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IDB Report: Economy of Latin America and the Caribbean 2016

The 2016 Macroeconomic Report for Latin America and the Caribbean, from Banco Interamericano de Desarrollo (IDB), warns of the risks of negative growth.

According to the IDB, many of the risks discussed in previous reports have materialized. With raw material prices falling, negative growth is expected in the region this year, from which it will recover relatively slowly – the forecast for growth rates to be on par with the average levels dominant since 1980 will be until year 2020.

For exporters of raw materials, the loss of revenue has generated pressure at the fiscal level and at the level of the balance of payments, making clear the limited space for counter-cyclical fiscal and monetary policies. National governments must focus on how to minimize the consequences of this context for continued growth and improved socioeconomic conditions, especially in the most vulnerable countries.

The fall in raw material prices – and its subsequent effect on trade in a group of raw material exporting countries – has been a very significant factor.

O Graph 1 demonstrates: i) exports of raw materials (mining industry and energy); ii) exports of manufactured goods originating from agriculture and mining; iii) exports of other manufactured products, with values as a percentage of GDP, in 2013 and 2015.

Graph 1 – Exports of raw materials and manufactures

The decline in exports varies considerably between countries, with Ecuador and Peru being the most affected among the countries studied. In these cases, given the initial composition of exports, it will be difficult for the increase in other exports (such as manufactured goods) to completely replace the income lost in raw materials.
On the other hand, exports of Mexican manufactured products have increased and, despite the recent drop in oil prices, the total of the three types of exports have increased as a percentage of GDP.

It should be noted that, although exports of raw materials have fallen in Brazil, some exports of manufactured products have taken their place. Colombia and Uruguay represent cases where exports of raw materials have declined and manufactured products have not increased enough to replace them.

It is suggested by the IDB that countries carry out a fundamental review of both expenditure and taxes. It is necessary to ensure a smooth transition for commodity exporters with lower net external incomes that may require legal and even constitutional changes in order to ensure long-term fiscal sustainability and improve their efficiency, minimizing impacts on growth current.

At the same time, it would be essential to propose policies that boost potential growth in the medium term and a fiscal rebalancing in order to increase investment levels.

The heterogeneity in improving the trade agenda is evident, with an effective expansion of market access, both inside and outside the region, as shown in the Graph 2 .

Graph 2 – Trade with preferred partners

For example, Mexico, Chile, Peru and Colombia have built a broad network of trade agreements with partners, including the largest and most dynamic markets in Asia. The share of interregional trade increased from 13% to 20% before the financial crisis. However, the 20% figure is still low compared to Asia and Europe, which have interregional trade shares of 47% and 60%, respectively. There is always the possibility that the region will not necessarily reach these levels due to its geography and the fact that its standard product of trade is related to raw materials, but there is certainly room for good progress in the future. The main objective is to make the region more competitive in some products and markets, in order to also increase investment attraction, especially private investment.