TOUGH CHOICES AS WELL AS OPPORTUNITIES FOR LATIN AMERICA

Washington, June 11, 2015.- Despite the challenges posed by the ongoing economic slowdown in Latin America, the current difficulties may also open up new opportunities for tackling deep-seated problems, participants said at a conference on Latin America.

The high-level conference on “Rising Challenges to Growth and Stability in Latin America in a Shifting Global Environment” was held in Washington, D.C. on June 1.

The one-day gathering, hosted by the International Monetary Fund, brought together regional experts, leading academics, senior policymakers, as well as IMF staff to discuss the current difficulties facing Latin America and policy priorities for the region. The conference is part of a series of IMF-related events in Latin America in preparation for the 2015 IMF and World Bank Annual Meetings in Lima, Peru.

“The conference is an important opportunity to take things forward: to hear your views so that together, we can frame an agenda for Lima that can help us navigate the challenges we face—and claim the brighter future that awaits the region,” said IMF First Deputy Managing Director David Lipton in his opening remarks to the conference.

Slowing growth, despite some divergence across countries

Economic activity in Latin America has been slowing down for several years. Regional growth is expected to dip below 1 percent in 2015, followed by a modest recovery in 2016, said Alejandro Werner, Director of the IMF’s Western Hemisphere Department.

Panelists pointed out that, despite the slowdown, there are significant differences across the region. Arminio Fraga, former President of the Central Bank of Brazil, argued that countries with strong macroeconomic fundamentals generally had more favorable prospects in the current environment. Countries in the north would also benefit from their strong ties to the United States, while South America is suffering because of its dependency on commodities, explained Guillermo Ortiz, former governor of the Bank of Mexico.

Charles Collyns, Chief Economist and Managing Director at the Institute of International Finance, added that it was likely that three of the largest economies in Latin America -Argentina, Brazil, and Venezuela- will be in a recession this year. Mario Blejer, former governor of the Central Bank of Argentina, warned that Latin America, like emerging markets more generally, has “lost its dynamism”.

Managing the slowdown

The conference considered the reasons behind the slowdown in Latin America and discussed looming risks on the horizon. Panelists agreed that external factors have played a key role in the slowdown—prospects that U.S. interest rates may rise, the sharp decline in commodity prices, and the slowdown in China. “Latin America has been affected by a lack of demand in the advanced economies, which has been augmented by the deceleration in economic activity in China,” said Nathan Sheets, U.S. Treasury Under Secretary.

Carmen Reinhart from Harvard University observed that exchange rate flexibility has helped the region cope with external shocks. “Had exchange rates not been flexible, the realignments that we’ve seen in the region would have been currency crises,” she said. Reinhart added that managing crises is crucial for raising living standards across Latin America on a sustained basis.

But Joaquim Levy, Finance Minister for Brazil, cautioned that exchange rate flexibility has its limits. To navigate the difficult external environment, he said that Latin America would be better off pursuing structural reforms but in “very precise ways,” such as by improving tax regulations and the incentives for workers and firms. Reinhart added that changing pension incentives would be another concrete structural policy to increase the saving rate in Latin America.

Raising potential growth

Panelists also recognized the remarkable progress that Latin America has made since the early 2000s in terms of economic growth, financial stability, and social gains, including dramatically lower poverty and inequality. Economic frameworks have been strengthened, policy credibility has improved, and exchange rate flexibility provides an important buffer against external shocks. While recognizing this progress, panelists came up with a number of priorities for raising productivity and potential growth over the medium term:

- Change the incentive structure for firms and individuals to reduce informality.

- Improve the business climate.

- Diversify production and exports.

- Increase infrastructure investment.

- Improve institutions and the rule of law.

- Increase labor market flexibility.

- Take more advantage of regional trade and global value chains.

- Improve the quality of education.

Shannon O’Neil, a Senior Fellow at the Council on Foreign Relations, said that Latin America is the region with the largest gap in terms of what companies say they need in terms of worker skills and what the labor force can actually provide. “Over one-third of companies can’t get the workers they need,” she said. Santiago Levy, a Vice President at the Inter-American Development Bank, agreed and added that labor and capital in Latin America are not being allocated to their best uses, due to high effective taxes on productive activities in the formal economy. Panelists also mentioned the high and variable logistics costs for companies interested in doing business in Latin America.

Several panelists mentioned the role of smart industrial policies to enhance growth. O’Neil said that such policies would help Latin America move up the global value chains. However, Miguel Castilla, former Minister of Economy and Finance of Peru, cautioned against mistakes associated with past industrial policies. The region could also do more to deepen integration through trade with each other and with other dynamic regions.

Several participants observed that a big challenge for Latin America was stamping out corruption. For Latin America, the most important reform is the rule of law—that would be a “real game changer,” said Ortiz. Andrés Velasco from Columbia University added that political reform is a key priority for the region.

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