Part I - Trends
• Latin American economy experiences a second consecutive year of stagnation and will probably contract (-0.2 per cent) in 2016. This is due mainly to weak economic performance in South America, where several countries (particularly Argentina, Brazil and Venezuela) have experienced falling levels of consumption and fixed capital formation. Tighter external conditions (including losses from the terms of trade) in 2015 led to fiscal retrenchment and exchange rate depreciation. The latter is being reversed in 2016, as net capital flows, after declining during 2015 (although remaining positive), rebounded in the first quarter of 2016 (Chart 1.3).
• In 2016, growth in Mexico (around 2.2 per cent) and the economies of Central America and the Caribbean (4.0 on average) will remain close to that of 2015. These economies were less affected (or even benefited) by changes in terms of trade. However, they may be affected by the deceleration in the United States and, in Mexico, the emphasis on fiscal consolidation will continue to dampen public investment (table 1.1).
• Investment rate in Latin America has been rather low, oscillating between 19 and 21 per cent of GDP in the last thirty years (compared to 25-26 per cent around 1980). As in most emerging economies, investment-to-profits ratio of non-financial corporations has declined in Brazil, Chile and Mexico. Instead, debt ratios have increased in Latin American countries, and also the financial assets-to-debt ratios, indicating higher levels of financialization, without it being translated into higher productive investment (table 5.3).
Part II – Industrialization and productivity growth have lost steam in Latin America since the 1980s
• Several Latin American countries have endured premature de-industrialization since the 1980s: unilateral trade opening, financial deregulation, regressive income redistribution and the retreat of the developmental State strongly affected manufacturing, whose share in employment and value added fell significantly (table 3.2).
• A large share of the labour force leaving the agriculture was employed in low-productivity services rather than manufacturing or modern services, while the slowdown in GDP growth and declining investment ratios had a negative effect on within-sector productivity in the 1980s and 1990s. With few exceptions (e.g. Argentina between 2002 and 2010), manufacturing in Latin American countries could not expand simultaneously its productivity and its employment after 1980 (charts 3.3 and 3.4).
• Gross exports expanded notably, including in manufacturing, but this did not translate into faster manufacturing growth, because they did not generate enough production and knowledge linkages: much of the inputs for manufacturing exports are imported, meaning than net exports of manufacturing did not progress (charts 4.3 and 4.7).
Part III – Policy
• Turning more towards the regional market may offer important benefits. Intraregional exports (particularly in South America) consist mostly of manufactures and processed commodities; it thus has the potential to support industrialization and diversification (Table 4.1 and Chart 4.2).
• Adequate management of natural resources is essential: (i) net exports of primary commodities contribute to the foreign exchange earnings needed for financing capital goods imports; (ii) processing of domestically available raw materials and developing inputs for the primary sector would promote forward- and backward linkages between the primary sector and industry; (iii) capturing a fair share of primary rents provide resources to fund infrastructure investment and industrial policies; (iv) resources should be used with a long-term perspective, avoiding macroeconomic pro-cyclical policies and excessive currency appreciation.
• Strengthening the investment-profit nexus in important in all countries, so corporations re-invest profits into productive investments that generate jobs and growth.
• Industrial policy should combine unless supportive macroeconomic policies ensure high levels of aggregate demand, high levels of investment and a stable and competitive exchange rate. It should seek to strengthen production and knowledge linkages and promote imported inputs substitution industrialization strategy (IISI) to cultivate domestic capabilities.