Trade vital for Latin America’s future growth

Wshington.– Countries in Latin America and the Caribbean are beginning to show signsof economic recovery and an increased volume of exports, including new productsin higher quality niches, according to the new semianual World Bank report onLatin America and the Caribbean, “The Big Switch: Restoring Growth throughTrade.”

The region is expected to contract by 1.1 percent in2016 but to recover to 1.8 percent in 2017, according to the ConsensusForecasts. Such recovery is attributed largely to a rebound in South America,where growth is expected to reach 1.5 percent in 2017. Meanwhile, Mexico,Central America and the Caribbean as a subregion —which depend less oncommodity exports and are more closely tied to the economic recovery in theUnited States—are expected to remain in positive territory this year and nextat 2.4 and 2.7 percent, respectively.

“The regionalslowdown seems to finally be coming to an end, with average growth expected toturn positive in 2017,” said Augusto de la Torre, WorldBank Chief Economist for Latin America and the Caribbean. “Now, we areemphasizing the need for a major switch of resources (workers, capital,entrepreneurial talent, financing) towards the production of goods and servicesthat are traded in international markets—that is, towards tradable activities.”

The report explains that in the new reality of lowercommodity prices the region can no longer depend on domestic demand to boostgrowth, as it did during the bonanza years. A turn toward outside buyers willbe crucial to boost economic activity.

However, just when the region seems ready to make thenecessary efforts to strengthen its presence in international markets, theworld seems to be going in the opposite direction, as the volume of globaltrade is flattening if not declining, pulled down by a contraction in thevolume of imports from China and East Asia, more broadly.

The good news is that some preliminary evidence nowshows that countries in the region are already increasing production of exportsincluding new, higher quality products that are finding niche markets in theU.S. and Europe. Moreover, the more competitive exchange rates, obtainedduring the adjustment of the past two years, open the space for greaterregional trade by replacing imports from outside the region with products andservices efficiently produced within the region. The report also finds thatcountries with a flexible exchange rate are diversifying their exports andexport destinations.

“One question iswhether the structural transformation required to make this shift in productionis consistent with the process of macroeconomic adjustments that is stillunderway in many countries in order to adapt to the new post-boom reality,” said De laTorre. “To sustain growth, the adjustment process should avoid undulysacrificing investment, so crucial to boost future growth.”

The pending macroeconomic adjustments tend to beconcentrated in South America, home to many commodity exporting economies thatsuffered the most from the drop in commodity prices. So far, at least threecountries, Peru, Chile and Paraguay, have completed their adjustments and canmore freely focus their energy on growth with social equity. Reigning on fiscalexpenditures has proven to be a tough challenge for many contries, however.

Putting macroeconomic balances on a sound footing willopen room over the medium term to invest on more and better education andinfrastructure, which are required to support the switch toward the productionof tradable goods and services. Without such a switch, it will be hard for theregion to reach the growth levels needed to recover the rhythm of social gainsseen during the commodity boom.

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For more information, please visit: www.worldbank.org/lac