Commodity Dependence: A look back at the “Decade Of Latin America”

Rob Wagstaff & Alexander P. Trueba

For the last decade, Latin America has ridden a commodities boom on its way to economic expansion. LatAm’s dependency on commodities is no secret and has grown to the point where today, commodities account for close to 60% of all exports for the region, excluding Mexico. For many of the region’s economies, China is their largest export destination. However, as China’s growth now begins to moderate and global commodity prices drop, what some call “the decade of Latin America” seems to be inching closer and closer to a tipping point. All signs suggest that Latin America will be forced to diversify its economy in order to maintain its place amongst the fastest growing regions of the world.

LatAm Thrives, China & Commodities Main Drivers

As China’s economy began expanding at an average rate of 9.5% during the first 5 years of the 21st century, and at an even quicker pace shortly there after, a need for natural resources outside of its local inventory arose. A developing industrial power requires fuel to motor its industry, food to feed its growing population and metals to expand its infrastructure. Enter Latin America; blessed with a vast array natural resources and raw materials, LatAm was able to capitalize on high Chinese demand and reap the benefits of elevated commodities prices and large orders for over a decade. China quickly became one of the world’s largest trading nations. Between the years of 2001-2010, China grew to import almost 53% of the world’s iron ore, 45% of the world’s soybeans and 18% of the world’s copper.

Simultaneously, key Latin American economies increased their percentage share of world commodity exports; Brazil
grew to rank second globally in iron-ore, Brazil and Argentina ranked second and third respectively in soybeans and
Chile first in copper. Annual trade between Latin America and the developing super-power grew nearly 1,200% during
the same time period according to the United Nations (UN). As a result of these elevated commodity prices and partially due to China’s economic ascendance, Gross Domestic Product (GDP) in Latin America averaged nearly 4% growth over the last decade, compared to 2.7% the previous decade. Unemployment in countries such as Brazil, Chile and Colombia hit all-time lows. LatAm also took positive
measures to alleviate poverty, which once stood at 48% in 1990 and now currently sits at 28%, according to the UN.
They even have managed to grow their middle class by nearly 50 million people since 2003, 30 million of which come
from non-Brazilian countries.

Historical Commodities Effect on Brazil, Changes for the Future

One nation that benefited greatly over the last decade from the commodities boom is Brazil. The South American country is rich in natural resources and is the world’s second largest exporter of iron-ore, a material used in everything from infrastructure construction to automobile assembly. Iron-ore makes up 15% of Brazil’s total exports. The Amazonian nation is also the world’s second largest exporter of soybeans, ranking ahead of Argentina. China is its most important market for both exports. Chinese imports from Brazil grew from nearly $1 billion in 2000 to $44 billion in
2011, a staggering amount of growth. Yet, contrary to popular belief, its Sino-dependence might be much lower than once believed. Exports to China are worth less than 2% of GDP according to a 2013 BBVA report, signifying that Brazil depends heavily on diverse export base to multiple countries other than China to help fuel GDP growth. Still, this diverse export base is primarily commodity driven, made up of sugar, coffee and beef, leaving it susceptible to price fluctuations.

In Q1’13 Brazilian exports fell by 8% and economic growth came in at 0.6%, under forecast for the 5th straight quarter, showcasing the enduring effect that a long-term commodities slump could have on them. Infrastructure and logistical insufficiencies have decelerated economic growth as well. Historically, mismanaged windfall commodity revenues have contributed to this deficiency. Brazil’s investment ratio stands as one of the lowest in LatAm at 18.4% of GDP. Only 5% of Brazil’s roads are currently paved and lines to get into some large ports are reportedly up to 15 miles long. Brazil has realized its shortcomings and is taking measures to amend the situation by investing more in domestic infrastructure. Earlier this year it passed a $26 billion bill to revamp its port infrastructure, which the government estimates could cut logistics costs by 30%.

Andean Region Effect/Mexico Outlier

Far and away the world’s largest copper producer, Chile relies heavily on commodities for economic stability. It has maintained its position as the world’s leading copper exporter for the past 50 years. Copper accounts for about threefifths of export receipts, 20% of government revenues and 15% of Chile’s GDP. In turn, over the past 12 years, China has imported more copper than any other nation, needing the metal for countless property and infrastructure projects. However, prices have dropped almost 5% in the past 12 months partially due to the Sino slowdown and the results could spell trouble for the Andean nation. If prices continue at the same pace, Chile could lose up to $4 billion in revenue from copper exports and up to $2 billion in royalties from private and state-owned firms. Of note, first quarter 2013
GDP growth came in under projections at 4.1%. Mexico seems to be the country in Latin America best built to withstand a commodities price reduction. With an economy less tied to commodities and driven more by services and manufacturing, Mexico does not depend on China and commodities in the same manner as other LatAm nations. Mexico is much more reliant on its northern neighbor, the United States, which has safeguarded them from the current weak global economy. In 2010, 74% of all of its exports were to the United States, and 73% of its imports originated there. The majority of these exports were not commodities, but instead industrial manufactured-exports such as automobiles and electronics. However, the veil of protection the United States provides can also act as a negative, exemplified by Mexico’s lack economic production during the most recent US downturn, when their growth slumped and bottomed out at negative 6.0% in 2009. Economic reliance on one nation can be just as harmful as reliance on a certain economic sector such as commodities; Mexico must diversify to insure against any possible future U.S. slumps.

Signs of Change: Diversity Out of Necessity

Despite the previously stated advances and benefits associated with its commodity-driven growth, Latin America would benefit greatly from a more balanced economy. By investing more in sectors such as infrastructure, education, service industries and technology, Latin America will be better suited to face current and future global market conditions. Some countries have already taken steps to improve their economic foundations. For example, Brazil’s $26 billion port infrastructure improvements, Chile’s education budget increases that now stand at $12.8 billion, Mexico’s recently enacted labor reforms, and Peru and Panama’s new capital city metro systems are steps in the right direction. Nevertheless more must be done in the upcoming years if Latin America is to retain its place amongst the fastest growing regions of the world. The good news for LatAm is that its economic foundation is strengthening. With growing political stability, a surging middle class and an increased emphasis on domestic investment, the region has the basic platform to improve upon current economic growth.

Sources: Wall Street Journal, Bloomberg, Diplomatic Courier, BBVA, Reuters, Financial Times, Eurasia Review, The Observatory of Economic Complexity, World Crunch, World Bank