January 2014: Is consumption consuming us?

January 10th 2014: George Gray Molina is the Chief Economist and Regional Team Leader of the Human Development and Millennium Development Goals in the Bureau for Latin America and the Caribbean in New York.

Consumption consumes you | George Gray Molina

Scott Fitzgerald used to say about alcohol: “First, you take the drink, then the drink takes a drink, then the drink takes you”. The same thing could be said about consumerism as a way of achieving social status and recognition.

First, let’s look at a few facts. Consumerism is the engine driving growth in Latin American economies. It represents 59% of the GDP in Brazil, 66% in Mexico, 69% in Chile, 77% in Honduras and 88% in the Dominican Republic ,so more than two thirds of the economic growth in Brazil, Mexico and Chile over the past twelve months.

Consumerism also led to a significant reduction in poverty and favored the emergence of the middle class in the region. Today, most of the population is no longer “poor” in the statistical sense of the term, but “vulnerable” as they work in precarious labor markets yet enjoy higher levels of income and purchasing power than before.

Secondly, let’s look at some areas of concern. Consumption is intrinsically linked to high levels of liquidity, easy access to credit, and household debt. Household debt has increased throughout the region: According to Morgan Stanley, the ratio of household debt to income is 60%, in Brazil, the ratio stands at more than 30%, and at less than 30% for Peru and Colombia.

Though it is still premature to announce “the end of the Latin American boom”, the sharp drop in the price of commodities sustaining our economies cannot be denied. The gradual depreciation of our currencies, increased interest rates and a fall in foreign reserves are all part of the process.

If we look at the issue from a human development perspective, the most worrying effect is the impact on poverty levels. Economic downturn tends to have a negative effect on financial markets (less credit available) and it is only a matter of time before it affects key sectors in the economy (construction, building materials) and leads to a drop in consumption and job losses.

According to a US survey, the level of credit card debt is one of the most avoided topic of conversation with a new acquaintance for 81% of all respondents. I am convinced the results of a similar survey in Latin America would not be that bleak but the glorification of easy money is a matter for concern; in these turbulent times, let's hope that consumption does not end up consuming us.

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