Uncertain Times

Author:José Antonio Ocampo

Uncertain Times Finance & Development, September 2015, Vol. 52, No. 3

José Antonio Ocampo

After a decade of social and economic progress, Latin America is facing challenging issues

Not long ago, Latin America was a success story of economic growth. While advanced economies suffered a severe recession during the 2008–09 financial crisis in the United States and western Europe, followed by a weak recovery, emerging market economies were seen as the promise for renewed world economic growth. Latin America was viewed as part of that promise.

The 2004–13 decade was, in many ways, exceptional in terms of economic growth and even more so in social progress in Latin America. Some analysts came to refer to the period as the “Latin American decade,” a term coined to contrast with the “lost decade” of the 1980s, when a massive debt crisis sent the region into severe recession.

But this positive picture has changed dramatically. Growth per capita ground to a halt in 2014 and much of the region is again viewed with a sense of forgone promise. The sudden deterioration in the region’s prospects also reflects significant changes in the international factors that affect the region’s economic performance—including a substantial decline in commodity prices, which remain the backbone of the region’s (and particularly of South America’s) exports—and an overall moderation of global trade. If Latin America is to regain its footing, it must undertake reforms to diversify economies and to upgrade technologically its production structure to make it less dependent on the behavior of commodities.

Good performance Although 2004 marked the start of the so-called Latin American decade, some economic improvements had begun years before. Low fiscal deficits have been the rule in most countries since the 1990s. A strengthening of the tax bases facilitated a well-financed expansion of social spending, which had severely contracted during the 1980s. Inflation, which for the region was nearly 1,200 percent in 1990, had fallen to single digits by 2001. These are all significant achievements. But the most remarkable one, given the precedent of the debt crisis, has been the sharp reduction in the ratio of external debt to GDP that took place during 2004–08. At the same time, countries in the region accumulated large foreign exchange reserves. External debt net of foreign exchange reserves fell from an average of 28.6 percent of GDP during 1998–2002 to 5.7 percent in 2008 (see Chart 1). Although the downward trend was interrupted in 2008, when the region ceased to run the current account surpluses it had been enjoying since 2003, it was still low by historical standards in 2014—only 8 percent.

Because low debt ratios make it more likely that a nation can pay its borrowings on time, they have permitted most Latin American countries extraordinary access to external financing. In the mid-2000s, real (after-inflation) interest rates on Latin American external borrowing returned to low levels the region had not seen since the second half of the 1970s, before the devastating debt crisis that led to the lost decade. Because of the prudent debt ratios, monetary authorities in several countries were able to undertake expansionary policies to counter the adverse effects of the strong recession in advanced economies. In particular, all major central banks reduced their interest rates, and several governments increased public sector spending to expand domestic demand. This ability to conduct economic policies that counteracted the business cycle rather than reinforced it was unprecedented in the region’s history.

Economic growth averaged 5.2 percent from 2004 through the middle of 2008, the best the region had experienced since 1968–74 (see Chart 2). Moreover, it was accompanied by an investment boom in many countries. Investment as a percentage of GDP increased to levels that were only slightly below the peak reached prior to the 1980s debt crisis—and higher if Brazil and Venezuela are excluded.

And after a brief and sharp slowdown in economic growth in 2009—which was a full-blown recession in some countries, notably Mexico—growth recovered to average 4.1 percent a year in 2010–13. For most countries, the truly exceptional growth occurred from 2004 to mid-2008, although a few countries—Panama, Peru, and Uruguay—did experience a full decade in which their economies grew at average annual rates of over 6 percent from 2004 to 2013.

Since the 1990s, the region has also experienced long-term improvements in human development thanks...

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