Executive summary

Over the past six months, analysts at the Elcano Royal Institute have consulted and interviewed experts from think tanks, academia, the corporate sector and national governments. In doing so, and with the inevitable caveats and qualifications, we have found that the most prevalent narrative in Europe with regards to Latin America consists of four basic elements:

1. In the economic sphere, the widely held view is that the region has once again squandered its opportunities to take a significant leap forward in development due to its tendency to suffer frequent and deep macroeconomic crises, induced by an unsustainable combination of monetary, exchange rate and fiscal policies.

2. In the political sphere, there is a perception of problems of political instability and poor quality of democratic institutions, combined with a thinly veiled pessimism with respect to the prospects for democratic regression, which many believe is occurring in the region as a result of political polarisation, the radicalism of some governments, and both left- and right-wing populisms.

3. In the geopolitical sphere, there is a degree of defeatism, deriving from the belief that economic failure and political volatility have led both Europe and the US to wash their hands of the region, opening the door to China, which is –or is very close to becoming– the hegemonic power in the region.

4. Finally, the view is that the companies –particularly Spanish ones– which backed the region in the 1990s, have ceased to view the region as a priority and have sold or at least cut back on their investments in Latin American countries, discouraged by the destruction in value for shareholders.

This report by the Elcano Royal Institute sets out and analyses why these four beliefs are prejudices are not backed by data.

The report is not intended to provide a conventional analysis of Latin America. Instead, our objective is to offer a rigorous, fact-based analysis of these economic, political and geostrategic accounts, in an attempt to shift the debate from preconceptions to evidence.

Myth vs reality

The aim here is not to establish a ‘new’ account, one that is more palatable and optimistic, but rather to alert those who are interested in the strategic, economic or political role of Latin America with regard to the need to challenge the prevailing wisdom.

If focusing on the reality rather than the myth is almost always good advice when seeking to understand the world, in the case of Latin America it is a prerequisite if we are to have a balanced view of the only emerging region that is seeking to pursue a democratic path to development. Our contribution is to show that, in Latin America, the facts challenge the generally accepted narrative.

Is Latin America a political disaster?

The dominant view is that the economic stagnation of the past decade has led people to become disenchanted with democracy, to lose faith with established parties and the traditional political elite, and has driven protest movements and protest voting, leading to the fragmentation and polarisation of the political system, and undermining governability.

This is a partial and biased vision. When political events in Latin America are seen in the context of global trends, what we really see is that the continent is not an exception. Moreover, there are cyclical elements at play in the region’s political dynamic, linked to the economic cycle, which are not necessarily permanent in nature.

The evidence suggests that democracy has been consolidated throughout almost the entire region, and that a whole generation of Latin Americans has grown up seeing elections as the only legitimate way to choose a government. In terms of democratic development and respect for human rights, Latin America occupies the pole position among emerging regions.

There is still a clear majority support for democracy as a political system, with 67% of people believing that ‘democracy may have problems but is the best system of government’. Moreover, while political alternatives on both the left and right have radicalised political discourse, this is not reflected in how voters perceive their own right.

These four elements –the global and cyclical nature of political setbacks; the prevalence of democracy; solid majority support for democracy; and a majority of voters who identify with the centre– suggest that the setbacks of recent years are situational rather than structural and could be reversed if the global context changes or if the region’s economy starts to grow again.

With respect to the rule of law, Latin America is no different from other emerging regions. If we exclude countries in the region that are dictatorships –namely, Cuba, Venezuela and Nicaragua– or autocracies, Latin American countries are in the top third of global ratings with respect to the rule of law.

Is Latin America an economic disaster?

The region has made significant progress in macroeconomic management over the past 20 years, and a sizeable group of Latin American countries has achieved impressive macroeconomic results.

A whole generation has grown up with low and relatively stable inflation, reasonably sustainable public finances, and banking regulation and supervision that means the region now has solid financial systems.

The most symbolic achievement is arguably the reduction in the frequency of balance of payment, debt and financial crises: from an average of four per year from the mid-1970s until the early 2000s, the equivalent figure since then has been an average of less than one crisis per year.

As a consequence of this improved macroeconomic stability, Latin America has gone from being a protagonist –one in every three global crises occurred in the region between 1974 and 2003– to playing only a supporting role: only one of every six global crises occurred in Latin America.

It is true that, during the first two decades of the 21st century, Latin America has not achieved significant progress in the process of convergence with the levels of per capita income in developed countries. But nor have the majority of emerging countries. In the almost three quarters of a century from 1945 to 2018, the jump to per capita income levels of developed countries[1] has only been achieved by 30 countries: four petroleum exporters (Saudi Arabia, Equatorial Guinea, Oman and Bahrain), two countries with a strong tourism sector (Seychelles and Mauritius), two historic European powers that had been destroyed in 1945 after the Second World War (France and Italy), Israel, six Asian tigers (Japan, Korea, Taiwan, Singapore, Malaysia and Hong Kong), 14 European countries (including Spain, Portugal and Greece), and Puerto Rico and Panama.

During the same period, 11 countries classed as high-income lost this classification. Nine were former Soviet republics and two were Latin American: Argentina and Venezuela.

The data show that it is rare for a country to make the jump to income levels associated with development, unless it has been able to take a shortcut (generally speaking, the exploitation of natural resources, a new industry such as tourism or rapid recovery following a historically anomalous shock). This is the reality which underlies the fact that, for the global economy, the income level in 1945 accounted for 70% of the income in 2018. Convergence with the per capita income levels of wealthy countries, in recent world history, is more of an aspiration than a realistic political and economic target.

In addition to the retreat of Venezuela and Argentina, it is clear that Latin American economies have grown little in relative terms: 11 countries (more than half) are further away from achieving real convergence with developed countries, and only seven (Colombia, Ecuador, Mexico, Costa Rica, Brazil, Panama and the Dominican Republic, ordered by least to most progress) have reduced the per capita income gap.

In other words, the challenge for Latin America continues to involve reactivating growth. Not only because faster growth would enable convergence but also, fundamentally, because a lack of growth will inevitably lead to redistributive demands that will create other problems and foment social tension.

Our hope is that the clear political, economic and social progress –ignored or silenced by the traditional narrative– has laid the necessary foundations for inclusive, sustainable growth.

Has the EU (and the US) abandoned Latin America?

There is a widespread perception that the EU and the US have turned their backs on Latin America, and that this has created a vacuum which China has been able to fill, making it the dominant player in the region.

However, once again, the facts paint a different picture. To start with, Mexico and Central America are inextricably tied to the US in all dimensions, not just in economic, trade and investment terms, but also in relation to military ties (arms sales) and human connections (migrants, tourists and students). The reality in South America is different. While China may be a force to be reckoned with in the strictly limited sphere of trade (as a buyer of natural resources and primary products and an exporter of manufactured goods), South America is far more ‘European’.

The EU –unlike China– is an important market for high technology products from South America and, by a long way, the largest investor in the region (20 times more than China). The EU is also the largest supplier of military equipment and the preferred destination of tourists, students and migrants from South America.

Have Spanish companies withdrawn from Latin America?

The prevailing narrative states that Spanish companies seized the opportunity posed by the opening up and economic restructuring of Latin America that followed the region’s lost decade. Spain capitalised on its close cultural and historic ties and access to cheap and abundant international finance that came with its accession to the European Economic Community (EEC), allowing the country to internationalise and insert itself into global value chains.

The Argentine convertibility crisis, which reminded businesses of the significant risks associated with investing in emerging countries, led to a shift in focus away from Latin America and towards more developed countries.

The central thesis here is that the volatility and low return on initial investment, together with legal uncertainty and poor economic growth, persuaded companies to limit their exposure in a region where it was difficult to generate value for shareholders.

However, the data does not support the hypothesis of a sudden withdrawal of Spanish investment in Latin America, following the 2001-03 crisis. In fact, the opposite occurred. Between 2007 and 2020, of every €100 invested, €30 were allocated to Latin America, €55 to the US and the remainder to other non-EU developed countries. The EU only accounted for 4% of net Spanish foreign direct investment (FDI).

Nor does the evidence corroborate the belief that, in countries with slow growth and that experience intense and frequent macro-financial shocks, shareholder value is systematically destroyed for investing companies. The comparison between gross yield on investment and the cost of capital shows that Spanish investment in Latin America created value to the tune of an average of 4.8% of capital invested, compared with the 3.5% yield on investment in developed countries.

The erroneous perception of both the sequence of internationalisation (first Latin America, then developed countries) and the waning interest in the region among Spanish companies (which has not occurred) can probably be explained by one of the most interesting features of the second phase of the internationalisation of Spanish investment: while the first phase was based on large-scale acquisitions and participation in tendering processes as part of the privatisation in Latin America, the second has been based on the reinvestment of profits from the first wave of acquisitions.

In other words, Spanish investors have lived up to their promise of being long-term investors, reinvesting a large part –if not all– of their profits.

The Spanish Presidency

The Spanish Presidency of the EU is a new window of opportunity –as in 2002 and 2010– to transform the links between Europe and Latin America into a true strategic alliance.

There are incentives for both parties. The Russian invasion of Ukraine has led to alliances being reformulated. The rise of China and of other aggressive powers such as Russia has upset the international equilibrium, ushering in a new geopolitical scenario.

This reshaping of alliances is leading Europe to look to Latin America as a key partner in its international leadership and promote a world based on multilateralism, democratic values and sustainable social and environmental development, in addition to being a reliable supplier of strategic raw materials.

This will require huge doses of political commitment on both sides: a commitment to continuing and deepening ties and, above all, the institutionalisation of the relationship so that it no longer depends on the stars to align or on Spanish presidencies but that can instead prosper in its own right, with financial and EU backing and bi-regional involvement.

The institutional and political dimension

The new ties must combine bi-regional and bilateral aspects in a flexible manner. The idea would be to establish a block bringing together the EU and the Community of Latin American and Caribbean States (CELAC) to act in coordination on the international stage, while at the same time strengthening the relationship with certain regional stakeholders.

To maximise the results of diplomatic efforts, the EU-CELAC summits should be backed by strong bilateral initiatives aimed at the countries with the greatest international potential (the three members of the G20: Brazil, Mexico and Argentina), regional importance (Chile, Uruguay, Peru and Colombia) or interest in strengthening ties with the EU.

The recent intensification of the presence of EU authorities and representatives of European governments is a good sign in this regard.

An EU-Latin America Trade and Technology Council

Designed as a high-level bilateral forum, an EU-Latin America and Caribbean Trade and Technology Council (EU-LAC TTC) would be an excellent starting point and would provide a unique platform for organising the bilateral relationship between the EU and Latin America and the Caribbean in the search for strategic agreements to meet global challenges.

The spirit of the EU-LAC TTC would be similar to that of existing bodies between the EU and the US or the EU and India. The aim would be to coordinate and cooperate on issues such as energy security, food and water security, digital governance and connectivity, supply chains, clean and ecological energy technologies, migration, crime and transnational terrorism.

A TTC would mark a significant milestone in relations between the EU and Latin America and the Caribbean and would take them to a higher level. It would be a vital mechanism for both regions to deepen their strategic commitment.

A strategic commitment of the first order: the EU-Mercosur agreement

Ratification of the EU-Mercosur agreement is not an end in itself but rather a starting point for a more ambitious project that will serve the strategic interests of the EU and Latin America.

If the EU-Mercosur agreement is completed, the EU will have agreements covering 94% of Latin American GDP, compared with a figure of 44% for the US and 14% for China. This would be a major achievement, as it would make the EU the global power with the strongest presence and the deepest ties with the region.

The EU-Mercosur agreement would also be a springboard for a more ambitious and deeper integration between the EU and Latin America, an objective that has proved to be elusive for decades.

It is part of a very pragmatic focus, which consists of interconnecting the various EU trade agreements with Latin America, for instance, through the mutual accumulation of rules of origin from the different agreements, the harmonisation of standards and regulatory processes, regulations on digital commerce and customs procedures to enable a greater cross-border circulation of goods, services and investments.

Harmonising the agreements between the EU and Latin American countries would create a vast economic space with a population of 1.1 billion and a GDP of over US$22 trillion, similar to that of the US.

The economic impact would be huge. In the trade dimension alone, trade flows between the EU and Latin America would increase by 70% and intra-regional trade in Latin America would rise by 40%, with negligible adverse effects on trade with other geographical regions.

If such an association were to become a reality, it would entail enormous mutual benefits. The economies of the EU and Latin America are complementary. Latin America has vast energy and mineral resources, sun, wind, water, fertile land, the capacity to produce abundant, cheap, clean energy, and organic food on a vast scale. The EU can provide the region with the capital, technology and know-how indispensable to Latin America’s development.

The EU-Mercosur agreement is a huge opportunity for both regions to deepen their cooperation and commitment. The circumstances have never been more favourable. The time is now.

[1] In 1945, of the 169 economies considered by Angus Maddison, only 39 (23%) had a per capita income greater than 5,000 constant dollars. In 2018 the number of countries with an income greater than US$20,000 was 59. This increase consisted of 30 countries that had a per capita income more than 30% greater than the global average, and 11 countries that were no longer counted among those which had high incomes in 1945. These included Venezuela and Argentina.

The following Elcano Royal Institute analysts contributed to this report: Félix Arteaga, Ángel Badillo, Gonzalo Escribano, Enrique Feás, Carola García-Calvo, Carmen González Enríquez, Raquel Jorge, Lara Lázaro, José Pablo Martínez, Rogelio Núñez, Ignacio Urbasos and Álvaro Vicente.

The report also drew on the work of analysts at other institutions: Juan Carlos Berganza, Rodolfo G. Campos and Jacopo Timini at the Bank of Spain; Alejandro Fiorito at Johns Hopkins University SAIS; and Antoni Estevadeordal and Alejandro Werner at the Georgetown Americas Institute. The opinions expressed in this report are not necessarily endorsed by the institutions to which they are affiliated.

María Dolores de Azategui and Miguel de Avendaño were in charge of the editorial process. The report’s editors, Carlos Malamud, José Juan Ruiz and Ernesto Talvi, would like to express their gratitude to all of them.

Stained glass window “El nacimiento del hombre” by Héctor Poleo at the metro station La Paz in Caracas, Venezuela (1995). Photo: Tom Fahy (CC BY-NC-ND 2.0).