Latin America has spent decades liberalizing, deregulating, and hoping competition would remake its economies. But as natural resources still dominate exports and low-productivity services absorb displaced workers, the real question remains painfully unresolved: what, exactly, comes next?
The Cleanup Never Built the Next Economy
Latin America knows this script by heart. Open the economy. Expose local firms to competition. Let the weakest disappear. Reallocate labor and capital. Trust the market to do the rest. But as Eduardo Levy Yeyati argues in a report for Americas Quarterly, AQ, the part that keeps slipping out of focus is what comes next. Which sectors are supposed to rise after the old protections fall away? Which activities are meant to absorb workers, generate exports, and sustain something like middle-class stability? The region has spent decades lowering barriers and deregulating, yet the promised transformation still feels partial, delayed, and in many places strangely hollow.
That is what makes this debate newly urgent. Latin America is again being asked to believe in growth through opening at a moment when governments are trying to shake their economies out of years of disappointment. Recent disruptions elsewhere, especially in the Middle East, have drawn fresh attention to the region’s geopolitical stability and to its vast commodity wealth, from oil to soy to iron ore. On paper, it can look like a fortunate inheritance. In practice, the report argues, the inheritance has never been enough on its own to produce the leap in development citizens keep waiting for.
The numbers are part of the problem. According to ECLAC, natural resources and resource-based manufactures still account for more than 70 percent of South America’s exports and more than 50 percent of Central America’s. That means the export mix remains overwhelmingly shaped by what the region digs up, grows, or minimally processes. There is nothing shameful about selling what a country has. The trouble comes when that structure keeps repeating itself across generations. At the same time, politicians and economists continue to talk as if one more round of liberalization will finally produce the missing diversified future.
This does not settle the case against openness. It does something subtler and more useful. It forces the argument to mature. Liberalization can remove distortions. It can expose weak firms that survive only behind walls. It can make an economy cleaner, more disciplined, and even more efficient. But efficiency, by itself, does not build a new productive structure. It closes one chapter faster than it writes the next.
A Resource Boom With Too Few Jobs
The comparison with richer resource economies is revealing precisely because it is uncomfortable. Australia and Canada also built prosperity around natural wealth. So why has Latin America struggled to do the same? Levy Yeyati’s answer is almost painfully simple. Arithmetic. Those countries possess much more natural wealth per capita than they must support. Latin America’s larger economies do not. The same weakness appears in human capital. The region has universities, engineers, managers, and professionals. What it often lacks is the depth, scale, and momentum required to build new tradable sectors strong enough to carry millions of workers.
That is why the report treats Chile as an outlier rather than a model that can be easily copied. Chile appears closer to the benchmark economies in terms of education and natural wealth per person, though it is still well short of Australia and Canada. Argentina, Brazil, and Colombia sit in a much weaker position. The point is not that the region lacks talent or resources altogether. It is that in its larger economies, neither resource abundance per person nor the skills base is strong enough to make a commodity-led model deliver broad prosperity at scale.
Even where natural wealth is abundant, it does not solve the labor problem. Mining, oil, and gas are capital-intensive. Modern agriculture is heavily mechanized. These sectors generate export revenues, fiscal income, and rents, but they do not create mass employment. The report’s use of Argentina is especially clarifying. World Bank employment data show that about 72 percent of jobs there are in the services sector.
In comparison, agriculture accounts for only 7 percent, and industry, broadly defined to include construction, mining, and utilities, accounts for about 21 percent. Brazil looks similar. Colombia shares the service-heavy pattern, with a somewhat larger agricultural workforce and a somewhat smaller industrial base. In other words, the sectors most closely tied to comparative advantage in natural resources do not employ enough people to anchor a social contract on their own.
Once that becomes clear, the weakness in the usual liberalization story is hard to unsee. If a country opens up and its least productive protected firms disappear, labor has only a few places to go. It can move into new tradables, into resource sectors, or into domestic services. Liberalization’s defenders usually imagine the first option. In much of Latin America, what has actually happened is closer to the third. Workers displaced from industry often end up in a large and increasingly informal service economy.
That is not a simple reallocation. It is often a downgrade. A former machinist driving deliveries or selling informally is still employed, yes, but the economy has not just shifted labor; it has shifted the economy. It has also wasted capabilities. Weaker wages, more informality, and thinner learning-by-doing erode the base from which future productivity might grow. Services are not the villain here. Every economy becomes more service-oriented as it urbanizes and incomes rise. The problem is that most services are not automatically tradable, scalable, or productivity-enhancing enough to replace a lost industrial core.
Some services can do that. India and the Philippines built real export sectors. Parts of Eastern Europe did too. But those successes did not begin with tariff cuts alone. They were built on technical skills, infrastructure, and sustained integration into foreign demand. Tourism can also generate foreign exchange and create large numbers of jobs, as seen in Spain, Greece, Portugal, and in parts of Latin America from Mexico to the Caribbean. But tourism depends heavily on geography, security, infrastructure, and connectivity. It is powerful, but it is not a scalable solution for every large, urbanized economy in the region. That is why the fallback line, that services will take over, keeps sounding thinner the longer one listens to it.
The Morning After Needs a State
Latin America has tried the opposite route before. Import substitution did deepen industry in some places, but it also produced a protected, high-cost manufacturing base that depended on permanent shelter. The lesson, as the report lays it out, is not that industrial policy is foolish. It is that protection without a credible path to competitiveness tends to preserve firms rather than build capabilities, often ending in balance-of-payments strain. The region has lived through both illusions now, the illusion that protection alone can industrialize, and the illusion that competition alone can diversify.
Resource booms, meanwhile, further complicate the picture. They are not a curse in some mystical sense, but they do make the structural problem harder to solve. Export windfalls raise spending, wages, and the prices of non-tradables, undermining the competitiveness of other tradable sectors in countries with their own currency, often leading to appreciation. In dollarized economies, it appears through domestic inflation and rising costs. Ecuador, as the report notes, is a reminder that even without a nominal exchange-rate channel, the competitiveness problem persists.
So the real divide in today’s politics is not between openness and closure, at least not in the old simplified way. It is between an opening that merely cleans up the existing structure and one that helps create the next one. Levy Yeyati’s answer is a two-pronged strategy. Governments should liberalize, yes, but also act catalytically, not by sheltering incumbents, but by crowding in private investment where new tradable capabilities might actually emerge. That means logistics, reliable energy, digital infrastructure, and business ecosystems that allow firms to scale in services, agritech, health, green inputs, and technologies tied to the region’s own resource base. It means formal employment policies, skill-building, clear rules, institutions, and actual resources behind the ambition.
That final point may be the most important one in the whole report. Latin America has private initiative. What it too often lacks are the conditions that induce that initiative to move into new productive terrain. The region has heard the cleansing half of the liberalization story for long enough. The harder question remains the one that keeps returning after every deregulation wave and every commodity upswing. When liberalization takes effect, what exactly is Latin America opening to? Until that answer becomes more concrete than faith, the region risks becoming cleaner at the margins while staying structurally stuck at the core.
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