Latin America needs increased investment and faster productivity growth.
BY JOHN LIPSKY
Following the best growth performance in over thirty years, and after an exceptionally vibrant period in financial markets, the global economy today is facing financial market turbulence that could undermine what had been viewed as a very favorable outlook. (..)
Turning briefly to Latin America and the Caribbean, the regional economy has been growing at the most vigorous pace since the 1970s. Last year, growth accelerated to 5 percent, with this growth relatively well distributed in the region. We had been expecting the region to grow at 5 percent this year, and around 4.5 percent next year. Obviously this forecast remains contingent—at least to some degree—on developments elsewhere, and it will be updated in the upcoming World Economic Outlook forecast.
The region's strong recent performance reflects both "good fundamentals" and "good luck." With external conditions less supportive, this is the time to underscore the importance of "good fundamentals," and to build on the gains that have been achieved. (...)
The region's recent growth—while strong relative to its own history—still lags other developing regions. Moreover, faster growth is a necessary condition in order to make more meaningful reductions in poverty. By necessity, this will have to be achieved through a combination of increased investment and faster productivity growth. But additional progress is possible: The region's productivity growth from 1990-2006 was some 2 percentage points per year slower than that of emerging Asia over the same period. Investment ratios also are substantially lower than the developing country average—in fact, by some 6 percentage points of GDP.
There are reasons for optimism, as it is recognized widely in the region that the investment climate must be improved. Nonetheless, it is noteworthy that of the top 50 economies ranked for the overall ease of doing business by the World Bank's Doing Business survey, only two countries—Mexico and Chile—are from Latin America. (...)
OPENNESS AND DIVERSITY
It is equally important to consider other drivers of prosperity—specifically, openness and diversification. The vital role these factors plays was demonstrated in a study conducted by our Research Department that looked at the predictors of sustained income growth—defined as per capita GDP growth of at least 3.5 percent per annum, maintained for at least seven years. According to this work, an increasing variety and share of manufacturing exports is one of the most striking features common to cases of rapid, sustained growth. Complementary work has been completed recently by the Commission on Growth and Development. The Commission's studies show that without exception, cases of sustained growth have been driven by an increasing GDP share of merchandise and services exports.
There have been encouraging recent developments in the LAC region, in terms of increasing and diversifying trade. (...)
Regional fiscal policy improvements have been notable recently, including increased primary surpluses. However, higher commodity prices accounted for more than half of the average increase last year of 1.5 percentage points of GDP in the region's primary fiscal surplus. More needs to be done to reduce the dependence of public revenues on commodities, however. Current spending also seems to be taking a precedence over public investment in Latin America. Public investment outlays have remained largely flat in relation to output. Public debt in Latin America, while greatly reduced to some 50 percent of GDP (from 65 percent of GDP in 2002) is still high, and comparable to where it stood in 1999. Thus, new efforts will be needed to make sure that fiscal policy makes room for the investment spending necessary to boost growth and reduce poverty.
LOCAL FINANCIAL MARKETS
Finally—and notwithstanding the current financial market difficulties—I would like to stress the importance for growth of strengthening local financial markets. The development of local markets is essential to mobilizing saving for productive investment, for providing governments a stable source of financing, for providing needed credit to consumers and businesses, and thus for spurring higher rates of growth. A recent study carried out by our Research Department shows that countries with stronger financial sectors are better placed to reap the benefits of increased cross-border capital flows, while coping better with periods of market volatility.
This is an area where much remains to be accomplished, but I am sure that you all are familiar with the essential building blocks of strengthened financial markets. These include the development of a well-specified legal, regulatory and supervisory framework, and the availability of accurate and timely information. The main point here is that the recent market turmoil outside the region should not impede progress in developing deeper and more sophisticated financial markets. The potential for improved economic performance from strengthened markets is significant. (...)
The still on-going turbulence in financial markets represents a significant test, but one that should not undermine the global economy's positive momentum. Nonetheless, the change in external conditions underscores the need for the region to remain focused on making fundamental improvements that will generate the faster growth that will be necessary for meaningful poverty reduction, enhanced stability and increased resilience. (...)
John Lipsky is the first deputy managing director of the International Monetary Fund. This column is based on his speech at the 40th Annual Meeting at the American Association of the Chambers of Commerce in Latin America (AACCLA) in Washington, D.C.