For the fifth consecutive year the Latin American & Caribbean region (LAC) faces a continuing decline in growth, as a result of an external environment particularly adverse to commodity exporters.
As a result, LAC didn’t grow in 2015 and is expected to contract by 1% in 2016. The region’s growth average is weighed by the slowdown in important economies such as Venezuela and Brazil. Bright spots include economies in the north such as Mexico, Central America and the Caribbean; these economies linked to the US.
Policy makers worry that the constricted prospects may jeopardize the social gains of the past decade, pushing Latin American economies into the so-called middle-income trap –a status in which countries see their development prospects constrained.
Countries are struggling to find a balance between reducing spending and minimizing its effects on economic activity and hard-won social gains.
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.
But the region’s deceleration is beginning to dent such expansion, according to recent findings.
Looking forward, commodity exporting countries would benefit from reforms that increase savings, boost productivity, and strengthen long-term 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.
But considering that benefits from such reforms will take time, the report also advocates a policy agenda that balances the need to stimulate economic activity in the short-term with the imperative of preserving macroeconomic stability.
In pursing this agenda, policymakers should strive to gradually implement fiscal adjustments over time, and to protect the poor by fairly distributing the pain of necessary spending cuts among all segments of society.
Last Updated: Apr 13, 2016