In 2011, every economy in Latin America will expand and the region will grow an impressive 4.5 percent, according to International Monetary Fund estimates. Latin America weathered the financial crisis with its banking system intact, a thriving democracy and a resilient, if not expanding, middle class. Brazil basks in the accolades of financial investors, attracting record investment into Latin America. So what is all the fuss about regional competitiveness? Does competitiveness matter when historical levels of wealth are being created in Latin America?
Latin America is the world's most globalized regional economy. Its economic fortunes are more influenced by the external economy than domestic policy. In 2009, in spite of superb economic management policies and decision making, Mexico's economy contracted almost 7 percent, thanks to a severe drop in U.S. demand for its exports, a collapse in oil prices, falling remittances, declining tourism and the collapse of bank lending as the country's foreign owned banks rapidly deleveraged.
In contrast, Argentina grew 9 percent in 2010, in spite of the Kirchner era's poor reputation for regulatory inconsistency. Even though foreign investment is a fraction today of what it was in the past, Argentina's economy is solvent and expanding, thanks to strong food, mineral and energy exports and low global interest rates.
In the 2011 Doing Business report published by the World Bank, Mexico ranks 35th and Argentina ranks 115th. From 2003-2008, as Latin America enjoyed a favorable international climate of low interest rates and high commodity prices, Mexico's competitiveness improved slightly while Argentina's worsened dramatically. Yet Argentina consistently outgrew Mexico during this period.
If Latin America's economic destiny is at the mercy of China's central bank or U.S. consumer sentiment, what incentive is there for Latin American political leaders to brave the second rounds of reforms (labor, pension, tax, judicial, education, customs, legal) that face stiff resistance from powerful domestic interests? Apparently not much. After setting the world on fire with dramatic macroeconomic reforms and privatizations in the 1990s (a decade of low commodity prices), Latin America has become the world's slowest reforming region, losing ground to emerging markets such as Eastern Europe, North Africa, the Middle East and East and Southeast Asia. Saudi Arabia, not long ago characterized as a nepotistic and...