Building on Latin America's Success

IMF Blog, December 6, 2012

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Author: Christine Lagarde; date: December 6, 2012.
Context: Second visit to the region since November 2011; upcoming meetings in Colombia and Chile and participation in the meeting of the Community of Latin American and Caribbean States in Viña del Mar.
Purpose: Discuss challenges of sustaining the region’s transformation with policymakers, business leaders, students, and civil society; engage with women leaders in Colombia and students in Chile.

Regional growth slowed from 4½ percent in 2011 to an estimated 3¼ percent this year.
The region is projected to expand by about 4 percent in 2013, broadly in line with its potential.
Commodity exporters supported by the double tailwinds of high commodity prices and favorable external financing conditions.
Global factors posing downside risks:
- Policy slippages in advanced economies could weigh on Latin America.
- A fiscal cliff-spurred recession in the United States would affect Mexico, Central America, and the Caribbean due to strong trade, tourism, and remittances ties.
- A deepening of the crisis in Europe could heighten risk aversion and lead to a sudden drop in external financing flows.
- Continued robust growth in Asia in the medium term is critical to support the region’s strong commodity exports.

Fiscal policy:
- Many countries have higher debt levels and generally weaker fiscal balances than before 2008; priority remains strengthening fiscal positions.
- Policymakers should avoid the temptation to use fiscal policy to support demand where private domestic demand remains very strong.
- Not an unconditional call for consolidation: if global risks materialize and private demand slows sharply, fiscal stimulus could be considered in countries not facing financing constraints.
Monetary policy:
- Monetary policy should continue to act as the first line of defense in case of slowing demand.
Capital flows and financial stability:
- Large and potentially volatile capital flows continue to present a challenge.
- The Fund’s thinking has evolved: a variety of tools could be useful in dealing with capital flows.
- Managing inflow surges or disruptive outflows requires:
- Sound macroeconomic policies.
- Strong financial supervision and regulation.
- In some cases, capital flow management measures.
- With credit growing briskly in many countries, policymakers need to balance vigilance to financial sector excesses while harnessing benefits of capital flows.

Structural challenges:
- Boosting productivity and competitiveness is critical and a longstanding weakness in the region.
- Required policy actions include increased investment in high-quality infrastructure and education, improved tax and regulatory structure, and export diversification.
Equity and social outcomes:
- Growth must be more broadly shared; more equal growth is also more lasting growth.
- Latin America has made significant progress in improving social outcomes, but more needs to be done.
- Better access to quality education is necessary to reduce inequality and equip young people with skills for an integrated and rapidly changing world.
Timing:
- Reforms take time; countries should act now while conditions are generally favorable.

The author is eager to discuss these issues with regional policymakers and stakeholders in Chile and Colombia.
Hope: Latin America will continue to rise to the challenge of ensuring lasting prosperity and stability for all.

Source: Building on Latin America's Success, Christine Lagarde, December 6, 2012.