A Brief of South America Economy

 

As a group, the economies of South American countries have changed profoundly since the 1970s. This has come as a result both of external conditions beyond the control of these nations and of internal policy decisions made to produce change. At the most fundamental level, these countries mainly are exporters of relatively low-value primary products and semi processed materials and importers of higher-value manufactured goods. Great efforts have been made across the continent to expand the manufacturing sectors and to reduce dependency on imports.

From the 1930s until the late 1980s, the majority of South American countries pursued economic development strategies based on a system of import substitution. National governments used such measures as tariff and price policies to boost domestic industries and protect them from external competition. They also created joint ventures with private capital and established state-owned enterprises, especially in the heavy industries, utilities, and transportation. They provided high subsidies for social programs in areas such as education and public housing. Furthermore, national spending on armaments and “defense” soared during periods of military rule.

South American countries borrowed from foreign private banks and international lending institutions, such as the World Bank and the Inter-American Development Bank, to fund existing programs while also trying to expand their economic productivity through investments in areas such as transportation, energy generation, industrialization, and agricultural modernization. However, many countries lived well beyond their means through the wholesale borrowing of funds at high interest rates on the world market. Consequently, they were forced to borrow more and more money just to service the interest payments that accumulated annually on their outstanding debt, thus creating the so-called “debt crisis.”

With the debt crisis, insolvency befell many South American countries. After decades of substantial progress in its economic development, the region as a whole regressed significantly in the 1980s. Between 1980 and 1990, gross domestic product (GDP) per capita measured in constant dollars declined for every South American country except Brazil, Colombia, and Chile. For a part of this same period, inflation rates skyrocketed in many countries, exceeding 3,000 percent per year in some instances. Currency devaluation, austerity programs, and governmental disinvestment were the most commonly used remedies to check these problems.

The severity of their problems and lender demands prompted most South American countries to initiate fundamental restructurings of their economies. These reorganizations were made in accord with neoliberal, or “free-market,” economic theory, which came to dominate the region’s economic planning and growth strategies in the 1990s. Emphasis was placed on stimulating economic growth through selling state-owned enterprises to private investors and eliminating or severely curtailing support for social programs. These actions were meant to increase productivity, reduce governmental expenditures, and diversify economic activities. Regional economic integration also had taken on importance in order to broaden markets. These changes had the greatest impact on those lowest on the socioeconomic ladder. At the turn of the 21st century, the economies of many South American countries started to improve, and some of those countries were able to start paying off their debts. Notably, Ecuador adopted the U.S. dollar as its currency in 2001, provoking protests from indigenous communities and the working poor; however, this conversion, as well as a rise in oil prices, helped stabilize the Ecuadorean economy the same year. Argentina, the victim of an economic crisis in 2001 when it defaulted on its foreign debt, had begun a recovery by 2003. Increasing economic independence sparked a trend of nationalization along with the election of left-leaning leaders in Venezuela, Brazil, Chile, Argentina, Ecuador, and Bolivia.

In South America, most banks and financial institutions are large enterprises, with branches in many cities and towns. In some countries a high proportion of these were government-owned until the late 1980s, but by the early 21st century foreign-owned banks or joint-venture enterprises of local and foreign capitalization were common. Wholesale and particularly retail business enterprises, on the other hand, are mostly individual concerns and in many cases are family owned and operated. Department stores or chain stores, uncommon in most South American countries until the early 1970s, have become an important part of the merchandising environment, especially in the larger cities. During the 1980s, modern managerial and marketing structures took hold in many countries—especially Brazil, Argentina, Chile, Uruguay, Colombia, and Venezuela—often giving a competitive edge in the marketplace to enterprises that adopted them.

Intraregional trade in South America has increased since the 1980s, accounting for about one-fifth of total exports. A firm conviction prevails in South America that intensification of intraregional trade is a necessary condition for overall economic growth, and it has in fact helped to reduce the region’s excessive dependence on foreign markets, to diversify exports, and to alleviate balance-of-payments problems.

South American trade with the rest of Latin America is concentrated in several countries. Argentina, Chile, Brazil, and Venezuela account for more than half of the exports, and these countries also absorb about half of the imports from the rest of Latin America.

All the independent South American countries except Guyana and Suriname belong to the Latin American Integration Association (known by its Spanish acronym, ALADI). Despite formidable obstacles, including unequal levels of development, inadequate infrastructural linkages, and enormous physical distances between countries, ALADI has directed its efforts toward designing a common trade policy for member countries. It gradually reduces import duties and other restrictions on imports from the rest of the world while arriving at agreements to compensate trade payments between member countries as well as making reciprocal credit arrangements between central banks. Moreover, in 1969 Bolivia, Chile, Colombia, Ecuador, and Peru formed the Andean Group (called the Andean Community since 1997) for the purpose of reaching agreements on common trade problems including external tariffs, reductions in tariffs applicable to subregional production, and coordination of policies toward foreign investment. Peru suspended its membership in 1992 but resumed it in 1997. Venezuela joined in 1973 and withdrew in 2006. Chile suspended its membership in 1977. In 2001 ALADI signed an agreement with the Andean Community that aimed to facilitate further integration, and Mercosur (a trade organization consisting of Argentina, Brazil, Paraguay, Uruguay, and Venezuela) also pursued free-trade agreements with ALADI members. In 2003 Mercosur signed a free-trade agreement with the Andean Community, which went into effect on July 1, 2004.

About three-fourths of the trade among ALADI members consists of basic commodities and about one-fifth consists of semimanufactured and manufactured goods. Among basic commodities the most important items are foodstuffs, beverages and tobacco, raw materials, and nonferrous metals. Among manufactured goods the main items of trade are chemicals, machinery, automobiles, and transport equipment.

All these efforts toward integration have been responsible in part for the rapid growth of the area’s internal trade and for a large contribution toward a greater balance of trade among these countries. An important component of this trade has been binational barter agreements. Trade surpluses and deficits between the countries have declined considerably.

External trade represents a key element in South America’s economic growth. Essential imports, particularly capital and basic intermediate goods, are needed to accelerate the industrialization process. A major problem has been that exports and net external financing have not generated sufficient income to pay for those imports. Despite increases in trade, South America’s share of world trade has remained small, primarily because the volume of trade between major industrialized countries has grown at an even faster rate.

South America’s major exports, in terms of value, are mostly primary commodities, including foodstuffs and plant products, fuels, and raw materials. Within the first group the most important commodities are sugar, bananas, cocoa, coffee, tobacco, beef, corn, and wheat. Oil, natural gas, and petroleum products dominate the second group, while linseed oil, cotton, cattle hides, fish meal, wool, copper, tin, iron ore, lead, and zinc top the third group. South American manufactured goods have gained access to world markets as well. Brazil has become a significant supplier of armaments worldwide as well as an exporter of, among other products, small aircraft vehicles and shoes. Several other countries, including Ecuador, Uruguay, Argentina, Colombia, and Chile, also increased their nontraditional exports at the end of the 20th century and the beginning of the 21st. More than one-fourth of these exports are sent to the United States, another one-fifth to western Europe, and an even smaller percentage to the rest of South America. Since the 1970s the illicit movement of drugs—particularly cocaine—which is mainly conducted from Peru, Bolivia, and Colombia, has added enormously to the value of exports from the region, despite international interdiction efforts. In the early 2000s the volume of cocaine traffic increased significantly in Venezuela, serving as a conduit to other regions of the world.

Almost three-fourths of South America’s imports consist of machinery, vehicles and parts, chemicals and pharmaceuticals, paper and paperboard, textile products, and other manufactures. About one-fourth of South America’s total imports are from the United States, one-seventh come from western Europe, and another one-seventh originate in South America. In general, South America’s foreign trade sector has been slow to diversify; it is heavily dependent on imports for domestic supplies of industrial goods and suffers from an imbalance in trade with the industrialized countries.