Latin America has enjoyed strong GDP growth in the past decade. The region grew 4 percent a year, almost twice the rate it recorded in the 1980s and 1990s. The strong growth was accompanied by declining inequality, poverty, and public debt levels. The improvement in the region’s living standards was unprecedented—in the past decade, real GDP per capita increased by more than 30 percent, about two times faster than in prior decades.
The strong growth, however, masks important differences within the region (see Chart 1). The net commodity exporters—that is, the South American countries, which exhibited increasing commodity dependence and an export base highly concentrated in primary goods—have grown, on average, 4.5 percent a year since 2003. But the rest of the region—Mexico, Central America, and the Caribbean—was much less buoyant, growing only about 2.5 percent a year.
South America benefited from an unprecedented improvement in its terms of trade because of the commodity boom of the last decade. Moreover, the financially integrated economies of this group—Brazil, Chile, Colombia, Peru, and Uruguay—which have close links to international financial markets, also benefited from the favorable external financial conditions. Large capital inflows in search of higher returns entered these countries in recent years as monetary policies in advanced economies flooded global financial markets with large amounts of liquidity.
The more northern countries, however, had stronger links to the advanced economies and were hit hard by the global financial crisis and the subsequent lackluster performance in the United States and the euro area. These links include tight commercial ties, in both goods and services (mainly related to tourism), and heavy dependence on remittances from the advanced economies. Moreover, this part of the region includes mostly net commodity importers; the surge in commodity prices added to their problems.
Cooling off
Recent data, however, suggest that growth in the region as a whole is cooling off, in some cases quite rapidly. Current conditions raise a number of questions. Is the slowdown a sign of a bumpy road ahead for the region, or is it temporary? As global financial conditions normalize and commodity prices stabilize—or even decline—will South America continue to enjoy the recent brisk growth rates, or will it revert to its past, subdued growth performance? Why have Central America, Mexico, and the Caribbean performed worse than the South American countries, and will they start to catch up?
The signs that an economic slowdown is emerging in China add to the rising concerns about growth prospects in Latin America. The region is now China’s second-largest trading partner and second-largest foreign investment destination.more
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