All eyes have been on China over the past few months as economic growth trends have slowly slipped, triggering widespread concern among investors worldwide. For the first time since 2007, average GDP growth rate has fallen below 7%. China had been cruising on an upward spiral since the 1970s, when it underwent a heavy set of reforms that quadrupled the size of its economy. However, recently the country has been experiencing economic turmoil stemming from production decreases and the summer 2015 stock market crash that put the world on edge. Regardless of these setbacks, today China is the world’s second largest economy, and consequently plays an important role in the international financial system, particularly by providing a large market to commodity-based nations. As such, its current economic slowdown has serious implications for global economic growth. In particular, Latin America, a region highly dependent on commodities, has found itself in trouble.
The problem is that Latin American economies are commodity-based. For the past decade or so, China has been one of the world’s largest consumers of commodity products, including copper, lead, petroleum, zinc, and iron. According to MIT’s Observatory of Economic Complexity, petroleum gas accounts for 47.8% of Bolivia’s exports and crude petroleum accounts for 88.8% of Venezuela’s exports. Similarly, the United Nations Conference on Trade and Development (UNCTAD) reports that 18.8% of Venezuela’s GDP comes from oil, 17.7% of Chile’s GDP comes from metals, and 18.2% of Paraguay’s GDP comes from food products. Although not reaching such drastic numbers, the rest of the region is highly dependent on either a single commodity or a mixture of commodities as well.
Starting in 2000, the world underwent a commodities boom, partly triggered by China’s unprecedented demand for raw materials, such as steel and copper, to complete its development projects. Due to this increase in demand, commodity prices soared, highly benefitting numerous Latin American countries, whose main exports are commodities, including Chile, which depends on copper, and Brazil, which depends on iron ore, oil, and agricultural products. The United Nations Development Programme estimates that by 2009 the share of commodities in total exports had risen to 55% in the region. As such, China’s demand for raw materials directly translated into economic gains for Latin America. During this period, per capita GDP in the region increased annually by an average of 1.9%, a figure that is significantly higher than the 0.3% growth rate the region experienced between 1980 and 2000.
However, with China’s economic growth quickly dwindling, Latin America has found itself in a precarious situation. China’s slowdown has not only brought down commodity prices, but has reduced demand for Latin American exports, drastically straining Latin American economies. As such, the International Monetary Fund has predicted that this year the region will experience its first economic contraction, by 0.3%, since the 2008-2009 economic crisis.
In today’s highly interconnected world, Latin America’s economic health is directly correlated to China’s economic performance. China’s current economic slowdown threatens to undo the positive gains the region achieved throughout the past decade or so. With the commodities boom of the 2000s, Latin America achieved unprecedented improvements in health, social programs, and education. Poverty dropped from 34% to 21%, according to The Atlantic. Most importantly, the 2000s saw the consolidation of a strong middle class in Latin America—a social class that had previously been basically nonexistent in most of the region. As such, Latin America today faces a difficult challenge: how can it prevent Chinese economic turmoil from adversely affecting its newly created middle class? What measures must it take to ensure its citizens do not fall back into poverty?
South American countries are particularly vulnerable to China’s slowdown, due to their high dependence on oil and minerals. Chile, Peru, Colombia and Venezuela, which trade heavily with China, must be prepared to respond with adequate social and economic policies in order to protect their fragile middle classes from widespread hardship. On the other hand, economic prospects in Mexico and Central America, which have closer ties with the United States, are not so gloomy. Regardless, the region as a whole has been unable to keep up with the high growth rate of 4.3% that it experienced from 2004-2011 during the commodities boom. As such, the whole region must begin executing economic reforms both as a safety cushion and to promote growth.
Undoubtedly, Latin America now stands in a risky situation, as China’s meltdown is poised to affect this region the most. The Eastern giant’s economic slowdown threatens the livelihoods of millions of citizens who have just recently escaped poverty. Unlike in any other region, the 2000s marked a period of unprecedented growth and social gains for Latin America. National governments cannot let China’s current situation reverse their groundbreaking achievements and must work towards both mitigating external effects and bolstering their economies. Thus, priority must be given to economic diversification, social policies, and movement away from high integration with a single foreign economy.