Inequality also became lower, and income growth of the poorest 40% accelerated more quickly than in any other region in the world.
Economic growth was key. Coupled with domestic reforms, high commodity prices powered strong economic expansion that sparked job creation, rising incomes, and improved living standards across the board. At the same time, complementary social programmes, made possible by growing fiscal space, helped support the poor and disadvantaged, ensuring that macroeconomic growth translated into real gains for those who needed them most.
But now that the commodity boom has ended and economic tailwinds have receded, countries in the region have to adapt to a more adverse external context — which seems here to stay. This “new normal” has already resulted in lower economic growth, especially for commodity exporters in South America, and there is increasing evidence that the region’s slowdown is negatively affecting job creation. It has even slowed the pace of middle class expansion, as we announced in recent days, prior to the World Bank-IMF Spring Meetings on April 15-17.
In the “new normal” scenario, protecting Latin America and the Caribbean’s hard-won economic and social gains is of paramount importance. To do this, the region faces two different but equally important agendas: one in the short term and another in the medium to long term.
In the short-term, the new external environment is driving governments into a protracted process of adaptation characterised by difficult policy dilemmas in a tightening fiscal environment. In contrast to the global financial crisis of 2008-09, when fiscal expansion contributed to a quick recovery in Latin America and the Caribbean, the erosion of budgetary positions across the region makes it in many cases inadvisable to inject fiscal stimulus this time around.
As a result, countries in the region now face a difficult balancing act of reducing spending while minimising the effects on economic activity and social gains. In this context, countries will need to find a way to protect investments in infrastructure, crowding in private sector financing, for instance. They will also need to keep building human capital and maintain well-targetted social services.
As challenging as the “new normal” may be, there are silver linings. In the 1990s, this kind of shock would have put the region in a far more difficult scenario, with no room for gradual adjustments. So far, indicators suggest that the current process has not reversed the social gains seen during the boom.
In the medium to long term, Latin America and the Caribbean cannot lose sight of the type of reforms that will help sustain the recovery and support new drivers of long term growth. Getting there will require well-targetted efforts to boost productivity, diversify the economy, and unleash the power of the private sector. And while there is not one single-bullet solution, there are some areas we do know are essential to help boost growth, particularly infrastructure, education, and innovation.
We at the World Bank stand ready to put our financial and technical resources to use in supporting the current transition and the path ahead. Among our priorities is encouraging more public-private investment to improve infrastructure. These resources not only generate short-term employment. More importantly, they help close persistent gaps in productivity and trade.
No less essential is our emphasis on improving the quality of education across the region. Without better-trained workers, other efforts to increase productivity and enhance competition will struggle to succeed. Across Latin America and the Caribbean, far too many children still do not finish school. Fully one in five are “ninis,” meaning those who neither work nor study, of whom two-thirds are female.
Limited capacity to promote innovation also makes it difficult to raise the competitiveness of Latin American companies in international markets. Today, Latin American firms suffer from a chronic and substantial innovation gap relative to comparator countries and regions. Even Multilatinas typically enter other markets in order to sell the same products across borders, rather than the more lucrative practice of integrating into global value chains.
Finally, it is important to note that a lack of competition leaves many local industries sheltered. This has the dual negative effects of reducing productivity growth and handicapping the export sector that relies on their services and intermediate goods.
There are many needs and no easy solutions to the region’s challenges. But the deep social transformation we Latin Americans were able to achieve over the past decade should give us the courage to persevere. We owe it to the 23% of people still living in poverty in our region, and to the 38% who remain vulnerable to falling back into it.
Jorge Familiar is World Bank Vice President for Latin America and the Caribbean