The recent report from the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) has sent shockwaves through the regionThe projected economic growth for Latin America in 2024 has been downgraded from 2.1% to a mere 1.8%. José Manuel Salazar-Xirinachs, the Executive Secretary of ECLAC, has raised alarms over the potential for Latin America to face its third 'lost decade' unless profound structural reforms are madeThis urgent situation begs the question: what challenges does the region face in its economic development, and how can cooperation with China aid in overcoming the so-called "Latin American trap"?

To understand the current predicament, it is essential to reflect on the pastLatin America has already endured two 'lost decades.' The first occurred in the 1980s when countries in the region found themselves ensnared in a crippling debt crisisAt that time, many Latin American nations adopted a high-leverage growth model reliant on floating interest rates for external debts

Advertisements

The U.SFederal Reserve's radical interest rate hikes at the end of the 1970s exponentially increased the cost of servicing these debts, resulting in a cascade of defaultsThis crisis led to massive capital flight from the region, resulting in severe currency devaluations and a vicious cycle of stagnation, inflation, and soaring unemploymentThroughout the 1980s, the region's GDP growth averaged a dismal 1.2%.

Prominent scholars attribute the origins of this crisis to a combination of external pressures and internal structural deficienciesAccording to Bu Shaohua, deputy director of the Institute of Latin American and Caribbean Studies at the Chinese Academy of Social Sciences, the 'import substitution' industrialization strategy employed by many Latin American countries failed to curtail imports, leading instead to greater reliance on imported raw materials and intermediate goods necessary for domestic manufacturing

Advertisements

Consequently, as the cost for these imports surged—exceeding the prices for their primary exports—the countries could no longer maintain sustainable trade balances and were forced to borrow increasingly more to sustain their economies.

The early 21st century brought about a revival for many Latin American economiesBetween 2000 and 2015, the region experienced annual GDP growth averaging around 3%, spurred primarily by a favorable external market environment resulting from a commodities supercycleNevertheless, by 2015, the tides turned once againFrom 2015 to 2024, the region's average growth rate plummeted to just 0.9%, with several nations experiencing economic stagnation or even contraction, thus marking yet another 'lost decade.'

Yue Yunxia, deputy director of the Institute of Latin American Studies at the Chinese Academy of Social Sciences, observes that, just like in the previous lost decade, Latin America lacked the industrialization advancements necessary to boost endogenous economic growth

Advertisements

The slow growth of global Total Factor Productivity (TFP) exacerbated the situationFollowing the decline of commodity prices beginning in 2014 and the rise of global protectionism, the conditions for international trade have worsened, leading to a substantial downturn in Latin America's economic trajectory.

Today, Salazar-Xirinachs has once again sounded the alarm for the nations in the region, warning of the potential for a third 'lost decade.' He attributes the downward revisions of growth forecasts to several factors including heightened global uncertainties, a cooling U.Seconomy, low prices for certain commodities, and reduced fiscal space combined with high interest rates and stringent international financial conditions.

In light of these pressing issues, both Salazar-Xirinachs and numerous experts advocate for deep structural reformsThey emphasize the urgent need for Latin American countries to focus on enhancing productivity and production efficiency while accelerating regional economic integration

• Slowdown in Indian Manufacturing Hinders Growth
• BYD Shares Rise While Tesla Stock Dips
• Definition and Types of International Capital Flows
• Gold Surpasses $2,700 Threshold
• Latin America Faces Urgent Call for Structural Reforms

Active participation in the global economy, embarking on digital transformation, and prioritizing sustainable environmental practices are also deemed essential for achieving high, sustainable, and inclusive growth.

However, these calls for reform are viewed skeptically by many, given the historical challenges that Latin American countries have confronted while trying to implement structural changes in their economiesSun Yanfeng, Executive Director of the Institute of Latin America Studies at the Chinese Modern International Relations Research Institute, remarked that while countries in the region have long attempted structural reforms and industrialization, they have not yielded the desired resultsThe entrenched traditional industrial structures, along with growing social welfare expenditures that haven't led to effective redistribution, have exacerbated fiscal burdens, thereby impeding reform.

Moreover, the heavy debt burden on many Latin American countries has significantly constricted the available fiscal policy space

According to Fitch Ratings, fiscal risks in the region have escalated, predicting a fiscal deficit to GDP ratio of 1.5% in 2024, compared to 1.4% in 2023.

As Latin American countries grapple with these daunting realities, many have begun to pivot towards diversification in diplomacy and multilateral cooperation, particularly seeking stronger ties with China as a potential breakthrough for high-quality developmentThe importance of this shift is underscored by the parallels between the modern Chinese development model and the structural reform aspirations of Latin American nations.

Countries across Latin America are becoming pivotal partners in China's Belt and Road Initiative, gaining not only crucial infrastructure improvements but also influxes of capital and technology in diverse sectorsFor instance, in Brazil, BYD has set up a production base that promises to introduce advanced automotive technology with an anticipated initial output of 150,000 vehicles per year

Meanwhile, in Peru, projects such as the Chancay Port—driven by Chinese enterprises—are employing fully electric-powered equipment, thus aligning with global sustainability effortsTrinidad and Tobago has also seen Chinese firms establishing the first 5G-covered industrial park in Latin America, incorporating ecological facilities like solar street lights and high-standard sewage treatment systems.

Recent developments reinforce optimism about Latin America's engagement with ChinaWithin the first half of this year alone, leaders or foreign ministers from nine Latin American and Caribbean nations have visited China, with 'cooperation' and 'development' emerging as frequently discussed keywordsNotably, Honduras successfully concluded six rounds of free trade agreement negotiations with China, marking a significant step forward for bilateral trade relations.

Moving forward, both China and Latin America have the opportunity to solidify their economic partnerships—potentially through the refinement of free trade and investment protection agreements to foster a reliable framework for trade cooperation