Dependency makes a comeback

IT’S AMAZING the lack of candour among multilateral bodies dedicated to upholding the status quo, when the facts shout out the need for radical change.

The World Bank’s latest outlook for Latin American economies is a classic example of this, blustering on about the need to fidget with monetary policy at a critical moment in the region’s fortunes.

Latin America and the Caribbean is finally beginning to emerge from a six-year slowdown, and is expected to resume positive growth in 2017. Analysts suggesting this could reach a modest 2.3% in 2018. After two consecutive years of decline – with real regional GDP falling by 2.9% in 2016 – South America will lead the way.

But a thorny question has been preoccupying economists – where will Latin America’s future growth come from?

It is a question that the World Bank dodges clumsily in its description of the policy choices that face Latin America which, it argues with cynical spin, leave it “between a rock and a hard place”.

In short, the Bank insists that global conditions right now leave policymakers with few options but to do what it recommends – and not to rock the boat.

In the process, however, and with blasé insouciance, the Bank ignores the most glaring conclusion of its own data: that this region is trapped by its condition of dependency.

As the Bank points out almost nonchalantly, external factors have long driven growth in Latin America – most recently after 2003, buoyed for a decade by high commodity prices and China’s insatiable demand for raw materials. But the commodity windfalls have come to an end, and these external factors show few signs of changing dramatically in the near future.

This confronts Latin America and the Caribbean with a perennial problem: it must find ways of driving growth internally.

The issue, however, is that the region’s fiscal woes make this all but impossible. Public finances have been badly damaged by the downturn since 2013. This constraint prevents countries from using fiscal tools to boost growth through policies of stimulus.

The World Bank argues that this places the burden for maintaining stable development on monetary policy, and argues that Latin America’s commodity-exporting countries face a “monetary policy dilemma” whereby any action to address external shocks such as changing interest rates or terms of trade will produce a negative outcome. Raising rates to fight inflation will prolong the slowdown. Lowering them risks fuelling inflation.

The Bank insists that some Latin American central banks have, nonetheless, found more nuanced, flexible ways to control depreciation, and this appears to be the entire sum of its policy prescription for the region at this juncture in its history: don’t rock the boat on inflation, just be creative with monetary policy.

However, there is a tried-and-tested way out of the uncomfortable position between the rock and the hard place that was once at the heart of Latin American economic exceptionalism.

It is called structuralism and it defined the development model across the region from the 1950s to the late 1970s, generating record rates of growth.

Based upon a centre-periphery view of global trade that still influences the perspective of the Comisión Económica para América Latina y el Caribe (CEPAL, the Economic Commission for Latin America and the Caribbean) and gave rise to dependency theory, structuralism argues that without changes in the structure of their economies and of world commerce to address weak terms of trade, commodity exporters will never escape low growth.

Consequently, the position adopted by most Latin American and Caribbean states after the mid-1950s was akin to a form of DIY. Extensive state intervention in the economy based upon import-substitution guaranteed robust development. The period 1955–75 still remains the heyday of Latin America’s so-called “Golden Era” of soaring growth.

Today, a new form of structuralism may be the only way for Latin America to achieve its true growth potential – and dismiss the modest rates of growth promised by tinkering with monetary policy that the World Bank deigns to recommend.

Given the limits of the region’s domestic capacity to stimulate growth, only structural changes can overcome the dependent relationship between their commodity-exporting economies and the large industrialised “centre”.

By not mentioning this alternative, the World Bank has unwittingly made it much more credible.