Redefining EM: Latam, an emerging or submerging market?
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It has been 34 years since a World Bank staffer first coined the phrase “emerging market”. The world has been stuck with the term ever since. Its merit is that it is inspiring: “emerging” implies “improving”. After all, without improvement — be that of governance or per capita wealth — there is no emergence; there are only “more developed” or “less developed” economies.
The problem with the term, though, is that it sets the bar quite high. It implies “convergence” with developed economies, which requires relatively better performance, sustained over time.
On this metric, how has Latin America fared? The answer, sadly, is not that well. This is especially important now as the end of the commodity boom tests which countries continue to emerge or fall behind.
The charts plot Latin American GDP per capita, on a purchasing power basis, as a percentage of US GDP per capita. They reveal three groups of countries: those that have fallen behind, those that have gone nowhere, and those that have moved ahead.
They also reveal three clear periods: the “lost decade” of the 1980s, when debt default and high inflation ravaged the region; the painful market reform, or “Washington consensus”, years of the 1990s; and the commodity boom of the 2000s, the so-called “decade of Latin America”. Forecasts out to 2020 are included too, using IMF data. Although all forecasts have to be taken with a pinch of salt, they are signposts to possible futures.
The biggest faller is Venezuela, despite the blessing or curse of its immense oil wealth (“the devil’s excrement”, as a Venezuelan diplomat famously once put it, that “will bring us ruin”). It is followed by Argentina, which some might say is the agricultural equivalent of an oil well. Both countries submerged through the 1980s and 1990s and rose quickly during the commodity boom of the 2000s.
But spendthrift policies have left both countries vulnerable to further declines. Consensus forecasts predict that Venezuela’s economy will shrink by 6 per cent this year, and by another 2.5 per cent in 2016.
The floaters are those economies that have seen little change in their population’s relative wealth. They are also the continent’s two biggest countries: Mexico and Brazil.
Mexico has essentially gone sideways over the past 30 years. Why, is one of the mysteries of development economics. The short answer to the conundrum is that the emphasis Mexico has placed on macroeconomic stability has not fed through into higher productivity. There are many reasons for this, ranging from absence of the rule of law, to cartelised domestic industries.
Meanwhile Brazil, contrary to popular wisdom, has done little better. Like all commodity producers, it enjoyed a boom in the 2000s. But, as the Petrobras corruption scandal shows, the boom was mismanaged. The country is now suffering a bruising recession but not necessarily an economic crisis (although a political crisis may be on the cards, which could result in the same thing).
The emergers include Colombia and Peru, both of which have emerged slowly but steadily over the past 30 years, and Uruguay, which rode the commodity boom without squandering the windfall. Chile, though, remains far and away the best performer.
Alongside Uruguay, it is the only Latin American country that unequivocally enjoys a proportionately higher GDP per capita than it did 30 years ago.
Why the divergence between the three groups?
Better policymaking is the obvious answer. That, plus a stronger focus on the long term rather than populist short-term fixes. But there is another factor that may be more determining. It is notable that all the better-performing economies are relatively small. This suggests something about the political economy of running a country. Smaller countries may be easier to manage than bigger ones — in part because of sheer geographical size but in part because their constituencies, be that of labour or capital, are less diffuse. Smaller countries, because of their limited internal markets, are also perforce more open to importing best practices from abroad. Such better governance is likely to be especially important in determining which countries continue to emerge during the tougher years that likely lie ahead.
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