Latin America Grows At Record Level But Prudent Policy Needed To Address Global Risks

Alejandra Viveros (202) 473-4306
Aviveros@worldbank.org

WASHINGTON, April 6, 2005 — The Latin America and the Caribbean region (LAC) grew 5.7 percent in 2004 -the strongest growth in 24 years. Growth is expected to moderate somewhat, but is expected to reach at least 4.3 and 3.7 percent in 2005 and 2006, respectively, in tune with global trends, says a new World Bank report.

According to Global Development Finance 2005, the region's record growth was the result of strong world demand for LAC exports, high commodity prices, and low international interest rates and spreads that contributed to large gains in output in Mexico, Chile, and to a lesser extent Brazil. A substantial recovery in Argentina, Uruguay and Venezuela, following the crises of previous years, also contributed to the strong regional performance.

The report notes that although high commodity prices will continue, their expected stabilization means that the contribution to growth from increases in resource-based incomes will decline. This, coupled with slower global growth and rising interest rates and inflationary pressures, will be a further drag on growth, which is projected to slow to about 3.7 percent by 2007.

"The region just experienced the strongest growth in 24 years," said Guillermo Perry, World Bank's Chief Economist for Latin America and the Caribbean, commenting on the report's release. "The country fundamentals are solid, but the region has to follow a prudent policy to reduce vulnerabilities to higher interest rates and a global growth slowdown."

According to Perry, LAC countries should take advantage of these favorable times to prepare for the future by being prudent with public social spending, building fiscal surpluses and reducing the public debt.

Global Development Finance (GDF) 2005 estimates a global economic growth of 3.8 percent in 2004—the highest in four years—but projects a slowdown to 3.1 percent in 2005, as a result of expected increases in U.S. interest rates, fiscal tightening, and the effects of the 25-percent real effective appreciation of the Euro. The report tracks developing countries' growth at 6.6 percent in 2004—the fastest in 30 years—but expects growth to moderate to 5.7 percent in 2005.

In particular, the report identifies as risks to the current favorable climate a sharp depreciation of the U.S. dollar which could result in major capital losses for developing countries with large dollar reserves, and higher global interest rates that could contribute to wider emerging-market bond spreads.

Remittances

The GDF 2005 also highlights the growing importance of private transfers to developing countries, especially workers' remittances, which totaled $125.8 billion in 2004, more than double their level of $61.2 billion in 1996. Latin America and the Caribbean is the region with the highest level of remittances, which increased to an estimated $37 billion in 2004 from $34 billion in 2003, $20.2 billion in 2000 and $5.8 billion in 1990. Mexico is the second largest recipient, with $14.6 billion in 2003, second only to India, with $17.4 billion. Brazil obtained $2.8 billion, ranking as the world's eighth, followed by Colombia with $3.1 billion.

Foreign Direct Investment (FDI)

Latin America and the Caribbean received an estimated $42.4 billion in foreign direct investment (FDI), up from 36.5 in 2003, according to the report. This $6 billion rebound reversed substantial declines in the previous four years and raised the region's share of net FDI inflows to developing countries slightly from 25 percent in 2003 to 26 percent in 2004, still well below the share of 48 percent reached in 1999-2000, at the peak of the privatization boom.

FDI has been highly concentrated: 88 percent of the estimated increase in net FDI flows to developing countries in 2004 went to Brazil, China, India, Mexico and the Russian Federation. Likewise, outward FDI from developing countries, which rose from $3 billion in 1991 to an estimated $40 billion in 2004 is concentrated in these same countries.