Latin America faces three major macroeconomic problems: subpar growth, fiscal deficits, and rising inequality due to poverty. Their solution requires adopting a new strategy.
Latin America was experiencing sub-par economic growth long before the COVID-19 crisis, due to low productivity and declining investment growth. Average annual per capita GDP growth declined by 0.7 percent between 2015 and 2019, far below the average positive growth for an emerging and developing economy of 2.9 percent. The pandemic has further weakened growth prospects in the region and led to an uneven recovery that, in the absence of structural reforms, could lead to another “lost decade”.
Latin America is suffering from large financial imbalances and debt burdens Because of the pandemic and Between 2019 and 2020, the fiscal deficit jumped from 4 to 8.7 percent of GDP “on average,” and debt ratios rose by nine percentage points of GDP. Although debt ratios fell in 2021, reflecting the halt in spending in response to COVID-19 and rising inflation, high interest rates and the associated tightening of global financial conditions mean that Latin America’s fiscal challenge will intensify.
The interactions between these two policy challenges, growth and fiscal sustainability, are well known. Excessive fiscal deficits can cloud the macroeconomic outlook and cause foreign investment to dry up, leading to lost growth opportunities. Meanwhile, low growth makes it more difficult to achieve fiscal sustainability. These interrelated problems have weighed heavily on Latin America in the past.
But these challenges are now made more difficult by a third factor: high levels of poverty and inequality, exacerbated by the pandemic’s disproportionate impact on the population, have reinforced long held perceptions of injustice.
policymakers are struggling to meet voters’ demands for increased economic welfare, and gains in living standards have collapsed in recent years, and this reflects two weaknesses that the region has been suffering in silence for decades, and which the pandemic has exposed.
The tax reform adopted by Colombia in 2021 holds valuable lessons. The original proposal to reform value-added and income taxes “and to introduce higher corporate taxes” had to be amended in order to be enacted, after widespread street protests.
Reducing the social impact of economic policies is not only a matter of morality, but also of stability. Policies aimed at ensuring financial sustainability can only succeed if they are socially and politically sustainable.
To this end, they must be complemented by policies that promote structural growth. Policy makers cannot neglect any part of this problem if they are looking to achieve sustainable economic and social gains.
