Rising Challenges to Growth and Stability in Latin America in a Shifting Global Environment

David Lipton
First Deputy Managing Director, IMF
High Level Conference on Latin America, Washington, DC
June 1, 2015

As prepared for delivery

Good morning everyone – Buenos días, Bom dia!

Distinguished speakers and guests, welcome to Washington and thank you for taking part in this conference on Latin America. This impressive gathering of senior policymakers and intellectual leaders is part of our continuing dialogue on the central issues confronting the region and the policies needed for the future.

All of us at the Fund are very excited about this year’s Annual Meetings in Peru. And today’s event is an important “mile marker” on our “Road to Lima”.

A major focus of our discussions in Lima this fall will be the region’s future prospects. There are numerous challenges on the horizon. And yet, as the Managing Director noted during her recent visit to Brazil, there is also immense opportunity.

Harnessing that opportunity to create a brighter future for the region will require making the right choices—and I would like to emphasize that the Fund is here to help our Latin American members in that effort.

In this spirit, I would like to share my perspectives on three topics:

  1. First, the recent shift in the global economic landscape;
  2. Second, what these changes imply for the region; and
  3. Third, how to reignite strong, balanced, and inclusive growth going forward.

1. Shifting global environment—more challenges ahead?

From a long-term perspective, Latin America has made remarkable strides in terms of economic growth, financial stability, and social progress.

Since the early 2000s, policy frameworks in the region have been clearly stronger—learning from the earlier debt crisis and a painful decade of lost growth. In many countries, monetary policy credibility has been established, commitment to fiscal responsibility affirmed, and more flexible exchange rates allowed to cushion the impact of external shocks.

Importantly, these impressive achievements have been underpinned by crucial social gains – dramatically lower poverty and inequality. Almost half of Latin America’s population now belongs to a vibrant and growing middle class, up from 20 percent just a decade ago. Bringing about this important development has been a variety of path-breaking social initiatives, such as Brazil’s Bolsa Familia program.

So yes, there has been great progress in the region. And yet, as we all know, there remains much more to do. This has become especially challenging given that, in recent times, regional growth has softened and concerns about the outlook have increased.

Think back to the conference in Santiago last December: at that time, we were all taken a bit by surprise at the collapse in oil prices; there were concerns about the financial volatility related to a U.S. interest rate liftoff; and worries about noticeably slower yet more sustainable growth in China – which has become an important trading partner for the region. In addition to these external developments, some countries were hit by domestic shocks as well.

Truth be told, many of these concerns that were discussed in Chile remain with us today. Indeed, the global economic landscape has probably become even more challenging for most parts of the region.

For a start, global growth remains modest and uneven, projected at 3.5 percent this year (about the same as last year), and 3.8 percent next year. For many people around the world— especially youth and the unemployed—this pace may not feel like a “recovery.”

At the same time, and while commodity prices seem to have stabilized, they are now at a much lower level than in 2011, and are likely to stay around that level for some time. This means that commodity exporters in the region need to prepare for some tough times ahead.

Moreover, with a widely anticipated rise in U.S. interest rates and monetary easing in Europe and Japan, new bouts of volatility in financial markets and exchange rates cannot be ruled out.

2. Regional outlook—domestic vulnerabilities exposed

This changing global backdrop has become intertwined with a continuing domestic slowdown in the region.

For a fifth year in a row, the pace of economic activity has decreased; growth is projected to dip below 1 percent this year before recovering to 2 percent next year for Latin America and the Caribbean. South America, in particular, is suffering from a loss of momentum; three of its largest economies – Argentina, Brazil, and Venezuela – are likely to contract this year.

On the brighter side, however, a stronger U.S. economy will boost prospects for those countries which have the most direct linkages—in Mexico, Central America and the Caribbean—through trade, tourism, and remittances. Other countries in Latin America will benefit as well.

More precisely, however, how do shifts in global conditions impact domestic prospects?

Back in Santiago we promised further analysis on two key aspects: lower commodity prices and the slowdown in investment. Let me share with you some of our initial findings.

First, our analysis finds that if the decline in global commodity prices persists, fiscal revenues will remain under pressure in several countries in Latin America. This is particularly the case where the commodity sector plays a larger role in the economy and where exchange rates are less flexible to adjust. So in countries without much fiscal space, this will require deliberate efforts to reduce budgetary deficits.

How about external balances? A deterioration in current accounts from weaker terms of trade is likely to be relatively moderate and temporary. This is due more to import compression than higher exports—so again, a sign of weaker growth.

Second, on the slowdown in investment: Our analysis finds that falling commodity prices are one of the main drivers of the investment slowdown in the region. Developments so far have been consistent with historical patterns.

What are the implications? Two things: to revive investment and growth, policymakers will need to provide better incentives to promote private investment; they will also need to improve the efficiency and productivity of public investment.

Beyond this more immediate impact of commodity prices on growth and investment, an even more worrisome trend is that potential growth has also been marked down for the region. This is the risk of a “new mediocre” we have been repeatedly warning.

Mitigating this risk means undertaking much-needed structural reforms to expand the economy’s productive capacity—today and tomorrow. Let me be frank: we simply cannot afford to lose ground in the precious economic and social gains that Latin America has accomplished in the recent past.

So how do we go about nurturing our futures and growing our economies? This takes me to my third topic—how to restore strong, sustainable, and inclusive growth in Latin America.

3. Reigniting strong, balanced, and inclusive growth

For a start, high-quality, durable growth will hinge on higher productivity and investment, as well as greater economic diversification. But what are the right incentives to promote diversification, investment, and productivity?

The policy priorities are not new:

  • Latin America needs better infrastructure;
  • it needs greater ease of doing business;
  • it needs better education;
  • it needs to diversify its productive capacities and to take more advantage of regional trade and global value chains; and
  • it needs to improve institutions and the rule of law.

The pressing issue, of course, is how to implement these policies. How can policymakers achieve these improvements in an environment of slow growth and less friendly global conditions?

That brings me back to our gathering here today: we need to find the “how.” And we need to find it together.

In the words of Chile’s Isabelle Allende: “We all have an unsuspected reserve of strength inside that emerges when life puts us to the test.”

The challenges ahead are non-trivial. Yet the region today is on a much stronger footing from a longer-term perspective, and the IMF stands ready to help all the way—with our resources, including our Flexible Credit Lines, and with our policy advice and capacity building. We are with you.

Conclusion

On that note, let me conclude. As we noted in Chile last December – this is not your grandfather’s Latin America, and this is not your grandmother’s IMF! Both the region and our institution have evolved – and so has our relationship: from one of intensive Fund program-based support to one where the Fund is drawn on more as a trusted advisor and provider of technical assistance.

This conference is an important opportunity to take things further forward: to hear your views so that together, we can frame an agenda for Lima that can help us navigate the challenges we face – and claim the brighter future that awaits the region.

Bienvenidos, esta es su casa!



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