Edmund Amann on the Middle Income Trap in Latin America

Edmund Amann is Professor of Brazilian Studies at Leiden University. Previously he was Reader in Development Economics in the School of Social Sciences at the University of Manchester and Research Fellow at the University of Oxford Centre for Brazilian Studies. He has published in a wide range of development and economics journals including World Development and Oxford Development Studies. He is joint editor of the Oxford Handbook of the Brazilian Economy.

More than two decades into the 21^st century Latin America finds itself in an unenviable position, saddled with a record of low growth, losing ground to other emerging regions and struggling to defend what social progress it has managed to recently accomplish. For some observers, the conditions described amount to a middle income trap. According to this interpretation, Latin America is failing to achieve a much needed step change in economic performance.

Very broadly, this is because it has lost the cost advantages associated with low income economies, but has yet to acquire the competitive strengths (especially in terms of innovation, sectoral diversification and productivity growth) that enable high income economies to reconcile solid growth rates with higher wages and other costs. Faced with this, the region is compelled to fall back on areas of traditional competitive strength in the natural resources-intense sectors. Hence, so the reasoning goes, Latin America keeps waiting in vain for living standards to take off and for its much vaunted economic potential to be fulfilled. A recently published volume of which I am co-editor[1]attempts to explore the empirical realities surrounding the potential existence of a Middle Income Trap in Latin America. The book’s key findings formed the basis of the seminar presentation (at the Latin American Centre in Oxford). Drawing on this and the concluding chapter, they are summarized here.

Examining the contemporary economic circumstances of the region, one obvious question that emerges is whether some of the factors holding the region back are connected with its position in the international division of labour, especially an exaggerated reliance on exports of natural resource-based products. The evidence presented in the book suggests that exports, including those that are natural resource-based, will and should remain central to accelerated development and a breakout from the middle-income trap. ​This is not only because of the direct impact on aggregate demand; exports also offer the capacity to engage in learning and gain international market experience. ​Evidence from Mexico, Costa Rica and to some extent Brazil and Peru even points to export diversification to varying degrees. There is definite evidence of movement up the value chain on the basis of natural resource-intense exports.​ However, building linkages between emergent centres of export diversification and the broader economy remain challenges​

Regarding the rise of China and its growing importance in terms of Latin America’s international economic relationships, while it is true that Latin American exports directed at China have been dominated by natural resource-intense products, there is little evidence that this resulted in an overshooting of key Latin American currencies. These would have resulted in competitive pressures on other elements of the region’s tradables sectors. ​

What appears to be more likely the case, as in the case of Brazil, is that competitive challenges in the non-natural resource intense tradables sectors find their origin in structural impediments connected, for example, with under-investment in infrastructure, education and innovation. Still, the presence of China as such a strong competitor poses a significant export challenge for the region in the field of manufactured exports in which the region should seek to seek to gain a firmer global foothold.

A related issue concerns the so-called reprimarization[2] trend to which Latin America has been subject, partly as a result of trade reforms in the final quarter of the 20^th century. To what extent does this present a problem? In first place, there is no suggestion in the recent structural evolution of Latin America’s economies and export profile that the trend is either universal or irreversible. As the cases of Costa Rica and Mexico, made clear, thanks to FDI inflows, it has proven possible for economies in the region to maintain an elevated profile of non-traditional industrial and manufactured exports, to say nothing of the business services and tourism exports that are so important for many economies in the region. Even if the re-primarization trend were seen as intrinsically undesirable, the capacity appears to exist in the region to buck it.​ 

Moreover, as suggested by the experiences of Argentina and Brazil, it would be a mistake to assume that natural resource-based activities are necessarily technologically inert. ​Nor should it be thought that they lack the potential to catalyze the emergence of related sectors, whether as a result of conventional backward and forward linkages, or through knowledge spillovers. ​Thus, in terms of driving growth and improved productivity performance, natural resource-intense activities will have much to offer the region. However, more consistent efforts will need to be made to exploit more fully their potential.

The book also highlights the role of non-traditional manufacturing and services activities in catalyzing growth and shifting, where desirable, Latin America’s place in the global division of labour. Argentina, Costa Rica and Mexico have achieved a measure of success in promoting such activities, the latter especially so in the consumer durables, electronics and automotive sectors. The challenge lies in extending linkages from these sectors to others in the economy, capturing greater parts of the value chain, and establishing related sectors. Also necessary is the ability to facilitate knowledge spillovers from these ‘lead sectors’ to others in the economy. Were such spillovers to become more the rule than the exception, then the potential is held out for accelerated productivity growth in the Latin American ‘economic hinterland’, a domain typically characterized by a lack of dynamism and formal innovation. ​

Moving towards a conclusion, as Latin America looks forward to the second quarter of the 21st century, the book suggests that, despite many frustrations, key elements for success in achieving a step change in economic performance are already in place. ​

Capabilities built up over the long term can be unleashed. The entrepreneurial spirit of the region is undoubted and can be channeled into new ventures. At the same time, opportunities in a more complex and troubled global economy are there for the taking and can be seized. ​All of this can unfold on the basis of a pragmatic approach to blending the region’s advantages in natural resource-intense sectors with emergent activities, many of which are linked to the knowledge economy.

Fundamental to success in all these dimensions will be well considered policy frameworks. ​Also required will be the allocation of resources into priority areas, especially around investment in people and productive assets. ​Whether or not Latin America grasps the opportunities within its reach will depend on societal choices and the political processes that underpin them. ​