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US Slowdown Affects Latin America

A U.S. recession would shave two percentage points off Latin America's GDP growth this year, the IDB warns.


Latin America's economies are expected to grow between 4.0 and 4.5 percent this year, depending in part on how the U.S. economy develops, the Inter-American Development Bank (IDB) predicts.  The region’s outlook for 2007 hinges on the performance of the U.S. economy, which is showing signs of slowing, the bank says in its annual report, which was released Monday. A U.S. recession, for example, would translate into at least two percentage points less growth in the region, it warns.

However, there is still cautious optimism. "The forecast is for another year of growth in the region in 2007, continuing its longest expansion cycle in the last thirty years," Luis Alberto Moreno, president of the Inter-American Development Bank, said Monday. "I am optimistic as I look to the region’s future, with all the opportunities and difficult tasks ahead."

The 2007 forecast comes as IDB reports GDP growth of 5.3 percent in Latin America last year.  "It was a good year for Latin America and the Caribbean in 2006," Moreno said during a speech at the IDB's annual meeting in Guatemala City. "For half a decade now the region has posted relatively high, sustained rates of economic growth—what we can well term high-quality growth—which it has ridden to bolster public finances and foreign currency reserves and to improve debt profiles. Behind this performance is a cycle that has been favorable to Latin America and the Caribbean, which have benefited from trade flows generated by buoyant commodities markets."

The Dominican Republic and Venezuela posted the highest growth in Latin America (10.0 percent each), followed by Argentina (8.5 percent) and Uruguay (7.3 percent).  Haiti saw the weakest growth (2.5 percent).

Inflation reached 4.8 percent, which is a new low and the latest evidence of progress in a region that for years had to tackle hyperinflation. "In contrast to past booms, economic management has been framed by fiscal responsibility and control of inflation," Moreno pointed out in a statement Monday.  

The best performer was Panama, which managed to post an inflation rate of only 1.3 percent, followed by Peru (1.5 percent) and Chile (2.1 percent). The worst performer was Venezuela (15.8 percent), followed by Haiti (11.8 percent) and Argentina (10.0 percent), according to the Inter-American Development Bank.



Poverty in Latin America is a major challenge, but can be solved by solutions that range from boosting competitiveness to increased capital access for entrepreneurs, policy makers say.

"The overarching challenge for our countries in the coming years is to make sure that every household in the region shares in the benefits of growth," Moreno said.  "It is intolerable that 205 million Latin Americans are living below the poverty line."

One way to reduce poverty is to build more competitive economies by, among other things, enhancing the business climate and upgrading infrastructure, Moreno argued.

Mexican Finance Secretary Agustin Carstens agrees.
"The deficits in basic infrastructure still present in the region... impede attempts to improve the quality of life of the people," he said in his speech Monday. "This lack of adequate infrastructure, or its poor quality, has adverse effects on economic growth and competitiveness, and hampers efforts to reduce poverty and improve living standards, particularly in the areas of health and education."

U.S. Treasury Secretary Henry Paulson also emphasized market solutions - including increased capital access for entrepreneurs - as a way to reduce poverty and boost wealth in Latin America. "Moving the poor into the middle class through a thriving private sector is vital to the region’s success," he said Monday. (See Thriving Private Sector Key to Success)

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