(Version in Español)
Next week, I will travel to Latin America—my second visit to the region since November 2011. I return with increased optimism, as much of Latin America continues its impressive transformation that started a decade ago.
The region remains resilient to the recent bouts in global volatility, and many countries continue to expand at a healthy pace. An increasing number of people are escaping the perils of poverty to join a growing and increasingly vibrant middle class.
During my visit to Colombia and Chile next week, I will talk to policymakers, business leaders, students, and civil society about the challenges of sustaining this transformation. Both countries are emblematic of the region—not only of its recent success but also of its desire to continue to move forward. They are aware that in our increasingly interconnected and changing world, economies must be resilient and adaptable. They are also working to make their societies more productive and competitive, and ensuring that the economic gains are shared more equally.
Not an easy year
This year, uncertainties about the path of policies in advanced economies have weighed on growth in many emerging economies. Growth in Latin America and the Caribbean slowed from 4½ percent in 2011 to an estimated 3¼ percent this year. Although this slowdown also reflected domestic factors in some cases, it serves as a reminder that the region is not immune to shifting global tides.
The region is projected to expand by about 4 percent in 2013, broadly in line with its potential. Commodity exporters in the region continue to be supported by the double tailwinds of high commodity prices and favorable external financing conditions.
However, the global recovery remains fragile and subject to serious downside risks. Policy slippages in advanced economies could weigh on Latin America. A fiscal cliff-spurred recession in the United States would affect the region, particularly Mexico, Central America, and the Caribbean, given their strong trade, tourism, and remittances ties. A deepening of the crisis in Europe could heighten risk aversion and lead to a sudden drop in external financing flows. And continued robust growth in Asia in the medium term is critical to support the region’s strong commodity exports.
Policies to strengthen resilience
Against this backdrop, the region must continue to work hard to enhance resilience. Tailwinds can quickly turn into headwinds should global risks materialize.
- With debt levels higher and fiscal balances generally weaker than before 2008, the priority in many countries remains to strengthen their fiscal positions. Policymakers should avoid the temptation to use fiscal policy to support demand, especially in countries where private domestic demand remains very strong. But, let me be clear, we are not advocating fiscal consolidation at all cost. If circumstances change, if global risks materialize and private demand slows sharply, fiscal stimulus could be considered in countries not facing financing constraints. Meanwhile, monetary policy should continue to act as the first line of defense in case of slowing demand.
- Large and potentially volatile capital flows continue to present a challenge to the region. The Fund’s thinking on this issue has evolved, and a recently released document underscores that a variety of tools could be useful in dealing with capital flows. Managing the risks associated with inflow surges or disruptive outflows requires not only sound macroeconomic policies, but also strong financial supervision and regulation, and in some cases capital flow management measures. With credit growing briskly in many countries of the region, policymakers need to balance remaining vigilant to financial sector excesses, while harnessing the benefits of capital flows.
Making growth more inclusive
Looking beyond these near-term challenges, building a vibrant and stronger Latin America will require boosting its productivity and competitiveness, a longstanding weakness in the region. To achieve this, the region will need to invest more in high-quality infrastructure and education, to improve its tax and regulatory structure, and to diversify its exports.
I know that these reforms are not easy, but they are necessary. And since these reforms take time to bear fruit, countries should act now that conditions are generally favorable.
But it is not enough to grow more quickly.
The region must ensure that the benefits of growth are shared more broadly. More equal growth is also more lasting growth. Latin America has made significant progress in improving social outcomes. But more needs to be done. In particular, better access to quality education is necessary to reduce inequality, as well as to ensure that young people have the skills and knowledge to compete in our increasingly integrated and rapidly changing world.
I am eager to discuss these issues with policymakers from Chile and Colombia, and more broadly from the region at the meeting of the Community of Latin American and Caribbean States in Viña del Mar, as well as with women leaders in Colombia, and students in Chile. Given its recent strong track record, my hope is for Latin America to continue to rise to the challenge of ensuring lasting prosperity and stability for all.