Latin America’s Incomplete Liberalization Story

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BUENOS AIRES—Latin America knows the recipe well: Open the economy. Expose firms to competition. Let the weakest disappear. Reallocate labor and capital. Grow faster.

What usually remains vague is what comes next.

Which sectors take over? Which activities absorb labor, generate exports, and sustain middle-class incomes? Efficiency can remove distortions. It does not, on its own, build a new productive structure.

Latin America knows this, because many countries did liberalize over the last 30 years or so. They did deregulate. They did lower barriers and expose firms to global competition. Yet the promised transformation remains incomplete. According to ECLAC, natural resources and resource-based manufactures still account for more than 70% of South America’s exports and more than 50% of Central America’s. The export mix still looks overwhelmingly shaped by natural treasures.

The debate has gained renewed urgency at a time when a new wave of Latin American governments is trying to stir their economies from an era of disappointing economic growth. While recent disruptions elsewhere in the world, namely in the Middle East, have drawn attention to our region’s relative geopolitical stability and wealth in commodities from oil to soy and iron ore, history suggests these advantages won’t be enough on their own to produce the meaningful leap forward in development our nations’ citizens are demanding.

None of this means the case is settled against liberalization. It does suggest that “shock treatment” isn’t enough on its own. The second half of the liberalization story is still to be written.

Playing with a weaker hand

Why isn’t Latin America’s natural resource wealth enough to build prosperous economies? After all, Australia and Canada began with similar profiles. The problem is arithmetic: Those two countries sit on much more natural wealth relative to the number of people they have to support. Latin America’s larger economies do not.

The same problem appears in human capital. The region is not devoid of skills. It has universities, engineers, managers, and professionals. What it lacks, in many of its larger economies, is the depth and momentum required to build new tradables at scale.
That is the comparison that matters.

The table above makes the constraint clear. The benchmark resource economies combine far more natural wealth per person with a much stronger skills base. Most of the larger Latin American economies sit well below them on both counts. Chile is the regional outlier, closer on education and somewhat stronger on natural wealth per capita, though still far from Australia or Canada. Argentina, Brazil, and Colombia occupy a much weaker position.

Moving beyond resource-led specialization requires a deeper pool of skills than most of the region has managed to build so far. Trends are no more reassuring, showing little if any convergence toward them.

While Latin America is in fact benefiting from a new cycle of demand for its commodities, the hard truth is that natural resources do not generate mass employment. Mining and oil and gas are capital-intensive. Modern agriculture is highly mechanized. These sectors can generate export revenues, rents, and fiscal income. They do not create large numbers of jobs.

Argentina illustrates the problem cleanly. According to the World Bank’s employment data, about 72% of employment is in services, while agriculture accounts for only 7% and industry broadly defined—including construction, mining, and utilities—for about 21%. In other words, the sectors most closely tied to Argentina’s comparative advantage in natural resources employ only a small share of the workforce. Argentina is not unusual in this respect. Brazil looks very similar, and Colombia combines the same service-heavy profile with a larger agricultural workforce and a somewhat smaller industrial base.

Take away Australia’s natural-resource wealth per person and its human-capital base, and what remains is a poor man’s Australia: a resource-heavy economy that may look cleaner and more efficient than the status quo, but lacks what makes the original prosperous.
Efficiency is not a development plan.

Industrialization is an eternal dream

The obvious objection is: why not protect the existing industrial base? Latin America already tried. Import substitution produced some industrial deepening, but also a sheltered, high-cost manufacturing sector that depended on continued protection to survive. The lesson was that protection without a credible path to competitiveness tends to preserve firms rather than build capabilities—at the cost of balance of payment crises.

If a country opens and the least productive, protected firms disappear, labor has only a few places to go: new tradables, resource sectors, or domestic services. The first option is the one liberalization advocates usually have in mind. The second is limited by the capital-intensive nature of the sector. The third is what happens when the first two are too small.

For much of Latin America, the common destination of recent years has been a narrower economy built around natural resources, some processing around them, and a large—and increasingly informal—domestic service sector. That can generate exports and foreign exchange. It can even stabilize the macroeconomy for a while. What it does not automatically create is a broad, labor-absorbing base of productive tradables.

This model also generates clear social and political disruptions. When labor displaced from industry is absorbed by low-productivity services, the result has not been simple sectoral reallocation. It has more often resulted in a deterioration in job quality: more informality, weaker wages, and the partial wasting of skills acquired in more complex activities. A former machinist who ends up driving deliveries or selling informally is still employed. But the economy has not simply reallocated labor; it has also downgraded it—and that carries a growth cost. As workers move from more complex activities into lower-productivity jobs, the economy loses skills, weakens learning-by-doing, and narrows the base from which future productivity gains can emerge.

Services themselves are not the problem. They always expand as economies urbanize and incomes rise. The problem is that most services are not automatically tradable, scalable, or productivity-enhancing enough to substitute for a lost industrial base. Retail, transport, personal services, informal intermediation, and low-end business services can absorb labor. They do not usually anchor export dynamism or sustained productivity convergence.

Some services can become real export sectors. India and the Philippines built them. Parts of Eastern Europe did too. But those transitions did not begin with tariff cuts alone. They rested on technical skills, reliable infrastructure, and sustained integration into foreign demand. Bangalore grew around engineering talent and a large supply of English-speaking graduates. Manila benefited from a deep pool of service workers and direct integration into global back-office networks. Those ecosystems took years to form.

Tourism is one of the rare service sectors that do all three: generate foreign exchange, create large numbers of jobs, and support local value added. Countries such as Spain, Greece, and Portugal built major export sectors around it, and parts of Latin America—from Mexico to the Caribbean—have done the same.

But tourism depends heavily on geography, infrastructure, connectivity, and security, and it tends to concentrate in a limited number of destinations. It can be a powerful complement to development, but it is unlikely to provide a scalable solution for the region’s larger and more urbanized economies. It can be considered an outlier sector: insufficient on its own to anchor productive strategies in most economies, particularly if a whole region bets on it at the same time.

This is why the fallback answer—“services will take over”—is not enough.

Natural resource booms are not a “curse.” But they can make the problem harder to solve. Export windfalls raise spending, push up wages and non-tradable prices, and weaken the competitiveness of other tradables. In countries with their own currency, this often appears through appreciation. In dollarized economies, it comes through domestic inflation and rising costs. Ecuador is a good reminder: During the oil boom, competitiveness deteriorated even without a nominal exchange-rate channel. Dollarization changed the form of the adjustment, not its substance.

So this is not a debate about exchange-rate regimes, nor about whether openness is inherently desirable. It is about what openness can realistically achieve in the absence of a broader productive strategy.

The morning after

The region has spent decades hearing the cleansing part of the liberalization story. But it is clear the second half of that story cannot be left to competition alone. If Latin America wants something broader than a resource core plus a large low-productivity service economy, it needs to actively build the conditions necessary for an alternative model.

The answer, then, lies with a kind of two-pronged strategy: a government that liberalizes, but is also catalytic—focused not on sheltering incumbents, but on crowding in private investment where the region still has room to build tradable capabilities. That means logistics, energy reliability, digital infrastructure, and business ecosystems that allow firms to scale in services, agritech, health, and green inputs, for example. It means technologies linked to the region’s resource base. It means policies to expand formal employment and build the skills these sectors demand, backed by clear rules, institutions, and resources.

The real divide in today’s politics, then, is between an opening that simply cleans up the existing structure, and one that helps create the next one. Latin America has private initiative but too often lacks the conditions that induce private investment to move into new productive terrain.

When liberalization takes effect, the question remains: What exactly is Latin America opening to? That is the growth challenge of our region in this new era of possibility.

Tags: Economic Policy, gig economy, Productivity