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WASHINGTON, December 11, 2002 — Argentina's economic crisis, with severe spillover effects in its smaller neighbors, dampened growth figures across Latin America and the Caribbean (LAC) in 2002. Region-wide GDP is expected to contract by 1.1 percent this year, but increase by 1.8 percent in 2003 and 3.7 percent in 2004, according to a new World Bank report.
The report Global Economic Prospects and the Developing Countries 2003: Investing to Unlock Global Opportunities notes that the regional contraction, which followed 0.4 percent growth in 2001, was in large part due to a deep protracted contraction in Argentina. Growth performance in the region, excluding Argentina, is expected to be 0.7 percent in 2002.
"This has been a very difficult year for the region but this is not a region-wide crisis," says Guillermo Perry, World Bank Chief Economist for Latin America and the Caribbean. "While Argentina's crisis has affected some of its neighbors deeply, the economies of Chile, Colombia, Mexico, Peru and several Caribbean countries have shown remarkable resilience in the face of low commodity prices and rising risk premium."
The report notes that the absence of a sustainable macroeconomic framework has delayed an IMF program in Argentina, shrunk net capital flows even further, and led to a deep protracted economic contraction of more than 10 percent, affecting other Mercosur affiliates such as Uruguay and, to a lesser extent, Paraguay and Bolivia. And in Brazil, uncertainty associated with the elections and the global outlook weighed on investor confidence, slowing the pace of the recovery.
According to the report, the external environment for most LAC countries was more adverse than expected. Despite low interest rates in industrial countries, capital flows to Latin America are projected to fall roughly 50 percent in 2002, while average spreads for the region rose 70 percent between May and October. Few were able to attract the necessary capital flows to sustain a strong recovery.
In addition, U.S. growth weakened after a strong start in the first quarter of 2002, while European growth was anemic, resulting in lower expectations for LAC principal markets in the short term. The region's export market grew only 1.2 percent in 2002 and was not helped by the price fall in key commodities exported by the region (sugar fell by 21 percent, arabica coffee by 3 percent, bananas by 9.1 percent, aluminum by 7.2 percent, and copper by 2.1 percent.) Central America was particularly affected by the fall in coffee prices.
"Trade with the U.S. and Europe is crucial to recovery prospects in Latin America and the Caribbean," says Richard Newfarmer, lead author of the report. "That's why removing trade barriers and subsidies in the rich countries is more important now than ever."
Prospects for recovery
Despite the short-term risks, regional GDP is expected to grow 1.8 percent in 2003 and 3.7 percent in 2004, supported by expected strengthening of the global economy, particularly in trade volumes, commodity prices and capital flows - provided there is a turnaround in the uncertain market outlook and the global economy, as we anticipate, begins to pick up momentum.
"We believe the worst is over", says Guillermo Perry, World Bank Chief Economist for Latin America and the Caribbean. "Argentina has stabilized somewhat and with the Brazil election over, we expect investors' confidence will firm up, and more generally we expect less turbulence and risk aversion in international financial markets."
The report notes that some countries have managed the difficult external environment relatively well. Mexico "has weathered the recent global downturn very well," and Chile is expected to benefit from firmer prices of copper. The policy stance of the new Colombian administration has been positive for investors, while an expected strengthening of metals prices in 2003 should help Peru recover from the 2001 recession. The Caribbean countries, says the report, "have shown resilience in the face of strongly negative external and domestic factors."
For the long-term (2005-15), Global Economic Prospects and the Developing Countries 2003: Investing to Unlock Global Opportunities projects an average of 3.8 percent growth a year and 2.6 percent of per capita growth - one point higher than what the region achieved in the 1990s.
"Improvement in macroeconomic management in a number of countries throughout the 1990s, albeit emanating from crises, should provide the basis for a good investor climate," the report says, while noting that regulation and supervision of financial sectors have been strengthened, and that potential gains from global trade have increased with trade liberalization and integration.
The document warns, however, that many LAC countries continue to rely on significant debt financing, particularly in the public sector. These countries may have to learn to live with less debt in the future, adjusting public expenditures as required to ensure fiscal and debt sustainability.
"Countries need to create fiscal space during good times to be able to conduct countercyclical policies in future downswings in economic activity," says Ernesto May, World Bank Director of Poverty Reduction and Economic Management for Latin America and the Caribbean.
The Bank's report also notes that low-income coffee producers need to further diversify their export base to reduce their vulnerability, and advises LAC countries to deepen their financial markets and improve infrastructure and quality of institutions, so that the region can attain high sustainable growth rates.The report summary and related materials are available at: http://www.worldbank.org/prospects/gep2003