Latin America and the Caribbean will grow by 6 percent in 2010

Following a 1.9 percent decline in 2009, Latin America and the Caribbean will grow by 6 percent in 2010 thanks to the economic recovery posted by most countries in the region, according to an annual report launched by Economic Commission for Latin America and the Caribbean (ECLAC) today.

In the Preliminary Overview of the Economies of Latin America and the Caribbean 2010, presented by Alicia Bárcena, executive secretary of this Regional Commission of the United Nations, counter-cyclical measures adopted by several countries in the wake of the international financial crisis have been shown to have a positive impact on economic growth, which points to a 4.8 percent rise in per capita GDP for this year.

The consolidation of the upturn also had a positive effect on regional employment, with the unemployment rate falling from 8.2 percent in 2009 to around 7.6 percent, while the quality of jobs created also improved.

Meanwhile, inflation edged up slightly from 4.7 percent in 2009 to an estimated 6.2 percent in 2010, mainly due to international prices for some commodities.

Although the growth of the region’s countries has been uneven, most recorded positive figures for 2010. South America will grow by 6.6 percent, while GDP is expected to rise by 4.9 percent in Mexico and Central America and by 0.5 percent in English-speaking and Dutch-speaking Caribbean countries.

Paraguay will post the strongest growth (9.7 percent), followed by Uruguay (9 percent), Peru (8.6 percent) and Argentina (8.4 percent).  Brazil will grow by 7.7 percent, while Mexico and Chile will expand by 5.3 percent.

In contrast, Haiti and the Bolivarian Republic of Venezuela are expected to see GDP fall by 7 percent and 1.6 percent, respectively.

From the second half of 2010 onwards, many factors have generated a less optimistic scenario for the international economy, and this combines with weaker demand from public policies and the shrinking of idle productive capacity to give a lower growth forecast for the region of 4.2 percent in 2011 (approximately a 3 percent rise in per capita GDP).

Externally, there remains major uncertainty about the robustness of the recovery in developed economies, especially those in Europe. In addition, emerging economies have gained in strength in relative terms, especially Latin American and Caribbean countries, thus increasing the flow of capital towards the region and causing currency appreciations there.

In the short term, increased capital inflows could have a negative effect on external accounts, but would not endanger growth. In the long term, however, the effects could still be negative, as can be seen from the region’s history.

High levels of world liquidity would push down real exchange rates while pushing up commodity prices, which could harm the external accounts and lead to excessive specialization in the production and export of commodities. This would make the region more vulnerable to shocks from abroad. ?

In its report, ECLAC points out that the measures that countries may take to regulate short-term capital inflows must be accompanied by a countercyclical strategy that covers the fiscal and financial spheres, so as to ease pressure on internal demand and prevent an excessive rise in credit.

However, the document adds that success requires increased coordination at the international level, so as to correct global imbalances.

According to Alicia Bárcena “The region’s main challenge is to rebuild its capacity to implement countercyclical actions and to create the conditions for productive development not based solely on the export of commodities”.

The report states that, following the dip observed in 2009 as a result of the crisis, the region’s countries are now rebuilding their public accounts, mainly by improving fiscal revenues. In terms of central governments, at the end of 2010 the fiscal performance of Latin America posted a primary deficit of 0.5 percent of GDP as a simple average, compared with a deficit of 1.1 percent for 2009.  Considering the overall result (including interest payments on the public debt), the deficit went from 2.9 percent to 2.3 percent of GDP.

For 2011, the fiscal accounts are expected to see a new improvement, with a primary deficit of 0.2 percent of GDP and an overall deficit of 2 percent of GDP.

The report states that the region’s economies must invest more in order to increase their capacity for growth.  Despite progress made to date, Latin America and the Caribbean is some way off the levels of investment observed in the 1970s.