Listening to the business-as-usual speeches by the leaders of Argentina, Bolivia, Venezuela and other South American countries in the wake of China’s economic slowdown, it seems like they are living on a different planet. They are still bragging about their countries’ abundant natural resources and raw materials, as if that mattered much in the new world of Google, Apple and Uber.
In recent years, when South America benefitted from record world commodity prices thanks to China’s ever-growing purchases of oil, soybeans and other raw materials, the region’s leaders embarked on a populist fiesta, failing to notice that the world was moving swiftly toward a knowledge economy.
They spent heavily on social subsidies, and fooled their populations into thinking that they had come up with magical formulas to reduce poverty. Meantime, they neglected investing in quality education, science, technology and innovation.
But now, the fiesta is over, and Latin America faces a perfect storm: an economic slowdown in China, falling commodity prices, a flight to safer countries by international investors, and the possibility that the U.S. Federal Reserve will raise interest rates, which would make it more difficult for countries in the region to get loans or pay their foreign debts.
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What’s worse, many South American countries are finding themselves with little to sell other than low-priced raw materials. They have become so complacent with their commodity booms, that they have done very little to become more competitive in exporting manufactured or high tech goods.
The region’s spending in research and development averages 0.5 percent of its gross domestic product, compared with 4 percent in Israel and Finland. South American countries rank last in international PISA student achievement tests, and together they produce about five percent of the international patents registered by South Korea, according to the U.S. Office of Patents and Trademarks.
New figures from the United Nations Economic Commission on Latin America and the Caribbean (ECLAC) show that Latin America’s exports of manufactured goods fell from 72.3 percent of the region’s total exports in 2000, to 58.6 percent in 2014. And if you exclude Mexico — the region’s manufacturing exports powerhouse — the decline of South America’s manufactured goods exports is much bigger, economists say.
“We have become too commodity-dependent,” ECLAC’s economic development director Daniel Titelman told me. “It is essential that Latin America diversify its export structure.”
An alarming study published Aug. 13 by the Mexican daily El Financiero, quoting a study by JP Morgan and central banks, shows examples of the commodity dependence of specific South American countries. Consider these figures, which according to the paper, are from December, 2014:
▪ Venezuela relies on commodities for 98 percent of its total exports. The country produces virtually nothing but oil, iron and aluminum.
▪ Ecuador relies on commodities for 86 percent of its total exports. Most of what the country sells abroad is oil, bananas and flowers.
▪ Colombia relies on commodities for 79 percent of its total exports. Most of its exports are oil, coal, coffee, gold and flowers.
▪ Bolivia relies on commodities for 72 percent of its total exports. Most of what it sells abroad is oil, silver and zinc.
▪ Argentina and Peru rely on commodities and basic agricultural manufactured goods for 70 percent of their respective total exports. Argentina exports mostly soybeans, while Peru exports copper, gold and fish meal.
▪ Chile depends of commodities for 63 percent of its export income. Its top exports are copper and fruits.
▪ Brazil depends on commodities for 52 percent of its total export income. It exports mostly iron, oils, soybeans, sugar and coffee.
One of the few exceptions to Latin America’s commodity dependence is Mexico, which relies on raw materials — mostly oil — for 17 percent of its total export income.
My opinion: Instead of investing in the future, much of South America has wasted its economic bonanza of the past decade in populist subsidies that have left it ill-prepared to face the coming headwinds.
Now more than ever, South American leaders should focus on changing their countries’ economic strategies and produce more sophisticated goods. They should be talking about spending as much as Israel in research and development, scoring as high as China in international PISA student achievement tests, and registering as many patents of new inventions as South Korea. Sadly, they are talking about the past, oblivious to the approaching storm.