Why the Commodities Crunch Could Hurt Stability in Latin America

Why the Commodities Crunch Could Hurt Stability in Latin America
An employee at the Vale do Rio Doce mining company shows iron deposit at the strip mine of Carajas, in the heart of the Amazon Forest in northern Brazil, on Aug. 30, 1999. Carajas is the largest iron ore mine in the world, and also exploits gold, manganese, copper, and nickel. Vanderlei Almeida/AFP/Getty Images
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Much of Latin America has seen an unusually long period of relative political stability since the early 2000s. With the exception of Cuba, democratically elected governments seem embedded throughout the region. The political rules of the game largely seem to be followed. Indeed, the international outcry following the 2009 coup that removed Honduras’ president, Manuel Zelaya, served to reinforce how much Latin American politics had changed since the 1970s, when military dictatorships were the dominant form of government.

It is no accident that political stability has been accompanied by an extended period of high prices for the natural resources that Latin American countries export. The region has benefited from a prolonged surge in demand for its commodities from China and other large emerging markets.

This raises the question of whether this period of political stability, and commodity-led economic growth has changed Latin America fundamentally. Has political stability strengthened institutions and rule of law, for example? And has economic growth led to sustainable development and a reduction in the region’s traditionally exceptionally high levels of inequality.

Certainly, commodity revenues have driven a drop in inequality. But it still remains high throughout the region. An important reason for this is that governments of all ideological persuasions have used windfall revenues to bolster welfare spending, particularly using conditional cash transfer schemes. These involve low-income families being given cash payments in return for meeting conditions such as sending their children to school or immunizing them.