Commodity Downturn Will Affect Mexico the Least in Latin/South America

Commentary by Doug Donahue

It’s reasonable to assume, as this Wall Street Journal blog post by Andrew Browne does, that as the Chinese economy cools off a bit, the countries in Latin America whose economies are heavily based on the production of commodities will have to adjust. The whole region will have to innovate more as they move away from a dependence on commodity exports. Mexico looks to be a noteworthy exception (more on that later).

The problem is that innovation has never been a strong suit of Latin or South America, a topic I’ve written about before in the context of Mexico. For innovation you need investment. And for R&D to succeed, you need a combination of a strong corporate environment, government support and small- and mid-sized companies with an international focus. For the most part, these attributes are in limited supply in Latin and South America.

The region faces the additional challenge of limited infrastructure within the region, as intra-regional trade accounts for just 18% of the total (compared to 50% within Asia and 70% within Europe) according to Browne. This is not surprising, as the most attractive export markets are to North America – not the internal regional market.

Is Mexico the Bright Spot?
All this said, I’d like to point out that of all the Latin and South American economies, Mexico’s is by far the most diverse. Mexico is less dependent on production of oil or mining, for example, than nearby Brazil, which should see a bigger impact as China levels off in coming years. Further, Mexico is in a better position to offset the loss of commodity exports than Brazil because the Mexican government gives fewer commodity subsidies and also because the country is arguably the most open trading partner in the world, positioning it better in the face of a downturn in the commodities markets.

Source: Wall Street Journal

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