This week, we will be continuing our series on emerging economies with some thoughts on Latin America.

In examining Latin America’s prospects this week, we present below four lenses through which one may begin to assemble a picture of the challenges and opportunities before Latin America.

The First Lens – Energy

Latin America is rich in the natural resources necessary for the energy economies of the present and future, holding a majority of the world’s lithium, oil reserves second only to the Middle East, and the world’s largest natural carbon sink in the Amazon rainforest. This abundance has only just begun to translate into benefits for the region. The three countries of the Lithium Triangle (Chile, Argentina, and Bolivia) combine for about a third of global lithium production, despite deposits in the Andes estimated to make up over half of the world’s lithium; by contrast, Australia is the largest producer at about 45% of global production. With global lithium demand expected to rise fourfold by the early 2030’s, production from the world’s richest lithium deposit will only increase.

Only three Latin American countries rank among the top 20 oil producers by volume. However, with the EU moving to cut out Russian energy imports, Latin America stands to reap the benefits of the transition with increased energy exports. Further down the development pipeline stands the demand for carbon sinks, with the Amazon rainforest providing over two million square miles of natural carbon dioxide sequestration. Though the forest faces risks from deforestation and the destruction of biodiversity, with aggressive protection and strategic management the Amazon could become one of the world’s most powerful assets in the new carbon-conscious economy.

The Second Lens – Dollar Dependence

Currency risk has once again reared its head in the region, re-awakening fears of a 1980s-style crisis. For much of the 21st century, the dollar has dominated Latin American markets, with an estimated 96% of transactions invoiced in USD through 2019, according to the Federal Reserve. Allianz estimates that the region may hold as much as 8.8% of GDP in excess foreign exchange reserves, with much of this going to what were, until recently, low-yielding US Treasuries. Although surging dollar demand is often dangerous to the weaker Latin American currencies, the region’s central banks began their tightening much earlier than the Federal Reserve, allowing their currencies to absorb some of the blow. Still, the tightening cycle will weigh on economic growth even as the cost of servicing foreign debt rises, with the World Bank estimating current debt repayments in the region could surge to 2.1% of GDP.

The Third Lens – Geopolitical Struggles

Although the Cold War between the US and the USSR often saw its proxy conflicts come to actual combat (as in the Vietnam War), today’s proxy wars between the US and China have a different battlefield – economic power. Already, the two nations are vying for influence over Latin America’s economies. Mexico’s proximity to the US has naturally made it a candidate for “nearshoring” (the movement of key supply chain components away from potential rivals to aligned neighboring countries); in Q1 of 2023 alone, the US spent approximately $6.4B in investments in the country.

Outside of Mexico, China is winning the race for trade in the region, with approximately $1.46 of import/export trade for every dollar of US import/export activity. China is also the leading trade partner for the majority of South America, though the US maintains a lead on a per-country basis when Central America is factored in. While the conflict in Ukraine has occupied the West’s attention for the past year, China has quietly built its influence in South America, especially in regards to the yuan – Beijing set up a currency clearinghouse in Brazil to circumvent the dollar as an intermediary for transactions with the country.

The Fourth Lens – Political Movements

Latin American countries have tilted towards left-wing populism, which in the region translates to a more statist, protectionist approach, often anchored by strongmen. The surge in left-wing populism coincides with a distrust of democratic institutions as having little difference from authoritarian ones, a belief especially popular among younger age groups. Much of this “pink wave” movement can be attributed to the significant levels of economic inequality throughout Latin America. Even with the rise of populist leaders in the region, regional political instability seems inevitable. Bolivia and Argentina stand at the precipice of economic meltdowns; leaders in Ecuador, Paraguay, Chile, and Colombia have been unable to govern effectively; Uruguay and Peru’s leaders have been accused of criminal activity; Mexico’s president faces increasing violence from drug cartels; Venezuela suffers under hyperinflation while Maduro remains in power; Brazil is still finding its footing as it moves from Bolsonaro to Lula.

The Picture – Opportunity in the Face of Adversity

The lenses above present a partial and fragmented picture of the multifaceted issues before Latin America. As with all developing economies, the portrait is one of immense opportunity threatened by instability. Latin America’s immense trove of natural resources presents an opportunity to step into a pivotal role on the global stage, provided the diverse and fractured nations of the region can come together to strengthen one another. If Latin America continues along its current trajectory, its people may be confined to a role as pawns (or worse) in a larger geopolitical game, an ignoble fate for any nation. In order to preserve the long and proud history of Latin America, the West and its allies must move to support Latin American integration into the global economy without resorting to exploitative policies or pushing the region into the arms of authoritarianism – a daunting task, but a necessary one.