Latin American and Caribbean nations must curb the current trend to increased public spending, reform tax structures to promote growth and equity and improve its infrastructure, says a Fund report obtained by Emerging Markets. Strengthening monetary and exchange rate frameworks is also important, to help inflation targeting, reinforce central bank autonomy and uphold flexible exchange rate regimes, the report says.
The report, to be issued on Monday, argues that banking systems in the region require a friendly environment to grow, including reduced taxes, lower reserve requirements and greater competition and the overall business environment must be improved to increase investment.
Anoop Singh, head of the western hemisphere division for the Fund, has said that growth in Latin America is buoyant by the region’s standard and will remain strong next year – despite elections in ten countries this year, macroeconomic stability is being upheld and improvements are being made in the region’s low inflation rates.
Latin American and Caribbean economies are growing at a rate “well above the historical average,” and the IMF just raised its projection for 2006 to 4.75%, Singh said at a press briefing yesterday. Growth is fueled by the commodities price boom and by sharp hikes in oil prices.
“The region has a historic opportunity, growing faster than ever before, to carry out reforms in macro and structural areas to entrench this expansion,” said Singh. That would require, of course, more of the same in terms of monetary and fiscal discipline and a dollop of good luck from bonanza prices for the region’s exports.
To sustain growth, however, it will also be indispensable for Latin America to take cues from the Asian region which has shot ahead of the Latin nations in recent decades in indicators including growth rates, trade opening, educational levels and poverty reduction.
“There’s one economic fundamental that must always hold— sustainable economic growth requires investment and requires investment to be productive,” Singh said.
Investment levels in Latin America are far lower than the historical levels that sparked the growth spurt in Asia. Investment rates reached 35-40% of GDP in Asia, and were enriched by high domestic savings from 1960 onward.