Executive Summary
After enjoying and benefiting from the boom years in the early part of this century, Latin American and Caribbean economies are suffering from what we could call reversion to the mean, which in this case means weaker economic growth. The China-led commodity boom cycle was extremely beneficial for many of the commodity exporting countries of Latin America. Some of them took advantage of this cycle and built bases for sustainable growth, while others misused the benefits in populist policies that have left no lasting benefits for growth sustainability. Many of the problems the region is experiencing today are not new—they have been there nearly forever. However, the boom years masked these issues and allowed some of these countries to exhibit better economic performances than their fundamentals seemed to suggest.One definite advantage that some of these countries have this time around is their exchange rate systems. While in the past a large majority of these economies tended to manage their exchange rate system, the region’s largest economies have learned from the past and implemented flexible exchange rates. Of course, there are exceptions, such as the extreme case of Venezuela with more than four different exchange rates, or Argentina, which has implemented capital controls and has an official exchange rate as well as a black market exchange rate. And then there are the cases of those countries that have adopted the U.S. dollar as their own currencies, such as Panama and Ecuador. Out of these two countries we have chosen to cover Panama since it has been growing strongly during the past several decades and is continuing to expand and deepen the Panama Canal. The canal expansion is expected to produce another boom in the coming decades for this small country.
Panama will probably be the exception to the rule in terms of lower investment in the region, as this will likely continue to be one of the most important factors limiting strong economic growth in Latin America. Thus, the future of growth in the region will be linked to the ability of these countries to attract and deploy private investment, both national as well as foreign for exportoriented activities or to support internal domestic demand.
Seven Countries Represent the Lion’s Share of the Region
In the second installment in our series of reports on six regions in the developing world, we turn our attention to economic opportunities and risks in individual economies in Latin America and the Caribbean. As shown in the appendix, the International Monetary Fund (IMF) includes 32 countries in its classification of “Latin America and the Caribbean.” A detailed analysis of all of these economies is beyond the scope of this report. Therefore, we will concentrate on seven countries that collectively account for more than 85 percent of the region’s GDP and more than 75 percent of its population.Brazil: Difficult Adjustment to a New Reality
Brazil was one of the countries in the region that did things relatively well from an economic point of view, although some analysts would argue that market-oriented reforms could have gone even further. Perhaps, today’s difficulties are linked to the inability to push reforms forward and putting more emphasis on investing some of the benefits of the boom years in solving one of Brazil’s most daunting issues: lack of infrastructure investment. It is true that economic growth from the mid-1990s until the 2008-2009 global financial crisis helped an estimated 40 million Brazilians move from the lower echelons of income into the middle classes. However, growth was not as strong as it was back in the “happy days” of the 1960s when the economy grew in excess of 6 percent per annum and during the 1970s when the annual average growth rate quickened to nearly 9 percent.Realeconomic growth in Brazil downshifted during the following decades. The debt crisis of the 1980s pulled the annual average growth rate down to only 1.7 percent. Economic growth averaged 2.5 percent per annum during the 1990s, 3.6 percent during the first decade of this century and roughly 2 percent over the past few years. The IMF forecasts that real GDP growth in Brazil will remain weak—approximating the growth rates of the 1980s—through the end of this decade. Although there is a perception that the Brazilian economy enjoyed strong growth during the past decade and a half, the truth is that the country saw better growth in the 1960s and 1970s.
Brazil has some long-run positives to keep in mind. First, it is a young country, and the workingage population is not expected to peak for another two or three decades. Second, it is a large economy. It is the fifth most populous country in the world—Brazil’s population exceeds 200 million individuals at present—and it is the seventh largest economy in the world, with GDP of roughly $2.4 trillion. It is also a fairly rich country relative to its neighbors in the region, with per capita GDP (measured using the purchasing power parity [PPP] exchange rate) of roughly $16,000. 1 It is a large commodity producer and exporter as well as a large manufacturing hub.
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