Deindustrialization and recommodification have set Latin American economies back decades. Can the push for increased productivity put them back on the right track?
In the 10 years from 2014 to 2023, Latin America’s macroeconomy has quietly managed to reach depths unknown even during the dismal lost decade that followed the beginning of the region’s debt crisis in 1982. The recent period recorded average annual growth rates of 0.9%, compared with 2% per year four decades ago, notes Marco Llinas, head of the Production, Productivity and Administration Division at the Economic Commission for Latin America and the Caribbean. (ECLAC), a United Nations agency headquartered in Santiago, Chile.
The COVID-19 pandemic has had some impact, but two parallel trends have contributed steadily throughout this period: deindustrialization and the recommodification of exports. Their origins date back to before 2014, and can be observed throughout the region, with the possible exception of Mexico.
Future economic historians may wonder why no one saw this coming, although contemporary analysts still disagree about the relative importance of both elements. “Deindustrialization is not the same as recommodification,” Lynas says. “The two phenomena may or may not occur at the same time.”
Both continue to play out amid a host of factors: the decline and fall of globalization, China’s growing role in the region, and Trump’s tariffs, to name a few. But how did it start?
Economists of all ideological stripes tend to agree on the steps that have traditionally facilitated the path from underdeveloped to developed countries. Nations begin with low-value-added production and basic services. Then comes industrial development and the emergence of the working middle class. Ultimately, services prevail, often cutting-edge services fueled by technology. Think of South Korea. In the 1950s, Korean War battles on unoccupied strategic landmarks such as Pork Chop Hill made headlines. Now, it is known as BLACKPINK’s house.
Until the debt crisis of the 1980s, Latin America seemed to be holding out. Its overall growth rate was 5.2% per year (6.8% in Brazil) from 1951 to 1980, outperforming the world (4.5%), and not far behind Korea (7.5%) and Japan (7.9%), according to a 2004 study by the Inter-American Development Bank. Using a narrow definition of manufactures, Brazil was able to double the share of industrial exports in GDP from 10.8% in 1968 to 23% in 1973, supported by industrial growth of 13.3% per year during that brief period known as the Brazilian miracle.
From 1981 to 1993, burdened by the debt crisis and its aftershocks, the region faltered at an annual growth rate of 1.7%, while Korea continued to advance at a rate of 7.2%. When globalization began to help lift parts of the world out of poverty – albeit unevenly – in the 1990s, Latin America mostly watched from the sidelines: either by choice, a preference for relative isolation, or out of lack of competitiveness.
Early industrialization declined
“Premature deindustrialization” is the term economists use to describe a shift away from manufacturing before the economy in question reaches a robust level of industrial production. This occurs at lower income levels than the richest countries have achieved historically. The latter are sometimes called “post-industrial” societies, characterized by sophisticated and technologically enhanced service sectors.
Premature deindustrialization has also occurred in sub-Saharan Africa and parts of East Asia. But it is particularly striking in Latin America, given the very different path their economies took before the 1980s.
“Argentina’s manufacturing subsystem shows a clear shift towards low-technology employment, with an increasing dominance of low- and medium-technology industries, which undermines the potential for higher value-added manufacturing,” Martin LePage and Erika Majlikova of the Bratislava University of Economics and Business wrote in a recent paper. Brazil faces “the most severe deindustrialization, characterized by an increasing reliance on low-technology manufacturing and low-knowledge services, which exacerbates its economic challenges.”
The contribution of manufacturing industries to Brazilian GDP fell from 36% in 1985 to just 11% in 2023, according to official statistics. “Why is it a problem?” Linas asks. “Because the industry has higher productivity and faster productivity growth. As well as greater potential for expansion.”
There are multiple factors causing premature deindustrialization, economists say: globalization; automation, hindering job growth; Shrinking global demand for products.
They also point to a series of “structural factors” ranging from resource dependence and weak institutions; Policies that hinder investment such as high taxes, bureaucracy, poor infrastructure, and burdensome labor laws. “The country is very closed,” says Sergio Goldman, a São Paulo-based corporate finance consultant, referring to his native Brazil.
Imports began to grow, from $60.4 billion in 1990 to $359.4 billion in 2000, according to World Bank statistics. The dominant traditional trading partner increased its exports of manufactured products to the region. In fact, evidence of the political nature of Trump’s 50% tariff on Brazil included the fact that the United States had a trade surplus with that country.
More recently, observers highlight closer trade ties with China and the subsequent influx of cheap manufactured goods, which sometimes leaves local producers reeling. “Colombia’s auto parts sector has been hit hard by Chinese competition,” says William Maloney, chief economist for Latin America and the Caribbean at the World Bank Group.
Given many countries’ history of protectionism, innovation is not a top priority among Latin American CEOs, according to Goldman. “My problem is with the administration,” he says. “Companies lack good managers.”
While Japan has invested its abundant copper reserves in creating world-leading companies in the sector, Chile has never seemed able to follow suit, as Maloney points out: “In Chile, only a few companies are approaching the technological frontier.”
But is the decline in manufacturing primarily due to “automation, trade, robotics, or the China shock?” he asks. “It’s not entirely clear.”
Rehousing
The second important trend is the “re-commodification” or “re-formulation” of exports.
Latin America was thought to be on its way out of commodity dependence over the past century, but fell back on producing greater amounts of raw materials during the commodity boom of the 2000s.
Driven by demand from China, but also from India and other fast-growing economies, the 2000-2014 supercycle was followed by a second boom at the beginning of this decade. Each wave tends to leave export volumes at higher baselines; For example, Brazilian soybean exports continue to set records.
Goods as a percentage of total exports in 2000 versus 2020 jumped from 41.1% to 55.6% in Brazil, from 63.1% to 83.2% in Chile, from 55.6% to 65.1% in Colombia, and from 73.2% to 85.3% in Peru, according to data provider Trading Economics.
Comparing 2024 and 2023, “agricultural products (11%) and mining and oil (11%) were the main contributors to the growth of goods exports, while manufacturing exports remained stagnant,” the Economic Commission for Latin America and the Caribbean reported.
“Productivity is everything”
Pundits and policymakers are notoriously controversial when it comes to Latin America; For decades the region has engaged in everything from import substitution to the free-market liberalism of the Milton Friedman-inspired Chicago Boys. But nowadays, they seem to have reached near consensus.
Lynas believes that the post-2014 contraction “was due in large part to stagnant or even declining productivity.” He adds, paraphrasing the words of Nobel Prize-winning American economist Paul Krugman: “Productivity is not everything, but in the long run it is everything.”
Four of the region’s leading economies – Brazil, Chile, Colombia, and Mexico – are implementing what Llinas calls “productivist policies,” which he is careful to distinguish from older industrialization strategies. There is a common feature: the selection of a set of priority sectors, whether industrial or not. These may include agriculture, mining or services such as sustainable tourism.
For example, the Brazilian program has allocated R$300 billion for credit, public procurement, regulatory reform, and infrastructure investments designed to benefit six sectors during the initial period of 2024-2026.
Commodity investing also has its champions, especially given the potential for innovative spin-offs. Efforts to improve business practices in sectors like mining and agribusiness could spur investments tied to cutting-edge industrial processes and services, for example, say Linas and Kieran Gartlan, São Paulo-based managing partner at The Yield Lab Latam, a venture capital fund focused on agri-food and climate technology. Gartlan refers to large-scale farms like Brazilian soybean producers as “open-air factories,” and points to start-up suppliers working to develop new technologies in fintech, drones, biotech, and others. His company has mapped some 3,000 high-tech startups in the agricultural sector in Latin America.
But the availability of credit is an obstacle to this.
Gartlan points out that private banks have “no real appetite” for agriculture; Because they lack the expertise to properly assess risks, they “introduce large spreads that make (credit) prohibitively expensive for farmers.” Many relatively large producers fail to invest in silos to store crops for sale when prices rise, for example. Instead, they live from harvest to harvest, paying off last season’s bills as the crop arrives.
The will to shift the Latin American economy – much of it – in a more productive direction exists; The next step is for investors and lenders to buy.
