4.7- Economics and Politics of Latin America

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21st Century Economics and Politics

In Section 4.6, we described how Latin American countries started to acquire huge debts that they could not repay after the recession of the 1980's. Alarmed by the large debts held by governments throughout the developing world, international bank began s to action in the early 1980's through the International Monetary Fund (IMF).  They developed and enforced programs to ensure that there would be sufficient funds to  repay loans despite widespread economic instability.  These programs relied on privatizing industries and enterprises formerly owned by government, developing a free market economy in support of free trade, globalizing national economies, opening them up to international investors and austerity leading to reductions in government deficits through cuts in spending and higher taxes.

Many government enterprises were sold to foreign investors and corporations in North America, Europe and Asia often at rock bottom prices. Governments were required to remove tariffs on goods of all types causing many local industries to fail.  Social programs and government services which had been expanding  were eliminated and many government workers who were a mainstay of the middle class lost their jobs. Public health, education, job training, day care, water systems, sanitation etc were all cut back.

In the 1990's the people of Latin America responded by moving towards governments who were socialist-leaning in Venezuela, Argentina, Bolivia, Brazil, Chile, Ecuador, Nicaragua, and Uruguay. Hugo Chavez emerged as a leader of the backlash, nationalizing foreign oil companies operating in Venezuela and using some of his country's oil wealth to help other countries. Argentina, Bolivia, and Nicaragua were able to pay off their international debt. The main exports of Latin America remained agricultural products and natural resources such as copper, iron, and petroleum. Strong prices for the region's exports supported years of steady expansion of social policies, resulting in major improvements in human development. By 2015, falling prices for raw materials resulted in an economic downturn and governments in Brazil, Argentina and Chile turned away from socialist policies.

In Latin America, the gap between rich and poor remains one of the largest in the World. The poverty rate for the region as a whole is around 33% but in the poorest countries (Guatemala, Honduras, Nicaragua, Peru, Bolivia and Paraguay) more than half the population lives in poverty. 

Chinese Influence

International banks, the IMF and the U.S.  have seen their influence in Latin America fall. Loans from the IMF dropped from US $48 billion in 2003 to just $1 billion in 2008.  Fewer countries are turning to the IMF for loans. China has stepped in to fill the gap. China's demand for resources, and its willingness to lend directly to governments as a means to securing access to these natural resources has transformed the region.

China's greatest influence in the region comes from trade. Strong economic growth in Brazil, Chile, and Peru during the early 2000's was based mainly on the export of raw materials to China, which is now their largest trading partner.  China is the second or third largest trading partner for every other major country in the region including Mexico, Colombia, Argentina, Venezuela and Ecuador. For Latin America this is both a boon and a bane. If China's economy is thriving and demand for raw goods remains high, Latin America benefits. But any slow down in China's economy directly impacts the economies of Latin American countries.

Still, this relationship with China has brought many changes. Brazil is part of the BRICS association between Russia, India, China and South Africa.  The BRICS countries are attempting to counter the influence of the US and Europe on the global economy. The BRICS countries recently formed their own bank, headquartered in China, as an alternative to the IMF and the World Bank.  In 2014 the IMF asked for help from Brazil, Mexico and Peru in developing a bail-out package for overly indebted countries in the European Union. 

Unfortunately, the one thing that has not changed is an economic reliance on raw materials. Of the major economies of this region, only Mexico has growth that is driven by the production of manufactured goods most of which are headed for the U.S.

The Informal Economy

The informal economy  is the part of any economy that is neither taxed nor monitored by any form of government. For centuries, many businesses in Latin America have operated without paying business, sales or income taxes. The majority of the working people are employed in the informal economy in most of  Central America and the Andean countries (Colombia, Peru, and Bolivia) and for the rest of the region, 30 to 40% work in the informal sector.  By contrast in the U.S., estimates are that about 16% work in the informal economy.

The Internet

Overall, this region is more advanced in terms of information technology than many other developing regions.  Brazil ranks fifth in the world in terms of the total number of internet users and has two world-class tech hubs near Sao Paolo. 

Mexico, with 49% of its population connected, recently launched a program to give its citizens free access to training and higher eduction via the internet. Similar efforts are ongoing around the region and are part of a long-term shift, especially in urban areas toward more tech and better paid service sector jobs.