By Mike Jarrett

“After six years of growth deceleration (including essentially no growth in 2015 and a contraction of 1 percent of real GDP in 2016), the Latin America and the Caribbean (LAC) region is estimated to have grown by 1.1 percent in 2017 and expected to grow by 1.8 percent in 2018
and 2.3 percent in 2019.”

In a region where commercial imports and exports are the main load-bearing pillars of the national economy, any talk of growth is like music to the ears.

According to World Bank figures, Latin America and the Caribbean (LAC) grew by just over one per cent last year. Weak, perhaps, but better, by far, than the preceding six years of stagnation.

There are, of course, inherent dangers in placing all countries in the Caribbean and Latin America in a single economic grouping. The disparities, social and especially economic, are so vast that the indices generated are generally inaccurate. South America accounts for about 70% of the LAC’s real Gross Domestic Product. Nonetheless, even in the smallest economies of the region, words about growth being uttered by the World Bank are melodic.

The marginal upturn in the region will allow many countries to get a grip; to arrest at least some of the fiscal fallout of the post-recession era. However, according to this World Bank report for 2018, the region’s fiscal situation continues to be quite fragile, with 31 of 32 countries having had an overall fiscal deficit in 2017. The median fiscal deficit for the region, it said, is 2.4% percent of GDP.

Marginal growth

In its recent (April 2018) Semi-annual report on Latin American and the Caribbean¹, from the Office of the Regional Economist, Carlos A. Végh, the World Bank acknowledged marginal growth in 2017 but significant increases in 2018 and 2019.

“After six years of growth deceleration (including essentially no growth in 2015 and a contraction of 1 percent of real GDP in 2016), the Latin America and the Caribbean (LAC) region is estimated to have grown by 1.1 percent in 2017 and expected to grow by 1.8 percent in 2018 and 2.3 percent in 2019.” (Leaving out Venezuela, these figures become 1.9% in 2017, 2.6% this year and 2.8% in 2019.)

That first sentence in the Introduction of the Report had to be great news for governments in particular who would have felt a fiscal strain in maintaining social
and economic stability.

The report further stated: “Since South America accounts for 71 percent of the region’s real GDP, the growth recovery has been mainly linked to the resumption of growth in the two largest South American economies, Brazil (sic) and Argentina.” 

Brasil and Argentina are mainly responsible for the positive growth projections by the World Bank. But, the Caribbean grouping is also creating positive expectations. Growth in the Caribbean was estimated to have fallen 2.7% in 2017, down from 3.0 percent in 2016, a decline attributed to the devastation caused by hurricanes Irma and Maria. Projections by the Bank are now for Caribbean growth of 3.5% in 2018 and 3.4% in 2019.

Challenges ahead

The World Bank pins future stability on fiscal management and responsibility
and identified three main challenges in laying stable foundations for growth.
The report stated:

“Based on (i) the recent growth performance, (ii) the current fiscal situation, and (iii) the current external environment, we can conclude that the region faces the following major challenges.

First, as already emphasized in recent issues of this semi-annual report, a major challenge is for the region to find and reinforce its own sources of growth to increase the long-run growth rate, which is critical to consolidate and eventually improve on the dramatic progress in social inclusion achieved during the Golden Decade of high commodity prices (2003-2012). While the recent partial recovery in commodity prices has provided a gentle push to the  region’s growth, it will clearly be
insufficient to reach growth rates commensurate with the region’s need. Indeed, the region is expected to grow at 1.8 percent in 2018, compared to 4.0 percent during the Golden Decade. While the reform needs naturally vary across countries in
the region, structural reforms (particularly in the areas of labour markets, education,
and pensions), increasing trade and financial integration within and outside the region, a big push in public infrastructure investment, and a tough anti-corruption framework should be at the top of the agenda.

The second major challenge will be to engage in fiscal adjustments to ensure debt sustainability in the long run and, for non-investment grade countries, the reductions in public debt needed to achieve investment grade, which will in turn provide for easier and cheaper access to international credit.

While gradual fiscal adjustments are already underway in several countries in the region (most notably, Argentina, Colombia, Ecuador, El Salvador, Mexico, Panama, and Uruguay), the process has yet to gain traction in many others. Even though political uncertainty related to various upcoming elections in the region may weaken the political will to carry out these adjustments, one would still hope that, since further delays can only make things worse, broad agreements on the need to tackle these issues will prevail. 

The third, and related, challenge will be to enact fiscal adjustments in such a way that they (i) are gradual, as opposed to shock adjustments, since the former carry less overall costs; (ii) do not rely excessively on cutting public investment (particularly at a time when addressing infrastructure needs in the region is critical) so as not to hurt future growth prospects; and (iii) protect the most vulnerable members of society by not cutting social transfers. Gradual fiscal adjustments will not only lead to lower inflation and higher growth in the long run, but will also help countries build some fiscal space during relatively good times and thus be ready to use fiscal policy countercyclically in the event of future downturns.”

¹ Carlos A. Végh, Guillermo Vuletin, Daniel Riera-Crichton, Diego Friedheim, Luis Morano, and José Andrée Camarena. 2018. “Fiscal Adjustment in Latin America and the Caribbean: Short -Run Pain, Long-Run Gain?” LAC Semiannual Report (April), World Bank, Washington, DC. Doi: 10.1596/978 -1-4648-1290-3. License: Creative Commons Attribution CC BY 3.0 IGO