Chapter 1. Macroeconomic outlook

Latin America is currently experiencing a slowdown in growth due to the downturn in external demand and the structural limitations of its economies. Although the slowdown is only moderate for the moment, there are reasons to believe that it could be persistent if there is no policy action to raise the growth capacity of the region’s economies. Given this scenario, this chapter analyses three important aspects and discusses suitable policies for reducing the associated vulnerabilities. First, it documents the changes in the external context and their consequences for the dynamics of external demand, considering some of the vulnerabilities resulting from the pattern of trade specialisation in the region and the limited ability of domestic demand to sustain growth. It also analyses the potential risks to financial and economic stability in the region’s financial systems amid the high uncertainty regarding the future direction of US monetary policy and liquidity in international capital markets. Finally, the chapter looks at how fiscal policy and the fiscal space are being changed. Institutions and regulations that can facilitate the sustainable creation of fiscal space are particularly important for the Latin American economies. Governments must do more than merely increase their revenue; they must also invest more efficiently and effectively to respond to new needs and demands.

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Chapter 2. Latin America and shifting wealth

This chapter analyses how economic development in Latin America is being influenced by the contemporary global context, in which global wealth is shifting towards emerging economies. It begins by explaining the main characteristics of this shift, in which China is playing a key role. It then assesses Latin America’s role in the process and some of the consequences that the shift is having on the region’s development model. The new global economic context is shaping an environment that makes it particularly difficult for Latin America to continue its structural transformation, overcome the middle-income trap and make its growth more inclusive. Finally, faced with the prospect that the global scenario will not change much in the near future, the chapter proposes various policy options to enable international integration in a way that fosters the region’s development: creating a more diversified production structure, enlarging the regional market, and capturing value added in the production chain.

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Chapter 3. Productivity, structural change and diversification of production in Latin America

Development involves economic, social and political changes. Within this process, productivity and change in the production structure are closely related to other areas of the economy and society. For technology and income per capita to converge, countries must move towards more diversified, more complex production structures with more technology and knowledge so they can make progress in improving their productivity and reducing their structural heterogeneity. Endogenous capacity-building and reducing economic and social gaps go hand in hand and require the appropriate public policies. Industrial, technological and capacity-building policies are therefore necessary to achieve these objectives. Consequently in Latin American countries, production diversification policies and industrial and innovation policies should play a central role in the new development strategy. The development agenda must prioritise long-term policies geared towards more knowledge-intensive and innovation-intensive production structures in which social and environmental sustainability are priority objectives.

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Chapter 4. Policies for boosting logistics performance in Latin America

Logistics, defined as the process required for transporting goods and services from the point of production to the end consumer, is a decisive factor for development and competitiveness. A country improving its score in the Logistics Performance Index by just 1 point has an average labour productivity gain of close to 35%. This is critical for Latin America and the Caribbean, since the region still lags far behind the OECD economies, and the region’s proportion of time-sensitive and logistics-intensive exports is three times more than that of the OECD countries. A range of policies need to be introduced to reduce transport costs, which, relative to tariffs, are much higher than in other regions. Gradually bridging the transport-infrastructure gap is vital for the region. In the short term, however, the region must use “soft” solutions to make the most of current infrastructure and thus improve its logistics performance and competitiveness. These solutions include providing modern storage facilities, streamlining customs and certification procedures and using information and communication technologies for logistics.

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Executive Summary

Clouds gather on economic horizon: After a decade of relatively strong growth, Latin America’s economic prospects are becoming more convoluted in response to three main factors: declining trade, moderation of commodity prices and increasing uncertainty surrounding external monetary and financing conditions. This is a consequence of the euro area’s weak performance, the slowdown in China’s economy and uncertainty over U.S. monetary policy. Rising domestic demand could make up for some of the weakening in external demand, but as many Latin American economies are now converging towards their potential GDP from an expansionary period, domestic demand stimulus could increase imbalances. Thus, previous experiences in the region signal the need to carefully monitor the expansion of credit and ensure the sustainability of government spending.

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