Latin American Economic Outlook 2012

Transforming the State for Development

image of Latin American Economic Outlook 2012

Even in the midst of a global financial crisis, Latin American and Caribbean economies find themselves in better condition than in years past. Latin America must seize this opportunity to design and implement good public policies. The greatest of the long-term objectives of Latin American states remains development: economic growth and structural change that is rapid, sustainable and inclusive. In particular, governments must reduce inequalities in income, public-service delivery and opportunities, as well as promote the diversification of economies, often concentrated on a few primary-product exports.

Improved efficiency of public administration is crucial to address both the short-term and long-term dimensions of these challenges. The real change, however, will come if Latin American and Caribbean states carry out meaningful fiscal reforms, making them not only more efficient but also more effective. The increased effectiveness of fiscal policy holds the promise to provide resources needed to address the key challenges of economic development. Three key priority areas for investing additional resources have been highlighted by many governments in the region for their potential to raise competitiveness and social inclusion: education, infrastructure and innovation. In each of these areas, more efficient administration and more effective strategic action is needed from states.

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Executive Summary

OECD Development Centre

Latin America’s solid economic performance since 2003 has created the opportunity for transforming the state, enabling the adoption of ambitious public policies that lock in the prospect of long-term development and mitigate short-term risks. Despite important differences in current economic conditions within the region —with South America outperforming Central America, Mexico and the Caribbean— strong external demand (especially from emerging economies like China), in combination with vigorous internal demand, resulted in an average annual GDP growth rate of almost 5% during 2003-08.1 Part of this performance was also due to good macroeconomic management that created sufficient fiscal space to manage the effects of the global financial crisis without jeopardising fiscal sustainability (Figure 0.1). Between 2000 and 2007, public debt in the region shrank on average by 15 percentage points of GDP, while fiscal balances moved from an overall deficit of 2.4% of GDP to a surplus of 0.4% of GDP. Macroeconomic policies and higher primary export prices strengthened macroeconomic stability and provided resources for implementing anti-poverty programmes and increasing access to basic public services. This led to less pronounced recessions and swift recoveries compared to OECD economies. While real GDP growth in the advanced economies is expected to remain sluggish, Latin America is expected to grow 4.4% in 2011 and 4% in 2012.2 In this context, Latin American countries have the opportunity to design and implement public policies with long-term development goals and also reduce some medium and short-term risks.

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