Since 2004 Latin America’s economic performance has been much better than in the previous decade of financial crises that hit Mexico, Brazil, Argentina, Ecuador, Uruguay, Dominican Republic, etc. Growth has recovered and inflation has been low. How much of this success is due to good policies as opposed to good luck? Certainly economic policies have vastly improved: lower fiscal deficits, primary surpluses, lower debt ratios, current account surpluses, accumulation of reserves, less balance sheet mismatches, financial sector reforms, central bank independence, low inflation, more moderate and reform oriented governments. So these are fundamental economic and policy improvements that explain the improved economic outlook and higher growth. However, external/global conditions have been ideal: the highest global growth of the last two decades, high commodity prices, very easy monetary policy conditions in the G7 until 2005 and modest tightening since then; low risk aversion of investors; excess supply of global savings leading to lower global long term interest rates and investors’ searching for yield. So, good luck in the form of the most ideal global conditions has also helped. And in spite of this ideal external conditions not all is well in Latam: Brazil is lumped among the BRICs but while all the other BRICs grow at 8 to 11% rates, Brazil last year – in the best of global conditions – grew only 3.5%. Or take Ecuador: with oil prices at very high levels it has changed presidents 8 times in the last decade and the last president threatened to default on it external debt; so what would Ecuador do if global growth slows down and oil falls to $50 rather than being at $65 a barrell? And in spite of this ideal global conditions, there is reform fatigue in Latin America and a populist backlash against the Washington Consensus in Venezuela, Bolivia, Ecuador, Nicaragua, etc. So not all is well in Latin America. The macro, structural and policy improvements are real; but part of the better performance was also due to good luck.So let us open a dialogue on these important issues….
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