In Cautious Praise of Latin America

BUENOS AIRES/WASHINGTON, DC – US President Barack Obama’s trip this month to Brazil, Chile, and El Salvador is a good opportunity to assess the recent performance of Latin America’s economies, and to analyze their prospects and risks going forward. Latin America showed strong resilience during the international financial crisis. While aggregate output fell in 2009, it recovered extremely fast. As the crisis hit, stronger banking systems and effective macroeconomic policies – including fiscal responsibility and low public debt, exchange-rate flexibility, and a large accumulation of international reserves – allowed Latin American countries to implement unprecedented countercyclical policies. Political peace was also preserved through social policies that reduced organized conflict. In short, while Latin America’s economies were helped by high commodity prices, it is indisputable that the significant economic reforms adopted in most countries enabled them to have a “good crisis.” But this successful performance, together with high growth rates from 2004 to 2010, seems to have led to an unhealthy level of self-satisfaction among observers and policymakers in some countries. Indeed, many now apparently assume that their countries have become immune to future shocks. Such complacency is unwarranted. Although growth has indeed been significantly above trend in recent years, performance over the entire decade was unimpressive. Second, although countries have laid the groundwork for sustainable growth in a number of areas, the reform agenda remains vast, and most countries are not yet able to avoid the boom-and-bust cycles that have long plagued them. When it comes to GDP growth, most countries recorded 3-4% annual rates on average in the period between the crises of 1999 and 2009. Countries like Uruguay, Mexico, and El Salvador grew at a mere 2-2.5% rate. Only the Dominican Republic, Peru, and Panama attained 6-7% growth. And, on a per capita basis, Argentina, Brazil, Colombia, Uruguay, El Salvador, and Mexico eked out less than 2% annual growth on average. But it is the agenda of pending reforms that should stifle excessive complacency. That agenda, with obvious country differences, spans five important areas, which together should be the focus of policy attention aimed at solidifying the region’s transformation. First, governments need to adopt urgent business-climate reforms in order to foster investment, entrepreneurship, and innovation. Latin America currently lacks a level playing field for entrepreneurship. Without it, the region will not be able to overcome its low levels of productivity and competitiveness. Second, Latin America needs to overhaul its weak health and education systems. Rapidly expanding demand for skilled workers cannot be satisfied as long as average schooling still totals eight years. Third, despite some significant improvements, major deficiencies in the coverage and quality of infrastructure are clearly affecting competitiveness and increasing costs. The private sector needs to become more involved in infrastructure, which requires the adoption of adequate public-private partnerships. Fourth, the social gains of the recent past, while important, are far from sufficient. Although the region’s poverty rate has decreased by 10 percentage points in the last decade, 180 million people remain below the line, more than 70 million are still indigent, and a large percentage remains just above the poverty line. Thus, soaring food and fuel prices are likely to upset efforts by governments to improve income distribution and social cohesion. Finally, while Latin America’s resource-based economic model and the increasing importance of China in the region catalyzed the growth spurt that began in 2004, the share of high-technology manufacturing and services exports has decreased. Unless this trend is reversed, it will be difficult to improve the quality of jobs in the region, which could jeopardize social and political stability. Latin America has come a long way. It passed the crisis test with flying colors, and the future is promising. But the region’s success should be seen as a base for cementing progress, rather than as an end in itself. Otherwise, countries risk losing their hard-won gains. Mario I. Blejer is a former governor of the Central Bank of Argentina; Graciana del Castillo is a former Associate Director of the Center for Capitalism and Society at Columbia University. They are co-founders and Managing Directors of the Macroeconomics Advisory Group (MAG). Copyright: Project Syndicate, 2011.