Introduction

Stronger growth in Latin America in 1996 reflected resumed positive growth in Mexico and Argentina (at 5.1 percent and 4.4 percent, respectively). Both countries managed to rebound from the 1994-95 crisis with restored growth and access to international capital. Uruguay also enjoyed growth of 4.9 percent after a decline the previous year. This reflected strong policy responses as well as strengthened economic fundamentals resulting from earlier reforms. In Chile, one of the earliest and most consistent reformers in the region, growth performance remained strong at 7.1 percent, but in many other countries, including Brazil, the region's biggest economy, growth slowed (see figure 3-8). Inflation continued to decline while net long-term private capital flows gained ground, with an estimated $74 billion of investments, of which $26 billion was in the form of foreign direct investment.

In the Caribbean, 1996 saw newly elected governments in the Dominican Republic, Haiti, and Suriname. The Dominican Republic and Guyana began to recover from recession and grew at more than 5 percent, but in Haiti and Jamaica, which still await the dividends from politically difficult reform programs, growth was close to zero. Stronger links to the North American Free Trade Agreement (NAFTA) and other regional trade groups, which will substitute for preferential trade programs, have not yet materialized. Prices for Caribbean bananas, which are a major merchandise export for several countries, have eroded significantly under evolving rules for preferential access to the European Union (EU).

With the exception of Bolivia, economic growth in the Andean countries was sluggish. The poorest performer was Venezuela where, in response to a combined economic and financial crisis, GDP declined by 1.6 percent and inflation topped 100 percent; in early 1997, however, stronger oil prices contributed to an incipient recovery in growth. Bolivia's sound macroeconomic management and accelerated structural reforms led to real GDP growth of about 4 percent. Peru's tight fiscal policy resulted in a sharp slowdown in growth from the previous year.

With the exception of 1995, GDP growth in the typical Latin American country this decade has ranged between 3 percent and 4 percent per year--insufficient to permit sustained progress on poverty reduction. About a quarter of the region's people live on less than a dollar a day. To overcome this magnitude of poverty and achieve sustainable development, governments must consolidate stabilization; achieve higher and less volatile growth; ensure that growth is environmentally, economically, and socially sustainable; and more effectively involve the poor in the growth process.

Analysis undertaken within the World Bank and elsewhere suggests that LAC countries that have undertaken serious reform have enjoyed an average 2 percent higher per capita income growth in the 1990s than those that have not. It is encouraging, therefore, that over the last year, a number of countries, including Argentina, Brazil, El Salvador, Mexico, and Peru, have shown deep commitment to reform.

To achieve higher, less volatile growth, governments must preserve the earlier gains made on price stability, fiscal balance, and trade openness. In addition, they need to pay attention to five critical policy areas:

· improving human and social development;

· strengthening public finances;

· reforming and strengthening financial markets;

· improving legal and regulatory environments to promote private sector activity

· reforming the public sector and improving governance.

It is against this backdrop that the Bank's assistance strategy for fiscal 1997 was set.