Preliminary Overview of the Economies of Latin America and the Caribbean 2010

Following a 2.8% fall in GDP per capita in 2009, ECLAC predicts that Latin America and the Caribbean will grow at 6% in 2010, corresponding to an increase of 4.8% in GDP per capita, although sub-regional performance has been varied.The growth observed in 2010 is consolidating the recovery that the majority of the economies in the region began to experience during the second half of 2009, brought on by the impact that the counter-cyclical policies that various countries implemented in addition to the recovery in the international economic environment.This growth had positive effects on employment, causing regional unemployment to fall to approximately 7.6% while at the same time improving the quality of the new jobs created. There was a modest increase in the inflation rate, which rose from 4.7% in 2009 to around 6.2% in 2010 due to the movement of international prices for several primary products.The evolution of the labour market, the increase in credit and improved expectations drove private consumption, and together with investment in machinery and equipment, were the principal engines driving the increase in demand.External prices had varied effects according to each country's trade structure. Those countries that export primary products exhibited improvement in their terms of trade and an increased value of their exports. In contrast, the majority of countries in Central America and the Caribbean again suffered a negative impact with net losses.Diverse factors came together during he second half of 2010 to create a less optimistic situation for the international economy that together with the diminished public spending efforts and the depletion in idle productive capacity suggest a decreased dynamism in the economies of Latin America and the Caribbean in 2011.ECLAC predicts that the growth rate in the region will fall to 4.2% in 2011, or approximately 3% growth in GDP per capita.The intense counter-cyclical activity that the governments of the region deployed allowed for a rapid recovery in the levels of production, the majority of which are currently above their pre-crisis levels. Nevertheless, the space for public policies will be affected by the need to rebuild the capacity for a counter-cyclical response in light of the predicted decreased dynamism in the world economy during 2011 and excess global liquidity.Beyond the short term, diverse questions regarding the possibility that this rapid recovery could transform into a new beginning of sustained economic growth. In effect, the external environment continues to have an affect on the region's economies given the high levels of uncertainty and doubts regarding how strong the recovery is in the advanced economies. At the same time, the relative strength of emerging economies and, especially, of those in the region, has led to an increase in the inflow of capital to Latin America and the Caribbean. This situation has led to currency appreciation.It is not the first time in the region that short-term capital inflows have led to real exchange rate appreciation. Nevertheless, in the medium- and long-term, the effects of these appreciations could be severely negative. In effect, this appreciation provides incentives for intense specialization in the production and exportation of primary products. This in turn increases the vulnerability of these economies to external volatility and could generate increased uncertainty in the internal monetary aggregates of the country. In addition, growth that is accompanied by deterioration in the external accounts could make these economies more dependent on external savings, the opposite of what was observed during the period of 2003-2008.Several countries have implemented or strengthened mechanisms that seek to regulate the inflow of short-term capital. However, given the magnitude of the increase in foreign exchange supply, these mechanisms could prove to be insufficient. Several central banks have opted to accumulate reserves, trying to avoid or slow the pace of appreciation. These measures should be complemented by a counter-cyclical strategy that includes not only addresses fiscal issues, but financial ones as well and should be oriented to diminish pressures on internal demand and to impede an excessive increase in credit. Productive policies should also be adopted that are oriented at improving the profitability of those sectors that produce commercial goods.With all of this, it is difficult that the current situation corrects itself in a long-lasting way without greater international coordination that allows the global disequilibriums to close, which appears to be an objective far out of reach.From the macroeconomic point of view, the challenge the region faces is to rebuild its capacity to undertake counter-cyclical actions while at the same time continuing to create conditions that allow productivity development that is not solely based on the exportation of primary products. To achieve this goal it is essential to promote a new fiscal pact that explains how to progressively satisfy the development needs and the level and composition of the tax burden that supports these spending programs.It is important to highlight the contribution that fiscal policy has made to confront the dangers associated with an external environment characterized by elevated global liquidity that are further magnified by insufficient levels of national savings and scare financial development.In the medium- and long-term it will be indispensable to elevate national savings - reinforcing the fiscal equilibrium in the medium-term and reducing public debt to moderate levels, among other things - and to promote financial systems that elevate the national savings capacity and support investment.In order to increase the capacity for growth, the economies of the region should increase investment. In spite of the recent advances, the countries of Latin America and the Caribbean still are far from achieving the levels of investment that existed in the 1970's. The challenge is to increase investment through increased national savings in order to better defend the exchange rate parities and to contribute to the creation of a standard that includes the requirements necessary to promote development in the region.