Velasco on Latin American Economies

Andrés Velasco, who was Michelle Bachelet's very popular finance minister, has an article worth reading about Latin American economies. The bottom line--Latin American policy makers need to address long-standing structural problems as commodity prices fall. In large part this means investment.

The composition of government spending is also a problem. According to the same IADB report, investment accounts for only 16% of fiscal outlays, less than half the share in emerging Asia. So Latin America suffers from a longstanding infrastructure deficit, which acts as a drag on growth. 

Even abundant domestic savings in the future would not guarantee higher investment. Firms’ eagerness to invest depends on how much additional output they can get out of that investment, and recent productivity growth in Latin America – as in the US – has been disappointing.

Of course, this is an old, old, old story. Far too many Latin American countries are exporting basically the exact same things as a generation or even several generations ago. And all too often these are centered on commodities.

So, can Latin American economies keep growing once commodity prices and world interest rates edge back toward normality? We in the region hope they can. But a return to stagnation is also a possibility – one that can be minimized only if policymakers acknowledge it and begin taking preventive action right away.

It is an age old problem. The types of investments he's thinking of don't generate too many votes.