Latin America's Resurgence
| Author | Anoop Singh and Charles Collyns |
| Position | Director of the IMF's Western Hemisphere Department/Deputy Director. This article draws on a longer study prepared by IMF staff (Singh and others, 2005) |
Region has fresh chance to entrench growth and break cycle of crises
Latin America often appears to lurch from the cusp of success to the depths of crisis, so to talk about resurgence invites skepticism. Nevertheless, much of the region has witnessed a swift and robust recovery from the successive financial crises of 2001-02. Within two years, the region's economic growth reached 5.6 percent in 2004, a 24-year high. Growth rates of about 4 percent in 2005 and 3¾ percent projected for 2006 are well above historical averages.
Since the so-called "lost decade" of the 1980s, Latin America has made progress on several fronts. Just 25 years ago, military dictatorships outnumbered civilian elected governments by two to one. Today the region is in the midst of an election cycle that will set the policy agenda and shape the continent for years to come. Destructive hyperinflation is becoming a dim memory, and Latin America is building resilience to external shocks by adopting market reforms and entrenching sound macroeconomic policies-raising the prospect that the current expansion will be more enduring than in previous cycles.
However, persistently low per capita income growth, high or rising poverty, and rates of inequality that remain among the highest in the world (see "Stuck in a Rut" on page 18) have risked undermining popular support for reform programs launched during the 1990s that held out great promise but often yielded disappointing results-especially relative to other emerging market countries. Targeted social programs have helped meet specific needs, such as raising literacy and health standards, but interrupted reforms and growth, and recurring financial crises, meant that broader social improvements remained elusive-especially for the bulk of indigenous peoples (see "Latin America's Indigenous Peoples" on page 23). Thus, there has been a growing sense in many countries that the benefits of global integration have been unevenly distributed, accruing primarily to those in upper-income brackets, while the costs have been borne by the less-wealthy majority. In a few countries, there has even been a growing militancy among disenfranchised groups.
[ SEE THE GRAPHIC AT THE ATTACHED ]
Given that many Latin American countries, including the largest, are holding elections over the next year or so (see map), the central question is whether the recent resurgence can be sustained once the global environment-still relatively benign despite high oil prices-becomes less friendly. After all, sustained, and even higher growth is critical to making a decisive impact on social and poverty indicators that remain weak with national poverty rates exceeding 40 percent of the population and secondary school enrollment averaging 62 percent. To provide perspective, this article draws on experience since the start of market-based reforms in the early 1990s to highlight policy priorities for the future.
Latin American economies have generally performed well in the past two years. Growth has been significantly above historical averages, particularly in commodity-rich economies that have benefited from robust global demand (see Chart 1). Mexico and South American countries have gained, in particular, from the surge in fuel, food, and metals prices, and have generally been able to exploit these opportunities by expanding production-in some cases very substantially-although most oil exporters have not been able to do so.
Inflation has stabilized in single digits, after a brief uptick. External positions have strengthened as booming exports have helped generate current account surpluses. Easy global liquidity conditions have contributed to capital inflows and rising international reserves (see Chart 2). And the recovery has also been better balanced than past episodes, with less reliance on domestic demand (see Chart 3).
[ SEE THE GRAPHIC AT THE ATTACHED ]
This recent improvement in performance reflects policy efforts over a number of years that are now bearing fruit-with some countries, such as Brazil, Chile, and Mexico, leading the way (see box). What are the key elements? Every country is different, but there are several common factors.
For many in Latin America, Chile's economic performance in recent decades is enviable. From 1982-97, its rate of growth averaged 6!/2 percent, with per capita income more than doubling. Although growth slowed during 1998-2003, reflecting in part the regional financial crisis, it rebounded in 2004 and has held strong in 2005. This robust growth, combined with macroeconomic stability, helped bring down poverty from about 39 percent in 1990 to 19 percent in 2003.
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