Commodities Bust Leaves Latin America with a Hangover

Lower prices for oil, metals and farm products means much slower growth for countries from Brazil to Mexico, putting pressure on policymakers to find new sources of economic expansion.


Five years ago spirits were soaring across Latin America. The region’s economies were bouncing back with startling speed from the global financial crisis to post their strongest growth rates in more than a decade. Robust Chinese demand for copper, iron ore, oil, soybeans and other commodities was filling government and private sector coffers and lifting millions of people into the ranks of the middle class. Companies like Brazilian aircraft maker Embraer, Chilean fashion retailer Falabella and Mexican bakery goods manufacturer Grupo Bimbo were extending their reach across the region and around the world. The Economist boldly proclaimed the region to be on the verge of a Latin American decade.

Today many Latin Americans are wondering if the region is going back to the bad old days of sluggish growth and dashed aspirations. A slowing global economy, especially the cooling in China, has sent commodities prices tumbling and exposed the failure of most Latin economies to diversify during the boom years. Raw materials account for more than half of the region’s exports, a proportion that has changed little since the 1990s. In January the International Monetary Fund cut its forecast for regional growth this year by 0.9 percentage point, to just 1.3 percent, virtually unchanged from last year’s 1.2 percent pace. It was the sharpest downgrade of any region except Russia and the Commonwealth of Independent States.

This colder economic climate has sent shivers throughout the region. Considered an elite emerging market a few years ago, Brazil is now a falling BRIC, struggling to escape from recession and maintain its investment-grade rating. In Colombia, where reduced political and drug-related violence fostered an economic flowering based on oil, agriculture and manufacturing, the currency has lost a quarter of its value since September and the current-account deficit is widening. Even Chile, the Latin American nation closest to developed-country status, has seen its economy sputter as prices for copper, its most important export, have tumbled. Pressure is even greater in the region’s basket cases. Argentina’s hopes of staving off economic collapse rest largely on increasing its soybean exports even as prices continue to shrink. And Venezuela, which gets 95 percent of its export revenue from oil, finds itself on the verge of default; its people struggle to buy food and basic consumer goods like toothpaste and toilet paper.

The end of the commodities supercycle has exposed other weaknesses, of poor governance, mismanagement and corruption. In Brazil, President Dilma Rousseff faces a mounting storm over the embezzlement of billions of dollars at state-owned petroleum company Petróleo Brasileiro (Petrobras). In Mexico, President Enrique Peña Nieto’s landmark economic reforms have been overshadowed by horrific episodes of drug violence and evidence that government officials, including the president, personally benefited from close ties to a major construction company. And in Argentina a politically weakened President Cristina Fernández de Kirchner will serve out her term this year under suspicion that her government was involved in the death of a star prosecutor.

The unprecedented revenues from oil, minerals and agricultural products over the past decade strengthened politicians across the region, but as the money has dried up they have become much more vulnerable to scandal. “We are seeing the end of a supercycle in politics as well as for commodities,” says Christopher Garman, a Washington-based analyst for Eurasia Group, a risk consulting firm.

As if these problems weren’t enough, Latin countries face a potential tightening of global liquidity as markets brace for the first rate hike by the U.S. Federal Reserve and the dollar rises against regional currencies. Banco Central do Brasil has raised its policy rate three times since October, lifting it a total of 1.25 points, to 12.25 percent, to contain inflationary pressures and defend the real. Argentina’s central bank raised its key rate by 1.8 points, to 21.8 percent, in November, but that did little to contain an inflation rate estimated at 40 percent.

Notwithstanding the difficulties, few economists and politicians believe the region risks a repeat of the Latin debt crisis of the 1980s. Triggered in 1982 when Mexico announced it could no longer service its foreign debt, the crisis spread across the region as weak commodities prices and rising U.S. interest rates left most countries trapped under spiraling debts. Living standards fell sharply across Latin America during the “lost decade,” as it was known. The crisis dampened cross-border bank lending and prompted the Basel Committee on Banking Supervision to draft the first global capital standards. More-recent dips in the commodities cycle — in the mid-1990s and at the nadir of the global financial crisis, in 2009 — have been briefer and less painful, though tighter international credit played a role as well.

“This is not a crisis; it’s a slowdown,” says José Juan Ruiz, chief economist at the Inter-American Development Bank (IDB) in Washington. Most Latin American countries, with the exception of free spenders like Venezuela and Argentina, took advantage of the good times by adopting orthodox economic policies. They established independent monetary policy frameworks that squeezed down inflation and improved their fiscal positions. “Most countries prepared for the slowdown,” says Ruiz.

The rise of a sizable middle class with political clout should help entrench sound policies, analysts say. During the 1980s more than 30 percent of Latin Americans were living in poverty, providing a ready constituency for radical policies. Over the past decade, however, some 60 million people have joined the middle class, reducing extreme poverty to about 20 percent of the region’s total population of 604 million. These voters are reluctant to support populist policies that might threaten their newly achieved status.

Nowhere is this more evident than in Chile. A burgeoning middle class delivered a ringing victory last year to President Michelle Bachelet, a Socialist who campaigned for more-affordable university education. But many of those voters have turned against Bachelet, dropping her popularity rating from 58 percent a year ago to 40 percent today. “With the economy slowing down, middle-class Chileans are more worried about losing their jobs,” says Patricio Navia, a political analyst and professor at Universidad Diego Portales in Santiago.

To pull out of the current slump, Latin governments need to reduce their economies’ dependence on raw materials and develop other sectors of activity. The commodities boom was exhilarating while prices of metals, grains and minerals were soaring, but it has left economies sputtering today. Commodities accounted for 53.2 percent of the region’s export revenue in 2013, according to IDB data, not far off the 55 to 60 percent range that prevailed in the 1990s. “What is sad is that Latin America has yet to identify other domestic engines of growth,” says Alberto Ramos, senior Latin American economist at Goldman Sachs Group in New York.

The region’s close economic ties with China, which seemed to promise a lifeline in the 2000s, stand in a different light today. Latin America’s two-way trade with China mushroomed from $10 billion in 2000 to $241 billion in 2013, according to United Nations statistics; commodities accounted for fully 88 percent of the region’s $100 billion in exports to China in 2013. Latin America’s trade with China approached its $343 billion of trade with the U.S. in 2013, says the U.S. Department of Commerce, but there’s a difference: “The U.S. engages the region with a much wider variety of imports and exports,” says Margaret Myers, director of the China and Latin America program at the Inter-American Dialogue, a Washington think tank.

Latin countries need to improve their terms of trade by boosting the proportion of manufacturing exports. That will require policies promoting freer trade, improved industrial productivity and massive infrastructure investments. “These are not magical solutions,” Ramos says. “There is no need to reinvent the wheel.”

So far, only Mexico has made a successful transition to manufacturing exports, thanks to its integration with the U.S. economy through the North American Free Trade Agreement. Other countries have relied on protectionist barriers to restrict the flow of quality imports and allow domestic producers to dominate local markets.

IDB president Luis Alberto Moreno insists that regional countries have the capacity to reform themselves. “Latin America has shown discipline in applying fiscal and monetary policies,” he says. “But growth will only come through more infrastructure projects, higher productivity and other structural reforms.”

NO COMMODITIES BUST HAS BEEN more sudden, or more painful for many Latin economies, than the precipitous drop in oil prices. With U.S. shale oil production rising and Saudi Arabia determined to maintain output and regain market share, the benchmark Brent crude plunged from $110 a barrel last June to less than $50 in January before recovering to just over $60 in mid-February.

The impact on Latin American producers has been devastating. Venezuela is in free fall because reduced oil revenue is widening its budget deficit and raising the risk of default. In Mexico, where historic energy reform last year opened the country to outside investment in oil and gas for the first time since 1938, the drop in prices has lowered expectations that the oil majors will rush to bid for fields up for auction later this year.

The impact on Brazil has been dramatic, which is ironic considering that the country is not yet an oil exporter. Brazil is the second-largest exporter of soybean meal, after Argentina, and the world’s second-biggest exporter of iron ore, after Australia, and it has suffered from the decline in prices of those commodities. Soybean prices fell from a record $623 a metric ton in August 2012 to $358 at the end of January 2015, and iron ore slumped to $67 a ton in January from $128 a year earlier because of the slowdown in China’s growth.

But the problems caused by shrinking revenues from those products pale in comparison with the largely self-inflicted damage that Brazil’s oil policies are causing. A combination of falling international oil prices and domestic mismanagement and graft has created a perfect storm that could stifle an economic recovery and even unseat President Rousseff.

In 2006 state-owned Petrobras announced the discovery of offshore oil reserves, as large as those in the North Sea, deep under Brazil’s Atlantic waters, beneath a thick layer of salt. “Petrobras became the standard-bearer of Brazil’s new ambitions,” says Thomas Kamm, São Paulo–based partner at media consulting firm Brunswick Group and author of a widely circulated report, “Brazil’s Unfinished Business.” He recalls, “At the time, the mood here was enormously optimistic.”

In 2010, Petrobras launched a record capital increase of $70 billion and unveiled the world’s largest capital expenditure program, valued at $224 billion over five years, to tap those so-called presalt reserves. Such ambition seemed natural for a country that was riding high. Under the presidency of Luiz Inácio Lula da Silva (2003–’11), Brazil combined a balanced budget, a stable currency, high growth and an expanding middle class through social programs like Bolsa Familia (Family Allowance) and Fome Zero (Zero Hunger). The economy grew by a China-like 7.5 percent in 2010. The country was chosen to host the FIFA World Cup in 2014 and the summer Olympic Games two years later.

But Petrobras overreached and essentially decided to go it alone with the development of the offshore reserves. “Other companies could be involved but only as financial participants, which is a lot less attractive for the oil majors,” says Jed Bailey, Boston-based managing partner of consulting firm Energy Narrative. When the government put a presalt reserve block up for auction in October 2013, the only bidder was a consortium led by Petrobras, with a stake of 40 percent, and partners China National Offshore Oil Corp., China National Petroleum Corp., Royal Dutch Shell and France’s Total. Besides paying a $6.8 billion fee, the consortium agreed to turn over 41.65 percent of output to the Brazilian government once production begins.

But exploiting the presalt reserves has overwhelmed Petrobras’s capabilities. “Because of the huge capital requirement, Petrobras has been borrowing like crazy,” Bailey says. In fact, with loans totaling $139 billion, the company has become the most indebted and least profitable of the world’s 15 largest oil companies by market value. Yet the 500,000 barrels of oil a day produced from Petrobras’s presalt deposits are far short of expectations — and far short of what’s needed to service that debt.

The government has added to the company’s burdens by keeping a lid on gasoline prices, forcing Petrobras to import fuel at market prices and sell it at subsidized prices.

To top it off, the company has become synonymous with corruption. Rousseff almost lost her reelection bid last year because of allegations that illegal payments from Petrobras and its contractors had been made to her Workers’ Party. So many billions of dollars have been siphoned off that PricewaterhouseCoopers refused to approve Petrobras’s third-quarter 2014 results, effectively shutting down the company’s access to international capital markets.

In February, CEO Maria das Graças Foster resigned under pressure. The announcement of her successor, Aldemir Bendine, former head of state-owned Banco do Brasil, sent Petrobras shares plummeting by 9 percent. The reasons: Banco do Brasil has been the biggest lender to contractors accused of involvement in Petrobras graft, and Bendine himself is considered a favorite of the Workers’ Party.

The scandals have made it more difficult for Rousseff to respond to a challenging economic situation caused in part by her failure to maintain the basic macro stability of the Lula years and extend the reforms started by her predecessor. The economy has stagnated over the past two years; the government projects growth of just 0.5 percent this year. Brazil is battling to keep its investment-grade rating — Baa2, or two levels above junk, according to Moody’s Investors Service — by raising taxes on fuel and consumer loans to achieve a primary fiscal surplus (before interest payments) of 1.2 percent of GDP.

But those efforts could fail if Petrobras is unable to regain access to capital markets, obliging the government to provide financial support. Yields on Petrobras’s dollar-denominated bonds due in 2023, which have the same Baa2 rating as Brazil, jumped 1.72 percentage points since October to 6.73 percent in late February.

The collapse in oil prices is forcing the majors to reconsider their commitment to developing Brazil’s reserves. At $70 to $80 per barrel, says energy consultant Bailey, “production costs for the presalt reserves are among the most expensive in the world.” And even if prices rise, the investments involved in exploiting new presalt reserves are far above those for onshore shale deposits.

Low oil prices have made foreign oil companies reticent about taking advantage of the opening of Mexico’s energy sector. Between January and September of this year, the country is supposed to tender 169 blocks of oil and gas reserves. Before oil prices began to tank, the government conservatively estimated that it would reap $12 billion in license revenue from foreign investors in these blocs, and $38 billion more by 2018.

But the 28 companies that have declared interest in Mexico, including majors like Exxon Mobil Corp., Chevron Corp. and Shell, are now likely to focus their bids on shallow-water deposits in the Gulf of Mexico with production costs below $40 a barrel. Tenders for more-expensive deepwater and shale fields will probably be postponed, Finance Minister Luis Videgaray told Radio Fórmula, a Mexican broadcaster, in January. “There will be less aggressive bids,” predicts John Padilla, who heads the Mexico City office of energy consulting firm IPD Latin America. “Both the government and private sector are sharpening their pencils.”

Unlike Petrobras, state-owned Petróleos Mexicanos has had little trouble raising money on the capital markets. In January, Pemex sold $6 billion of bonds in three tranches maturing between 2020 and 2046 with yields ranging from 2.35 to 3.3 percentage points above U.S. Treasuries of similar maturities. Pemex will use the proceeds to fund oil production, which has declined for ten consecutive years, to 2.43 million barrels per day in 2014 from a record 3.4 million in 2004. Pemex announced last year that it intended to borrow a total of $15 billion in 2015.

The bright spot in Mexico’s energy landscape is infrastructure, particularly pipelines to import U.S. shale gas. The first phase of a $2.5 billion gas pipeline in the northern Mexican state of Nuevo León, a venture of Pemex and San Diego–based Sempra Energy, was completed in December and will increase Texas shale imports by 45 percent, to 4.7 billion cubic feet a day. Mexico projects that gas pipeline construction will increase by 75 percent by 2018. Such infrastructure-related investments “offer better yields than traditional fixed-income instruments for investors with long-term horizons, such as pension funds, life insurers and sovereign wealth funds,” says Axel Christensen, BlackRock’s Santiago-based chief investment strategist for Latin America.

CHILE LED THE WAY on market-oriented reforms in Latin America by promoting privatization and the growth of a domestic capital market after a military regime led by the late general Augusto Pinochet overthrew the Socialist government of Salvador Allende in the 1970s. Today, however, Chile is in need of further reform, especially in the copper sector, which has been the country’s engine of economic growth. As Goldman Sachs’ Ramos puts it, “The agenda doesn’t stop just because a country carried out reforms years ago.”

Copper accounts for 15 percent of Chile’s GDP and 60 percent of its exports. It’s importance was such that Pinochet kept the country’s giant copper mines, which Allende had nationalized, under state control. He combined the mines under state-owned Corporación Nacional del Cobre de Chile (Codelco) in 1976 and earmarked 10 percent of the company’s revenue for the military. (In addition, Codelco has earned more than $100 billion in profits over the years, which it has turned over to the state, its sole owner.) Private companies, both foreign and domestic, were allowed to invest in new mines.

Global mining giants such as Anglo-Australian BHP Billiton, U.K. company Anglo American and Phoenix-based Phelps Dodge Mining Co., as well as Chile’s privately owned Antofagasta Minerals, have dramatically expanded operations over the past two decades, boosting output nearly sixfold. In 2014 private companies produced 4.25 million metric tons of copper, or more than 70 percent of Chile’s output, while Codelco accounted for the remaining 1.75 million tons. Twenty-five years ago Codelco delivered 85 percent of the country’s output of 1.1 million tons.

Not only has Codelco fallen behind private sector miners in production, but its mines are the oldest in the country and their ore grade is among the lowest. Because of high export earnings during the boom years, the company postponed tough investment decisions. Although Codelco’s output rose 8 percent last year, its pretax earnings fell 20 percent, to $3 billion, because of lower prices. Copper was trading at $2.49 a pound in late January, down from a high of $4.50 four years earlier.

Despite repeated promises not to interfere with the running of Codelco, a change in government inevitably results in new management. When Bachelet returned to power, she appointed her campaign aide, Oscar Landerretche, as chairman and Nelson Pizarro, a respected mining engineer, as CEO.

“Management is less independent than it was a few years ago,” says Patrick Cussen, chairman of the Center for Copper and Mining Studies (Cesco), a Santiago-based think tank specializing in mining. “And Codelco is facing its biggest challenges ever. Many projects were delayed for all sorts of reasons, but now there is no room left to maneuver.”

Codelco has unveiled plans to spend as much as $25 billion by 2018 to expand its two big mines, El Teniente in central Chile and Chuquicamata in the Atacama Desert to the north, and raise production by more than 40 percent, to 2.5 million tons in 2030. Without this massive investment, to be financed by a combination of earnings, government resources and debt, annual output would dwindle to less than 300,000 tons within 15 years. Pizarro conveyed the sense of urgency in a January interview with Chilean daily El Mercurio. “We jumped on the caboose on the last train out of the station,” he said. “It is an enormous bet.”

Fortunately, Chile did not waste its bounty from the years of soaring copper prices. During her first presidency, from 2006 to 2010, Bachelet created two sovereign wealth funds to preserve windfall gains for the future rather than squandering them in a burst of inflationary spending. “We decided we didn’t want to be hostages to commodity prices and go through one more of those booms that ended in disaster,” says Andrés Velasco, the former Finance minister who designed the funds.

The Economic and Social Stabilization Fund and the Pension Reserve Fund have accumulated $15 billion and $8 billion, respectively, after barely eight years in existence. The Banco Central de Chile and an independent advisory board of five financial services experts advise the government on the funds’ investments. About 70 percent of the capital is invested in Treasury bills and money market instruments, with the remaining 30 percent in equal holdings of corporate bonds and equities.

The funds have kept Chile in an enviable fiscal position. “We have almost no public debt and ample reserves,” Velasco says. “And partly as a result of the stabilization funds, the volatility of economic growth has been drastically reduced.”

The same cannot be said of Chile’s neighbor across the Andes. Argentina remains locked out of global capital markets because of its dispute with holdout creditors, led by New York–based hedge fund firm Elliott Management Corp., over the restructuring of its defaulted debt. The economy fell into recession last year, and output is projected to decline by 1.5 percent this year, according to the IMF. Soybeans are part of the problem. Rising soybean exports to China at ever-higher prices helped Argentina’s economy grow at an average rate of more than 7 percent a year from 2004 to 2012. More recently, however, the country’s dependence on the crop has only deepened, even as prices have dropped by 40 percent over the past three and a half years.

Corn may grow as high as an elephant’s eye, and wheat fields may look like amber waves of grain, but there is nothing poetic about soybeans. The plants, which grow about three feet tall and have veined leaves and yellowish pods, are known derisively as yuyito, or “little weed,” because they proliferate so readily. Yet on the loamy pampa 80 miles west of Buenos Aires, where Oscar Moncho is the third generation of his family to farm the land, soybeans are the cash cow, displacing the cattle he raises in ever-dwindling numbers.

“The pampa is a very versatile land,” says Moncho, standing amid a large soy plot where Herefords once grazed and wheat grew just a few years ago. “Because of its high price and low cost, soy is pushing aside other grains. And we’ve moved our livestock to less fertile fields.”

Soy was a minor crop for Moncho a dozen years ago. Today it covers almost two thirds of the 5,000 acres he farms — 1,250 acres owned by his family and the rest rented from neighbors. Such explosive growth has been typical of Argentina’s farmers. When the economy collapsed after the government’s record $95 billion debt default in 2001, the country produced less than 20 million metric tons of soy a year. According to U.S. Department of Agriculture estimates, the 2014–’15 harvest will reach a record 55 million tons, ensuring that Argentina remains the world’s leading exporter of soybean meal, shipping more than the combined exports of the No. 2 and No. 3 players, Brazil and the U.S. Last year the crop generated $24 billion of Argentina’s $78 billion in export earnings, which were down from $85 billion in 2013.

The government has imposed stiff taxes that claim a third of soy export revenue, angering farmers. “How can it make sense for the government to discourage the country’s most valuable export?” asks Alfredo Rodes, executive director of CARBAP, the farm association for the provinces of Buenos Aires and La Pampa, in the soy heartland. Thanks to their long experience with rapacious governments and commodities crises, Argentinean farmers have developed sophisticated strategies to survive and even prosper. When the government sought to raise the tax take on soy exports in 2008, a farmers’ strike centered in Buenos Aires province persuaded officials to drop the plan. More recently, farmers have hoarded as much of their soy harvest as they could afford and used the beans to barter for fertilizer, pesticide, fuel, machinery and even residential property. “We and our suppliers hire commodities brokers to negotiate contracts set to either current or future soy prices,” says Moncho.

These days Fernández appears too preoccupied with scandal to hound soy farmers. In January, federal prosecutor Alberto Nisman was found dead in his Buenos Aires apartment from a gunshot wound to the head. He had been scheduled to provide evidence to Congress the following day linking the president to an attempt to cover up Iran’s involvement in a 1994 bombing of a Jewish community center in Buenos Aires that killed 86 people. The incident has spawned conspiracy theories ranging from suicide to assassination by government agents or international terrorists. Last month another prosecutor promised to continue the investigation.

Farmers, meanwhile, are hoping for better treatment from whoever wins the presidential election to succeed Fernández later this year. “The way out of the current economic crisis starts with the farm sector,” CARBAP’s Rodes says. As for Moncho, his strategy is “to rent as much land as possible and plant more soy because it’s cheaper to grow and still pays higher prices than any other crop.”

FOR LATIN AMERICAN countries struggling to cope with lower prices for their commodities exports, the prospect of tighter global capital conditions is an added worry. Recent rises in bond yields may be a harbinger of capital flight. “When U.S. interest rates start to rise later this year, there will be a growing American economy offering more-attractive bonds and more security,” says Alfredo Coutiño, West Chester, Pennsylvania–based senior economist for Latin America at Moody’s “If investors stay in Latin America and the foreign exchange market continues to be volatile, they will risk capital losses.”

In January, Brazil’s central bank raised its benchmark Selic rate to 12.25 percent — its highest level in more than three years — to curb inflation and defend the real, which has fallen by 21 percent against the dollar since the start of September. In addition, the government has announced taxes on gasoline and personal loans that are supposed to raise the equivalent of $7.8 billion this year to help keep the budget deficit below 1 percent of GDP. By contrast, Mexico’s central bank has kept its benchmark rate at 3 percent since June. “If Mexico continues to hold down its policy rate while U.S. and Brazilian rates go up, there will be higher capital flight from Mexico and the interest rate adjustment will be more severe,” Coutiño says.

Some investors contend that valuations on Latin American equities — especially in Brazil, where stocks have suffered bigger declines than in Mexico — are starting to look attractive. According to Verena Wachnitz, London-based manager of T. Rowe Price’s Latin America Equities Fund, Brazilian share prices don’t yet reflect improvements in macroeconomic policy since Rousseff started her second term, in January. “We have seen positive signals in terms of monetary policy, with rate hikes to bring down inflationary expectations,” says Wachnitz. Many investors have welcomed the president’s appointment of Joaquim Levy, former head of Bradesco Asset Management, as Finance minister, although they are waiting to see if Rousseff gives him a free hand to control spending.

Adam Kutas, London-based equities portfolio manager for the Fidelity Latin America Fund, says lower commodities prices and tighter credit are pushing Brazilian manufacturers, such as automobile and auto-parts makers, to become more efficient and competitive. “On my most recent trip to Brazil, last September, I saw a widespread acceptance that the commodity boom wasn’t coming back any time soon,” Kutas notes. “Managers are a lot more focused on cost-cutting and higher returns on capital than I had seen in the previous five years. And that should be good for equities.”

Although investors are already trying to pick business winners as the region recovers, Latin American policymakers are still searching for formulas that will break their nations’ dependence on the commodities cycle.

“Almost every Latin American country has wasted the opportunity to develop new export goods,” says former Chilean Finance minister Velasco. “The one exception is Mexico, which is plugged into the U.S. value chain in several manufacturing sectors.”

Last year four fifths of Mexico’s $380 billion in exports were manufactured products, and the total exceeded the industrial export revenues of all other Latin American countries combined. Thanks to its access to the U.S. market, which takes 80 percent of its manufactured exports, Mexico has become the world’s leading exporter of refrigerators and flat-panel TV screens and the fourth-largest exporter of autos.

But in the past, efforts by the rest of Latin America to develop significant industrial exports have failed. From the 1950s through the 1980s, the substitution of locally made goods for foreign manufactured imports was the rage in Latin America. Markets as small as Chile and Uruguay assembled cars.

In 1991, Argentina, Brazil, Paraguay, Uruguay and Venezuela established Mercosur, a common market aimed at creating freer trade among those countries and eventually extending it throughout the region. But Mercosur has floundered because local political pressures have maintained protectionist barriers, particularly in times of economic stress, when concerns heat up over falling foreign currency reserves and rising unemployment.

Brazil is the candidate with the best potential to match Mexico’s transition from commodities to industrial exports. Trade accounts for only 28 percent of Brazil’s GDP, or about half the trade-to-GDP ratio of the six nations that have larger economies than Brazil, according to the World Bank.

With General Motors Co., Toyota Motor Corp., Fiat and other global automakers operating local subsidiaries, Brazil is the world’s eighth-largest car manufacturer, yet it ranks only 21st in auto exports. “Brazil has such a large domestic market that many companies feel they don’t even need to go abroad,” says Brunswick consultant Kamm. It also helps that they don’t have to worry about competition from imports. Thanks to protectionist barriers, a locally made Toyota Corolla sells for more than twice the price of the same model in the U.S.

Before Latin American nations can go about developing new export industries, they need to strengthen local capital markets. “There should be mechanisms to save the windfall from commodities exports during the good years and use the savings during bad years,” says Goldman Sachs’ Ramos. Thus far only Chile has managed to do this on any significant scale through the development of a funded pension system and more recently the creation of a sovereign wealth fund. Other Latin countries must hope the commodities cycle makes a turn for the better so they can catch up. •