Latin America’s Twin Challenges—Increasing Rate of Growth and Managing Volatility
IMF Blog, March 28, 2011
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- Authors: Dominique Strauss-Kahn
- Published: March 28, 2011
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- Author: Dominique Strauss-Kahn
- Date: March 28, 2011
- Blog: Diálogo a Fondo, the IMF’s blog for Latin America
- Language availability noted: (Version in Español)
Core diagnosis
- Latin America faces two principal economic challenges: to increase the sustainable rate of economic growth and to reduce the volatility of growth.
- Recent meetings with government leaders, parliamentarians, and university students in Brazil, Panama, and Uruguay informed this assessment.
- In a meeting in Calgary on March 26 with Finance Ministers of the region, emphasis was placed on reducing vulnerability so that favorable conditions today do not come at the expense of a bust tomorrow.
Managing the good times — three policy areas to reduce vulnerability
- Sound economic policies
- The region’s relatively good performance during the global financial crisis reflected prior improvements in economic fundamentals.
- Specific improvements cited: reducing inflation and public debt, improving the composition of debt, strengthening fiscal institutions, introducing greater exchange rate flexibility and credible monetary regimes, and building up foreign reserves.
- Recommendation: Continue the progress in these areas.
- Financial stability
- Increasing integration with the global economy raises exposure to volatile capital flows.
- Financial deepening can introduce risks such as credit bubbles.
- Recommendation: Strengthen the financial system and empower regulators and supervisors to take early preventive action—including using macroprudential tools.
- More diversified economy
- Diversification is important to reduce vulnerability to specific external shocks; there is "no simple recipe" for achieving it.
- Policy levers to foster new sources of growth include more public funding for infrastructure and human capital development, improvements in the business climate (including security in some countries), and overall governance to attract private investment.
Short-term policy implications given current conditions
- Growth is described as "now back at potential, or above" in most Latin American economies, with "worrisome signs of overheating" in many cases.
- Immediate policy priorities:
- Reverse earlier economic stimulus.
- Use a range of policies 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 be useful, but they should not substitute for fundamental policy adjustments.
Inclusive growth and social policy
- Despite "tremendous social gains," poverty and income inequality remain high in Latin America compared with other regions.
- To achieve more equitable growth, efforts should focus on strengthening the provision and quality of education, health, and public infrastructure.
- Specific policy emphases: better targeting of government spending and strengthening social safety nets.
From Diálogo a Fondo, the IMF’s blog for Latin America.