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LATIN AMERICA LOSES ITS GROWTH POTENTIAL

Date: 22/06/2018

Author(s): Borja Santos Porras, Gregorio Bustos Serrano, Jorge Díaz Lanchas



We recently talked about the theory of economic complexity, and disclosed some revealing data about the economic complexity of Spain. We would like to continue this series by focusing on the countries of Ibero-America. Specifically, we will analyze the extent to which their productive capabilities have evolved in recent years.

As we have previously explained, economic growth rates are fundamentally related to productive capabilities. A given country’s capabilities are demonstrated by the products that it is capable of competitively producing and exporting, and are measured by the Economic Complexity Index. In the following graph, we compare the 2000 and 2014 indices with the per capita income of Ibero-American countries, including Spain and Portugal as benchmark countries in this group. Gross Domestic Product (GDP) per capita—a productivity indicator—is shown on the vertical axis, and the countries’ economic complexity is shown on the horizontal axis.

Figure 1: Complexity and GDP per capita by country (2000 vs. 2014)
[image 1]
Source: Compiled from data from the CID at Harvard.

From this data we can see that, from 2000 to 2014, Latin American countries have on average gained more income than complexity. Venezuela, Ecuador, Argentina, Brazil, Bolivia and, relatively speaking, Chile have lost complexity at a particularly dizzying pace. This is not good news for the major economies of South America, as it may indicate a reduction in their growth potential in the coming decades. In contrast, small countries like Honduras and Costa Rica, as well as Mexico—one of the strongest examples—have increased their productive capabilities in this period, which is a positive sign for Mexico’s large economy. When it comes to Portugal and Spain, although the former has generated a greater productive capability—which could be explained by the economic results shown in recent years—the Spanish economy has lost its productive potential, as demonstrated in our previous article.

In the following table, we can see the evolution of the global rankings of economic complexity of Latin American countries by analyzing the change in their positions from 2000 to 2007 (before the economic crisis) and from 2008 to 2014 (during the crisis).

Table 1 – Evolution of the global rankings of economic complexity of Ibero-American countries
[image 2]
Source: Atlas of complexity from the CID at Harvard.

When we analyze the positions of Latin American countries during the years prior to the economic crisis (2000 to 2007), we see that the Dominican Republic, Cuba, Guatemala, Panama and Paraguay rose quite a few positions in the global ranking (showing relatively greater economic complexity), while Bolivia, Brazil and Venezuela fell farthest in the ranking (showing comparatively lower economic complexity). When we consider the period from the beginning of the recession onward (2008 to 2014), we can see that most Ibero-American countries dropped in the ranking. From this, we can deduce that the crisis had a greater negative effect on the economic complexity of Ibero-American countries than it did on that of others.

To measure this economic complexity, we focus on two features of each country’s exports portfolio: diversity (which shows how different or diverse its products or capabilities are) and ubiquity (which shows the degree to which these products are unique to that country or not). In the following figure, both factors are again shown for Ibero-America in 2000 and 2014. The horizontal axis represents the product diversity of each country’s economy, and the vertical axis represents its ubiquity. The lower the latter value, the more unique and exclusive the economy’s products.

Figure 2: Diversity and ubiquity by country (2000 vs. 2014)
[image 3]
Source: Compiled from data from the CID at Harvard.

Figure 2 delves deeper into the data of Figure 1, showing that the vast majority of Latin American countries are decreasing in diversity (Venezuela is the clearest example of this). When it comes to ubiquity, the results are more mixed. Some countries—such as Guatemala, Honduras and the Dominican Republic—produce less ubiquitous products, while countries such as Argentina and Chile produce more ubiquitous products, suggesting that they specialize in goods that most other countries are also capable of producing. Portugal seems to differentiate itself again here, as it has increased its diversity and slightly reduced its ubiquity, giving some indication that the productive capability of its economy has improved.

Evolution of exports portfolio 2000-2014
[image 4]
[image 5]
Source: Atlas of complexity from the CID at Harvard.

The evolution of a country’s exports portfolio from 2000 to 2014 provides more clues for understanding its increase or decrease in economic complexity. In the case of Brazil, which accounts for about 40% of Latin America’s GDP, there has been an especially notable loss of diversity as the percentage of major agricultural products (such as soybeans and sugarcane) and minerals (iron, oil, etc.) has increased, and the percentage of other products has decreased. A very similar analysis also applies to the loss of complexity in Colombia and Argentina. We previously noted that Mexico stands out as a country with great economic complexity, in comparison with other countries like Chile. For example, the North American Free Trade Agreement, signed three decades ago, played a role in the fact that Mexico’s manufacturing exports increased in comparison to its oil exports during that time. The possibility of trading with the neighboring United States has also been highly influential. In the case of Chile, its exports are largely based on unsophisticated products like copper and gold, and it has not diversified its production over the years, resulting in lower economic complexity. Despite the fact that Chile has improved with respect to many other indicators, its economic growth has slowed down in the last decade. Ricardo Hausmann drew attention to this lack of diversification in an infamous and controversial tweet that said, “Why isn’t Chile growing? Because it’s full of Chileans.” What he really wanted to point out was the low percentage of immigrants in Chile (2%), since migration is essential for the generation of productive capabilities, as well as for entrepreneurship and innovation.

We have also noticed that when we compare the economic complexity of Chile and Mexico, it varies greatly—even though both countries have a similar per capita income. This is because the Economic Complexity Index only measures one aspect of competitiveness, which is linked to the sophistication and diversification of exports. But there are other key factors at play, such as macroeconomic environment, political stability, the labor market and the state of other institutions. In this case, for instance, there is a significant difference between the percentage of the economy that is informal in Chile (30-35%) vs. Mexico (60%), as well as in their macroeconomic stability.

The most striking case of decline is that of Venezuela, which in the last decade has greatly reduced its productive knowledge due to a significant loss of capabilities. On the one hand, oil requires capabilities that have few alternative uses in other activities, and on the other hand, emigration and the disappearance of many companies have contributed to this decline. The most positive cases are those of Costa Rica and in particular Nicaragua, although they remain relatively low in the ranking due to the fact that they export raw materials and goods with low added value.

As previously stated, there are many other factors that influence future economic growth, and even more so when it comes to inclusive growth in a region with so much inequality. But readers should pay attention to the way in which productive capabilities are developed, as this is a fundamental factor for the improvement of Ibero-American economies.