Strong public and private consumption, abundant credit and strong currency appreciation among other reasons helped Latin American countries overcome the 2008/09 recession and outperform other regions according to the World Bank report Latin America and the Caribbean’s Success Put to the Test.
However looking ahead inflation, currency appreciation, overheating of the economies and the struggle to find the right balance to keep interest rates high enough to check inflation but not too high to attract speculative foreign capital, have become the main challenges for the region.
The report, prepared for the World Bank and IMF Spring Meetings enumerates those points: strong public and private consumption; aggregate domestic demand outpacing GDP in the post-crisis, just as net exports have been declining; credit to fuel recovery: mortgage credit in Argentina, Brazil, Chile, Colombia, Mexico, and Peru remained strong during the depths of the crisis and accelerated significantly during 2010; a rebound of jobs with unemployment in Argentina, Brazil, Ecuador, Peru, and Uruguay reaching lower rates than those prevailing before the downturn and strong currency appreciation pressures.
The real effective exchange rate of the larger countries in the region appreciated by a cumulative 18% between its lowest levels reached around March 2009 and December 2010 points out the report.
But 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 favourable 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 skilful 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%. 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”, concludes the report.