MIAMI, September 16, 2010 - Often maligned as growth villains, getting in the way of Latin America's long-term prosperity, commodities are quickly turning around their bad reputation to become the unsung heroes of the region's recovery and increasingly bright economic outlook.
According to the report " Natural resources in Latin America and the Caribbean: Beyond Booms and Busts?", the current commodity bonanza, if managed wisely, can propel Latin America to rich-world growth levels, contradicting the long-held view that commodities are a curse to a country's development -- quick riches that never seem to produce lasting wealth.
Commodities' new role as an engine for lasting growth can be seen in the region's recovery from the global financial crisis, largely attributed to exploding exports of raw material to emerging markets. China, in particular, has become an important destination market, with its share of commodity exports growing tenfold since 1990 --from 0.8 percent in 1990 to 10 percent of total commodity exports in 2008.
"Assuming that Asian demand for soy exports from Argentina, iron ore from Brazil, copper from Chile, fish and minerals from Peru and other Latin American commodities keeps up, the region is in a strong position to profit from its natural resources," says the report's author and World Bank's Chief Economist, Augusto de la Torre.
So, is everything that glitters gold for Latin America? Not quite so, de la Torre says.
Windfall revenues from natural resources need to be saved for a rainy day so when highly volatile commodity prices drop countries don't go broke, the expert notes.
Fortunately -he argues- countries are increasingly savvier with commodities, leading him to believe that Latin America may be breaking the "natural resource curse" – a huge deal for a region where 93 percent of the population and 97 percent of economic activity is in countries that are net commodity exporters.
In 2008, commodity exports for the seven largest economies in LAC reached a high of nearly US$400 billion. This accounted for just over half of overall exports (52 percent). In the Southern Cone of the region (Argentina, Uruguay, Paraguay, and Southern Brazil) the share of agriculture related exports represents more than 50% of total exports, as an average.
Chile's copper stabilization fund is a good example of wisely managing a commodity boom, he argues."The commodity bonanza is less likely to end badly for Latin America this time around, because countries that are rich in natural resources are being smarter in the way they manage their income", says de la Torre.
By saving the proceeds of its copper windfall during good times Chile has been able to maintain its social programs and invest in new industries during lean times. Chile even used part of the stabilization fund to finance the country's reconstruction following its February 27 earthquake.
De la Torre added that other commodity-exporting countries such as Peru, Colombia and Brazil, which are following responsible economic policies, may be following Chile's steps.
The World Bank report argues that well-designed natural resource stabilization or long term savings funds could help the region deal with revenue instability and wealth preservation. Of five countries that began the boom in 2002 with stabilization funds or similar fiscal arrangements, Chile and Trinidad and Tobago ended it with significant savings to be able to finance a countercyclical response to the downturn.
It also warns that many stabilization funds have failed because it is hard to resist political pressure to spend unduly during the boom. However, according to the report, Chile's experience shows that savings out of windfalls (to use in downturns) can have economic and political pay-offs.