America’s Back, But Missing From Its Backyard
“America’s back,” Joe Biden said recently at his first G7 meeting, seeking to reassure allies and to recruit them as partners in the US competition with China. But for all the policy focus on East Asia, Russia, the EU and the Mideast/Southwest Asia, America’s backyard in the Western Hemisphere is now its fourth decade of recurring political and economic crises.
Latin America was the great catch-up growth story between 1945 and 1980 — growing 2.7% annually in that period. The Olympics (a classic sign that a country has made it) were held in Mexico City in 1968–20 years before Seoul and 40 years before Beijing. However, most of the region has stagnated since the 1980s, with its troubles even more evident when compared with East Asia or Central Europe. The region’s two biggest economies — Brazil and Mexico are confronted with China catching up fast, even as Korea, Poland and Turkey have pulled away.
There are many reasons for South America falling behind (Mexico has separate issues), but the biggest lies in the centrality of commodity exports as the main motor of global integration. Ricardo Hausmann has said that a country is rich not because of what it has but because of the number of things that it knows to do well (Link to a fascinating conversation here — https://www.ideasuntrapped.com/p/development-and-capability). He describes the ability to compete in global markets in a range of products as “economic complexity” and his Atlas of Economic Complexity is a chronicle of South American decline. https://atlas.cid.harvard.edu/rankings
South America’s relatively undiversified economies are especially vulnerable to global growth cycles and to overreliance on debt denominated in foreign currencies. This is a combination that has led repeatedly to economic distress and political turmoil. Most countries in Latin America are democracies, but Peru is only the most recent regional example of how elections have become little more than a contest between left-and right-wing populists against a backdrop of festering disappointment.
Efforts to break out of commodity dependence have typically taken the pattern of import-substitution industrialization, but this has proved inferior to the East Asian approach. Those countries relied on a short period of protecting local industry with “training wheels” and provided a welcome mat for FDI, while an export focus imposed the discipline of global markets. But other than Brazil’s regional jet manufacturer Embraer, South America’s local champions have receded from the leading edge of technology even as Asian counterparts have come closer to or reset it.
This divergence is obvious in equity markets. 64% of EEM (a leading emerging markets ETF) consists of firms in China, Taiwan or South Korea, with India having another 10%. Brazil has about 5% of the index and its largest entrant is mining giant CVRD. As one emerging market equity manager (who goes by “Justinian”) put it on Twitter — East Asia is a convergence story, Latin America is a cyclical story for global booms that originate outside the region.
Mexico is different but has still fallen short. Integration with advanced US industrial supply chains via NAFTA improved the structure of Mexican exports but not much else. Manufactures have gone from 10% of Mexican exports in 1980 to 80% now, but there has been little diffusion of new technologies beyond the maquiladora economy. The biggest components of the Mexican index are cellphone quasi-monopolist America Movil and Walmart de Mexico — slim pickings that are a far cry from Alibaba/ANT (even with its latest troubles) or Samsung.
There are many local causes for Mexico’s sluggishness — education is a particular problem, as is the misfortune of being next door to US markets for both arms and narcotics. But, beyond this, a comparison of Mexico in NAFTA with ex-Communist Europe in the EU is telling. The EU is a “full-service” integration project, offering not just market access but also infrastructure improvement funds, free movement of labor and a shared legal and institutional framework. This message seems to have been digested by portfolio investors, making central European currency and external debt markets much less volatile than their Mexican counterparts.
But US politics (particularly on the fraught issue of migration) make it unthinkable that any such offer could ever be made to Mexico. The EU’s increasingly fractious relationship with Turkey is a better analogue for US/Mexico, with the depressing caveat that Turkey has put in a much better growth performance over the last 30 years.
A recent map in The Economist showed how, since 2000, China had become a bigger trading partner than the US to most countries. In purely economic terms, this is more natural than worrisome. China’s growth pattern soaks up commodity imports and its position as the world’s dominant exporter of mid-tier manufactures makes it a bigger trading partners for most countries than a commodity-rich, services-oriented, high-tech exporter like the US.
But the diplomatic consequences are different. China’s rising economic role in South America makes it hard to muster the region into any US-led alliance to contain or counter China. Worse, the region’s decades of economic underperformance and its unhappy history with the IMF make it hard to frame a case against China’s alleged “debt trap diplomacy”. One way to think of Latin America’s problems is that it has spent the last few decades alternating between being the Washington Consensus’s guinea pig and its poodle.
Meanwhile, US policy makers and politicians seem to view the region (when they are paying attention at all) along two primary axes — as a potential vector of Chinese influence, or as a locus of vexing immigration issues that spill into internal US politics. The Good Neighbor policy was never much more than a slogan (and US political interventions in the region were often anything but neighborly), but what’s replaced it as an Mostly Indifferent and Annoyed Neighbor Policy.
Further integration (even with Mexico) along the lines of the EU looks like a political non-starter. And even if the rest of Latin America offered an attractive base for global corporations to replicate the role they played in Asian catchup, the US’s political tolerance for outbound FDI and inbound imports has collapsed. US fiscal reflation accommodated by a dovish Federal Reserve could give Latin American markets relatively favorable winds for now, but a permanent escape from the region’s social, economic, and political doldrums looks much harder.
