The Latin American & Caribbean region (LAC) is at a turning point. The windfall from the global commodities boom has faded while LAC governments face increased social expectations from an emerging middle class that is more connected, more involved, and demanding more.
Gross Domestic Product in the region is expected to contract 1.3 percent in 2016, following a 0.7 percent decline in 2015. That marks the first back-to-back years of recession in over three decades. Economic growth is forecast to expand by 1.2 percent in 2017 and 2 percent in 2018, but the capacity to recover will be limited if macroeconomic challenges like fiscal deficits, inflation and high interest rates are not addressed. The challenge will be making these adjustments gradually and as equitably as possible to protect the most vulnerable while allowing the economies time to recover.
Domestic markets and domestic demand are no longer enough to fuel growth now that the commodity windfall is gone. External demand and shifting resources to the export economy are needed. Many LAC countries are already doing this and looking to international economic ties as a potential source of stable growth. Crucial to this transformation will be complementing regional integration with global integration efforts.
The good news is that the LAC region does not face a serious crisis. Over the last decade, the region experienced a deep economic and social transformation, which lifted millions out of poverty and swelled the ranks of the middle class. Strong economic growth – driven by both domestic reforms and a favorable global economic environment - was responsible for this progress. Complementary social programs, made possible by growing fiscal space, helped support the poor and disadvantaged.
Now, satisfying rising demands from the middle class is harder as governments adjust to the new post-boom reality. The transformation happened so fast that governments are having difficulty keeping up and responding to those demands. Transparency and accountability are fundamental to maintaining government credibility and heading off impatience from the population and markets.
Investing in people, particularly the poor, will be key to continuing recent social gains and reducing LAC’s persistent inequality. In particular, investment in education quality will play an important role in allowing the poor to contribute to and benefit from future economic growth. Additional emphasis should be placed on building skills and reducing obstacles to economic activity, such as poor infrastructure and inflexible labor or financial regulations.
Last Updated: Sep 23, 2016