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WB: Latin America on Course to Full Recovery, Expected to Post 4 percent Growth in 2010

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WASHINGTON DC, April 21, 2010 - Latin America has left the economic crisis behind and it is on course to post solid growth in 2010 on the strength of a global recovery largely led by emerging markets economies, including the region’s own, said today World Bank regional chief economist Augusto de la Torre.

Presenting his 2010 economic forecast for the region, de la Torre hailed this rebound as one of the world’s strongest, second only to Asia’s, which along with other emerging markets is the main engine pushing global economies towards a full-fledged recovery.

In his report “From global collapse to recovery” de la Torre predicts a 4 percent growth for the region as a whole in 2010, with Brazil topping projections with an estimated 5.5 percent expansion, closely followed by Peru, Chile, Panama and Mexico, individually expected to post growth in the 4 percent range. Other countries –such as Argentina, Bolivia, Colombia, Costa Rica, Dominican Republic, Paraguay, and Uruguay -will grow closely below the regional projected average of 4 percent and some others, including Venezuela and Jamaica, will either show negligible expansion or fall into negative territory, de la Torre said. Lagging behind, but rebounding nevertheless, are most countries in Central America and the Caribbean. Economies experiencing stronger rebounds tend to be characterized by vigorous expansion in domestic demand; extensive use of countercyclical policies; economic complementarity to Asia (especially China); and commodity abundance, the report states. (Click here to see full report).

Overall this is good news, as it becomes clear that the region is mending faster and more firmly than previously anticipated, the Bank’s top regional economist said.

“Latin America comes out of this crisis with much less economic contraction than people expected, and without any major domestic financial crisis,” de la Torre noted.

With a GDP contraction of 2.3 percent, Latin America’s recession in 2009 was deeper than the East Asian Tigers’ fall of 0.1 percent but milder than in high-income countries (around 3.4 percent) and Eastern Europe (around 5.7 percent), the report states. Furthermore, excluding Mexico’s output contraction of about 6.5 percent, the region’s GDP hardly contracted in 2009, it adds.

On a sobering note, the new research presented ahead of the Bank-IMF annual Spring Meetings, notes that while Latin America’s recession was milder than expected, it led to a partial reversal of the robust poverty reduction gains that the region achieved in the five years prior to the crisis.

“While 60 million Latin Americans are estimated to have left the poverty ranks during 2002–2008, some 9–10 million people joined the poor in 2009, and that number would have been greater had it not been for the fact that—again breaking with history—LAC governments were able to maintain, and in many cases actually step up, social assistance programs, including the very effective conditional cash transfers schemes that have become a LAC trademark in social policy,” the paper states. De la Torre noted, however, that he expects the number of newly poor to shrink “significantly” towards the end of 2010.

A similar picture forms for employment. Altogether, the region shed about 3.5 million jobs during last year’s recession –albeit at a slower pace than in the recessions of the late 1990s. “Perhaps even more surprisingly, the share of informal employment —a commonly used indicator of deterioration of the quality of employment—did not rise,” the report states.

The ‘China Connection’

De la Torre explained that the region’s change of fortune draws on the strength of Latin America’s solid macroeconomic and monetary policies, its savvier integration into global financial markets and what he termed the “China connection”, or the increasingly closer integration of Latin America’s economies with China’s economic dynamo.

This has allowed many countries on the China axis –including Brazil, Chile, Uruguay, Costa Rica, Peru and Argentina- to lessen the crisis’ impact and to recover much more quickly than the rest. External demand from China and fast-growing emerging markets has boosted exports and terms of trade for Latin America’s net commodity exporters—which are mainly located in South America and account for over 90 percent of the region’s population and GDP.

Looking forward, the region’s demonstrated resilience to economic crises and investment-friendly local conditions will raise the relative appeal of many Latin American countries as destinations for foreign direct investments, according to the report. Overall, this set of circumstances will provide “greater assurance that future gains from growth will not be wiped out by financial crises,” it argues.

A Few Challenges Ahead

“However, the jury is still out on whether the region will be able to seize the opportunity to boost long-run growth, especially considering the large gaps that Latin America would need to close in such key areas as savings, human capital accumulation, physical infrastructure, and the ability to adopt and adapt new technologies,” the report says.

De la Torre emphasized the need for the region to invest in its human capital which, right now, carries a significant deficit.

Education quality in Latin America, for instance, lags behind most regions even though at 10-20 percent per student, GDP investments are on a par with Eastern Europe or Asia, World Bank studies indicate. Furthermore, regional health investments of 6.8 percent of GDP are close to the Organization for Economic Cooperation and Development (OECD) average of 8.9 percent of GDP, yet regressive out-pocket-expenditures remain a large share of national expenditures. Innovation is also lagging behind in a region where most countries, with Brazil as an exception, invest much less than the prescribed 1 percent of GDP in research and development while offering very little fiscal incentive to inventiveness.

Video: Why Did Latin America Perform Well?

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