Latin America's Economic Challenges: Deindustrialization & Recommodification

From 2014 to 2023, Latin America's collective economy experienced a significant downturn, registering an average annual growth rate of just 0.9%. This period contrasts sharply with the "Lost Decade" of the 1980s, which saw a 2% annual growth, highlighting the severity of recent economic stagnation. According to Marco Llinás, head of the Production, Productivity and Management Division at the UN’s Economic Commission for Latin America and the Caribbean (ECLAC), the decline was exacerbated by the COVID-19 pandemic, but primarily driven by two entrenched trends: widespread deindustrialization and the intensified recommodification of exports. These phenomena, whose roots predate 2014, have been observed across most of the region, with Mexico being a notable exception.

While contemporary economic analysts debate the precise interplay and relative importance of deindustrialization and recommodification, it is clear that these trends are unfolding amidst a complex global landscape. Factors such as the ebbing tide of globalization, China's burgeoning influence in the region, and protectionist measures like the Trump tariffs have all contributed to the current economic climate. Understanding how these processes began requires a look at Latin America's historical economic trajectory.

Historically, economists generally agree on a common path from underdevelopment to prosperity: nations typically progress from low value-added production and basic services to industrial development, fostering a robust middle class, and eventually transitioning to a service-dominated economy, often driven by high-end technology. South Korea serves as a compelling example, transforming from a post-war battleground in the 1950s to a global leader in technology and culture today.

Latin America, for a significant period, appeared to be on a similar upward trajectory. Between 1951 and 1980, the region’s aggregate annual growth rate stood at 5.2% (with Brazil reaching an impressive 6.8%), outperforming the global average of 4.5% and approaching the growth rates of Korea (7.5%) and Japan (7.9%), as detailed in a 2004 paper by the Inter-American Development Bank. Brazil, during its "Miracle" period (1968-1973), saw its share of industrial exports in GDP more than double, fueled by 13.3% annual industrial growth. However, this progress was severely disrupted by the debt crisis from 1981 to 1993, during which Latin America’s annual growth plummeted to 1.7%, while Korea continued its robust expansion at 7.2%. As globalization lifted other parts of the world out of poverty in the 1990s, Latin America largely remained on the periphery, hampered by either deliberate isolation or a lack of competitiveness.

Premature Deindustrialization

"Premature deindustrialization" describes a scenario where an economy shifts away from manufacturing before achieving a substantial level of industrial output. This occurs at income levels significantly lower than those historically experienced by today's advanced, "post-industrial" economies, which are characterized by sophisticated, technologically advanced service sectors. While seen in sub-Saharan Africa and parts of East Asia, this phenomenon is particularly concerning in Latin America due to the region's earlier, promising industrial development path.

For instance, research by Martin Lábaj and Erika Majzlíková indicates that Argentina's manufacturing sector is increasingly dominated by low- and medium-low-tech industries, hindering its potential for higher value-added production. Brazil faces an even more severe form of deindustrialization, marked by an escalating reliance on low-tech manufacturing and less knowledge-intensive services. Official statistics reveal that manufacturing's contribution to Brazilian GDP sharply declined from 36% in 1985 to just 11% in 2023. This is problematic because, as Llinás points out, "industry has higher productivity and faster productivity growth. Plus, greater potential for expansion."

Economists attribute premature deindustrialization to a confluence of factors, including intensified globalization, automation's impact on job creation, and a shrinking global demand for manufactured goods. Additionally, "structural factors" such as heavy resource dependence, weak institutional frameworks, and policies that deter investment—like high taxes, excessive red tape, inadequate infrastructure, and rigid labor laws—play a significant role. Sérgio Goldman, a corporate finance consultant in São Paulo, describes Brazil as a "very closed" economy. The surge in imports, from $60.4 billion in 1990 to $359.4 billion in 2000, further illustrates this trend. More recently, increased trade with China has led to a flood of inexpensive manufactured goods, often displacing local producers. William Maloney, chief economist for Latin America and the Caribbean at the World Bank Group, notes the severe impact of Chinese competition on Colombia's auto parts sector. Furthermore, a history of protectionism has often led to a lack of innovation among Latin American executives, with Goldman lamenting the scarcity of effective management within companies. Maloney highlights Chile's inability to leverage its copper resources into leading global firms, contrasting it with Japan's success with its copper deposits. The exact weight of factors like automation, trade, and the "China shock" in driving deindustrialization remains a subject of ongoing debate.

Recommodification of Exports

The second significant economic trend affecting Latin America is "recommodification," often termed the "reprimarization" of exports. After seemingly moving away from commodity dependence in the 20th century, the region reverted to exporting larger volumes of raw materials during the commodity boom of the 2000s. This super cycle, driven by robust demand from China, India, and other rapidly growing economies between 2000 and 2014, was followed by another surge at the start of the current decade. Each successive wave has tended to establish higher baselines for export volumes; for example, Brazilian soybean exports consistently set new records.

Data from Trading Economics underscores this shift: commodities as a percentage of total exports jumped from 41.1% in 2000 to 55.6% in 2020 for Brazil; 63.1% to 83.2% for Chile; 55.6% to 65.1% for Colombia; and 73.2% to 85.3% for Peru. ECLAC reports that in 2024, "agricultural products (11%) and mining and oil (11%) were the main contributors to growth in goods exports, while manufacturing exports remained stagnant," further cementing the region's reliance on primary goods.

"Productivity Is Everything"

Despite historical ideological disagreements among pundits and policymakers regarding Latin America's economic strategies—ranging from import substitution to Milton Friedman-inspired free market liberalism—a near consensus is now emerging. Llinás posits that the post-2014 economic downturn is "in large part due to stagnant and even declining productivity." He echoes Nobel laureate Paul Krugman's famous assertion that "productivity isn't everything, but in the long run it is everything."

In response, four of the region's major economies—Brazil, Chile, Colombia, and Mexico—are implementing what Llinás terms "productive policies," distinct from traditional industrialization strategies. A common thread among these new approaches is the strategic selection of a few priority sectors, which may include agriculture, mining, or services like sustainable tourism, regardless of whether they are industrial. Brazil's program, for example, has allocated R$300 billion for credit, public procurement, regulatory reform, and infrastructure investments aimed at benefiting six specific sectors during its initial 2024-2026 phase.

Investment in commodities also has its proponents, particularly given the potential for innovative spin-offs. Llinás and Kieran Gartlan, a São Paulo-based managing partner of The Yield Lab Latam, a venture capital fund focused on agrifood and climate technology, argue that efforts to enhance business practices in sectors such as mining and agribusiness can stimulate investments in industrial processes and high-end services. Gartlan likens large-scale Brazilian soybean farms to "open-air factories" and highlights a growing ecosystem of start-up suppliers developing new technologies in fintech, drones, and biotechnology for the agricultural sector, with his firm having identified approximately 3,000 such high-tech start-ups in Latin American agriculture.

However, credit availability remains a significant hurdle. Gartlan notes that private banks often lack the appetite and expertise to properly assess risk in farming, leading to high-interest rates that make credit expensive for agricultural producers. Consequently, many relatively large farmers fail to invest in essential infrastructure like silos to store crops, missing opportunities to sell when prices are favorable and instead operating on a harvest-to-harvest basis to settle previous debts. While the resolve to steer Latin America's economy towards greater productivity is evident, the crucial next step involves securing comprehensive buy-in from investors and lenders to facilitate this transformation.