Latin America’s Commodity Dependence: What If The Boom Turns To Bust?

By Gustavo Adler and Sebastián Sosa

(Version in Español)

As a commodity exporting region, Latin America has greatly benefited from the commodity price boom of the past decade. But with talk of a new global recession, what will happen to the region if the boom turns to bust?

The IMF's latest Regional Economic Outlook: Western Hemisphere sheds light on Latin America's reliance on commodities from a historical perspective. Our study also looks at the effect of a sharp decline in commodity prices on emerging market economies and on the policies that could shield countries from that shock.

More dependent but also more diversified

The reliance on commodity exports can be looked at as a share of GDP (commodity dependence) as well asrelative to total exports of goods and services (export diversification).

The first ratio tells us about the potential impact of a commodity price shock on domestic output, while the second tells us about the economy's ability to adjust to a commodity price shock. There are significant differences within the region across these two dimensions:

• South America is as commodity dependent (or more) as four decades ago, with exports of basic goods reaching about 10 percent of GDP in 2010 (see Figure 1, left panel). But this contrasts markedly with the pattern seen in Mexico and Central America—where commodity dependence has fallen sharply, reaching balanced trade in 2010. It is also very different from the trend observed in emerging Asia, which has gone from being a net commodity exporter in 1970 to a net importer in 2010.

• At the same time, Latin America as a whole is today more diversified than four decades ago, as noncommodity exports have grown even more rapidly than commodity exports during the past 40 years, especially in Mexico & Central America (see Figure 1, right panel).