Source: ECLAC, Prelimary Overview of the
Economies of Latin America and the Caribbean, 2004.
Summary
Two thousand four marked a year of vigorous recovery for Latin America and the Caribbean following the long period of stagnation that began in 1998. The international climate was favorable in 2004, thanks to robust world growth, a recovery in commodity prices and a significant improvement in the international financial risk environment compared with the situation prevailing up to 2002. Correction of external deficits, decreases in real exchange rates, moderate levels of inflation and the strengthening of fiscal accounts were the main factors behind the improved economic performance, and were common to most countries.
As a result of this confluence of favorable external and internal factors, economic growth climbed from –0.5 percent in 2002 to 1.9 percent in 2003 and approximately 5.5 percent in 2004. However, a number of vulnerabilities remain, despite the strong recovery. Although fiscal positions have been strengthened, public debt levels remain high in many countries and pose a risk to stability. A number of risks persist in the financial systems of some countries as well, due to partial dollarization and the weight of government securities on their balance sheets. Most countries continue to report low levels of investment, yet there appears to have been little policy action to improve the investment climate and the quality of economic regulation. In the social domain, unemployment rates have eased very little despite the recovery, and in most countries disenchantment with current economic policies and their social consequences remains the order of the day.
Given these vulnerabilities, deterioration in the international scenario over the short term would cause a variety of difficulties for Latin American and Caribbean economies. Rising foreign interest rates could push up debt service costs significantly and restrict the availability of financing for highly indebted countries. If the dollar continues to depreciate on international markets, the ensuing pressure on real exchange rates in the region will erode export growth. Slower growth in China may depress commodity prices as well. The current vulnerabilities also limit the capacity of economies to respond to potential disruptions in the region, such as natural disasters or disturbances in local financial markets.
For these reasons, governments should redouble their efforts to strengthen public finances, improve public debt maturities and currency structure profiles, reinforce the independence of central banks, and expand prudential regulation of the financial system. The hesitancy on the part of some governments to undertake structural reforms over the last few years suggests the need to concentrate efforts on the institutional front in order to combat corruption and strengthen compliance with the law. In the social domain, the main challenges continue to involve targeting social spending to protect and support the poor, while improving the coverage and efficiency of basic social services in education and health care.
