Latin America’s Big Opportunity

Latin America has long languished on the margins of globalization, its economic path marked by slow growth, inequality, and market concentration. Yet current geopolitical and commercial trends present an opportunity for faster, more inclusive growth, economic diversification, and technology-driven prosperity. After all, Latin America has much to offer a world that is both fragmenting and pursuing greener growth models. Moreover, its economic success would bolster the case for democracy around the world.

Over the last three decades, average economic growth in Central Europe, East and Central Asia, Southeast Asia, and Sub-Saharan Africa has outpaced growth in Latin America, where most economies have actually become less sophisticated and diversified. While Asia became the world’s workshop, producing half of the world’s manufactured goods, Latin America was left exporting raw commodities and importing final products. And as its own manufacturing sectors were hollowed out, it had even fewer opportunities to acquire and deploy new technologies, to learn by doing, or to broaden and upgrade its skills base.

Latin American policymakers’ own choices held their economies back. Governments spent too much on “white elephant” infrastructure projects (whose costs outweigh their benefits), and on backstopping inefficient state-controlled energy and commodity producers. They spent too little on roads, rails, ports, and airport connections between their cities, their countries, and the rest of the world. They collected too little in taxes to provide high-quality health care and education. And they spent too little on police, courts, and prison systems to ensure security and the rule of law, thus undercutting the dynamism that they could have achieved.

Moreover, Latin American governments did very little to tie themselves together commercially, thus squandering an opportunity to achieve the economies of scale and specialization that enable technological advances and global competitiveness. That failure made it even more difficult to compete with regionally linked Asian economies and other emerging markets catering to global consumers.

LATAM-SHORING

Yet now, climate change, energy concerns, national-security preoccupations, and geopolitical strategies are shifting commercial calculations. In many sectors, politics and industrial policies are weighing on business decisions as much as, or even more than, traditional market forces, and that has opened up new paths to profits. While shifting supply chains and commercial relations are not good news for everyone, they could be for Latin America.

Latin American countries already lead much of the world in the pursuit of greener, more sustainable energy systems and economic models. Around one-third of the region’s energy comes from clean sources, which is far above the 20% global average, and 60% of its electricity already comes from renewables. Its abundant solar, wind, and geothermal power sources are ideal for companies and industries seeking to fulfill climate pledges or to tap into new clean fuels such as green hydrogen.

Latin America also holds the keys to others’ decarbonization. It produces over one-third of the world’s lithium, a primary component in electric-vehicle batteries, and it boasts sizable deposits of cobalt, manganese, nickel, rare earths, and other minerals used in EVs, solar panels, wind turbines, and energy-storage technologies. In the 11 Latin American countries with free-trade agreements with the United States, local miners, refiners, and manufacturers have a leg up with EV producers that are angling to capitalize on US Inflation Reduction Act subsidies, since their minerals and inputs are eligible for rebates.

Such opportunities are part of a broader trend. A recent McKinsey Global Institute report shows that “friend-shoring” is gaining momentum across the world’s major economies. Since 2017, the US, China, Germany, and the United Kingdom have all increased their trade with ideologically aligned countries and decreased their trade with rivals. Similarly, a recent New York University study shows that the near-shoring trend is significant for North America – though less so for Asia or Europe, owing partly to their pre-existing regional commercial ties.

The push for friend-shoring and near-shoring gives Latin America an advantage, since most countries in the region have longstanding diplomatic, commercial, and cultural ties with the US. Despite frequent grumbling over past US interventions, backdoor commercial dealings, and sanctions against Cuba, much of the Western Hemisphere has stood together in wars and conflicts ever since World War II. Latin American countries side more often with the US than with China on important votes at the United Nations, and public opinion throughout the region is generally more favorable toward the US than it is toward America’s geopolitical rivals.

Moreover, no other region has greater preferential access to US markets through free-trade agreements. All told, the US has relatively few freetrade agreements, and most of them are confined to the Western Hemisphere. It is the largest investor in Latin America and the biggest outside supplier of intellectual property.

A NEW DAWN?

If there is something to the idea that geopolitics is becoming a competition between authoritarianism and democracy, Latin America lines up quite cleanly on the US and Western side. Despite its poverty, inequality, violence, and weaker rule of law, it has more people choosing to live under democratic governance than tonier European and North American societies do. And while some Latin American polities are under duress from populist misrule, the region still presents the best test case for harmonizing democratic governance and economic development.

But Latin American leaders will have to seize the moment. They must maintain their lead in the green transition, not least by doubling down on solar, wind, geothermal, and green hydrogen in their own electricity and energy grids. Governments and private-sector players must balance their ambitions to capitalize on the global demand for critical minerals with nationalistic tendencies that could cut them off from the foreign investment and technological expertise they need.

To attract companies and producers seeking to manage their geopolitical and supply-chain risks, Latin American governments should invest in infrastructure needed to lower logistics and other costs, and in expanding the supply of attractive inputs. In addition to doubling down on clean energy, they need to streamline bureaucratic costs associated with customs procedures and other regulations; invest in education and the skills needed for twenty-first-century manufacturing and services; and champion more transparent rules and governance to attract global production and sourcing.

Equally important, they must do all of this together. As Asian countries (including China) have found, regional ties and production platforms drive global competitiveness. While Latin American governments have long championed regional integration, they have done little to make it happen. To start, they can tie their economies together physically, with roads, rails, air flights, and ports of call, and through more robust trade and other agreements. These building blocks can help create regional supply-chain ecosystems like the ones that have benefited many Asian and Central European economies.

The potential for an economic takeoff in Latin America is real. But the opportunities will fade once investments and supply chains adjust to the new geopolitical and industrial-policy landscape. Latin American leaders must not delay in taking the steps needed to attract trade and investment for a more prosperous future.