A Clear Direction

• Author: Alejandro M. Werner

A Clear Direction Finance & Development, September 2015, Vol. 52, No. 3

Alejandro M. Werner

International partnership, commitment, and flexibility are essential to improve the global condition

Academic economists debate whether confidence is an independent force driving economic outcomes or it reflects fundamental information about the current and future state of the economy. But practitioners know that whatever its nature, confidence problems are real, and when times are hard, confidence in policies and policymakers is tested.

And hard times are here. After five years of declining growth, Latin America faces its slowest economic growth in a decade and a half. Business and consumer confidence is close to where it was in the aftermath of the U.S. investment firm Lehman Brothers bankruptcy as the prospect of protracted lower growth haunts many countries in the region. Indeed, confidence indices remain about 30 percent below their 2010 peaks.

There are a number of causes: lack of policy direction now that the commodity boom is over, uncertainty about potential new sources of growth, and political crises associated with unsustainable gains for a growing middle class, along with episodes of corruption. And recent presidential approval ratings mirror the decline in confidence.

A renewed push To restore confidence, support sustainable long-term growth, and ensure shared prosperity, governments in the region must clarify the direction of their economic policies and deepen Latin America’s democracies and market institutions. Stronger policy frameworks and structural reforms are necessary to support the recovery, but political leaders may have to take additional steps to strengthen governance, transparency, and the rule of law.

Trends in the global economy will continue to weigh heavily on growth and confidence in the region, despite an environment much improved over 2008–09. Most notably, the likely continued slowdown in China suggests that commodity prices will remain low for the next three to five years and that South American countries may need to find new sources of robust growth. In addition, the expected liftoff in the U.S. federal funds rate means a return to normal after a prolonged period of easy liquidity in global financial markets. While most observers expect a smooth process, financial markets could get turbulent. In some countries, the effects of these global conditions will be compounded by domestic worries, such as heightened...