Latin America’s Triple Policy Challenge
High levels of poverty and inequality have intensified a longstanding sense among Latin Americans that the economic chips are stacked against them. Policymakers should consider voters’ frustration as they seek to boost fiscal sustainability and preserve social stability.
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WASHINGTON, DC – Latin America faces three major macroeconomic problems: subpar growth, fiscal deficits, and rising poverty-driven inequality. Solving them requires addressing all three simultaneously, with a strategy that recognizes the complex interactions with one another.
Latin America was experiencing subpar economic growth well before the COVID-19 crisis, owing to low productivity and investment growth. Average annual per capita GDP growth actually fell by 0.7% in 2015-19, well below the emerging- and developing-economy positive average growth of 2.9%. And the pandemic has weakened the region’s growth prospects even further, with an uneven recovery that, in the absence of structural reforms, could lead to another “lost decade.”
The pandemic has also left Latin America with large fiscal imbalances and debt burdens. From 2019 to 2020, fiscal deficits surged from 4% to 8.7% of GDP (on average), and debt ratios jumped by nine percentage points of GDP. While debt ratios fell in 2021 – reflecting the withdrawal of COVID-related spending and higher inflation – rising interest rates and the associated tightening of global financial conditions mean that the fiscal challenge Latin America faces will intensify.
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