After a Golden Decade, Can Latin America Keep Its Luster?
IMF Blog, May 6, 2013
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- Authors: Alejandro Werner
- Published: May 6, 2013
Regional outlook and recent performance
- Latin America continues to be one of the fastest growing regions in the world, even though growth slowed down a bit in 2012.
- Many economies in the region are operating at or near potential, inflation remains generally low, and unemployment is at historically low levels.
- Near-term drivers: easy external financing and relatively high commodity prices.
- IMF May 2013 Regional Economic Outlook projection: the region will expand by about 3½ percent in 2013.
- Brazil: economic activity is strengthening, driven by improving external demand, measures to boost investment, and the impact of earlier policy easing.
- Rest of Latin America: output growth is expected to remain near potential.
Managing the commodity windfall
- The income windfall from persistently high commodity prices averaged 15 percent of domestic income on an annual basis, and close to 90 percent on a cumulative basis.
- The windfall spurred rapid growth and enabled substantial improvement in government and external balance sheets.
- Efforts to save the windfall have eroded since the 2008 global crisis; in many countries, public debt at end-2012 remains above pre-crisis levels and fiscal balances are much weaker.
- Recommendation: increase fiscal savings to better manage the likely fading of external tailwinds and to help narrow external current account deficits.
Higher capital inflows and financial stability risks
- Easy monetary conditions in advanced economies and stronger fundamentals in the region fueled large private capital inflows.
- Net capital flows to financially integrated economies in Latin America more than doubled from an average of below 2 percent of GDP during 2005–07 to about 4 percent in 2010–12, driven mainly by higher net portfolio flows.
- Financial indicators of concern: bank credit continues to grow at a relatively fast pace; asset prices have increased significantly (including housing prices in key metropolitan areas).
- Policy responses suggested:
- Tighter fiscal policy to prevent inflows from generating financial excesses.
- Use exchange rate flexibility to discourage speculative flows.
- Consider faster reserve accumulation where currencies are on the strong side of the range consistent with fundamentals.
- Deploy prudential measures such as tighter loan-to-value ratios, higher capital requirements, and limits on sectoral exposure to prevent buildup of financial vulnerabilities.
Sustaining high growth through productivity
- Growth during 2003–12 was driven by increases in physical capital and labor; productivity growth also picked up but remains well below other fast growing regions.
- Quantitative contributions during 2003–12: labor and capital accumulation contributed 3¾ percentage points to Latin America’s annual GDP growth, while total factor productivity contributed around ¾ percentage points.
- With labor participation at historically high levels and very low unemployment rates, future growth must rely increasingly on productivity gains.
- Policy measures conducive to higher productivity:
- Higher investment in infrastructure and human capital.
- More modern legal frameworks.
- More efficient and competitive product and labor markets.
- Near-term priority: calibrate macroeconomic policies based on a realistic assessment of the supply potential of the economy.
Key policy takeaway
- The region should use still-favorable external conditions to consolidate gains of the past decade by:
- Strengthening fiscal positions further.
- Prudently managing capital flows to avoid financial excesses.
- Pressing ahead with structural reforms to increase productivity and potential growth.
Alejandro Werner, May 6, 2013
Content in this bundle
- Após uma década de ouro, conseguirá a América Latina manter o seu brilho?; 6 de Maio de 2013
- Regional Economic Outlook -- Western Hemisphere: Time to Rebuild Policy Space; May 2013
