World growth is likely to be suppressed below potential for several years to come, but Latin America and the Caribbean can escape this global outlook and boost growth significantly by adopting appropriate structural reforms, according to the Inter-American Development Bank’s annual macroeconomic report, released during the banks annual meeting.
The report, “Rethinking Reforms,” argues that if countries across the region embrace reforms that are tailor-made to their particular institutions and situation, regional spillovers will give an additional considerable boost to growth.
“We are expecting moderate growth in the region for several years and even if there is room for counter-cyclical fiscal policy, countries should refrain as fiscal space has also diminished,” said Santiago Levy, vice president for sectors and knowledge for the bank. “It’s crucial for countries to consider more structural measures to boost growth.”
The report notes that the region is likely to grow just 3.9 percent annually over the next five years, nearly 1 percentage point lower than the 4.8 percent registered before the Great Recession which began in 2008. Slower growth in world trade and a decline in commodity prices are expected to dampen consumption and investment in Latin America and the Caribbean.
The report notes that currencies in the region have appreciated, potentially affecting exports and growth. Appreciations have likely been fueled by a combination of factors, including high commodity prices, strong capital inflows given attractive investment opportunities, as well as the expansionary monetary policies and policies of central banks in advanced economies.
The report argues that the time has come to reignite the region’s reform agenda. “Latin America and the Caribbean have the economic resources to grow much faster, but there is a need to allocate those resources more effectively,” says Andrew Powell, the principal advisor in the bank’s research department and coordinator of the report. If the region could increase the efficiency of how it deploys its resources to the efficiency of the U.S. over 10 years, then productivity would be 20 percent higher and growth would be increased by at least a full 1 percent per year over that decade for the typical country.
There are many areas in which countries may wish to focus reform efforts, depending on their particular needs. Recent Bank publications have included recommendations on education and tax reform. The 2013 Latin American and Caribbean Macroeconomic report calls for a full country-by-country diagnostic on the best ways to enhance efficiency. The report focuses on two key areas of reform that hold considerable potential to impact productivity and growth: labor market reform, and investment in infrastructure.