Study also looks at potential GDP impacts of trade and asset price shocks

MENDOZA, Argentina – Latin America and the Caribbean should grow more strongly in the coming years though the region will continue to underperform with regards to the world economy, due to both low levels and low quality of investment, according to the Inter-American Development Bank’s 2018 Macroeconomic Report.

The region’s GDP is expected to grow an average of 2.6% in 2018-2020, which is in line with historical growth rates (2.4% is the average growth rate from 1960-2017). However, this rate lags regions such as Emerging Asia and Emerging Europe, which are expected to grow 6.5% and 3.7% over the same period.

The first part of the Macroeconomic Report, A Mandate to Grow, was released on the side of the IDB’s Annual Meeting taking place in Mendoza, Argentina. The second part, on what countries can do to boost investment, will be unveiled Sunday, March 25.

Risky scenarios

Even these moderate baseline growth projections may be at risk. A negative global asset price shock – perhaps triggered by faster than expected inflation – could shave off 0.7% of regional growth per annum (2.1% of GDP over the next 3 years).

These risks are not evenly distributed. The Southern Cone (excluding Brazil) is expected to grow at 2.9% in 2018-2020 and might lose 0.8% per annum of growth per year. Mexico is expected to grow at 2.7% 2018-2020 could lose a full 1% of GDP each year over that period. Brazil, expected to grow at just 2% for the next 3 years, might lose 0.5% per year from such a shock.

An alternative scenario sees higher than expected US growth coupled with somewhat higher interest rates and more action on trade policies. This combination may be neutral for the U.S. economy that continues to grow strongly, but the report argues it would be negative for Latin America and the Caribbean. The combined impact could trim the baseline scenario by 0.3% to 2.3% growth for 2018-2020, with higher impacts on Mexico and the Andean region

“The good news is that most of the region is back on the growth path,” said IDB Chief Economist José Juan Ruiz. “However, growth is too slow to satisfy the desires of the region’s expanding middle class. The single biggest challenge is increasing the levels and efficiency of investments to make the region more productive, make growth faster, more stable, and shield the region more from external shocks.”

The investment and productivity challenge

One of the main reasons for the region’s economic underperformance is low productivity growth.

In an innovative analysis of the region’s growth performance that considers the significant increase in labor skills, the growth in productivity has been flat between 1990 and 2017. By contrast, Emerging Asia registered a 0.22% average annual productivity increase over the same period. Only Sub-Saharan Africa performed more poorly. Over the same period, the average per capita growth rate in Latin America and the Caribbean has been almost 1.4 percentage points below that of Emerging Asian countries, largely due to the absence of total factor productivity growth and low investments.

The report found that the region not only invests less than its more successful peers, but also does so less efficiently. A percentage point of incremental investment as a share of GDP yields about 0.28 percentage points of higher GDP growth per year in Emerging Asia. By contrast, it yields about 0.20 percentage points in Latin America. The differences accumulate over time to produce significant growth gaps, the report says. If Latin America had managed to match Emerging Asia’s investment efficiencies over the past six decades, it regional GDP today would be twice as large.

 “In the past 50 years, much of Latin America’s growth rates have come from its expanding labor force,” said Andrew Powell, the IDB Research Department’s Principal Advisor and coauthor of the report. “These favorable trends are going into reverse as the population ages. The region must invest more and do it efficiently to increase growth. This would also help to ensure fiscal sustainability.”

About the IDB

The Inter-American Development Bank is devoted to improving lives. Established in 1959, the IDB is a leading source of long-term financing for economic, social and institutional development in Latin America and the Caribbean. The IDB also conducts cutting-edge research and provides policy advice, technical assistance and training to public and private sector clients throughout the region.