The economies of Latin America and the Caribbean have shown themselves to be relatively resilient in the face of growing debt pressure, inflation, and global uncertainty. But new headwinds from falling commodity prices, rising interest rates in developed countries and uncertain recovery in China could once again cloud the region’s prospects.
To fuel much-needed growth in the region, countries must preserve their hard-earned resilience and take advantage of the unique opportunities offered by global economic trends towards nearshoring and green industry, according to the new World Bank reportThe potential of integration, opportunities in a changing global economy”.
The report estimates that regional GDP will grow 1.4 percent in 2023, a lower rate than anticipated. Rates of 2.4 percent are expected for 2024 and 2025, too low to make significant progress in reducing poverty.
“The region has largely recovered from the pandemic crisis, but unfortunately it has returned to the low levels of growth of the previous decade,” said Carlos Felipe Jaramillo, Vice President of the World Bank for Latin America and the Caribbean. “Countries must urgently accelerate inclusive growth, so that everyone benefits from development, and this will require maintaining macroeconomic stability and taking advantage of the opportunities that trade integration offers today.”
After recovering from the pandemic, the region has weathered the multiple crises caused by the Russian war in Ukraine and the uncertainties surrounding the global economy with relative success. Both poverty and employment have largely returned to pre-pandemic levels, while average inflation excluding Argentina is expected to fall to 5.0 percent in 2023, after reaching 7.9 percent in 2022.
According to the report, the region’s overall resilience is the result of hard progress made in macroeconomic management over the past two decades. Preserving this achievement will be paramount.
However, fiscal imbalances remain high, with an estimated average of 2.7 percent of GDP in 2023, further eroding already reduced fiscal space; and the level of indebtedness is expected to reach 64.7 percent of GDP this year, slightly below the 66.3 percent reached in 2022. In addition, recent bank failures in the US and Europe add to uncertainty. Its repercussions on the banking system and capital flows in Latin America and the Caribbean remain to be seen.
“The region continues to be one of the least integrated, while trade openness and international direct investment have stagnated or declined in most cases over the last 20 years; countries must find ways to become attractive and take advantage of the trend towards the relocation of companies“, said William Maloney, Chief Economist for Latin America and the Caribbean at the World Bank. “Furthermore, harnessing the region’s extraordinary comparative advantage in sustainable energy production, the commodities needed for emerging green industries, and its unique natural capital offers a potential new source of growth, but this will require policies to facilitate access to markets. global, capital and technology."
The report suggests a series of integration policies that countries should consider to take advantage of these opportunities. This includes long-term policies, such as reducing systemic risks, boosting investments in traditional and digital infrastructure, and improving human capital; as well as short-term options, such as preserving macroeconomic stability, promoting progress in customs and transport regulations, and improving export and investment promotion agencies.