Latin America: Making the Good Times Better

IMF Blog, February 25, 2011

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Latin America: Making the Good Times Better

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Bibliographic details

• Authors: Dominique Strauss-Kahn
• Published: February 25, 2011

Context and framing

• Author: Dominique Strauss-Kahn
• Date: February 25, 2011
• Theme: Latin America has enjoyed tremendous economic dynamism and a rising quality of life in recent years, but faces new challenges to sustain progress.
• Framing questions the author will discuss on travels through Panama, Uruguay, and Brazil:
  • Can there be too much of a good thing? (una época de vacas gordas)
  • Are countries equipped to handle future times of lean? (la época de vacas flacas)
  • How best to share these times of plenty—across society, and with future generations? (Como compartir—y prolongar—la época de las vacas gordas?)

Near-term macroeconomic risks and policy responses

• Findings and risks:
  • Latin America’s economies are growing rapidly, buoyed by good access to external financing and high commodity prices.
  • Potential signs of overheating: rising inflation, rapidly growing credit, and booming stock markets.
  • Boom-to-bust dynamics are a key near-term risk if policymakers do not act early.
• Policy recommendations:
  • Withdraw macroeconomic stimulus adopted during the global crisis; some countries are already doing so.
  • Begin adjustment with fiscal policy to reduce the burden on monetary policy.
  • In some cases, take action on both fiscal and monetary fronts when inflationary pressures rise.
  • Preserve exchange rate flexibility; appreciation can help temper capital inflows by making foreign investors think twice about future exchange rate risk.
  • Tighten prudential measures to protect financial stability.
  • Capital controls may be useful temporarily in some cases, but should not substitute for macro or prudential measures.

Readiness for future shocks

• Findings:
  • The global financial crisis (2008-2009) is only just receding; the global economy remains exposed to downside risks.
  • Latin America bounced back from the crisis much better than most other regions, benefiting from policy buffers and reduced vulnerabilities built in times of plenty.
  • Over the last decade, countries across the region have:
  • strengthened their policy frameworks,
  • lowered public debt,
  • increased foreign reserve buffers,
  • allowed greater exchange rate flexibility,
  • improved financial supervision and regulation.
• Policy priorities going forward:
  • Rebuild fiscal space; bring debts down to safe levels where needed (Panama cited as already working in this direction).
  • Strengthen financial stability frameworks:
  • Develop better tools to monitor risks within and across institutions.
  • Empower regulators and supervisors to take early preventive action.
  • Strengthen macroprudential financial regulations (Brazil cited as an example).

Sharing prosperity and structural reforms

• Findings:
  • The region has lifted tens of millions out of poverty over the past decade.
  • Uruguay example: the poverty rate has fallen by 10 percentage points since 2004.
  • The region remains profoundly unequal, with about a third of its people living in poverty.
• Policy recommendations to sustain and share growth:
  • Pursue reforms that boost productivity, including revitalizing infrastructure and improving education and training.
  • Improve the business climate and strengthen governance for a pro-growth strategy.
  • Enhance social protection:
  • Make the social safety net more effective.
  • Support innovative conditional cash transfer programs—example: Brazil’s bolsa familia program.
  • Raise social spending and improve the quality of service delivery in education, health, and public infrastructure.
• Strategic imperative:
  • Capitalize on today’s favorable conditions to transform countries to the next level and ensure the benefits of growth are more widely shared.

Source: IMF blog post “Latin America: Making the Good Times Better,” Dominique Strauss-Kahn, February 25, 2011.

Content in this bundle

• América Latina: Como transformar o bom de hoje no melhor de amanhã
  • América Latina: Como transformar o bom de hoje no melhor de amanhã (Markdown version)
  • América Latina: Como transformar o bom de hoje no melhor de amanhã (PDF)