Latin America & Caribbean remains resilient to turmoil but faces uncertain scenarios Regional challenges include adapting to changing global circumstances to stay competitive a Catastrophic scenario less likely as Euro-zone crisis fades out and US economy picks up.
Latin American economies have remained stubbornly resilient to the global economic turmoil but face an uncertain scenario going forward.
Even as the region is expected to stay strong in 2012 and a dose of stability has been injected into global financial markets, many challenges remain ahead in the medium term, notably the projected slowdown of China’s economy –the supercharged engine that has contributed to the region’s growth and market diversification over the past few years.
The so-called catastrophic scenario, an economic meltdown arising from the Euro-zone crisis and a double-dip recession in the US, now seems improbable following the Greek bailout, a capital injection by the European Central Bank, and the improving US economic prospects.
On the other hand, the so-called benign scenario is none too rosy. The European crisis has created worldwide uncertainty and heightened volatility, leading to over-reaction in financial markets.
For Latin American and Caribbean countries (LAC), this uncertain external scenario has placed downward pressure on the region’s growth since July 2011. LAC is expected to grow 3-4 percent in 2012, with parts of it, mainly in the Caribbean and Central America, growing at a slower rate.
Overall, the region will quickly need to adapt to changing global circumstances in order to remain competitive and continue to grow at a solid clip.
Immediate challenges span the region’s social and economic agendas.
Socially, Latin America and the Caribbean remains one of the most unequal in the world with social spending still relatively low and, in some cases, still untargeted – for example, in parts of Central America subsidies reach poor and rich populations equally.
Economically, the region can use its strong record to continue to build value into commodity exports, while addressing other practical issues such as production capacity constraints, modernizing its infrastructure and logistics, boosting innovation and modernizing the State.
To contribute to the region’s unique demands for sustainable and socially inclusive growth, the World Bank Group has upped its strategic support to individual LAC countries. The Bank’s financial and technical contribution to regional economies in fiscal 2011 amounted to US$14.7 billion, with the vast majority of these funds supporting social and human development programs, including knowledge and facilitating services drawing on the Bank’s global expertise.
Over the past decade, 73 million people were lifted out of moderate poverty on the heels of Latin America’s unprecedented growth and economic stability.
The Bank’s goal is to help the region preserve and build on those gains by addressing existing social and economic gaps.
On the skills front, improving quality of education is still a tall order. LAC's percentage of population with tertiary education rose from 9.5 percent in 1990 to 14.2 percent in 2009. In the meantime, Asian Tiger nations have gone from 10 percent to 20 percent in the same period. The education lag has had a significant impact on intergenerational social mobility –one of the world’s lowest— and continues to perpetuate itself as a vast majority of small children remain alienated from early stimulus, the only investment proven to help children succeed in life, according to experts.
Human Development Challenges
Even though the region’s map of Early Childhood Education (ECD) is rapidly expanding, much remains to be done to ensure that more than 20 million kids receive nurturing support –in health, education and nutrition- in the first five years of their lives.
To come to fruition, this complex collage of pending assignments needs a favorable environment of improved citizen safety –both from crime and violence and natural hazards.
In parts of the region crime and violence take an unbearable high toll on people and local economies. For instance, in Central America 14,257 lives –an average of 40 per day-- are claimed annually by crime, costing countries up to 8 percent of their GDP. The impact of this scourge is so profound that experts fear development can be set back many years as a consequence.
Similarly, natural disasters are a dent to prosperity and wellbeing of the region’s citizens. Haiti,Brazil, El Salvador, are just a few examples of countries recently hard hit by catastrophe. Experts fear such list can quickly grow as disaster risk management continues to stall across the region.
The region’s gaps in infrastructure, productivity and innovation drag down growth, especially as global uncertainty becomes the new normal. LAC’s growth performance over the last century has been subpar –with per capita income remaining at 30 percent of the U.S. In contrast, East Asian countries’ per capita income increased from 15 percent to more than 70 percent in the last 50 years.
Overheating is an all too familiar risk in the region as countries tend to bump against capacity constraints at comparatively low growth rates. In most of LAC the non-inflationary growth rates that can be sustained over long periods hover below 5 percent.
Logistics, closely linked to efficient infrastructure, will play a key role in the region’s growth - still today the cost of logistics in LAC is 2 to 4 times more than in OECD countries or Asian Tigers.
By and large, these key improvements hinge on a nimbler State --neither big nor small, but more effective. Improving tax revenue and delivery of basic services will go a long way in attempts to modernize the State in LAC countries. Latin American economies, minus Brazil, have some of the lightest tax burdens. In industrialized nations up to 27 percent of State revenue comes from personal income taxes; in LAC it amounts to less than 4 percent. About 13 percent of the region’s population lacks access to clean and drinking water and 29 percent does not have access to sanitation.
WORLD BANK RESPONSE
From straight financing of development projects, including sophisticated contingency lines of credit, to in-depth development research, the World Bank Group has supported the region’s social and economic agendas to the tune of US$14.7 billion.
New strategies for Brazil and Bolivia created more economic opportunities for the underprivileged and built on advances of previous partnerships that expanded access to basic services, education and health to many.
Brazil’s US$ 8 billion Country Partnership Strategy 2012-2015 calls for close coordination with Brazil’s new national extreme poverty eradication program, ‘Brasil sem Miséria’, which aims to improve social and economic opportunities for 16 million of the country’s most vulnerable people. In turn, Bolivia’s Country Partnership will impact the lives of 3 million people, largely from rural areas, and support directly one million farmers in the country’s impoverished north.
On the second anniversary of Haiti’s tragic earthquake, a new interim strategy, good for 12 months, provided US$225 million in grants towards the country’s reconstruction efforts. This funding supports the safe return from camps of more than 22,000 displaced, improves neighborhoods for 75,000 people, and finances tuition waivers for about 100,000 school children.
Small children continued to top the Bank’s human development agenda. Five million mothers, and children ages 0 to 6, are benefiting from programs developed throughout Latin America under the Early Childhood Initiative: An investment for Life. After two years of operation, the initiative has approved US$400 million worth of projects, doubling the initial projected funding, and surpassing the original total commitment of US$300 million for the period 2010-2013.
In fiscal year 2012, several countries took out lines of credit as insurance against unforeseen economic circumstances and the risk of natural disasters. El Salvador activated a US$50 million line of financing after massive flooding left thousands of Salvadorians homeless and caused widespread damage. The Disaster Risk Management Policy Development Loan Catastrophe Deferred Draw Option (Cat DDO) addressed vulnerability to disasters and risk management in the Central American country.
Similarly, Uruguay took contingency financing to tackle the impact of the current uncertainty in global economic affairs. The US$260 million Second Programmatic and Reform Implementation Policy Development Loan (DPL)supports Uruguay’s reform program and growth with equity agenda. The Deferred Drawdown Option (DDO) is a financial instrument specifically created for countries without an immediate need for financing but wishing to possess an additional insurance in case of an unforeseen deterioration of its economic environment.
Key Regional Studies
Contributing to a greater understanding of key development issues, the Bank launched key studies covering gender equity and the stability of the region’s financial system.
The flagship study by the Chief Economist Office concludes that banks and financial institutions are strong and could withstand the impact of a global crisis but wonders about potential weaknesses, such as credit bubbles.