World Bank: End of Boom Doesn’t Have to Mean a Bust for the Poor in Latin America

Washington, October 8, 2014.- During the recent commodity boom, Latin America and the Caribbean proved that growth could be pro-poor and help fuel tremendous social progress. Now as growth slows regionally and beyond, it is critical to consider what will shore up economic activity while ensuring the poor won't stay behind.

In its latest semiannual report, Inequality in a Lower Growth Latin America, the World Bank´s Office of the Chief Economist for Latin America and the Caribbean forecasts an average 1.2 percent rate of growth for 2014 with a rebound to 2.2 percent in 2015. This deceleration comes with a difference.

“In terms of equity, the simple fact that Latin America today is not the Latin America of the 1980s or 1990s, is already a good news story,” said Augusto de la Torre, World Bank Chief Economist for Latin America and the Caribbean. “For the first time in recent history, the region is no longer following a boom-bust cycle of the type that used to set the economy back for many years, hurting the poor the most”.

The report, issued ahead of the IMF-World Bank Group annual meetings, finds a great deal of heterogeneity within the region. Panama leads with an impressive 6.6 percent growth for the year and Bolivia, Colombia, Dominican Republic, Ecuador, Guyana, Nicaragua, Paraguay, and Surinam are expected to grow more than 4 percent, well above the regional average. Meanwhile big economies such as Venezuela and Argentina are going into negative territory, at -2.9 and -1.5 percent respectively, and the regional giant, Brazil, is expected to growth by only 0.5 percent.

With this level of growth, countries may find it challenging to keep the social gains from the last decade. During those golden years the region was able to cut extreme poverty by half to 12 percent in 2012, and double the ranks of the middle class to 34 percent of the population in 2012. That year, Gini index of income inequality was 7 points lower than in 2003, largely due to a narrowing of wage gaps in the region.

Now in a more stable, albeit slower growth environment, governments in the region will understandably want to focus on maintaining the levels of employment that contributed to those equity gains and thus meet the expectations raised during the boom. Some countries in the region will have at their disposal the types of tools -such as countercyclical monetary policy with flexible exchange rates as well as ample space to borrow- that will help them maintain jobs without compromising the longer term priority of boosting productivity in order to grow more.

“Other countries, however, with high levels of indebtedness or facing inflation pressures despite the slowdown, may find it more difficult to respond,” said de la Torre. “The temptation for these countries would be to take the path of least resistance, keeping aggregate consumption and government spending high and borrowing to finance the associated fiscal and external deficits. This path might be encouraged by highly liquid international markets seeking higher yields. The short-run gains, however, would carry a high price: lower long-run growth due to a more vulnerable balance of payments or an uncompetitive real exchange rate”.

To maintain the path of pro-poor growth of the past decade, productivity oriented reforms need to be complemented by policies that increase the quality and coverage of education in line with growing demand for skilled labor. The report thus concludes that advances in the quality of primary, secondary, and tertiary education that benefit all Latin Americans will be crucial to ensure that the dividends of productivity gains are fairly distributed so that the prosperity is truly shared.