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Latin America and the Caribbean is a region of small open economies and global factors have a large impact on the region’s economic progress.
As discussed in the 2012 Latin American and Caribbean Macroeconomic Report, the region survived the Great Recession relatively well and appears to have gained ground in terms of resilience to negative shocks. However, global growth is likely to be suppressed below potential in the coming years, real commodity prices may decline, and trade growth is expected to slow; this will have a dampening effect on growth in the region.
Growth theory remains an area of controversy. In an influential paper entitled, “Was Prometheus Unbound by Chance? Risk, Diversification and Growth”, Daron Acemoglu and Fabrizio Zilibotti argued that developing countries that may not be able to fully diversify risks are likely to have limited capital accumulation and more variable growth patterns. Some lucky countries, however, may escape this stage and develop faster; Prometheus may be unchained by chance.
But perhaps policymakers can also help to break Prometheus’ chains. This report argues that there is limited space for traditional fiscal and monetary macroeconomic policies and countries should consider more structural reforms. The report presents evidence of great potential to enhance growth in the region by reallocating existing resources. While all economic projections are subject to uncertainty, given lower expected growth in the world economy, governments would do well to pursue growth enhancing reforms and attempt to free their economies with specific policy actions, rather than simply relying on chance.
Global growth projections have waned since last year and growth may be suppressed below potential for several years to come. Lower global growth will, all things being equal, imply lower growth in Latin America and the Caribbean. At the same time, clear limits to the potential use of monetary and fiscal policy measures pose another constraint. Consequently, countries should consider further structural reform measures to enhance economic prospects and to escape suppressed global growth. If all countries pursue reforms to enable growth to accelerate by 1.5% on average, then the effect on the region as a whole may reach 2.3% additional growth per annum.