Latin America in the Aftermath of Europe’s War

 

Chapter 6 of:

“Aftermath of War in Europe The West VS. the Global South?” (ed. by Len Ishmael)

Policy Center for the New South, 2023

 

This chapter examines the impacts and durable consequences of Europe’s war (in Ukraine), overlapping with the effects of other components of the ‘perfect storm’ (pandemic, severe weather phenomenon, hunger, global inflation), for Latin America. Although commodity-dependent countries in Latin America have exhibited some positive surprises in terms of GDP growth, inequality has risen more broadly, and the living conditions of the poor have deteriorated. The mediocre growth performance of the last decade appears to be the underlying trend, in case a reshuffle of the growth pattern is not pursued. First, we deal with the global tectonic shifts that have conditioned the region’s economic performance since the 1990s. Second, we outline the range of effects stemming from the ‘perfect storm’. The third section discusses how economic relations between China and Latin America have evolved. Finally, we frame the U.S.-China rivalry in a Latin American context.

1 Implications for Latin America of Global Tectonic Shifts

Latin America’s economic evolution since the 1990s has been conditioned by three ‘tectonic shifts’ underlying the global economy. Such tectonic shifts directly impacted three basic prices at the global level, with direct implications for the region’s economic trajectory[i].

First is the shock associated with a decline in labor prices, reflecting the sudden incorporation of workers whose labor services were previously not integrated into the global market economy. That evolved into a supply shock emanating from an increase in the number of manufacturing workers engaged in international trade. We refer to the fall of the Berlin Wall, and the dissolution of the Soviet Union, as well as to China’s opening of free trade zones, which happened even before China joined the World Trade Organization in 2001.

Two complementary changes also weighed in favor of this labor-supply movement. Countries implemented reforms toward trade opening, lowering tariff and non-tariff trade barriers. Furthermore, a cluster of technological breakthroughs in information and communications technology (ICT) and transportation (containerization) made possible the geographical fragmentation of manufacturing processes, and the relocation of parts of value chains according to convenience—including the use of cheaper labor. The phenomenon of integration of Asia into global or regional value chains that was seen in the previous decades was reinforced.

The combination of industrialization being facilitated by those changes and cheap labor in Asia (and Eastern Europe) directly challenged manufacturing in Latin America. The region’s previous ‘import-substitution industrialization’ (ISI) strategy had already initiated a phase of review, as it had clearly started to face limits, even in the cases of relative success, including Brazil, Mexico, and Argentina. To differing degrees, countries in the region partially reversed protectionist trade policies pursued in the previous decades.

However, except for Mexico which opted for integration into North America’s value chains through NAFTA, countries in the region were now facing a tougher transition to any ‘export-led industrialization’ (ELI) strategy. Difficulties in implementing structural reforms that would allow the region to phase out the legacy of ISI policies and compete with low Asian wage-productivity, help to understand the ‘precocious deindustrialization’ in many countries in the region.

A second tectonic shift corresponded to a change in the financial landscape, arising from declining interest rates in advanced economies and the availability of global finance at lower costs. Even considering risk premiums associated with emerging markets, relative to the sources of finance in advanced economies, capital flows to the former acquired a huge significance, with cycles of boom and bust.

The debt crisis in Latin America and South Korea in the 1980s followed a strong cycle of international bank credit in the previous decade, particularly recycling surpluses of oil producers after the oil price shocks—in what became known as ‘petrodollars’ through the ‘Eurodollar system’. However, the banks’ retrenchment after the debt crisis was followed in the 1990s by the arrival of non-banking financial intermediation, fed by declining earnings rates in advanced economies. Subsequent episodes of busts in Asia (1997), Russia (1998), Argentina, and others did not close the financial window of flows to emerging markets.

The third tectonic plate shift and basic price change was more a consequence of the two previous ones. Because of the high growth-cum-industrialization in Asia, with globalization thriving using its cheap labor, prices of natural resources and commodities went through a super-cycle.

A demand shock was associated with an increase in global demand for primary goods, one not matched by a commensurate supply-capacity response. It reflected the relatively high commodity intensity of imports of the larger rising Global South countries, particularly China. The result was a rise in commodity prices—an unusually vigorous upswing phase of a commodity super-cycle. For commodity exporters, including in Latin America, this shock was associated with terms-of-trade gains.

A super-cycle of commodity prices started in the mid-1990s, reaching a peak by the time of the global financial crisis, and hitting the bottom with oil price declines by 2015. In Latin America, except for Mexico and its integration into U.S. value chains, the super-cycle of commodities was gravitationally strong enough to become the basis of economic growth.

One important feature of the upswing phase of the commodity-based economic cycle was that it cascaded down to the bottom of the income pyramid, with poverty reduction and expanding middle classes as outcomes. Several countries in the region created or reinforced social policies that partly conveyed macroeconomic gains to the poor—for example, conditional cash transfers implemented in Mexico, Brazil, and others.

The combination of income gains associated with natural resource-intensive tradable goods and non-tradable services, in addition to capital inflows and exchange-rate appreciation, exercised an additional price and competitiveness pressure on tradable manufacturing production.

As the super-cycle faded out in the 2010s, bringing down GDP growth and affecting fiscal conditions, countries in the region faced higher levels of potential social unrest and political instability. This was the case even in countries, including Chile, Colombia, and Peru, that had adopted fiscal frameworks or policies aiming at mitigating the consequences of cyclical fluctuations of commodity prices. Chile, for instance, established rules under which part of the extraordinary fiscal receipts during copper boom times was set aside as a reserve fund to be used in down times. Brazil attempted to extend the cycle by resorting to public-debt-financed lending by the National Economic and Social Development Bank (BNDES), but that led mainly to a fiscal crisis without commensurate private investment results[ii].

It must be noted that, despite the overall stronger macroeconomic performance in the 1990s and 2000s relative to the 1980s, there was little convergence of GDP per-capita levels in Latin America with those in the United States. In the meantime, emerging Asia and Eastern Europe underwent rapid convergence[iii].

Political contestation of incumbent governments became a normal feature in the region. With some exceptions—Ecuador—a new ‘pink tide’ of more left-wing governments has spread in the region, starting with Mexico in 2018 and Argentina in 2019, followed by Bolivia in 2020, along with Peru, Honduras, and Chile in 2021, and Colombia in 2022. In Brazil, the incumbent right-wing government lost the 2022 October election to the center-to-left former President Lula.

In Venezuela, the period of a parallel ‘government’ led by the opposition, recognized by 54 countries, is coming to an end, and President Maduro’s position has strengthened. At the same time, the war in Ukraine has raised the possibility that sanctions will be lifted in exchange for more oil from Venezuela, given Europe’s and the U.S.’s need for energy supplies. A major limitation is the lack of investment in the country, which has stopped Venezuela from even using fully its OPEC quota. The change of government in Colombia has also brought a more friendly relationship between the two countries.

One important aspect of Latin America’s economic evolution in recent decades has been the continuity of its shallow physical and trade integration. Although slightly superior to sub-Saharan Africa, the degree of physical (infrastructure) and trade integration pales relative to dynamic Asian economies. While the ratio of intraregional exports to total exports in Latin America hovered between 10% and 20% from 1980 to 2010, levels climbed in Asia from 30% to 50% in the same period[iv].

Efforts like the South American Regional Infrastructure Integration (IIRSA), led by the Inter-American Development Bank in the last decade, ended up not receiving appropriate backing by countries in the region. While Peru implemented some IIRSA-related projects, efforts were dispersed after the creation of the Union of South American Nations (UNASUR) in 2008.

Even the Southern Common Market (MERCOSUR)—initially established by Argentina, Brazil, Paraguay, and Uruguay, and subsequently joined by Venezuela and Bolivia—has remained limited as a regional integration process. Despite being signed as a ‘common market’, still nowadays MERCOSUR resembles more a free-trade zone, full of country exceptions and without a common trade policy. MERCOSUR has signed trade deals with several economies, but significant deals, including with the European Union, remain to be completed and ratified. One may say that the political will to deepen regional integration has not been strong and broad enough to pull the agenda forward.

 2 Pandemic, War, Climate Change, and Global Inflation: Multiple Economic Shocks to Latin America

The pandemic hit the region hard, and the economic recovery has been slower than in other regions of the world. As well as a legacy of higher public debt, the pandemic has scarred the labor market and undermined the human capital accumulation of future workers.

The COVID-19 crisis has receded in Latin America but has left a significant toll. Reported deaths related to the pandemic are currently low and have converged to global levels—albeit from much higher levels than previously thought. Average excess mortality during the pandemic was among the highest in the world: 250% in 2020-21, double the global average (120%), and second only to Central Europe and Central Asia[v]. Low vaccination rates in some countries leave them vulnerable to new variants.

In most countries, GDP and employment have moved back to their pre-pandemic 2019 levels. On the other hand, according to the World Bank, expected growth rates may be named as “resiliently mediocre”. Banking systems are sound, and debt burdens overall seem not have entered any unsustainable path, differently from many developing countries elsewhere. However, economic growth is not projected to go above the low levels of the 2010s that we discussed in the previous section.

The post-pandemic economic recovery has led to a large unwinding of the rise in income poverty in 2020-21. But the permanent output losses from the pandemic will not be recovered, nor have the longer-term scars of the pandemic in terms of education, health, and future inequality been wiped out[vi].

The Russian invasion and the war in Ukraine have further had an economic impact on the region, particularly through the commodity price shock and consequent domestic inflation hikes. While commodity exporters (importers) faced positive (negative) effects on their GDPs, via terms of trade, they all had to face higher levels of inflation, with food and energy prices affecting in particular the lower half of the income pyramid, given the weight of such items in their consumption basket.

Growth rates in the region have been systematically upgraded since January 2022—in contrast to the downgrades of the rest of the world because of the war in Ukraine. GDPs of net importers of food and fuel, including Caribbean and Central American countries, have been negatively affected. Rising prices of these goods have also affected households across the region. On the other hand, the overall rise in commodity prices has been a blessing to regional exporters including Argentina, Brazil, Chile, Colombia, Ecuador, and Peru.

The favorable tailwinds coming from commodity prices are expected to change course[vii]. In the case of oil prices, futures markets point to a fall in coming years, after rising by 41% in 2022. Russia’s invasion of Ukraine lifted base metal prices, but these are expected to end 2022 5.5% lower on average, and to decrease by a further 12% in 2023. The IMF report forecasts precious metal prices to drop more moderately, by 0.9% in 2022 and an additional 0.6% in 2023.

Food commodity prices, which also climbed after Russia’s invasion of Ukraine, had returned to prewar levels by mid-2022, finishing a two-year rally. However, this was not before adding 5 percentage points to food price inflation for the average country in 2021, an estimated 6 percentage points in 2022, and 2 percentage points in 2023.

Higher frequency and greater extent of adverse weather events, probably already reflecting climate change, have also constituted a source of price shocks on food and energy. In the last few years, more frequent floods and droughts have affected the supply of food and energy in China, India, Europe, the U.S., Africa, and Latin America itself. Climate change, a plague (pandemic), war, and hunger risks have constituted a ‘perfect storm’.

For commodities as a group, 2022 was a very volatile year. After rising dramatically in the first half, because of the shocks mentioned, prices declined in the third quarter, as a reflection of China’s growth deceleration[viii], and the U.S. dollar appreciation. The supply shock stemming from the war in Ukraine has been followed by a downward demand shock.

The asymmetric effects of higher commodity prices on the population of the region, harming especially the purchasing power of the bottom of the pyramid, have been—to different degrees—compensated for by social policies of transfers and other types of support. The lack of readily available fiscal space has been a constraint.

Even as Latin American countries continue to deal with the effects of those three previous shocks, a fourth has come with the tightening of global financial conditions. High global inflation in the wake of the previous shocks has been met with tighter monetary policies by central banks in advanced economies[ix].

Growth momentum has surprised positively in most of the region, favored by the return of service sectors and employment to pre-pandemic levels, as well as external conditions that stayed favorable until recently, including still-high commodity prices, still-strong external demand, and remittances, besides the tourism comeback. These explain upward revisions to regional growth forecasts in 2022.

But the tightening of global financial conditions works against this momentum. The availability and costs of domestic finance have become less favorable as major central banks have raised interest rates to tame inflation. Capital inflows to emerging markets have slowed and external borrowing costs have increased. Domestic interest rates in emerging markets have risen as their central banks also hiked rates to curb inflation, and because of the lower risk appetite of investors.

The region is overall more resilient to a monetary-financial shock than in previous times[x]. Banking systems are healthy and public balance sheets are not in general as fragile as at other times in the past. The cushion in terms of foreign exchange reserves also makes a difference in several cases when favorable commodity prices and trade surpluses led to the piling up of the former. Corporate debt outside the banking system nevertheless deserves attention. Higher domestic interest rates will also stiffen public debt conditions[xi].

After the upward surprises of GDP growth in 2022, the performance expected for next year is weaker. While the IMF and the World Bank, respectively, expect GDP growth rates to reach 3.5% and 3% in 2022, their forecasts drop to 1.7% and 1.6% in 2023. A successful post-perfect-storm recovery in Latin America should not be limited to a simple return to its pre-pandemic ‘mediocre’ levels of output growth—already unimpressive and vulnerable to shocks—but should represent an inflection point towards more resilient, inclusive, and productive growth patterns[xii].

3 Impact of Tectonic Shifts on Latin America’s Economic Relations with China

The global tectonic shifts—labor supply increase, low-cost finance, and natural-resource boom—have had a counterpart in terms of profound changes in the economic relationship between China and Latin America over the past 20 years. In 2001, Latin America’s exports to China corresponded to 1.6% of total exports, while in 2020 they had reached 26%. This contrasts with the region’s exports to the U.S., which went from 56% of total exports in 2001 to 13% in 2020[xiii]. Such a radical change was largely due to China’s accelerated manufacturing-based growth during this period and its rising demand for raw materials, especially from South American countries such as Peru, Chile, Brazil, Argentina, and Uruguay. Something similar happened in relation to the region’s imports of manufactured goods. According to the IIF report, China’s total trade with Latin America grew over the past 20 years at a 19% compound annual rate.

The weight of Latin America in China’s total imports and exports has also risen. Latin America’s share of China’s total imports rose from 2.4% two decades ago to 8.1% in 2020: higher than the U.S. and close to Japan’s share. China’s exports to Latin America, meanwhile, became larger than those to Japan, although remaining smaller than its exports to both the U.S. and the European Union[xiv].

China has become the top trading partner for most countries in South America, surpassing the U.S. in all but Colombia, Ecuador, and Paraguay. Mexico, in turn, has strengthened its trade dependence on the U.S. While the tectonic shifts have led to flows of exports of commodities to—and manufacturing imports from—China in South America, the same shifts underlie Mexico’s integration into regional manufacturing value chains in North America.

China’s investment in Latin America has also undergone a significant evolution, in line with China’s rising financial flows that have accompanied its rising trade. Excluding Hong Kong (China), Latin America is the largest destination for Chinese outbound direct investment (ODI), reaching almost 50% of China’s total ODI stock.

Since 96% of China’s ODI in Latin America went to two offshore financial centers (the Caymans and British Virgin Islands), it is hard to pin down exactly its ultimate destination. China’s ODI in those offshore centers is overwhelmingly larger than those of other countries and, if they are excluded, China’s ODI in the region is smaller than that of the Netherlands, Canada, Germany, Italy, or Japan, and corresponds to only 5% of the U.S. ODI in Latin America[xv].

The bulk of China’s total ODI in the region went to business services (23%), and wholesale and retail (14%), whereas less than 6% was in mining. To some extent, this highlights what could be seen as a ‘metamorphosis’ in China’s financial flows to the region[xvi]. After becoming a major source of capital flows to Latin America and the Caribbean from 2005 to 2019, a more diverse range of Chinese investors surfaced, interested in more than simply channeling resources toward infrastructure, governments, and state companies.

The profile of Chinese investment in the region has tracked the evolution of China’s economy as it has moved to greater reliance on services and domestic consumption (Canuto, 2022a). Lending by the China Development Bank and China’s ExIm Bank was until recently directed mostly to infrastructure and the energy sector. Before declining in recent years, China’s development lending to Latin America and the Caribbean reached levels larger than lending from the World Bank, Inter-American Development Bank (IDB), and Development Bank of Latin America (CAF) combined.

Of the estimated $140 billion that China lent to Latin America from 2005 to 2018, over 90% went to four countries—Venezuela, Brazil, Argentina, and Ecuador. More than 80% of China’s foreign direct investments, either as greenfield investments or through mergers and acquisitions, went to Brazil, Peru, and Argentina, with Mexico also rising as a destination for manufacturing investment more recently[xvii].

This shift in focus brought with it the emergence of new investors. Direct investment in the region went from almost nothing in 2005 to likely passing $110 billion by 2018. The initial focus was on the extractive industry (oil, gas, copper, iron ore), but moved to more than half of the flows going to services. The pursuit by Chinese investors of opportunities in transport, finance, electricity generation and transmission, information and communications technology, and alternative energy services catering to local markets, grew rapidly.

China-backed commercial financial institutions and platforms have also established their footprint in the region, engaging actively in private-sector deal-making. As well as co-financing projects and setting up regional investment funds, four major Chinese commercial banks have ramped up operations in the region, many in partnership with international banks. The scale and number of transactions may be smaller than the lending spree led by development banks, but point to a qualitative change in the structure of financing options coming from China.

Increased participation of non-state investors has introduced new sources of dynamism and diversification to Chinese direct investment in Latin America. Brazil’s emerging tech industry, for instance, has successfully and continuously attracted high-profile Chinese investments. Additionally, Chinese participation in mergers and acquisitions into specific value-added sectors reflects new consumption habits in China, ranging from vineyards in Chile to meat-packing plants in Uruguay[xviii].

Attention to risk when looking at potential returns has also come to the fore among Chinese investors, particularly after their experience in Venezuela. As domestic regulations and lending caps tighten in China, given concerns with its increased financial fragility, a more stringent look at the country’s development lending has followed.

State-owned enterprises are still foremost among Chinese investors in the region, from mining, infrastructure, and oil and gas to hydroelectric plants. China’s policy response to the global financial crisis in the form of large-scale stimulus given to infrastructure and housing sectors generated excess domestic capacity in heavy industry and in real estate, while financially boosting industries including construction, retail and wholesale trade, hotels, and restaurants. This overcapacity then went to look for foreign markets.

China’s physical integration abroad via the Belt and Road Initiative (BRI) was a vehicle to put its overcapacity in construction and heavy industry to work elsewhere. Nineteen of the 33 Latin American countries have formally signed off on their participation in the BRI, while Brazil and Mexico have not officially done so.

Episodes of contention with Latin American governments around environmental impacts and corruption associated with some previous lending deals, have highlighted the need for China’s investment finance to reckon with the risks and fallout from environment and governance issues. Official guidelines have been issued on environment and social policies for Chinese companies investing abroad, signaling the matter has caught the attention of Chinese authorities.

While Chinese deals used to be limited to construction—winning concessions, building projects, then leaving—new equity investments in Latin America indicate longer-term interests and ownership in projects beyond their construction, to include operation, maintenance, and more. This is especially true in port projects.

The speed and intensity of China’s growth-cum-structural-change has seemed to a great extent to be matched by the profile and volume of its capital flows to Latin America since 2005. However, the sizable Chinese financial and investment footprint in the region has apparently come close to a halt in the last two years, with a slowdown in reported new flows. In 2020-2021, Chinese policy banks issued no new loans to Latin American governments or state-owned enterprises[xix].

Myers and Ray suggested that the total of combined Chinese finance to Latin America is unlikely to ever approximate the previous peaks of policy bank lending in 2010 and 2015. It remains to be seen if this simply reflects a movement away from big natural resource-based finance to state entities in oil and mining, with Chinese investments eventually returning to positive ground on the services side. Since 2018, financial and investment relations have moved to Chinese companies, backed by Beijing, as investing partners and not only financiers of projects.

4 The U.S.-China Rivalry and China’s Economic Extroversion in Latin America

A major consequence of the war in Ukraine has been the exacerbation of the rivalries between major global powers, inevitably encompassing trade and technology policies. The rivalry brings spillovers to Latin America.

Already before the ‘perfect storm’, such rivalry had escalated with political anti-globalization backlashes in several advanced countries during the last decade. But the pandemic and the invasion of Ukraine mainstreamed geopolitics to government policies and consequently to private-sector corporate strategies.

The U.S.-China rivalry was already evident through U.S. President Trump’s trade wars. The pandemic also brought forms of soft-power dispute around vaccines, and the search for reassurance about countries’ access to strategic goods (medicines and medical equipment, semiconductors, and others). Russia’s invasion of Ukraine and China’s apparent alignment took geopolitical tensions to higher levels.

As a justification for his style of trade war, President Trump had alluded to a goal of revitalizing jobs in the U.S. manufacturing industry by protecting it from the unfair trade practices of other countries, particularly China. However, according to a study by two Federal Reserve Bank staff, the effect was just the opposite, i.e. a reduction in U.S. manufacturing employment.[xx] President Biden has not reversed Trump’s trade measures, but clearly the focus of U.S. actions has shifted predominantly to science and technology, notably in relation to China’s access to semiconductors and other high-tech areas.

The war in Ukraine and the pandemic have dovetailed with another reason given as a justification for revisiting the globalization and global value chains that were developed as an outcome of the tectonic shifts. Supply-chain disruptions during the pandemic led to claims that cost optimization attained through global value chains (GVCs) came with reduced resilience in the face of localized shocks that tend to affect entire chains. The war in Ukraine, in turn, raised the profile of geopolitical risks as an additional factor to be reckoned with in the configuration of—and reliance on global value chains[xxi].

Such arguments have been raised before, but the pandemic and the war have made them more common and louder. They have been accompanied by calls for re-shoring or near-shoring of global value chains, with ‘friend-shoring’ to minimize geopolitical risks. National security justifications have reinforced the call in some sectors. The great development of logistics and transport across the world’s industrial clusters—as part of one of the tectonic shifts—allowed ‘just-in-time’ manufacturing to become the main adopted production model. However, to maximize resilience against shocks, this should now move to a ‘just-in-case’ mode, even if costly, reflecting a trade-off between efficiency and resilience.

So, where does Latin America stand in the middle of such rivalry? Simple calls for alignment of countries in the region will not be effective if not translated into actual advantages, counterbalancing the consequences in terms of losses with whoever is not chosen for such alignment.

As a reaction to the upswing in China’s financial and investment flows to Latin America discussed above, the U.S. authorities opted to warn governments in the region about risks of ‘debt traps’. Furthermore, China’s hands-off approach with respect to environment and governance safeguards—under the guise of respecting local standards and the sovereignty of borrowers—was highlighted as facilitating local corruption and misuse of resources. A typical response from governments in the region was to ask: “what are the alternatives?” Rhetoric around the risks of engaging with China is ineffective.

As remarked by Aragão (2021), historically the predominant U.S. approach to Latin America has been to deal with the region as an “inexhaustible source of problems”. the fights against drug trafficking, illegal immigration, and corruption are at the top of the list of U.S. priorities for engagement with the region

In the last decade, U.S. trade agreements have been reached with several countries in the region, though not with the large countries in South America, including MERCOSUR. It is still to be seen if President Biden will come to the region with any trade-boosting plans, while Trump only exercised threats against Mexico and a review of NAFTA that narrowed the scope for Mexico in automobile value chains.

On the finance and investment side, there are obviously the U.S. based private capital flows, but carrying them to bulk infrastructure and risky-asset finance is not straightforward and has not been substantial[xxii]. Even U.S. President Biden’s proposal of an alternative to the Chinese Belt and Road Initiative (BRI) has been shy in terms of resources to be made available with official government support.

Will ‘nearshoring’ and ‘friend-shoring’ be used by the U.S. to boost its attractiveness as a partner in the rivalry? For example, recent U.S. initiatives on electric car batteries have sparked a flurry of activity from American and European firms to Canada with proposals of billions in new investments in metals, and more. However, there are reasons to believe that such possibilities cannot be taken for granted. The homework in the region to make it feasible to seize opportunities is a tall order, and direct or indirect subsidies would still be necessary[xxiii]. Not by chance, one may expect deglobalization to remain relative and circumscribed to very high-tech and national security-sensitive sectors[xxiv].

Soft-power disputes around access to technology, on the other hand, will intensify, in complex ways. In 2020, the communications company Huawei started to distribute 5G kits to Brazilian agribusiness companies, enhancing their connectivity capabilities and searching for their alignment against the Brazilian government following any suggestion by the U.S. to prohibit their participation in 5G auctions as a provider. [xxv]

The issue is also illustrated by China’s donation of thermal cameras to the government of Nicaragua, through which a previously non-existent Nicaraguan dependency on thermal cameras is tentatively being developed. It is likely that, as time passes, the Chinese cameras will not be exchanged for others in Nicaragua, and a market reservation for China in detriment to competitors from the U.S. and Europe may have been created.

The main point here is that—without Trump’s unilateral style of trade war, which in the end was counterproductive—the heightened U.S.-China rivalry will have to be exercised mainly through the offer of trade and investment opportunities, and finance to countries of the region.

Is a revival of the pro-active financial and investment stance abroad taken by Brazil between the mid-2000s and mid-2010s, likely after the 2022 Brazilian elections? Probably not, since the former was based on a combination of public debt emissions? transferred to the country’s National Economic and Social Development Bank (BNDES), including coordination with domestic private companies. The fiscal crisis that erupted in 2015, together with the governance scandals and justice trials that also marked the end of the cycle, have made it politically, fiscally, and practically impossible to replicate.

5 Concluding Remarks

The war in Europe (Ukraine) and the other elements of the ‘perfect storm’ (pandemic, severe weather phenomenon, hunger, global inflation) have consequences for Latin America. Positive GDP growth surprises in commodity-dependent countries in the region must be weighed against increases in inequality and worsening living conditions for the poor. The scars of the pandemic on health, education, and human capital remain. Except for commodities that are key to the transition to clean energy, the broad picture of their prices ahead is far from that of a new super-cycle. The underlying trend seems to be the mediocre growth performance of the pre-pandemic decade.

The region will have to find new economic growth avenues. A wave of green infrastructure investments looks obvious. It remains to be seen how widely and comprehensively opportunities for nearshoring or friend-shoring will be created by the U.S.-China rivalry and the relative deglobalization.

Apart from specific country cases, there are no clear-cut benefits from aligning automatically to either of the rival powers. Hopefully the rivalry will be exercised through the offer of trade and investment opportunities, rather than via attempts to exclude rivals from the region.

Doubling down efforts around regional integration might finally generate the enjoyment of benefits—regional gains of scale and scope economies—that have so far been blocked by regional fragmentation. The issue was already present before the war in Ukraine because of lack of political will to do what such integration would take. The homework in terms of reforms and joint infrastructure investments, however, will remain substantial. It is not by chance that, exceptions notwithstanding, the region remains relatively commercially closed, including among neighbors.

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[i] Otaviano Canuto, Climbing a High Ladder – Development in the Global Economy (Rabat: Policy Center for the New South, 2021).

[ii] Otaviano Canuto, A Straitjacket to Help Brazil Fight Fiscal Obesity (Rabat: Policy Center for the New South, October 2016).

[iii] Bas B. Bakker et al. The Lack of Convergence of Latin-America Compared with CESEE: Is Low Investment to Blame? (Washington: IMF Working Paper WP/20/98, June 2020).

[iv] Otaviano Canuto and Manu Sharma, M., Asia and South America: A Quasi-Common Economy Approach (Washington, DC: World Bank, Economic Premise No. 65, 2011).

[v] World Bank. New Approaches to Closing the Fiscal Gap. LAC Semiannual Update. (Washington, DC: World Bank, October 2022).

[vi] Otaviano Canuto, Permanent Output Losses from the Pandemic (Rabat: Policy Center for the New South, October 2021).

[vii] IMF – International Monetary Fund, World Economic Outlook – Countering the Cost-of-Living Crisis (Washington, DC: October 2022).

[viii] Otaviano Canuto, Whither China’s Economic Growth (Rabat: Policy Center for the New South, Policy Brief PB – 53/22, August 2022).

[ix] Otaviano Canuto, Whither the Phillips Curve? (Rabat: Policy Center for the New South, Policy Paper PP – 17/22, October 2022).

[x] Otaviano Canuto, Will Another Taper Tantrum Hit Emerging Markets? (Washington, DC: Project Syndicate, July 2021).

[xi] Santiago Acosta-Ormaechea et al., Latin America Faces a Third Shock as Global Financial Conditions Tighten (Washington, DC: IMF, The IMF Blog, October 2022).

[xii] Otaviano Canuto and Pepe Zhang, Global Recovery May Not Be Enough for Latin America (New York: Americas Quarterly, June 2021).

[xiii] IIF – Institute of International Finance, China Spotlight: Trade & Investment Ties with Latin America (Washington, DC: Institute of International Finance, May 2021).

[xiv] IIF, China Spotlight.

[xv] IIF, China Spotlight.

[xvi] Otaviano Canuto,  How Chinese Investment in Latin America Is Changing (New York: Americas Quarterly, March 2019).

[xvii] Pepe Zhang and Tatiana Prazeres, China’s Trade with Latin America is Bound to Keep Growing.

[xviii] Otaviano Canuto, How Chinese Investment in Latin America Is Changing (New York: Americas Quarterly, March 2019).

[xix] Margaret Myers and Rebecca Rey, What Role for China’s Policy Banks in LAC? (Washington, DC: China-Latin America Report, The Dialogue, March 2022).

[xx] Aaron Flaaen and Justin Pierc, Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected U.S. Manufacturing Sector, Finance and Economics Discussion Series 2019-086 (Washington: Board of Governors of the Federal Reserve System, 2019).

[xxi] Otaviano Canuto et al., Pandemic, War, and Global Value Chains (Brussels: Jean-Monnet Atlantic Network 2.0, October 2022).

[xxii] Karim El Aynaoui and Otaviano Canuto, “Bridging Green Infrastructure and Finance”, in Scaling Up Sustainable Finance and Investment in the Global South, ed. Dirk Schoenmaker and Ulrich Volz (Geneva: CEPR, 2022).

[xxiii] Otaviano Canuto et al., Geopoliticized Industrial Policy Won’t Work (Washington, DC: Project Syndicate, February 2022).

[xxiv] Otaviano Canuto et al., Pandemic, War, and Global Value Chains

[xxv] Thiago de Aragão, The US Still Doesn’t Understand China’s Strategy in Latin America (Washington, DC: The Diplomat, September 2021).

 

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a professorial lecturer of international affairs at the Elliott School of International Affairs – George Washington University, a nonresident senior fellow at Brookings Institution, a professor affiliate at UM6P, and principal at Center for Macroeconomics and Development. He is a former vice president and a former executive director at the World Bank, a former executive director at the International Monetary Fund, and a former vice president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at the University of São Paulo and the University of Campinas, Brazil.