Is Latin America’s Boom Over? A Pall, Personal and Economic, Falls Over a Regional Summit

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Pablo Porciuncula / AFP / Getty Images

Argentine President Cristina Kirchner takes part in the XLII Mercosur Summit in Montevideo on December 20, 2011.

A pall was cast over the summit of Mercosur nations in Uruguay this week when Iván Heyn, Argentina’s Undersecretary for Foreign Trade, was found dead, hanged with a belt in his Montevideo hotel room. Heyn, only 34, was a rising star and close friend of the family of Argentine President Cristina Fernández de Kirchner, who was just sworn in Dec. 10 after her landslide re-election victory. Visibly upset, Fernández, who is taking over as chair of the South American trade alliance, could have been speaking in a personal as well as macroeconomic context when she told her fellow heads of state at the end of the summit on Dec. 21, “We have to protect each other.”

Uruguayan investigators say they’re trying to determine whether Heyn’s death was a suicide or possibly accidental asphyxiation. But even before the Undersecretary’s demise, the Mercosur nations were feeling an end-of-the-year malaise – and an urgent need to protect each other’s economies. In short, the continent’s decade-long boom may be ending. According to the U.N.’s Economic Commission for Latin America and the Caribbean (ECLAC), Latin American growth, which topped 6% last year, will slow to 4.3% this year and 3.7% in 2012. Brazil’s economy, the region’s largest, actually flat-lined in the third quarter; Argentina’s scorching growth of 9% this year will be halved to 4.8% next year, and capital flight is expected to be robust. Mexico’s growth, meanwhile, will drop from 4% to 3.3%.

That’s hardly doomsday news, but it’s one reason the Montevideo summit’s main action was to raise protective import tariffs inside its four full-member nations of Brazil, Argentina, Uruguay and Paraguay. (The rest of Spanish-speaking South America are associate members.) A big reason the severe global recession hadn’t caught up with most of Latin America until now is that el boom was fueled mostly by exports of commodities, from soy to iron ore, to insatiable China. But even China’s stratospheric growth is expected to fall in 2012. That, coupled with still drooping demand in the U.S. and Europe, is bad news for Latin America – but not only because the global market for its raw materials will be weaker. A more important reason is that the boom let Latin America slip once more into its addiction to raw materials exports.

(See “A New Iron Lady: Why Dilma Is Brazil’s Best Bet to Revive Its Economy”)

Mercosur and much of the rest of the region feel the need for higher tariffs now because their manufacturing sectors, the real long-term muscle of any modern economy, can’t yet compete with those of countries like China. Beijing has flooded Latin America with cheaper industrial goods like electronics, machinery and clothing, while its unfairly undervalued currency has made access to the massive Chinese market difficult for even industrialized countries like Brazil. It’s thrilling for Latin America, which has long wanted to shake its trade dependence on the U.S., to see its commerce with China skyrocket from $12 billion in 2000 to almost $150 billion today. But at the same time, for all the tons of wheat and copper it’s sent across the Pacific during that time, its trade deficit with China has also exploded, from $863 million to $32 billion.

A few countries, like Brazil, have sold China enough commodities to actually post a trade surplus with Beijing. But even Brazil lost about 70,000 manufacturing jobs last year. The fact is, according to ECLAC, commodities accounted for 27% of Latin America’s exports in 1999; today that has jumped to 39%, and that in itself should have been a pall hanging over the Mercosur summit even before it began. Organizations like ECLAC have implored Latin America for years to focus on economic diversification, innovation and integration – astonishingly, Latin American economies do only a fifth of their total trade with each other – goals the boom should have made it easier to accomplish.

The Miami Herald’s Andres Oppenheimer makes probably the most important point this morning: Latin American nations “should be using their extra income to improve their disastrous education standards and become more competitive in the global economy.” Amen: while Asian economies account for a third of the world’s research-and-development expenditures today, Latin America accounts for about 3%.

(See “How Brazil Is Sending 75,000 Students to the World’s Best Colleges”)

Higher tariffs won’t solve that problem. Unfortunately, a lot of that discussion got drowned out at the Mercosur summit by more political fare like rallying around Argentina in its renewed efforts to win back the Falkland Islands, or Las Malvinas, as they’re known in Argentina, from Britain. (Next March marks the 30th anniversary of the then Argentine military junta’s disastrous invasion of the Malvinas, when the British dealt the dictatorship a quick defeat that led to its collapse.) The gathering also approved a largely symbolic free-trade agreement with the Palestinians, and appointed a special committee to consider Venezuela’s request for full Mercosur membership.

That last item is being held up because Paraguayan Senators charge that socialist Venezuelan President Hugo Chávez has an authoritarian bent. They may have a point, but their objection is more than a little ironic since the Senators are from Paraguay’s Colorado Party – the lapdog of the brutal 1954-89 Stroessner dictatorship and historically one of South America’s most anti-democratic forces. Chávez is just as guilty of the commodities craze: thanks in no small part to his over-reliance on Venezuela’s prodigious oil exports, production inside the country’s own key manufacturing sectors fell during the first half of 2011 below 1997 levels, according to the central bank.

Meanwhile, four major Latin American economies on the region’s Pacific rim – Mexico, Chile, Peru and Colombia (with Panama as an observer) – agreed this month to start a new trade bloc, the Alliance of the Pacific, to put them in closer contact with the Asian “tiger” markets. Last month, Chile and Peru became founding members of the new Trans-Pacific Partnership (TPP) that includes powers like the U.S. and China. It may be a sign Latin America wants to be more like Asia – especially if 2012 really does mark the end of el boom.

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