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Latin America’s Twin Challenges—Increasing Rate of Growth and Managing Volatility

(Version in Español)

Earlier this month, I had the opportunity to discuss Latin America’s regional outlook with government leaders, parliamentarians, and university students in Brazil, Panama, and Uruguay.

The key conclusion that I took away from these meetings is that Latin America faces two principal economic challenges: to increase the sustainable rate of economic growth and to reduce the volatility of growth.

In my meeting in Calgary on March 26 with Finance Ministers of the region, I focused on the second challenge so that favorable conditions today do not come at the expense of a bust tomorrow.

It’s a nice coincidence that this meeting of Finance Ministers of the Americas and the Caribbean was held here in Calgary. Canada is a good example of “managing the good times,” but as in many countries across the globe, some challenges remain.

Managing the good times

Turning to Latin America, here are three ways in which the region can reduce its vulnerability to wide economic fluctuations.

What does all this mean now?

Growth in most Latin American economies is now back at potential, or above—and in many of them there are worrisome signs of overheating.

Clearly, the earlier economic stimulus needs to be reversed. Furthermore, a range of policies could be used to prevent overheating and dampen the credit cycle, including upward exchange rate flexibility, a more appropriate mix of monetary and fiscal policies, and adequate financial regulations—including a macroprudential approach. In some cases, capital controls might also be useful. But they should not substitute for fundamental policy adjustments.

Finally, I also talked about sharing the benefits of growth more broadly.

While the region has enjoyed tremendous social gains, poverty and income inequality remain high in Latin America compared with other regions. To have more equitable growth, efforts should center on strengthening the provision and quality of education, health, and public infrastructure. This includes better targeting of government spending and strengthening social safety nets.

From Diálogo a Fondo, the IMF’s blog for Latin America.