The average Latin American family will be better off in the next two years

Washington, January 16- Latin America's economies will grow in the next two years at a rate of 3.3%, which which an average family in the region will be able to afford more goods and services. But this won't be enough to reach the goal of eradicating extreme poverty by 2030, according to the World Bank's Global Economic Forecast 2014 study. Derek Chen, who wrote the chapter on Latin America, says that despite healthy growth forecast for the region, its Achilles' heel will continue to be the huge inequality in incomes.

Question: The GEP forecasts average growth for LAC at 3.3 percent per annum over the medium term. How does that compare to growth levels before the global financial crisis and to population growth rates?

Answer: For the years 2004 to 2007, LAC GDP grew at an average rate of 5.3 percent per annum. Therefore our average growth forecast of 3.3 percent for the years 2014 - 2016 is relatively lower, noting that this relatively lower growth is broadly in line with the potential growth rate for the region.

The LAC region’s population is growing around 1.15 percent per year and continues to slow down. Given that real GDP growth is faster than population, GDP per capita (in real terms) is also on the rise. We forecasts real GDP per capita growth in the region to accelerate from 1.7 percent in 2014 to 2.7 percent in 2016.

Q: With that in mind, what does it mean more concretely for the region to be growing at its current levels? (at a micro level, what does it mean for families and businesses?).

A: With the expected growth rates, the region’s real GDP per capita should be around or close to US$6,000 per capita. It would mean that the average family in the region should be able to afford more goods and services. However, while growth is necessary for improving living standards it may not be sufficient. Equally important is the distribution of the wealth generated. Indeed, income inequality remains high in the region.

Q: You forecast that, at best, total net capital flows to the region will decline by about 3.7 percent (y/y) this year, on top of the 5.1 percent decline seen in 2013. What does that mean for the region's economic activity?

A: With total net capital flows to the region temporarily declining, this could dampen domestic demand as consumers and businesses may not be able to raise capital as cheaply as they did in earlier periods. However, note that net capital flows are expected to pick up after 2014, reaching $313.8 billion in 2016, which is higher than the 2012 level.

Q: Over the last decade the region has made significant inroads against poverty and inequality, at what levels of growth those social gains begin to lose momentum?

A: According to other World Bank reports, between 2003 - 2011, real per capita incomes in LAC grew at 3% and reduced extreme poverty (less than $2.50 per day) from 25% to 13 % (around 80 million persons). Presently, we do not have projections on the level of growth below which social gains will unwind. However, a recent Bank study indicates that even if incomes in LAC continue to grow at 3% and it is able to sustain the gains in inequality, it will still miss the 2030 extreme poverty target of 3%. To achieve this poverty target, per capita incomes in LAC will have to grow at 7.5% per year.

Q: The report touches on sharper than expected commodity price declines, which are important drivers of economic growth, employment etc in Latin America. What can the region do short term and long term to make up for lower revenues from commodities?

A: In the short-term, countries with flexible exchange rates could allow their currencies to adjust accordingly to maintain their competitiveness. This would further incentivize the export sector while import demand would likely slow and allow for a more sustainable current account balance. In the long-term, countries should focus on diversifying their export baskets and structure of the economy away from commodities in order to reduce volatility and to enhance the long-term growth prospects.