The economic growth enjoyed by many countries in Latin America during the first decade of the new century has come to an abrupt halt. In order to recover its lost rhythm, the region will need to adopt a number of measures, including massive investments in infrastructure.
The Inter-American Development Bank (IDB), for example, emphasizes investing in the energy sector, which it considers crucial for the region to get its economy back up to speed. In light of its future needs, the region ought to invest an estimated $430 billion to double its installed production capacity by 2030, according to the bank in a report.
The IDB, which has been giving financial support to development projects throughout the region since 1959, considers the expansion of the energy sector as one of the region’s biggest challenges as it looks to electrify more houses, roads, factories, plants. This development, however, ought to follow the principles of environmental sustainability. This means reducing as much as possible the use of fossil fuels and replacing them with renewable resources, beginning with water in the construction of hydroelectric plants, then wind, sun and biomass.
The Battery of the World
The IDB acknowledges that Latin America has a lot of work to do to bridge the energy gap that still exists in the region. But it already seems to be well on its way to becoming one of the biggest producers of renewable energy in the world.
This optimism is reflected by the International Renewable Energy Agency (Irena) in its latest report dedicated to the market of renewable energy in Latin America. «Latin America hosts some of the world’s most dynamic renewable energy markets, building on the historical role of hydropower – the cornerstone of the region’s power sector development – and liquid biofuels, driven by Brazil’s early determination to diversify its transport fuel mix,» says the inter-governmental organization.
«Since 2004, renewable energy investment in the region (excluding large hydropower) has grown 11-fold, compared with a 6-fold increase worldwide. Investment trends attest to the rapid evolution of the region’s energy mix towards a more diversified set of technologies and countries. For the first time in 2015, in addition to Brazil, both Mexico and Chile joined the list of the top 10 largest renewable energy markets globally,» it adds.
All of this has an obvious effect on the job market. The agency calculates that two million people work in renewables in the region, while big hydroelectric projects being planned could create 500,000 more jobs.
Experience of Individual Countries
The agency highlights those countries that have already started to plan investments in the sector. Brazil has come up with $53 million to modernize its energy network and increase its production capacity from 25 GW to 31.5 GW in three years. It will invest part of the amount in the hydroelectric sector and spruce up old plants and build new dams.
By 2017, Argentina’s government expects to meet 8% of its energy needs from hydroelectric plants, wind farms and solar panels – a percentage that could rise to 20% by 2020.
Chile has similar ambitions. Soon it too will become a reference point for clean energy in the region as it aims to supply 20% of its energy needs from renewable resources by 2025. The government has adopted a series of measures like tax breaks for companies that invest in green technology, attracting as a consequence $3.4 billion in foreign investment in 2015, 151% more than the prior year.
This is the type of investment that countries need to make to overcome the gap that threatens to widen as demand for electricity grows at a relentless pace. It is a gap that was quantified by International Monetary Fund (IMF) last April. It found that the annual average production capacity between 1990 and 2012 was 46 KW for every 100 people in Latin America, compared with 294 KW in the United States and Canada. As for the consequences of waste caused by the poor state of power plants, the average amount of wasted electricity totaled 19% of production between 2001 and 2013 against 7% in the United States and Canada. But the region does better in terms of accessibility to electricity, reaching 88% of its people, which is not too far from the 100% obtained by the United States and Canada.
Investments and economic revival
These figures obviously show the need to invest in the energy sector. But it is a need that is not easily met given the lack of public and private funds in most of the region’s countries. A number of structural interventions are in order, with energy being one of the sectors where it must be applied. In one of its estimates, the United Nations calculates the gap to be equal to 6.2% of the region’s gross domestic product (GDP).
The difficult economic period weighing on the region makes breaching this gap all the more difficult. Since 2009, Latin America’s economic boom has gone bust, set off by a deep crisis in Brazil. Forecasts by the Organisation for Economic Co-operation and Development (OECD) are not optimistic. Its Latin American Economic Outlook 2017 sees GDP contracting in the region by between 0.5% and 1%, with a modest recovery the following year. Dragging everything down is the dismal performance by Brazil and Venezuela.
But the region is big and varied, with some countries responding to the crisis better than others. As Brazil, Venezuela and Argentina struggle, countries closer to the United States are having an easier time. Mexico and nearly all of Central America are seen by the OECD growing between 2.3% and 6% in 2016. The same goes for the Caribbean, where GDP growth is expected to range between 0.5% to 4.5%.
The OECD views the economic trouble faced by the region could turn into an opportunity should investors return. In fact, the region’s importance in the global economy was confirmed by the World Bank in 2015 in its decision to hold its annual meeting in Lima, Peru, returning to South America for the first time since 1967. It is an important acknowledgement even though the future of the region, rich in natural resources, depends for the most part on its ability to elaborate a new development model that begins with investments in energy to support economic growth.