Why you should care

Because you might not expect the big panda bear’s diet to starve out … Latin America.

Protesters fed up with rising prices and cheapening currencies march by the tens of thousands in Caracas and Buenos Aires. Others tired of woeful public services fill Brazilian cities, decrying the billions of dollars being spent to host the World Cup this summer. A year of discontent is rolling out across Latin America, with a new middle class demanding more from their leaders and hitting the streets to make their voices heard.

Yet behind all the instability sits an unexpected force on the other side of the globe: China’s domestic appetite.

The more China turns away from Latin America, the more the world is seeing shock waves.

China’s been feeding itself from Latin America’s breadbasket and running off its oil fields for years now. But, surprise: suddenly, the Asian giant is switching things up – turning instead to its own backyard. Commodities (a.k.a., in this case, iron ore, copper and soybeans) account for 92 percent of Latin America’s exports to its eastern trading partner.

Which means the more China turns away from Latin America, the more the world is seeing shock waves on the southern continent — especially in Venezuela and Argentina, where soaring inflation and a shortage of dollars are already strangling people’s budgets.

China’s repositioning is also testing Latin America’s economic long game. But with the spigot tightening, both of those nations’ economies seem to be reaching breaking points.

Man leading bike with cart carrying bunchs of soybean plants

Farmers harvest soybean in outskirt of Shenyang, northeast China’s Liaoning province

Source Getty

What comes next? The answer will hinge on the leadership that emerges from presidential elections scheduled in seven countries this year: Bolivia, Brazil, Colombia, Costa Rica, El Salvador, Panama and Uruguay. The options? Scrap the old commodity model as China changes, or dig in and hope for a return of Chinese demand.

“The growth of many Latin American countries has been clearly boosted by a commodities boom … that is coming to an end,” explains Jamele Rigolini, an economist with the World Bank.

Which means the challenge lies in finding new sources of growth, he says.

Most vulnerable will be Argentina and Venezuela, which built their economies on heavy public spending and currency and price controls. And then there are friendly leftist governments in Bolivia, Ecuador and Nicaragua, which also adopted versions of the economic model.

Most vulnerable will be Argentina and Venezuela…

Argentina put itself on the map by exporting soybean products back in the 1970s. The United States was still the big player then, accounting for 84 percent of the world’s market share. But by 2010, Brazil and Argentina caught up, together comprising close to 50 percent of the world’s soy exports.

Today, Argentina is the world’s No. 3 exporter of soybean and soy products (the U.S. is still No. 1, followed closely by Brazil) — and soy accounts for more than 80 percent of the country’s commodities exports to China.

But to stay competitive and to keep soybeans and other commodities attractive to China and the world, Argentine President Cristina Fernández de Kirchner used currency controls to keep exports cheap. And that’s had the knock-on effect of spiking inflation to almost 40 percent annually, according to recent government figures.

Woman at right facing left of frame with butcher facing her, between them is a table of raw meats

A shopper asks the price of different cuts of meat at a market in Buenos Aires, Argentina.

Source Corbis

The harsh effects are already evident on the streets, in markets and in homes. In December, police went on strike to protest how inflation was withering their salaries. Then a wave of looting hit Buenos Aires. In January, the peso took its biggest dive yet, weakening by 16 percent. At least one Argentine said he was having nothing more than eggs for dinner after finding the price of beef — a homegrown staple in Argentina — staggeringly beyond his reach. And with labyrinthine (and often prohibitive) rules for withdrawing foreign currency, the government doesn’t make saving in dollars easy.

The economic shock strikes even harder for Venezuelan President Nicolas Maduro, whose country sits atop what many consider the world’s largest proven oil reserves. Maduro (who came to power after Hugo Chavez’s death) has continued printing money to finance public spending. And Venezuela watched inflation climb to an annual rate of 56 percent through 2013. Predictably, protests have flared over the last several months over what many Venezuelans believe is an economy cracking apart, with rampant food shortages and energy blackouts. They can’t even get toilet paper in largely empty stores.

The crisis in Venezuela has gotten so bad that young people are packing up and leaving. There’s Giovanna Delgado, a 25-year-old teacher who paid 400 euros, submitted her paperwork and hopped a plane to Dublin.

What will rise from the wreckage of the two countries’ economic model?

“If I were working as a teacher in Caracas, I’d be dying of hunger,” Delgado says. “Dublin isn’t where I want to be forever … I want to die in Venezuela. But I’m scared to go back.”

The question now: What will rise from the wreckage of the two countries’ economic model? One answer may point to Chile, which has followed more conservative economic policies, building a rainy day fund using the country’s bountiful copper revenue.

Nieto holding up a piece of paper smiling

Mexico’s President Enrique Peña Nieto enacts his proposed energy reforms, Dec. 20, 2013.

Source Eduardo Verdugo/AP

But cycles happen — especially in Latin American history, where, according to Chile’s charismatic former Finance Minister Andrés Velasco, the last half-century has been marked by “booms that have been mismanaged and ended badly.”

More possibilities lie in another charismatic leader, Mexico’s Enrique Peña Nieto, who is pushing through reforms that will open up the country’s long-protected oil industry to foreign investment. That lines up with China’s well-known need for more oil and gas and less dirty fuels (like coal).

What’s abundantly clear is that Latin America’s swelling urban middle class is demanding a response to the changing economics they are witnessing. More protesters want top-notch public services, even as their country’s budget shrinks.

And there lies the irony: Latin Americans want more just as they’re having to make do with less. Good thing they’ve got some change-hungry politicos waiting in the wings.

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