In Latin America and the Caribbean, growth rates remain low, which for the Inter-American Development Bank (IDB) economist, Eduardo Cavallo, are indicators that leave the region behind with respect to the rest of the world, despite the fact that a recovery is expected for 2024.
“Latin America, today, is the one that grows the least among all the regions of the world,” he said, while explaining that this must be a very important issue for the growth and development agenda of the countries of the region, during the panel “International trade and financial system: global perspectives in a post-covid world and a post-conflict world in Eastern Europe”, at the thirty-eighth Latin American Congress on Foreign Trade (Clace).
Straight
For the economist, one of the main challenges for the region is inflation. “It has indeed gone up significantly over the course of 2022,” he said. This is a trend that has been accentuated since the war.
Although in recent months there has been a “slight” downward trend, he understands that it is still at “very high” levels, compared to those witnessed before the war and the pandemic. “What is interesting about this is that the increase in inflation is consistent in all the countries of the region, regardless of the monetary regime they have,” he highlighted.
In this sense, he warned that what has been observed is that food inflation increased “much more” than the prices of other types of products. “This is a problem because food inflation fundamentally hits the poorest and most vulnerable segments of our population,” she said.
According to the economist, if the increase in food inflation reaches 20% and becomes persistent, it could have a very significant impact on poverty in the region.
“We could see that 15 million more people across the region could be pushed into poverty. This is a challenge for economic policy because precisely one tries to find ways to avoid and mitigate this type of pacts and effects, ”she said.
Another consequence would have to do with the cost of financing. “With one as high as the one we had in the worst moments of the pandemic, this causes the cost of borrowing – for example from the public sector – to increase significantly,” he said.
If governments go out to issue debt today, they do so at much higher rates than before the pandemic, this also translates into the cost of external financing for the private sector. “If the public sector is paying higher rates, the private sector, much more so. Therefore, external financing conditions have tightened for the region and this is a second huge challenge that we face this year,” said Cavallo.
The fiscal situation is also a topic of interest. During the pandemic there was what the economist classified as a “strong expansion of public spending”, to try to mitigate the effects of the pandemic.
As a result, a “strong” increase in public debt was witnessed. “The debt went from an average of 57% of gross domestic product (GDP) before the pandemic, to more than 70% of GDP towards the end of 2021 and 2022.” For the IDB economist, this increase puts the region in a difficult situation.
“We have a lot of experience, as a region with high levels of indebtedness. The economic policy challenge is that we need to lower these levels of indebtedness precisely to avoid the repetition of cycles that have been very bad in previous times”, he pointed out.
In this sense, he recommended reducing debt levels to counteract the increase in interest rates that are being seen globally and to reduce financing risks and thus boost growth. “We know that over-indebtedness is like a kind of brake on growth,” she warned.
Good news
However, the good news is that reducing debt levels is possible. However, a fiscal effort is required that is greater than what is projected for the region, “which again greatly increased the fiscal deficit during the pandemic.”
To try to mitigate the effects of the health crisis, this cycle has begun to be reversed, “but the projection is that this cycle of fiscal consolidation is going to stabilize”, but a “much more significant” consolidation or increase in the fiscal surplus would be needed ” from what is taking place in order to reduce the debt towards what are estimated to be prudent levels.
In closing, he stressed that the region has to be very efficient with spending and has to try to eliminate “those redundancies” and inefficiencies. “Here we have the general challenge of increasing productivity.”
For the economist, Latin America does not grow, “ultimately”, among other factors, due to poorly targeted investment, problems in the supply chain, as well as informality “that threatens the possibility of efficiently allocating resources.”
“We still need to advance in the digitization agenda, precisely to make the processes in the productive framework of our economies more efficient.” Likewise, he said that the opportunities that are opening up in terms of international trade should be taken advantage of.
“When the war broke out, we realized that Latin America and the Caribbean exported to the rest of the world a basket of products similar to those that, for example, countries that were in conflict export. The fact that we are already in some markets in which the countries in conflict cannot export, is an opportunity for the region”, he highlighted.
In this sense, he said that the penetration of products in the markets should be increased, “exactly to try to stabilize prices and help the recovery of the global economy.” However, for that, our agreements must be strengthened, and be more efficient in the supply chains, eliminate the restrictions that exist, as well as facilitate internal trade, he concluded.
