40 The Americas The EconomistJune 1st 2019
21strategy to become less brazen and more
enterprising, often outsourcing violence.
Duque de Caxias is among Brazil’s richest
municipalities thanks to its oil refinery,
chemical industry and position on the
highway. That makes it an attractive mar-
ket for what Gabriel Ferrando of the state
police’s organised-crime unit (draco) calls
the militias’ “power project”. They have “an
absurd capacity to adapt”, he says.
By contrast, the authorities are weak. A
federal judge was murdered in another part
of Greater Rio in 2011. A police delegation
sent in February to investigate land-grab-bing in Duque de Caxias concluded that of-
ficers could not do their work without risk-
ing their lives. According to Julio José
Araujo Junior, a federal prosecutor, “our
goal, frankly, is not to resolve the situation
but to keep it from getting worse.”
To prosecutors’ consternation, the
mayor’s office has sought to issue titles for
irregularly occupied federal land. “It’s pre-
cisely this stamp of approval that the mili-
tias seek,” says Mr Araujo. Locals say that
after several low-lying areas in São Bento
were declared uninhabitable and 300 fam-
ilies were promised apartments in a gov-ernment housing project, militia members
distributed the flats among families from
another area, and then extorted money.
In 2016, when he was a federal congress-
man, the mayor of Duque de Caxias, Wash-
ington Reis, was fined by the supreme
court for cutting down trees in a nature re-
serve in order to build an illegal housing
development. He appears in Facebook pho-
tos with Chiquinho Grandão, a city coun-
cilman accused by prosecutors in 2010 of
leading an extermination squad responsi-
ble for some 50 murders. Both deny militia
connections. Mr Grandão laments theBello Export or stagnate
Goingsouth*1990constant$
†Nodatafor1940-45Source:Maddison
ProjectDatabaseAverageregionalGDPperperson*
As%ofUSGDPperperson01020304050601910 20 30 40 50 60 70 80 90 2000 10SouthernEuropeLatin
AmericaSouth-EastAsia†Sub-SaharanAfricaF
orecasters slashingtheir predic-
tions for economic growth in Latin
America has become a depressing annual
ritual. This year is no different. The imf
at first expected growth of 2%. By April
that had become 1.4%. Even this may be
too rosy. In the first three months of the
year the three biggest economies—Bra-
zil, Mexico and Argentina—all seem to
have contracted and others performed
weakly. Since the world economy has
expanded relatively strongly in recent
years, what this means is that Latin
America is falling behind.
Of course there are some bright spots.
Many Latin American economies are at
least more resilient and less volatile than
they were, thanks to more responsible
fiscal policy. Those countries where
leaders thought that prudent macroeco-
nomic policy was for dummies—Hugo
Chávez in Venezuela, Dilma Rousseff in
Brazil and Cristina Fernández in Argenti-
na—have seen slumps. But the really
worrying thing is that Latin America’s
lagging economic performance has
lasted for several decades (see chart). The
gap between the region’s average income
per person and that of the United States
is wider than it was in the 1950s. Two new
studies try to explain this relative failure,
and how it could be reversed.
In a paper for the Inter-American
Dialogue, a think-tank in Washington,
Augusto de la Torre and Alain Ize look at
what distinguishes those Latin American
countries whose gdpper person has
grown significantly faster than that of
the United States in this century. That
applies to Peru, Chile and Uruguay,
which are commodity exporters, and to
Costa Rica, the Dominican Republic and
Panama, which are service exporters.
They conclude that success in interna-
tional markets—as measured by a risingshare of world exports—has been the route
to income convergence. That is partly
because exporting is a form of learning, as
other economists have noted. There is a
troubling exception to this rule: Mexico
has gained export share but its income has
stagnated largely because the rest of its
economy is so inefficient.
Counter-cyclical macroeconomic
policies are crucial, too, especially in
countries that export commodities, the
prices of which can fluctuate wildly. But
extreme income inequality and wide-
spread poverty make it hard for Latin
American governments to resist public
pressure to spend during booms. This
means that rather than an afterthought,
good social policy should be considered a
core component of economic manage-
ment. Clearly, not every country can ex-
pand its share of world exports; this is
especially hard when protectionism is on
the rise. But Latin America has much scope
to expand service exports, such as care of
the elderly as well as tourism, provided it
reduces crime.
Researchers at the McKinsey GlobalInstitute look at Latin America’s lack of
convergence from a different angle.
Focusing mainly on Brazil, Mexico and
Colombia, they identify two “missing
middles”. The first is a shortage of medi-
um-sized firms. Relative to the size of the
economy, Latin America has only about
half as many companies with sales of
$10m to $500m a year as a comparator
group of ten emerging economies else-
where. The Latin American ones tend to
make higher profits—a sign that they
face less competition.
The flipside is a lack of well-paid jobs
and thus “a missing cohort of middle-
class consumers with sufficient income
to maintain robust domestic demand”,
the report finds. The poorest three-
quarters of Latin Americans account for
just 40% of total consumption, com-
pared with two-thirds of consumption in
the comparator group. Lack of consumer
demand deters firms from investing.
Unless Latin American businesses
become more productive, the region’s
outlook is dim. According to McKinsey,
72% of the region’s economic growth
between 2000 and 2016 was owing to the
expansion of the labour force rather than
higher productivity. Latin American
women now have fewer babies so the
labour force will soon stop growing.
Two political lessons stand out. The
left should understand that fiscal dis-
cipline and exports are vital to achieve
sustained income growth. But the right
needs to learn that monopolies hold back
economies, that workers should share in
productivity gains and that taxes should
be adjusted so that they do not fall dis-
proportionately on consumption rather
than income. Otherwise Latin America
risks being trapped in a vicious circle of
economic stagnation and social and
political conflict.Latin America is falling behind economically. Here’s why