Is the party over in Latin America?

Latin America begins another cycle in the region’s decades-long boom/bust economy.

by Brian Liberatore, MBA ’16, EMI Fellow

The party is over in Latin America. Again.

The last decade saw soaring commodity prices flood the region with tax dollars, bloating government budgets, ballooning social programs, and distorting currencies. Now oversupply and shrinking Chinese demand for those commodities have sent prices crashing back to earth. And so begins another cycle in the region’s decades-long boom/bust economy.

“The consequences look to be the same. Governments become dependent on this influx,” said Cornell Assistant Professor of Government, Gustavo A. Flores-MacÍas[1]. “And it disappears.”

The next several years will answer major questions: how well have governments prepared for the price collapse, and what will they do to prepare for the next decline. The cash flow from skyrocketing commodities disguised structural weaknesses across the region. As that flow shrinks to a trickle, the consequences of those policies is coming to light.

In Venezuela, fist fights are erupting in breadlines, while high-rise condominiums are reshaping Cartagena’s skyline in Colombia next door. Creeping inflation threatens to send Brazil’s currency into a bought of hyperinflation now wiping out wealth in Argentina and Venezuela. Peru’s Nuevo Sol, meanwhile, is holding a steady 4 percent inflation rate.

Venezuela and Argentina are the most visible examples of the decline. Venezuela under Hugo Chavez and his hand-picked successor, NicolÁs Maduro, poured oil profits into social programs, collecting votes and billions of dollars in debt. Overnight Venezuelan oil lost two-thirds of its value, dragging the country with it. To pay the debt, Maduro upped money printing. Now a dollar buys 75-80 bolÍvars, the country’s official currency, on the black market. That is seven times the official rate.[2] Grocery store shelves are empty, doctors struggle to get supplies, and the streets have erupted in violence. Government attempts to keep the lid on inflation have only constricted the economy. The government will have to loosen its grip on the economy, letting the currency fall. It is a slow crawl back to prosperity.

Argentina’s economy looks woefully similar. Prices of soya – the backbone of the country’s agricultural industry – have dropped 48 percent over the past three years. Inflation in the country stands around 28 percent.[3] The country’s federal government meanwhile defaulted on $1.3 billion in US loans. The country’s president, Cristina FernÁndez de Kirchner, seems content blaming supermarkets and US-based vulture funds, while ignoring the federal spending spree over the past decade.

Brazil, briefly a beacon of economic hope for the region, is now starting to show signs of stress. Global demand for the country’s soya, iron ore, and oil helped squeeze a 2 percent growth from the country between 2011 and 2014. In the fourth quarter of 2015, Brazil is looking at a 2 percent contraction. This year, the Brazilian population exploded in protest as word leaked out about a decades-long scandal involving state-owned oil company Petrobras, President Dilma Rousseff’s ruling party, and billions in blatant graft.

Corruption, Gustavo A. Flores-MacÍas points out, tends to run rampant when times are good. The Petrobras example is by far the largest example, but thousands of small transaction – police bribes, influence peddling, and corrupt contracting tend to follow revenue spikes. Calls for reform are often lost in the prosperity.

The collapse of commodity prices helps fuel discontent and economic hardship in places such as

Argentina, Venezuala, and Brazil. But it can put public pressure on institutions to reform.

Colombia, for example has seen a relative economic boom, with growth at nearly 4.5 percent in 2014.[4] The United Nations held its Urban Forum two years ago in Medellin. The city, home to the late cocaine kingpin Pablo Escobar and once synonymous with violence and corruption, now boasts an enviable public transit system, world class museums and conference centers, and a thriving tourism culture.

The International Monetary Fund’s mission chief for Colombia, Valerie Cerra, said earlier this year that, “The authorities have ample policy space to counteract the negative effects of any shocks. Colombia also has a comfortable level of international reserves, reinforced by its access to the IMF’s Flexible Credit Line, which provides insurance to countries with very strong policies and track records.”[5]

This kind of rainy-day fund could spell good news for Colombia’s future. Corruption, according to Flores-MacÍas, is still a powerful malignancy across the region – including Colombia – but attacking it through reforms and international monitoring has shown a few signs of success.

A wave of anticorruption demonstrations across the Latin America this summer preceded US charges against former Honduras Vice President Jamie Rolando Rosenthal and his son Yani Rosenthal for allegedly laundering millions of drug cartel money.[6]

In Chile, the economic picture is also improving, despite a drop in commodity prices that promises to push down tax revenue for the mineral-rich country. According to the OECD,[7] Chile is seeing some success broadening its economic base and could see a moderate recovery this year and next. The organization predicts that there will not be a significant recovery in the copper-mining sector, a major contributor to the country’s economy.

No one expects that commodity prices will stay suppressed permanently. They may not rise significantly in the next few years, but they will rise. And with that rise will come another boost across Latin America. The years in between leave open the opportunity for Latin America to push forward with fiscal and political reforms, building strong institutions as a buttress against corruption. These years could leave Latin America well poised for growth or back on the boom/bust roller coaster. Only time will tell.

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[1] Gustavo A. Flores-MacÍas, interview by Brian Liberatore, October 8, 2015boom/bust dly A. Flores-MacÍas,

[2] “Latin America’s weakest economies are reaching breaking-point.” The Economist. Feb 1, 2014.

[3] Ibid

[4] http://www.imf.org/external/pubs/ft/survey/so/2014/car052014a.htm

[5] Ibid.

[6]http://topics.nytimes.com/top/news/international/countriesandterritories/honduras/index.html

[7] http://www.oecd.org/economy/chile-economic-forecast-summary.htm