How Latin America has tamed macroeconomic volatility

AuthorAnoop Singh
PositionDirector, IMF Western Hemisphere Department
Pages225-233

Page 225

Latin American countries have a history of macroeconomic instability, including boom-bust cycles and high inflation. But, over the past three years, they have registered good macroeconomic performance. Anoop Singh, Director of the IMF's Western Hemisphere Department, finds that the region has made steady progress in advancing market-based reforms and entrenching sound macroeconomic policy frameworks. That said, there is scope for further progress, and the region's top priorities will be continued policy and institutional reforms to reduce public debt and strengthen fiscal frameworks.

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How Latin America has tamed macroeconomic volatility

After experiencing another decade of turbulence, Latin America has registered good macroeconomic performance over the past three years. Although there are large differences among countries, the region as a whole is estimated to have expanded at an average annual rate of 5 percent during 2004-05, the fastest two-year growth rate in two and a half decades. It has done so while generally maintaining low inflation and recording current account and primary fiscal surpluses. Moreover, 2006 is expected to be another strong year.

A recent IMF Working Paper considers whether the region's recent performance marks a distinct break from the past. Over the past century, countries in the Latin American region have tended to experience macroeconomic instability, with boom-bust cycles, bouts of hyperinflation, devaluations, failed currency reforms, banking sector collapses, and debt defaults. Periods of strong growth have tended to be relatively short-lived, often ending in deep recessions, financial instability, and crisis. Output volatility has been higher and average growth lower than in many other regions (see chart, this page), contributing to persistent economic inequality and high poverty.

Roots of instability

What explains this history of recurrent macroeconomic instability? To be sure, external shocks have played a role, especially given the region's dependence on commodity exports and foreign capital. Terms of trade volatility and global capital market conditions have indeed weighed on the region's macroeconomic performance. At the same time, however, recent IMF research finds that more than 70 percent of the volatility of real GDP per capita growth in Latin...

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