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Latin America Faces a Second Lost Decade

By Ichiro Suzuki

Yet again, another tough decade is ahead for Latin America as Peronists returned to power in Argentina, a left wing populist is at the helm of Mexico while a right wing populist rules Brazil. The Bolivian military had ousted the longest-serving president in the region as he became increasingly authoritarian and tried to bend the Constitution. Venezuela continues to descend.Even in Chile that has been remarkably stable by the standard of the region, riots erupted on the street of Santiago.

It is not entirely correct to predict a lost decade for Latin America since this decade has been already really tough if not lost. A commodity prices boom had suffered a hardlanding in the middle of this decade, and Latin America relied so much on it for wealth creation. A boom had allowed income to rise and left wing governments to raise social welfare spending and while it lasted.  A bust had reversed the direction of commodities, no longer making it possible for the region’s governments to meet rising expectations among the people. It looks more likely that Latin America faces a chance of a lost generation if the 2020s turns out to be as tough for them as it is feared now. The original lost decade for Latin America was the 1980s, when the heavily-indebted region in general proved unable to pay back in the face of a surge in U.S. interest rates and a collapse in crude oil prices. The region was eventually saved by a scheme that was effectively a debt relief by creditor countries, primarily the United States. 

In the first decade of the 21st century, East Asia also boomed as a part of the great emerging market boom. Having sunk so deep in the Asian Crisis of 1997-98, the region went into the new century lean and restructured, and due for a rebound. China’s entry into the WTO ignited the boom as the countries and the region were ready to take full advantage of it. East Asia sold manufactured goods and components to China while Latin America filled China’s voracious appetite for raw materials, and China consumed commodities in so wasteful fashion those days. While the early 21st century boom was spectacular for Asia, it was not the first boom the region went through. In the mid-1980s, ‘Asian Tigers’ began to follow the footsteps Japan had left, emulating the export-driven development model Japan went through in the 1950s through 70s. Prior to the 1997-98 crisis, the region outside of China was reasonably well off despite with a varying degree of development. This may be a part of the reasons why East Asians did not go on a spending binge in the early years of the 21st century while Latin America’s left wing governments splurged, when they found windfalls suddenly made them richer than before. 

Yet the biggest reason that kept East Asia from profligate fiscal policy was the hard lessons the region learned from the 1997-98 crisis. Capital flight and depletion of foreign exchange reserves made the region acutely aware of the necessity to rebuild wealth, and the region pushed exports fiercely while not loosening belts on the domestic front. This presents a sharp contrast from a debt relief that brought to an end to the lost decade of the 1980s.

As the 2010s draws close to its end, Asia leads the world in cutting edge technologies in some fields, with accumulated knowledges in manufacturing and technology over the last few decades. In contrast, little is left for Latin America after the region had consumed much of the gains from the boom. It still remains under-invested. Latin America may have missed the last chance to take off when an outsized demand from China brought an unprecedented commodities boom. 

That said, roads ahead for East Asia probably are not as rosy as they are believed, at a time when the Chinese economy continues to grow more slowly than before. While the region looks better than Latin America, East Asia has to learn to grow less dependent on exports, on its own model, not imitating someone else’s. On top of it, the region leads the world in aging of its population. Asia as the world’s growth center is definitely an illusion.

About the author: Ichiro Suzuki, CFA, is an Advisory Group member at Richard A. Mayo Center for Asset Management of Darden School of Business, University of Virginia. He has retired as Senior Portfolio Manager/ Global Equity Strategist at Nomura Asset Management. Suzuki graduated with B.A. from Waseda University and MBA from UVA's Darden School of Business.


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