Forthcoming IDB Report: A Mandate to Grow

New IDB report calls on Latin America to lift the brakes on growth

Global economic fundamentals appear to be strong. Yet, Latin America and the Caribbean is expected to grow at rather mediocre rates in the coming years. Given recent projections, the region’s share of global GDP will continue to decline.

In last year’s Latin America and Caribbean Macroeconomic Report, Routes to Growth in a New Trade World, we focused on the benefits of deeper trade integration. The region’s Preferential Trade Agreements (PTAs) still contain many complexities and inconsistencies, and despite there being no less than 33 PTA’s in Latin American and the Caribbean, there are still important missing links between countries. The region has expended a lot of resources thinking through and negotiating these agreements but has not reaped all of the rewards. Just simplifying and resolving specific technical issues (such as making so-called rules of origin consistent across PTA’s) could have significant beneficial impacts on firms and on growth. Completing the missing links could then approximate a free trade area encompassing the whole region’s US$5.7 trillion market.

In A Mandate to Grow, this year’s Latin American and Caribbean Macroeconomic Report to be released as part of the IDB Group’s Annual Meeting in Mendoza on March 25th 2018, we will look at how other structural factors, including large gaps in investment and productivity, act as brakes on growth. The level of investment is too low and quality has been lacking. Only by lifting these brakes through the right policy actions can the region grow consistently at a higher pace. As detailed in Savings for Development (the IDB’s 2016 flagship report), low savings rates, small and inefficient financial systems, and low fiscal revenues, as well as insufficient public investment, have contributed to an accumulated growth deficit. Building on this analysis, A Mandate to Grow will argue that there is also a serious misallocation of resources and provide a set of policy suggestions to boost growth.

Even the projections for moderate growth may be at risk. Higher inflation in the U.S. could provoke faster than expected interest rate hikes, further dips in global asset prices and higher borrowing costs for emerging economies. Higher tariffs on U.S. imports and any retaliatory actions could dampen trade flows and hurt countries dependent on exports, particularly those with large trade surpluses with the U.S. In the forthcoming report, simulations from economic models quantify these risks. The modeling also suggests opportunities. If individual countries manage to boost growth, even quite modestly, then the links between them will reinforce the positive impacts, yielding significantly higher regional growth.

Countries are in different positions, particularly in terms of the level and efficiency of public spending and revenue collection, and of fiscal balances. Many countries are in a process of gradual fiscal adjustment. Depending on starting positions, countries may wish to adopt different policymaking paths to boost growth. The report outlines recommended actions depending on where countries are along specific dimensions of the policy space.

On a positive note, while there are very different exchange rate regimes in the region, inflation is low for most countries. Inflation targeting has become very popular in Latin America, and the recent experience has been fascinating to watch. In general, this arrangement has allowed for considerable exchange rate flexibility to absorb shocks while providing an anchor for economic stability, reflected in relatively stable medium-term inflation expectations. The report considers how the larger economies that operate with this regime in place may wish to calibrate monetary policy going forward to assist in increasing output while maintaining hard-won credibility.

Countries across the different monetary and exchange rate regimes have maintained substantial international reserves to protect against external shocks. These buffers are normally considered particularly important for countries with less exchange rate flexibility. At the same time, fiscal and current account imbalances have grown. This implies the optimal level of reserves to provide adequate protection has increased. Simulations of improvements in the fiscal accounts and in current accounts, documented in the forthcoming report, reveal how reserve gaps (the difference between actual and optimal reserve levels) would fall.

The region faces stiff challenges but there are also many opportunities. A Mandate to Grow will attempt to provide a balanced view and a set of practical policy suggestions to boost growth and improve lives.

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The Author

Eduardo Cavallo

Eduardo Cavallo

Eduardo Cavallo is currently a Lead Economist at the Research Department of the Inter-American Development Bank (IDB) in Washington DC. Prior to re-joining the IDB, Eduardo was a Vice-President and Senior Latin American Economist for Goldman Sachs in New York. Eduardo had already worked at the IDB as a Research Economist between 2006 and 2010. Before that he served as a research fellow at the Center for International Development (CID), a visiting scholar at the Federal Reserve Bank of Atlanta, and a member of the faculty at the Kennedy School of Government's Summer Program. In Argentina he co-founded Fundación Grupo Innova. Eduardo’s research interests are in the fields of international finance and macroeconomics with a focus on Latin America. He has published in several academic journals, and is the co-editor of the IDB book Dealing with an International Credit Crunch: Policy Responses to Sudden Stops in Latin America. He holds a Ph.D. in Public Policy and an MPP from Harvard University, and a B.A. in Economics from Universidad de San Andres (UdeSA) in Buenos Aires, Argentina.

The Author

Andrew Powell

Andrew Powell

Andrew Powell is the Principal Advisor in the Research Department (RES). He holds a Ba, MPhil. and DPhil. (PhD) from the University of Oxford. Through 1994 he dedicated himself to academia in the United Kingdom as Prize Research Fellow at Nuffield College, Oxford and Associate Professor (Lecturer) at London University and the University of Warwick. In 1995, he joined the Central Bank of Argentina and was named Chief Economist in 1996. He represented Argentina as a G20/G22 deputy and as member of three G22 working groups (on crisis resolution, financial system strengthening and transparency) in the late 1990’s. In 2001, he returned to academia, joining the Universidad Torcuato Di Tella in Buenos Aires as Professor and Director of Graduate Programs in Finance. He has been a Visiting Scholar at the World Bank, IMF and Harvard University. He joined the IDB’s Research Department in 2005 as Lead Research Economist and in 2008 served as Regional Economic Advisor for the Caribbean Region until returning to the Research Department as the Principal Advisor. He has published numerous academic papers in leading economic journals in areas including commodity markets, risk management, the role of multilaterals, regulation, banking and international finance.

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