A Watershed Moment for Latin America: Nine Takeaways from our High-Level Conference
IMF Blog, June 5, 2015
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- Authors: Alejandro Werner
- Published: June 5, 2015
Overview
- Author: Alejandro Werner
- Date: June 5, 2015
- Context: High-level IMF conference in Washington, D.C. under the theme “Rising Challenges to Growth and Stability,” with participants including central bankers, finance ministers, and academics to discuss current difficulties facing Latin America and policy priorities.
Main takeaways (1–9)
- 1. Savor the progress.
- Latin America has come a long way since the days of hyperinflation and debt crises of the 1980s and 90s.
- Countries have strengthened their economic policy frameworks.
- Exchange rate flexibility now provides an important buffer for external shocks in many countries.
- Poverty rates have fallen, inequality has come down, and the middle class has grown.
- These economic and social advances have been underpinned by the broad-based establishment of democratic societies.
- 2. Life after the bonanza.
- Optimism of 2010, when the region made an impressive rebound from the global financial crisis and grew more than 6 percent, has faded.
- Economic activity has been slowing every year since then.
- Most panelists agreed that medium-term growth is also likely to be mediocre as the “good luck” of booming commodity markets is over and structural weaknesses—in the form of low saving, low investment, and low productivity—have come to the fore.
- Quotation: Mario Blejer — “the party is over.”
- 3. Risks.
- Views varied on how much the region will be affected by rising U.S. interest rates, with potential effects including capital outflows, higher funding costs, and weaker domestic currencies.
- One view: balance sheets are quite resilient because a lot of government debt is now denominated in domestic currency, foreign exchange reserves are ample, and firms only take on foreign-currency debt for which they have appropriate hedges.
- Another view: important vulnerabilities remain as firms face increased indebtedness, lower growth, and weaker commodity prices.
- Additional risk: further commodity price declines, perhaps in the context of weaker-than-expected growth in China, could make the period ahead “a rough ride.”
- Conclusion: vigilance will be key.
- 4. Policies matter.
- Important differences across the region—countries with stronger macroeconomic fundamentals are better prepared to handle challenging times.
- In some countries, misguided policies (or “self-inflicted wounds”) contributed to today’s mix of low growth and elevated inflation.
- Quotation: Carmen Reinhart — preventing macroeconomic crisis—with the large output losses that past crises have typically entailed—is crucial for raising living standards across Latin America on a sustained basis.
- 5. Macro vs. micro.
- Macroeconomic improvements have not been sufficient to raise growth to the level of other emerging market regions.
- Microeconomic problems remain a major obstacle to productivity and growth.
- One reflection of these problems is the persistence of very high informality in many economies.
- 6. Reform priorities.
- General sense that labor markets, education, infrastructure, and governance quality are key problem areas.
- To generate a sustained rise in investment and economic dynamism, Latin America will need to upgrade its physical and human capital as well as the institutions supporting the market economy.
- 7. Economic diversification and trade.
- Progress should involve greater diversification of economic structures and deeper integration through trade—both within the region and with other parts of the global economy, such as Asia’s value chains.
- Several speakers saw a case for smart industry-level intervention.
- Caution: there are still basic things to get right (in education, infrastructure, and governance) before turning to more activist sectoral policies that are fraught with risks.
- 8. Political buy-in.
- Securing popular support for reforms remains a key political challenge.
- Legacy of high inequality tends to hamper emergence of a broad consensus on desirable policies.
- An extended period of low growth could compound this challenge given high expectations for further social and economic progress.
- There is significant scope to achieve better outcomes without additional resources; current government policies in many countries—even those with high taxes and extensive transfer schemes—fail to effectively improve the distribution of income.
- Conclusion: more targeted, better-designed policies are needed to secure shared prosperity.
- 9. Turning challenge into opportunity.
- Difficult situations can be opportunities for decisive improvements that countries could not achieve during normal times.
- Example: ongoing corruption scandals could be used to bring about lasting improvements in governance and the rule of law.
- Quotation: Arminio Fraga — this could be a “watershed moment.”
- Closing thought: Latin America is facing very significant challenges; the task ahead is to rise to those challenges and turn them into an opportunity.
Policy implications and priorities emphasized at the conference
- Preserve and build on macroeconomic strengths to avoid crises that cause large output losses.
- Address microeconomic constraints to productivity by prioritizing:
- Labor market reform
- Education improvement
- Infrastructure upgrades
- Governance quality enhancement
- Pursue greater economic diversification and deeper trade integration while being cautious about activist sectoral policies until basic reforms are in place.
- Design more targeted and better-designed redistribution and social policies to improve income distribution without necessarily increasing overall spending.
- Maintain vigilance against external shocks (including rising U.S. interest rates and commodity price declines) given remaining vulnerabilities in some countries.
Alejandro Werner, June 5, 2015.
Content in this bundle
- Um momento decisivo para a América Latina: Nove mensagens de nossa conferência de alto nível
- REO_WHD-2015_FM.indd