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
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
"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
"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.