New IDB macroeconomic report analyzes the current situation in Central America, Panama, and the Dominican Republic

The big challenge is to strengthen inclusive growth and reduce poverty

Economic growth in Central America, Panama and the Dominican Republic followed a positive path in 2017, with 3.8 percent expansion, although this scenario failed to produce significant improvement in poverty alleviation and income distribution.

Amidst growing uncertainty over the path of the global economy, authorities in the region would do well to adopt actions and policies to foster inclusive development.

Those are the main conclusions of the macroeconomic regional report published by the Inter-American Development Bank (IDB) titled, Inclusive growth: Challenges and Opportunities for Central America and the Dominican Republic.

The report analyzes the region’s economic context and how it could be affected by international economic trends that include lower demand and uncertain trade policies from the region’s main trading partner. The report also explores some alternatives to foster inclusiveness in the region, in the medium and long term.

In 2017, economic growth in Central America, Panama, and the Dominican Republic presented a positive trend thanks to stable prices for commodities and the economic dynamism of the United States. These features boosted consumption and regional investment, bolstering an economic expansion of 3.8 percent, but they have not led to any significant changes in poverty reduction or wealth distribution.

This poses significant policy challenges, considering that growth forecasts for the next few years include downward adjustments associated with risks in key variables such as commodity prices, interest rates, and the U.S. trade policy, among others.

“In recent years, the region has benefitted from a favorable international context, but unfortunately this growth surge hasn’t reached the most vulnerable segments of society,” said Verónica Zavala, General Manager of the IDB’s Department for the countries of Central America, Haiti, Mexico, Panama and the Dominican Republic. “The region needs to maximize the impact of its current assets, such as a growing workforce, its financial system, or its high level of commercial and financial integration to accelerate growth and offer a more equitable distribution of the economic expansion’s benefits.”

The report analyzes a series of determinants that affect human capital accumulation and its influence on economic growth. It observes that certain characteristics of individuals or households affect their likelihood of accessing education and health services. For example, if there is only one parent in the household or if the family lives in a rural area, the chances that a child will attend school are lower. Regarding health, the higher the mother’s level of education, the more likely it is that her children will have access to health services. Knowing this enables the region’s authorities to better focus the interventions that seek to increase education and health coverage.

In addition, countries are more prone than others to display high levels of informality in the job market, where variables like sectorial composition and the inflexibilities of the formal sector contribute to the phenomenon of informality.

The IDB report also evaluates the role of financial integration in the region’s credit behavior and explores scenarios of regional economic performance in the face of external shocks. The region is subject to the pace of interest rate adjustments related to U.S. monetary policy, and to price changes for commodity exports and imports. Commodities may suffer price volatility for various reasons, such as better harvests in Brazil, weather events in the case of coffee and sugar, or conflicts in the Middle East affecting oil prices.

“We hope this report leads to a debate on the actions and policies authorities in the region should take to boost growth and improve inclusive development,” Zavala said. “Our main goal must be to ensure that the benefits of growth reach the greatest possible number of people.”

About the IDB

The Inter-American Development Bank is a leading source of long-term financing for economic, social and institutional projects in Latin America and the Caribbean. Besides loans, grants, and credit guarantees, the IDB also conducts cutting-edge research to offer innovative and sustainable solutions to our region's most pressing challenges. Established in 1959 to help accelerate the progress of its developing member countries, the IDB continues to work every day to improve lives.