Latin America has reached the end of a “golden decade” marked by average regional GDP growth of 5 percent to 6 percent a year, and now is facing a period where “the new normal” will likely average around 2.5 percent per annum, said Augusto de la Torre, the World Bank’s Chief Economist for Latin America and the Caribbean.
While such a slowdown may have once spelled financial catastrophe for a region where booms and busts have tended to be the economic story, this time around it may be different. De la Torre says the region today has built “a better immune system” to avoid the impact of international financial shocks, and can continue to make progress if it learns how to ignite and sustain new growth, develop an effective social agenda for its people, connect with the international value chain and use foreign investment more effectively. De la Torre, formerly head of Ecuador’s Central Bank, spoke at the Ninth Annual Latin America Conference in Miami sponsored by the University of Miami’s Center for Hemispheric Policy.
In a recent report on Latin America and the Caribbean, the World Bank said that real GDP grew by 2.5 percent in 2013, “broadly unchanged from 2012, but sharply below preceding years.”
In Miami, de la Torre pointed out that regional growth during the “golden decade” (which ended in 2011) had been the result of “good luck,” as well as structural changes in most Latin economies, high commodities prices, and good liquidity. “About 75 million Latin Americans came out of poverty in this ten-year period,” he said, “and about 55 million joined the middle class. Currently less than one-third of Latin Americans are poor, and we now have more people in the middle class than in poverty.”
At the same time, the region changed from a debtor to the world to a creditor to the world, meaning it now loans money to the rest of the world.For most of the region, macroeconomic problems seem to be a thing of the past due to government reforms, he noted. But the Caribbean, Venezuela, and Argentina still must deal with macroeconomic issues.
A serious challenge for the region under the low growth scenario is social policy in the face of higher middle-class expectations. “We can’t continue to deliver the type of social development benefits we’ve seen in recent years,” he said. The dissatisfaction this creates has already been seen in a number of protests rocking the region, from last year’s mass protests in Brazil, to ongoing opposition protests in Venezuela, and occasional movements in Argentina.
While the region has made good progress in achieving stability and reducing its economic vulnerability, better macroeconomic policies by themselves will not solve the problems of growth. The new middle class wants more opportunity and equality. Governments need to change the “generational immobility” that afflicts the region, he said, meaning “where you are born determines where you go in life.” This is not the case in South Korea, and Latin governments must make real improvements in education so that “society is not rigged against you. “Public education stinks,” de la Torre said.
To engage the new middle class in the social contract and finance improvements in social services, the region needs to ignite and sustain economic growth. One way to do this is to make investors enthusiastic about your country. Different things can be done in different counties, he said: For example, moving closer to peace in Colombia and figuring out how to sell cheap hydro power to neighboring countries in Paraguay.
To sustain growth, de la Torre said, the region needs to close the “huge gaps” in human capital. Labor today has three more years of education than in the past, “but it’s a lousy education. We need more engineers.”
Moreover, the region is less competitive than other parts of the world due to poor general infrastructure and a weak energy infrastructure in particular.
To become more competitive, “We need to connect to the global value chain, and not look inwards.” Manufacturing in Asian countries, for example, is highly connected, but in Latin America, only Mexico is part of the global value chain.
Using foreign investment effectively offers new opportunities for growth. While FDI is “not a silver bullet by itself” it is “a way to learn,” he said. Opportunities for investment and growth across the region exist in public-private partnerships in vital areas such transportation infrastructure – highways, seaports and airports. In Chile, PPPs are being used for jails and hospitals. They don’t seem to work well, however, for huge works such as sewer systems.