For workers, the long run has arrived in Latin America

August 19, 2013

The outlook for emerging market economies over the next decade looks more challenging as long-term interest rates start to bottom out in the United States. Here is another complicating factor: ageing populations.

That problem is not as serious as in Japan or Europe, of course. Still, investors probably need to cut down their expectations for economic growth in Latin America over the next years, according to a report by BNP Paribas.

The graphic below shows the declining demographic contribution for economic growth in Latin American countries. The trend is particularly bad in Chile, Venezuela and Brazil:

To keep their growth rates close to historical standards, Latin America will have to do more with the same labor resources: the keyword is productivity. If it fails to improve education and infrastructure –important factors to boost productivity in other regions– then it will either live with lower growth or with constant bouts of inflation. Or both.

BNP Paribas analyst Gustavo Arruda says:

Under the first scenario of a 1.0 percent annual increase in productivity, real GDP would grow only 2.4 percent on average. Note that this scenario assumes productivity gains close to those seen on average over the last 20 years.

As Paul Krugman said, ‘productivity isn’t everything, but in the long run it is almost everything.’ And in Brazil, the long run looks as if it has arrived.

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