Economy of South America
Economy of South AmericaStatistics
Population / 358,941,000 (2010)[N 1][N 2]
GDP / nominal: US$3.205 trillion (2010)[N 1][N 2]
PPP:$3.990trillion(2010)[N 1][N 2]
GDP growth / Per capita: 5.5% (2008)[N 3][N 2][N 4]
GDP per capita / nominal: US$8,929 (2010)[N 1][N 2]
PPP: US$11,115 (2010)[N 1][N 2]
Millionaires(US$) / 400,000 (0.07%)
Unemployment / 9% (2002)
Top10% income / 44.37%
All values, unless otherwise stated, are inUS dollars.
Theeconomy of South Americacomprises around 382 million people living in twelve nations and three territories. It contributes 6 percent of the world's population.
From the 1930s to 1980s, countries of South America used what is called theImport Substitution. Import Substitution is an economic policy which replaces foreign businesses as well as imports with domestic production. This was a policy made to produce more development and help grow domestic businesses, which are not competitive with other international industries. However, this policy created adebt crisisin the South America.[1]
It was only from 1990s when countries in South America switched over to the system ofFree-Market economy. This eventually pulled countries in South America out of the debt crisis. Now, major economic activities includeagriculture,forestry, andmining.
Economic Snapshot for Latin America
Latin America’s economy continued to struggle at the beginning of the year within a context of subdued global demand related to a gradual transition in the world’s economy. Last year, the region’s economic activity cooled rapidly in the second half of the year. It began to deteriorate in Q3 2015 as GDP decreased 0.3% on an annual basis and more complete data show that the region’s economic contraction deepened further in the final quarter of the year. The economy fell 1.3% year-on-year in Q4, which represented the sharpest contraction that the region has seen in six years.
According to a recent survey on the world’s Major Economies elaborated by FocusEconomics, the global economy decelerated toward the end of 2015 and a gradual transition toward slower growth continues due to a combination of factors. Among these factors are diverging monetary policies in major central banks, subduedcommodities pricesand the gradual slowdown and rebalancing inChina’s economy. Moreover, the Consensus view among analysts is that soft global demand persisted at the beginning of this year as the recovery in advanced economies remains modest and uneven, while growth in emerging economies continues to weaken on a broad basis. Against this backdrop, Latin America continued to strive to gain footing and the economic deterioration persisted in the first quarter. An aggregate GDP estimate for Latin America shows that the region’s economy contracted 1.4% in Q1, virtually mirroring the reading registered in the previous quarter. The result suggests that while some economies within the region are taking the global economy’s transition in stride and continue to grow, other countries—representing slightly more than 50% of the region’s economy—are facing contraction, mainly on the back of domestic factors.
In the second quarter, Latin America witnessed a period of relative calm in financial markets, particularly in foreign exchange markets. A loose monetary policy stance in the U.S., a gradual increase in global commodity prices and investors’ perception that risks associated to the Chinese economy are decreasing prompted currencies in the region to strengthen. Currencies inoil-exporting nationsin particular have benefited since the beginning of Q2 from asustained increase in global oil prices, which rebounded from the multi-year lows registered at the start of the year. Meanwhile, currencies in other economies have received an extra boost from domestic factors on top of the gradual recovery in commodities prices. In Peru, the sol strengthened after the first round of presidential elections left two market-friendly candidates to compete in a run-off election in June. In Brazil, monetary authorities continued reducing the Central Bank’s short-dollar position in the market and investors turned more confident on the possibility of fiscal consolidation and more orthodox economic policies following the outcome of a marathon 20-hour session in which the Senate voted to begin the formal impeachment trial of President DilmaRousseff. Looking forward, it remains to be seen if this period of relative calm in financial markets and sustained currency appreciation in the region is here to stay. Analysts share the view that volatility may reappear in the region due to expectations that the U.S. Federal Reserve will resume its monetary tightening cycle in the second half of the year.
Latam economy to contract for second consecutive year as in 1982–1983
Latin America’s economy is expected to slow substantially this year and is seen recovering in 2017, according to a group of economists surveyed by FocusEconomics this month. Analysts project the region’s GDP to contract 0.5% in 2016, which, if confirmed, will mark the first time that Latin America has registered two consecutive years of negative growth since 1982 and 1983 when it was hit hard by a severe debt crisis. Next year, analysts expect the region’s economy to rebound strongly and expand 2.0%.
In this month's LatinFocus economic outlook, analysts cut the 2016 GDP growth forecastfor the 17th consecutive month, this time by 0.2 percentage points as significant vulnerabilities continue to cast a dark shadow on the economy. Latin America’s economy remains particularly vulnerable to a stronger-than-expected slowdown inthe Chinese economy, a subdued recovery in commodities prices and the negative spillover effects from a further deterioration in Brazil. The expected contraction in the region’s GDP this year reflects a projected contraction inArgentina,Brazil,EcuadorandVenezuela, which together represent over 50% of the region’s GDP.
Get the Full FocusEconomics Latin America Report
BRAZIL |The economy and Rousseff’s political career take a nosedive
Brazil’s economysank into the deepest recession in recent history last year amid low prices for key exports, soaring inflation and depressed confidence levels. Moreover, as the economy plummeted so did President DilmaRousseff’s political career. A wide-spread corruption scandal and the economy’s abysmal performance caused approval levels to fall to all-time lows and resulted in the commencement of impeachment proceedings last year. On 12 May, the Senate voted to continue with these proceedings, forcing Rousseff to step down for a maximum of 180 days while a trial is conducted.Vice President Michel Temer took over as interim presidentand his first task will be to find a way to halt the sinking ship. However, a number of daunting challenges lie in Temer’s path andrecent economic data remain poor: retail sales returned to contraction in March and the manufacturing PMI fell to the lowest level in over seven years in April.
A change in leadership will not be a magic bullet for Brazil’s economy and the recession is expected to continue throughout this year. FocusEconomics panelists see the economy contracting 3.7% in 2016, which is down 0.2 percentage points from last month’s forecast. For 2017, the panel sees the economy recovering slightly and growing 0.7%.
MEXICO |Growth picks up in Q1; government reacts to Moody’s potential ratings cut
Mexico’s economy was more resilient to external headwinds at the beginning of the year.Preliminary data show that GDP growth picked up from 2.5% year-on-year in Q4 2015 to 2.7% in Q1. The result, which exceeded expectations, was driven by faster growth in all three of the main sectors of the economy. Agriculture and services expanded robustly in Q1, while growth in the industrial sector was surprisingly faster, considering cutbacks in oil production and a slowdown in the U.S. economy in Q1. Moreover,manufacturing gauges in Aprilsuggest that the sector is off to a positive start to Q2. On a negative note,consumer confidence slipped further in April, suggesting that sentiment is losing traction, despite strong consumption fundamentals. In response to Moody’s warning in March that it could decide to downgrade Mexico’s rating, the government announced new expenditure cuts together with the guidelines for next year’s budget.
Economic growth will be supported by strong private consumption this year. However, Mexico is facing a painful adjustment to low oil prices and weak demand for its manufactured exports. Analysts project Mexico’s 2016 GDP to be just a tick below last year’s 2.5% at 2.4%, which is unchanged from last month’s forecast. For 2017, growth is seen picking up to 2.8%.
ARGENTINA |Successful issue of bonds allows economy to put sovereign default behind it
Argentina officially exited default in late April following the payment of USD 9.3 billion to holdout bondholders. The payment was carried out after the government managed to successfully finalize the sale of USD 16.5 billion in bonds.The settlement with the holdoutsalso paved the way for the government to pay the holders of restructured bonds. Following the end of the holdout saga, the country’s debt rating was upgraded by the three important rating agencies. While the return to credit markets marks a milestone for Argentina, Mauricio Macri’s aggressive reform drive is triggering massive discontent at home. In recent weeks, thousands of people have taken to the streets to protest against layoffs and austerity cuts. Against this backdrop, earlier this month, Macri struck a deal with local businessmen to suspend layoffs for 90 days.High inflationand massive job cuts are a main cause of concern for Argentinians. In April,consumer confidence deteriorated to the lowest level in nearly two years.
A slow adjustment to the new government’s policies,low commodity pricesand the prolonged recession inBrazilare factors weighing on this year’s growth outlook. However, following the renewed access into international capital markets, the economy is expected to largely benefit from fresh capital inflows. Analysts project Argentina’s GDP to contract 0.8% in 2016, which is down 0.1 percentage points from last month’s Consensus. For 2017, analysts project the economy to accelerate markedly and increase 3.0%.
VENEZUELA |Economic situation becomes increasingly dire
The Venezuelan economyis set to experience another difficult year in 2016 due tolow commodity pricesand structural macroeconomic imbalances. The economy has taken a turn for the worse since President NicolásMaduro, inan effort to tackle an ongoing energy crisis, ordered the working week for civil servants to be shortened to two days per week and announced daily power cuts. The measures, which will constrain economic activity even further, have unleashed a wave of looting and rioting across the country. Meanwhile, the political opposition has stepped up their effort to end the president’s term by using all the legal mechanisms at their disposal. The government has responded by imposing numerous hurdles and declaring a state of emergency to thwart any impeachment attempt.
The country’s growth prospects remain bleak; runaway inflation and a dysfunctional retail sector are likely to keep the economy mired in a deep recession this year. FocusEconomics panelists see the economy contracting 7.8% this year, which is down 0.6 percentage points from last month’s projection. Next year, the panel sees GDP decreasing 1.5%.
Get the Full FocusEconomics Latin America Report
INFLATION | Inflation reaches the highest level in two decades
Despite a recent stabilization in the region’s major currencies and a decline in exchange rate pass-through, inflation remained elevated in Latin America at the outset of the second quarter. An estimate elaborated by FocusEconomics showed that inflation in the region rose from 20.6% in March to 22.0% in April—the highest point since 1995.
Central banks across the region have refrained from raising interest rates as the impact of past exchange-rate weakness on consumer prices is fading gradually. The exception isColombia’s Central Bank, which continued to tighten its policy. The Bank has hiked the monetary policy rate eight consecutive times, most recently on 29 April, with a surprising 50-basis-point increase. Meanwhile, in Brazil, rate cuts are the most likely scenario this year, but the Central Bank is lowering expectations of such cuts in the short term.
Price pressures are seen staying elevated this year as analysts project inflation in the region to end 2016 at 24.5%. This month’s projection was revised up from the 21.9% expected in last month’s Consensus. Economists see inflation in the region falling to 17.4% at the end of 2017 due to a recovery in commodities prices and stabilization in the foreign exchange markets
South America, the fourth-largestcontinent, extends from the Gulf of Darién in the northwest to the Tierra del Fuego archipelago in the south.
South America’sphysical geography,environmentandresources, andhuman geographycan be considered separately.
South America has diverse agricultural products, vastmineralwealth, and plentifulfreshwater. It also has rich fisheries andports on three bodies of water: the Caribbean Sea, Atlantic Ocean, and Pacific Ocean. The continent’seconomyis centered on theexportofnatural resources.
Climate and Agriculture
South America extends from a broadequatorialzone in the north to a narrow sub-Arcticzone in the south. It can be divided into four climatic regions:tropical,temperate,arid, and cold.
Tropicalclimates—which include both tropical rainy andtropical wet and dry climates—cover more than half of the continent. Tropical rainy conditions occur in the Amazon River basin, the northeastern coast, and the Pacific coast of Colombia. The regions’ average daily temperature is 30 degrees Celsius (86 degrees Fahrenheit) with very little temperature variation throughout the year. While average annual rainfall is 262 centimeters (103 inches), some areas receive an extreme amount ofprecipitation; the Chocó region of Colombia, for example, receives more than 800 centimeters (315 inches) of rain every year.
Tropical wet and dry conditions occur in the Orinoco River basin, the Brazilian Highlands, and in a western section of Ecuador. Temperatures are similar to tropical rainy, but have a greater daily range. There is also less precipitation and a prolongeddry season.
Manycrops thrive in the tropical climates of South America. Cashews and Brazil nuts arecultivated. Fruits such as avocado, pineapple, papaya, and guava are also native to tropical South America.
Two very important cash crops are coffee and cacao, which is the source of cocoa, the base ingredient in chocolate. Brazil is the world’s largest exporter of coffee, and it used to be one of the largest exporters of cacao. In 2000, afungusspread throughout many of South America’s cacao plantations, devastating the economies of the region and driving up the price of chocolate. The chocolate industries of Brazil, Venezuela, and Ecuador are slowly recovering, but most of the world’s cacao now comes from countries in tropical Africa.
The continent’s temperate climates are located south of the Tropic of Capricorn and in the mid-level elevations of the Andes mountains. Temperate climates have a greater temperature range and lower winter temperatures than tropical climates.
South America’s temperate climates are home to a number of industrial crops andlivestock. Corn is produced throughout the temperate climates, and soybeans have become an increasinglylucrativecrop in thePampas.
The Pampas’ vast, high-qualitypastures are also the center of South America’s hugeranchingindustry. Brazil is the world’s third-largestbeefexporter (behind only Australia and the United States). Argentina is also an important beef exporter.
Arid climates are found indeserts, coastal areas, and interior regions throughout South America. Some of these climates are extremely cold, while others are extremely hot—but they all receive very little precipitation. This makes agricultural production difficult. However, heavilyirrigated crops, such as rice and cotton, are grown in desert oases.
Cold climates occur in the southern ends of Argentina and Chile and the highest elevations of the Andes. Cold climates have an average annual temperature of below 10 degrees Celsius (50 degrees Fahrenheit). These climates are characterized by long dry seasons and high winds.
While these cold climates limit crop production, they are also home to thousands of native potato species and the nativequinoaplant—a grain-like crop grown for its edible seeds. Potatoes and quinoa arestarchyfood staples of the Andeandiet. Potatoes are now one of the biggest crops in the world. Ninety-nine percent of the potatoes grown throughout the world can be traced to a single species that was originally cultivated in the Chiloé Archipelago more than 10,000 years ago.
In addition to potatoes and quinoa,grazing animals such as sheep, llamas, alpacas, and vicuñas also thrive in cold climates. These animals are bred for their meat and wool, which is used in high-qualitytextiles exported throughout the world.
Forestry and Fishing
Forestryis the management of trees and othervegetationin forests. It is a major economic activity for tropical South America, especially the Amazon River basin. Many high-value tree species, such as mahogany and rosewood, are native to the rain forest. Lumber from these trees is exported to foreign markets for use in cabinets and floors. Some countries havetree plantations. Chile, for example, is an important exporter of wood chips,plywood, and paper pulp.
Lower-grade woods are important to the construction market in South America. The most familiar of these less-expensive woods is eucalyptus. Eucalyptus is not native to South America, but it grows at an incredibly quick rate. Eucalyptus is used as both a building material and asfuelin low-income communities throughout South America.