is a lot of variation in the performance of the individual countries[9]. For the large commercial farms, investment in precision agriculture and Plant breeding techniques will lead to an increase in productivity, and for small-scale farms, access to basic technology and information services will lead to an increase in productivity[9].
Mining
editLatin America produces 45% of the world’s copper, 50% of the world’s silver, 26% of the world’s molybdenum, and 21% of the world’s zinc[10].
Half of the participants in a BNAmerica’s mining survey believe that political and legal uncertainty will slow mining investment in Latin America in 2017[11]. However, individual countries have implemented changes that could improve conditions for mining companies in 2017. For example, in Argentina, discussions are underway in the Chubut Province to lift the bans on open pits and Cyanide use.
Costs related to labor, energy, and supplies have increased for Latin American mining companies[11]. Thus, many companies are focused on reducing costs and improving efficiency to achieve growth. Some companies are looking towards consolidation, automation, and owner-operated mines to lessen the impacts of rising costs[11].
Infrastructure
editIn Latin America, the level of infrastructure is described as inadequate and is one of the region's main barriers to economic growth and development[6]. The International Monetary Fund reports that there is a positive correlation between infrastructure quality and income levels in Latin American countries, however, Countries in Latin America have lower quality infrastructure relative to other countries with similar income levels. This causes a loss of competitiveness due to the quality of physical infrastructure has been a significant drag on economic growth[6].
Governments play an important role to encourage infrastructure investment. In Latin America, there are sectoral planning institutions in place across the region, but many key attributes can be improved. The International Monetary Fund found that Latin America performs poorly in the availability of funding for infrastructure and the availability of multiyear budgeting frameworks.
Latin America invests roughly 3% of its GDP into infrastructure projects[7]. The Financial Times argues that infrastructure spending should be at least 6% for Latin America to reach its infrastructure goals[7]. This can be done by promoting private sector participation. The Private sector also plays an active role in supplying infrastructure. Governments in Latin America do a poor job of encouraging private sector participation[6]. Developing financial markets for infrastructure bonds and other financial products can help governments mobilize resources for infrastructure projects while limiting their exposure to currency risk.
While Infrastructure in Latin America still has room to grow, there are encouraging signs for investment in Latin American Infrastructure[12]. In 2013, Private Equity firms invested more than $3.5 billion in energy, telecom, and supply chain development. Governments are still looking for small partnerships between the public and private sectors to reduce inadequacies in the trade dynamic. Panama has taken steps in the direction to integrate its physical infrastructure for supply chain capacity. In 2014, Panama built the new Tocumen International Airport and the Colón Free Trade Zone are major mechanisms to enhance supply chains in Panama[12].
Main Economies
editBrazil
editIn 2016, Brazil's currency appreciated by 30% and their stock market, the Ibovespa, returned 70%[13]. Investors do not expect a similar rate of return in 2017 but they are expecting modest returns. The Ibovespa is the largest stock exchange in Latin America, so it is often used by investors to study investment trends in Latin America[14]. The economy in Brazil is recovering from its most severe recession since it began tracking economic data. Following Dilma Rousseff's impeachment, Brazil is experiencing a period of political certainty and rising consumer and business confidence[13]. Unemployment is expected to increase in 2017 and inflation will slowly return to its target range [14].
A 2016 report on Brazil's economy suggests that Brazil’s fiscal stance is mildly contractionary which strikes a good balance between macroeconomic requirements and stability[14]. This shows that the Brazilian government is committed to restoring the sustainability of public finance through a steady path[14]. Fiscal adjustment will allow monetary policy to loosen and encourage foreign and domestic investment. Brazil’s rising productivity depends on the strengthening of its competition, improvement of infrastructure, and fewer administrative barriers[14].
Brazilian president Michel Termer and former governor of the central bank, Henrique Meirelles, have proposed an overhaul of Brazil’s economic governance[15]. Public spending, including the pension system, will be cut and regulations will be lifted, beginning in the oil and gas sector, which has suffered due to over leverage and corruption. Over the past 20 years, public spending has increased annually by 6%, which has grown the deficit to -2.3% of GDP for the year ending in April 2016. Prospects for the Brazilian economy have garnered hope among investors and entrepreneurs. The yield on the Brazilian bond has fallen from 17% in January 2016 to 13% in June 2016, showing confidence in Brazil’s financial future[15].
Argentina
editThe OECD expects Economic growth in Argentina is expected to increase in 2017 and 2018 due to recent economic reforms[16]. In 2016, Argentina reformed the national statistics agency, causing an upgrade in Argentina's credibility. This enabled the central bank to increase interest rates to contain inflation and respond to exchange rate pressures[16].
The latest inflation data shows that the inflation rate will stabilize at a 1.5% month over month, with expectations anchored at 20% YoY[16]. Inflation in 2017 is set to slow down due to a restrictive monetary policy and stable exchange rate[17]. 2016 has affirmed the credibility of the Argentine central bank and its transparency efforts. The government is seeking to adjust wages at the level of inflation while unions are seeking for adjustments past inflation targets.
In mid-2016, Argentina saw a low point of economic activity with weak first and second quarters and strong third and fourth quarters. The decline in GDP reached -3.4% in the second quarter of 2016[16]. BBVA research expects improvements in the coming year for industrial activity oriented in foreign markets, driven by the recovery of Brazil. Household consumption began improving at the end of 2015 due to higher retirement income catalyzed by the implementation of the historical reparations program.
Colombia
editBBVA Research suggests that consumption and investment have undergone an adjustment and caused domestic demand to fall below total GDP[18]. The economy is expected to grow at a rate of 2.4% in 2017 [13].
Falling imports and lower profit repatriation caused the deficit to stand at 4.8% of the GDP at the end of 2016. This deficit is expected to stand at 3.8% of GDP in 2017 [3]. Current exchange rate levels will help the external deficit correct itself. In 2017, the Colombian Peso is expected to trade at 3,007 COP per 1 USD.
At the end of 2016, the Congress of Colombia approved a tax reform bill, with the goal of making public accounts more sustainable and replacing revenue that the government lost from the oil sector[13]. This reform will increase non-oil revenue by 0.8% of GDP in 2017 and will gradually increase in future years[13].
Recent economic data supports a slowdown of growth relative to previous estimates[18]. This slow growth is occurring in all areas of domestic demand. Private consumption eased in line with a drop in consumer confidence and the slowdown was beyond the drop of spending in durable goods.
Mexico
editScotiabank expects Mexico's economic growth to be largely influenced by the economic policy of the Trump Administration[13]. The Mexican Peso ended 2016 at 22 MXN per 1 USD. This forced the Mexican central bank to step in and intervene in the Foreign Exchange market. Expectations of shifts in trade with the United States, immigration, and monetary policy have caused the Mexican currency markets to be volatile, unlike other Latin American currencies that are appreciating[19].
Credit rating agencies have put Mexico’s sovereign debt into negative territory for 2017[13]. The government responded by putting measures in place to improve public finances. These measures include reducing government spending and increasing the national price for fuel. Estimates for inflation for 2017 are 5.5%. There is a risk that inflation dynamics could be affected further by the volatility of the Mexican Peso.
High levels of uncertainty have prevailed since the United States elections causing many global investors to delay their investments[19]. The government’s reduction in spending is focused on the capital side, meaning that infrastructure spending in Mexico will be weak in 2017.
Solid consumption and stagnant production should converge next year as consumer spending lowers[19]. The unemployment rate at pre-crisis levels, rising bank credit, and rising real wages indicate that consumption will cool down gradually rather than a drop sharply.
Chile
editGrowth in Chile's economy is projected to increase in 2017 and 2018 due to high demand for Chilean exports and an increase in investment and private consumption[20]. In 2016, economic activity was driven by the services sector and dampened by mining and manufacturing[20].
An increase in unemployment is expected from 6.5% to 7.1%. the investment environment in Chile is expected to see a positive shift and will be realized by lower investments in mining, and a rebound in other sectors[20]. Measures to increase productivity and investment will help diversify the economy and support sustainable growth. In 2016, inflation receded to 2.7%, .3% lower than the central bank’s target[20].
Chile is most closely associated with the mining industry, though it is not the only important industry in Chile. An eighth of the working population is employed in this industry[20]. Codelco is the world’s biggest copper exporting company. In addition to copper, Chile also mines gold, silver, and cement materials. While Chilean administrations have been trying to diversify the economy, a strong mining industry has been the basis for financial stability[20].
Foreign Investment
editBrazil
editBrazil has seen a slowdown in foreign investment after reaching a zenith of $64 billion dollars of foreign investment in 2013[21]. Foreign investment in Brazil declined in 2016, however, Brazil is still the largest recipient of foreign investment in Latin America. Brazil is attractive due to its market of 210 million inhabitants, easy access to raw materials, and a strategic geographic position. The main investors in Brazil are the United States, Spain, and Belgium. With the impeachment of Dilma Rousseff and the embezzlement scandal behind them, Brazil is set to benefit from stronger commodity prices and attract more foreign investment[21].
Argentina
editArgentina ranks fourth in South America in terms of foreign investment and sixth in terms of foreign investment influx [22]. Argentina has access to natural resources (copper, oil, and gas) and a highly skilled workforce. In the past, Argentina has suffered from restrictions that were placed on foreign investment in agriculture, which is important for the country’s food security[22]. Santander Bank expects Argentina to receive an influx of foreign investment thanks to the favorable business environment set by President Mauricio Macri[22].
Colombia
editThe improving security environment in has restored investor sentiment in Colombia[23]. This has caused a growth in foreign investments, mostly in mining and energy projects. Over the past 10 years, Bogotá has received 16.7 billion in direct foreign investment in financial services and communications, allowing it to emerge as a leading business center in Latin America[23]. BBVA Continental expects investors in Colombia will also benefit from a strong legislative framework[18].
Mexico
editMexico is one of the world’s main destinations for foreign investments (#10 in 2016), however, Mexico is also the country that will be most affected by protectionist American trade policies[24]. In recent years, investments in Mexico have been hampered by the growth of organized crime, corruption, and administrative inefficiencies[24]. In 2014, the government planned new industrial centers which would require foreign investment. Additionally, the IMF reports that the exploitation of Mexico’s Hydrocarbon reserves will require an annual investment of $40 billion from 2015-2019[24].
Chile
editThe influx of foreign investments in Chile grew every year from 2010-2015[25]. In terms of foreign investment, Chile is the region’s second most attractive country, after Brazil, however, the investment cycle in Chile is variable because it is linked to mining projects[25]. Chilean economics are founded on the principles of transparency and non-discrimination against foreign investors. Investors are attracted to Chile due to its natural resources, macroeconomic stability, security, and growth potential[25].
Regional Risks
editCurrency Risks
editOver the past five years, dollar-based investors in Latin America have experienced losses driven by a depreciation of local exchange rates[26]. Looking forward to 2017, several factors suggest that current exchange rates will provide positive tailwinds to dollar-based investors over the next several years[26]:
- Local Currencies appear undervalued on a PPP basis: Latin American currencies are seeing an increase in purchasing power. Cheaper goods and services in Latin America will stimulate an appreciation in local currencies[26].
- Real exchange rates have declined enough to resolve Current Accounts Deficits: Low currencies are resulting in a decreased demand for imported goods and stimulus for foreign demand for exports. Cheap exchange rates have set the stage for strong trade dynamics moving forward which should increase demand for Latin American currencies[26].
- Commodity Prices are Rising: Commodity prices are trading at 64% below their peak in 2007[26].
- Interest Rate Differentials are Stimulating Capital Flows in Latin America: The monetary policies of central banks in the region are supportive of strong currency levels. Central banks have acted and raised interest rates to maintain price stability. With decreasing inflation, the real return differentials between the Dollar and Latin American currencies are attractive enough to carry trade into these local currencies and support appreciation[26].
Trade Uncertainty
editPresident Donald Trump’s import tariffs and limits on trade present significant risks for Latin American economies[27]. Uneasiness over President Donald Trump's shift away from a free trade policy was manifested on the day after election day, where the Mexican Peso lost 15% of its value. This knock on confidence will produce unwanted effects on the Mexican economy in the form of weak private consumption and foreign investment[27].
Given Donald Trump’s sharp rhetoric about immigrants and Mexico, and the context of potential policy shifts affecting trade will cause diplomatic relations between the United States and Latin America more volatile[27]. Latin America stands to suffer from global economic repercussions of the Trump agenda such as fluctuations in the stock and commodities market[27]. Volatility in commodity prices, to which Latin American economies are highly exposed, can be a big shock to the growth that Latin America is beginning to see[27].
- ^ "Latin America & Caribbean". The World Bank. 2016.
- ^ "Economic Snapshot for Latin America". Focus Economics.
- ^ a b "2017 Latin America Economic Outlook" (PDF). Morgan Stanley.
- ^ "Western Hemisphere Regional Economic Outlook" (PDF). International Monetary Fund.
- ^ a b c d e f "History of Latin America". Encyclopedia Britannica.
- ^ a b c d Karpowicz, Izabela (June 9, 2016). "Investing in Infrastructure in Latin America and the Carribbean" (PDF). International Monetary Fund.
- ^ a b c Goldschmidt, Gabriel. "Infrastructure: the road to greater prosperity in Latin America". Financial Times.
- ^ "South America Economy". InfoPlease.
- ^ a b c d e f "Latin America Agricultural Perspectives". Rabo Research.
- ^ Vergara, Rafael. "Mining in Latin America". Who's Who Legal.
- ^ a b c "LatAm Mining Industry In For a Tough 2017, But Not Without Hope". BNAmericas.
- ^ a b Corrigan, Thomas (April 4, 2014). "Huffington Post".
- ^ a b c d e f g Breard, Pablo (January 17, 2017). "Latin America Capital Flows" (PDF). ScotiaBank Global Outlook.
- ^ a b c d e "Brazil Economic Forecast". Organisation for Economic Co-operation and Development.
- ^ a b "Brazil's Economy: Nowhere to Go But Up". The Economist.
- ^ a b c d "Argentina Economic Forecast". Organisation for Economic Co-operation and Development.
- ^ "Argentina Economic Outlook". Focus Economics.
- ^ a b c Tellez, Juana. "Colombia Economic Outlook" (PDF). BBVA Research.
- ^ a b c "Mexico Overview". The World Bank.
- ^ a b c d e f "Chile Economic Forecast". Organisation for Economic Co-operation and Development.
- ^ a b "Foreign Investment in Brazil". Santander.
- ^ a b c "Foreign Investment in Argentina". Santander.
- ^ a b "Foreign Investment in Colombia". Santander.
- ^ a b c "Foreign Investments in Mexico". Santander.
- ^ a b c "Foreign Investment in Chile". Santander.
- ^ a b c d e f Cummins, Andrew. "Latin America Research: Currency Risk" (PDF). Paladin Realty.
- ^ a b c d e "Trump's Win Brings Uncertainty to Latin American Policy". The Economist Intelligence Unit.