LatAm Economy Back on Track, But Growing Slowly, Says IDB

In its 2018 Macroeconomic Report, the bank has urged countries in the region to revive economies, criticizing that ‘investment shortfalls and inefficiencies’ are limiting their growth.

Economy IDB

Economies across Latin America and the Caribbean are back on the growth path, but are set to under perform compared to the countries in emerging Asia and Europe, according to the Inter-American Development Bank (IDB).

In its 2018 Macroeconomic Report, the bank has urged countries in the region to revive economies, criticizing that ‘investment shortfalls and inefficiencies’ are limiting their growth.

The region’s GDP will grow an average of 2.6% in 2018-2020, which is in line with historical growth rates (2.4% is the average growth rate from 1960-2017). But emerging Asia and emerging Europe are expected to grow 6.5% and 3.7% respectively over the same period.

Macroeconomic weaknesses, such as inflation, could shave off further 0.7% of regional growth per annum (2.1% of GDP in total) over the next 3 years, the report has warned.

These risks are not evenly distributed. The Southern Cone (excluding Brazil) is expected to grow at 2.9% in 2018-2020 and might lose 0.8% per annum of growth per year.

Mexico is expected to grow at 2.7% in 2018-2020 and could lose a full 1% of GDP each year over that period.

Brazil, expected to grow at just 2% for the next 3 years, might lose 0.5% per year.

US growth, the report argues, would have a negative impact on several regional countries. Changing trade policies under the Donald Trump administration and the rising interest rate could hurt Mexico and a few countries in the Andean region.

“The good news is that most of the region is back on the growth path,” said IDB Chief Economist José Juan Ruiz. “However, growth is too slow to satisfy the desires of the region’s expanding middle class. The single biggest challenge is increasing the levels and efficiency of investments to make the region more productive, make growth faster, more stable, and shield the region more from external shocks.”

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Latin America invests less in education and infrastructure than its more successful peers, but also does so less efficiently. In some Asian countries, more investment yields larger growth.

If Latin America had managed to match emerging Asia’s investment efficiencies over the past six decades, its regional GDP today would be twice as large, the report noted.

“In the past 50 years, much of Latin America’s growth rates have come from its expanding labor force,” said Andrew Powell, the IDB Research Department’s Principal Advisor and coauthor of the report. “These favorable trends are going into reverse as the population ages. The region must invest more and do it efficiently to increase growth. This would also help to ensure fiscal sustainability.”

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