LatinFinance - September/October 2015 - 112

PARTING
SHOT
As Latin America's need to diversify from
commodities deepens, internal reinforcement will
prepare the countries for the next chapter of growth,
says Augusto de la Torre

Bracing for opportunity
Latin Americans have enjoyed a rise in purchasing power,
improvements in living conditions and generally become
accustomed to different political and social expectations over the
past several decades.
Financial markets in the region have grown. Economies have
made progress from the so-called "lost decade" of the 1980s, a
time when military dictatorships outnumbered civilian-elected
governments.
Since the 1990s, there have been upgrades to monetary policy
and central banks have adopted a higher degree of transparency
amid increased autonomy. The adoption of market-determined
exchange rates by some Latin American countries has greatly
improved the flexibility and resilience of macroeconomic policy
frameworks. The region as a whole has developed a more robust
basis for monetary policy by moving away from exchange rate
anchors. There is willingness in the region to tackle inflationary
pressures at an early stage, which has boosted the credibility of
monetary policy.
In a bid to absorb global capital markets fluctuations, Latin
America must continue to develop its local capital markets. This
includes the deepening of local government and corporate bond
markets and equities in order to manage interest rate fluctuations
and exchange rate risks. Strengthening financial sectors can also
help reduce the high level of dollarization that remains present in
some economies.
Moving forward however, Latin America is faced with low
commodity prices and a slowdown in China, an important trading
partner.
While the commodities debate circulates, it's important to look
at the challenges governments face. Latin America has grown
accustomed to rapid growth in the last 20 years, but the slowdown
has been in place for about four years now. Future fiscal planning
needs to be based on conservative assumptions. Policies need to be
defined in light of lower oil prices along with weak soy, minerals and
metals prices.
With lower growth forecast for the coming years, it's time for
policy makers to increase investment into areas of education and
innovation. Without denying the considerable growth of the past,
such advances have not been enough to move Latin America beyond

112 L ATINFINA NCE.COM - September/October 2015

the middle-income trap,
where growth plateaus amid
a loss of competitiveness.
Without resting on the laurels
of the commodities boom,
policy must incorporate
greater levels of savings
and investment, higher
spending on education and
an emphasis on technological
enhancements to boost
innovation.
To implement such
changes, Latin America's
leaders must focus on
pragmatic policies for
equity and inclusion as
well as the development
of human capital to foster
technological enhancements
and innovation. Governments
can also improve the business
climate to include more
private sector investment,
both domestic and foreign,
and promote infrastructure
upgrades. These targets can be achieved through regional
cooperation and improved governance.
Latin America has come a long way since the dictatorships of
the past and obviously this is not an overnight cure-all. It will take
proactive policy makers to usher in the next phase of growth in the
region. Latin America is faced with a period of transition, moving
away from external circumstances the region cannot control, into a
period of pragmatic policy and macroeconomic stability, all in a bid to
reduce the earlier-mentioned overall poverty figure. LF

"IT WILL TAKE
PROACTIVE POLICY
MAKERS TO USHER
IN THE NEXT
PHASE OF GROWTH
IN THE REGION"

Augusto de la Torre is chief economist for Latin America and the
Caribbean for the World Bank. This is an edited transcript of his
comments in interview with Aaron Weinman.
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