PRESS RELEASE

Latin America and the Caribbean: After Excelling, New Test Ahead

April 13, 2011



Inflation pressures, volatile capital flows, and exchange rates issues looming

 

Washington DC, April 13, 2011 – It is widely recognized that Latin America and the Caribbean weathered the 2008-2009 recession much better than it had previous downturns. Less well-known is that the region also decisively outperformed many other regions during the same period with a decline in growth smaller than that of the middle-income country average and with a rebound that was swifter and stronger.

 

The region’s growth of about 6 percent last year exceeded the growth rate of Eastern Europe and Central Asia and the rate of high-income countries by more than three percentage points, according to a new report Latin America and the Caribbean’s Success Put to the Test prepared by the World Bank’s chief economist office for the region.

 

To be sure, post-crisis growth performance has been uneven within the region. Several South American countries — most notably Argentina, Brazil, Peru, Paraguay, and Uruguay— have registered a remarkably vigorous recovery with growth rates that exceeded 7.5 percent in 2010. In contrast, economic activity in many countries in Central America and the Caribbean, and particularly the English-speaking nations of the Caribbean, expanded at rates in the 1-3 percent range. Negative growth rates were registered for very few countries in the region, notably Jamaica (-0.1 percent), Venezuela (-1.4 percent), and Haiti (-8.5 percent).

 

As a whole, the region’s Gross Domestic Product (GDP) is forecast to be in the 4 to 5 percent range in 2011, a rate similar to that expected of the East Asian Tigers. Inflation rates this year are also expected to remain below two digits at around 6 to 7 percent.

 

The report, prepared for the World Bank and IMF’s Spring Meetings, also explores in greater detail the nature of the recovery in Latin American countries in contrast with past performance and that of other middle-income countries. Top among those differences are:

 

·         A strong public and private consumption. Aggregate domestic demand has outpaced GDP in the post-crisis, just as net exports have been declining.

 

·         Not a credit-less recovery. Mortgage credit in Argentina, Brazil, Chile, Colombia, Mexico, and Peru remained strong during the depths of the crisis and accelerated significantly during 2010.

 

·         Not a jobless rebound. In Argentina, Brazil, Ecuador, Peru, and Uruguay unemployment has already reached lower rates than those prevailing before the downturn.

 

·         Strong currency appreciation pressures. The real effective exchange rate of the larger countries in the region appreciated by a cumulative 18 percent between its lowest levels reached around March 2009 and December 2010.

 

The region’s vigorous and exemplary recovery does not necessarily mean smooth sailing ahead. External and internal risks loom large, and those countries recovering more robustly face conflicting policy challenges.

 

Externally, the region’s prospects are dependent on the pace of recovery in advanced economies and the surge in commodity prices. The recent natural and nuclear disaster in Japan and the implications from the political turmoil in the Middle East and North Africa, however, portend less favorable economic conditions.

 

Internally, faced with the combined challenges of inflation, local currency appreciation, and the prospects of economic overheating, central bankers struggle to find the right balance to keep, for instance, interest rates high enough to check inflation but not too high to attract speculative foreign capital.

 

These complexities raise the premium on skillful policy,” says the Bank’s Chief Economist for Latin America and the Caribbean, Augusto de la Torre. “Contrary to popular perception, the quality of macro-financial policy is being more subtly and perhaps more severely tested in the midst of the current buoyant juncture.”

 

The current policy mix seems to be unduly burdening monetary policy, with insufficient help from the fiscal side.  Particularly in countries experiencing a major commodity windfall, stepping up fiscal savings, without endangering social programs, will be essential to rebuild the buffers that helped the region successfully manage the crisis, the report argues.

 

Achieving the right balance of policies is essential, although not sufficient, to improving long-term growth prospects. For countries in the region such prospects remain elusive and, in fact, would be unthinkable had the region not achieved the macroeconomic stability that now seems a given, as well as important inroads against second-to-none inequality.

 

Since 1995, the Gini coefficient, a measure of income inequality, has fallen from 0.57 to 0.53 and the share of income held by the top ten percent of the population has declined from 46 to 42 percent. During this past decade the region has also lifted more than 50 million people out of poverty. What’s more, during the recession, overall poverty did not skyrocket and the downward trend in inequality remained.

 

To maintain these social gains and foster more vigorous long-term growth, governments in Latin America and the Caribbean need to address structural hurdles to higher growth by investing on infrastructure, innovation, and human capital through improved coverage and quality of education and health, the report concludes. Where appropriate, fiscal policy should also expand targeted support programs to the most needy. Today, one out of every four children in the region still lives in extreme poverty.

Media Contacts
In Washington
Sergio Jellinek
Tel : (202)458-2841
sjellinek@worldbank.org
Marcela Sanchez-Bender
Tel : (202) 473-5863
msanchezbender@worldbank.org

PRESS RELEASE NO:
2011/429/LAC

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