An end to the commodities boom of the past decade will mean sharply lower growth rates for Latin America, even if prices for natural resources stabilize at today’s levels, a leading economist has warned.
Writing exclusively for LatinFinance, former IMF Western hemisphere director Claudio Loser said that if Latin America’s terms of trade were to stop improving, average GDP growth in the region would fall from 3.7% of the past decade to between 2% and 2.5%.
“If terms of trade were simply to stabilize at the current high levels, the multiplier effect would disappear, and there would be no additional gains in GDI [gross domestic income] in excess of GDP,” Loser, president of Centennial Group Latin America, said. This would lead to a decline to a “rather mediocre trend growth rate” for the region.
“A reversal of prices would have a major impact on disposable income, and thus on growth through the normal channels into the domestic economy,” he said.
Loser’s warning comes as falling minerals prices have started to take their toll on Latin economies, with analysts already downgrading growth forecasts in commodity producers including Chile and Peru.
Better terms of trade since 2000 have meant gross domestic income has grown more quickly than GDP – an effect that would be erased if terms of trade were to normalize, Loser said.
“A steep but not unusual decline in terms of trade of 10% would result in a one-time decline in income of 5% in Latin America, with grave consequences for public finances and the external accounts,” he said.
To safeguard the fruits of the boom years, countries must pursue fiscal discipline, including structural rules like in Chile, a competitive private sector, better education, and a well-protected financial system, Loser said.
“The last several years of commodity-led prosperity have resulted in a degree of complacency in Latin America that is misplaced. The impact of lower terms of trade can be staggering. Prices will continue to fluctuate, and may even show a secular downward trend,” the veteran economist said.
The IMF meanwhile this week said in its regional economic outlook that a reversal of the “favorable tailwinds” of benign financing conditions and high commodity prices are the biggest risks to LatAm. The Fund cut its GDP growth projection for the region for this year to 3.4%, from 3.6%. LF
Read Claudio Loser’s exclusive article in full in the May/June edition of LatinFinance magazine, online here.