High commodity prices and pro-growth reforms played equal role in LatAm economic boom
Washington. –Favorable external conditions including high commodity prices and a stable macroeconomic environment, as well as pro-growth reforms boosted GDP per capita in Latin America and the Caribbean by about 5 percentage points (in purchasing power parity terms) over the last decade.
With the decline in prices of many of Latin America’s major commodity exports, and slower growth both at home and in several of its trading partners, the region will increasingly need to turn to growth-enhancing reforms while maintaining a sound macroeconomic framework.
A new World Bank report, Beyond commodities: The growth challenge of Latin America and the Caribbean, takes a closer look at the region’s growth trends, and highlights which reforms can achieve better results in raising income levels. The report concludes that domestic pro-growth reforms can deliver even greater results for sustained growth and poverty reduction in the region, than external factors.
“With the end of the commodity boom and world conditions turning less favorable, the region is waking up to a new reality of slow growth,” said Jorge Familiar, World Bank Vice President for Latin America and the Caribbean. “What we have learned from this analysis is that some of the successful reforms carried out by governments to boost growth and the efforts to maintain a sound macro-fiscal framework were key drivers of the region’s good performance during the last decade. If the region did it once, it can do it again”.
Among the report’s key findings:
• The boom of the 2000s is a result of both domestic growth reforms and favorable world conditions: Many countries in the region have taken the difficult decision to undertake reforms in the financial sector, education and infrastructure to boost growth during that period, with strong results. In addition, most countries implemented policies to control inflation in the 1990s, stabilizing the economies and helping boost other domestic engines of growth.
• New growth stars such as Panama, Peru, Colombia and the Dominican Republic emerged: Panama was the region’s champion, with average annual per capita growth of 5.1 percent between 2001 and 2012. Peru, at 4.6 percent, enjoyed a lift both as a result of commodity prices and domestic reforms. Colombia and the Dominican Republic also appeared as fast growing economies.
While commodity producers benefited from higher exports, other relatively resource-poor countries such as Costa Rica also recorded strong performance during that time.
• Learning from regional best performers can help prioritize reforms to accelerate growth: Different countries have different path to sustain growth. While Argentina, the Dominican Republic, Ecuador, and Venezuela could gain from the inflation-control experience of other countries, in others – Central American and Caribbean countries in particular – longer-term pro-growth reforms would be essential. According to the report, countries with lower per capita income, such as Nicaragua, Paraguay, and Honduras, have the most to gain by closing the infrastructure gap.
Looking forward, the report also concludes that the region can learn and build on the success of the 2000s to maintain its hard-earned social gains and further promote growth. There is no one size fits all solution, and countries will need to look at domestic drivers of growth.