ECLAC says region at development crossroads

Urgent and fundamental changes in governments’ policies on spending and taxation are required if economies in Latin America and the Caribbean are to experience inclusive and sustainable growth.

This warning has come from the Economic Commission for Latin America and the Caribbean (ECLAC), which has predicted a major slowdown in economic growth for the region next year, to reach just 1.3 per cent, following an estimated 3.7 per cent this year.

This is outlined in the regional Commission’s recently released annual Preliminary Overview of the Economies of Latin America and the Caribbean 2022.

“In a context of external uncertainties and domestic restrictions, the countries of Latin America and the Caribbean will grow by 3.7 per cent in 2022, just over half of the 6.7 per cent rate recorded in 2021. It is estimated that the deceleration in economic growth will intensify in 2023, giving rise to a 1.3 per cent rate,” it said.

ECLAC is forecasting growth of 10 per cent for the Barbados economy this year and 3.5 per cent next year.

The report, which was unveiled by the Executive Secretary of ECLAC José Manuel Salazar-Xirinachs, noted that the monetary policy responses adopted worldwide in 2022, in a context of rising global inflation, have sparked greater financial volatility and increased risk aversion and have thereby prompted fewer capital flows to emerging economies, including those in the region. However, it added that the reduction in global inflation expected in 2023 will tend to moderate monetary policy rate hikes by the main central banks.

The report also highlighted that the labour market recovery process underway in the first half of 2022 did not allow for the elimination of the traditional gaps between men and women as it relates to labour force participation rate and unemployment levels.

“In addition, an increase in informality has been observed in 2022 along with a decline in real wages,” it added.

The Commission noted that “The region is at a development crossroads that calls for a fundamental change in the fiscal policy paradigm.”

According to ECLAC: “The current macroeconomic foundations, which are characterized by slow growth and low levels of investment and productivity, are too weak to drive sustained, sustainable and inclusive growth.

“Meanwhile, persistent structural development gaps – inequality, poverty, informality, and weak social protection, health and education systems, among others – are increasingly limiting the economic and social potential of Latin America and the Caribbean. At the same time, the region, already highly vulnerable, is facing the existential threat posed by climate change,” the report added.

“Active fiscal policy will be needed to confront these challenges, in order to create the conditions to boost growth and investment, guarantee social welfare and build resilience to climate change,” it said.

However, the commission noted that given the intensive investment required to realize this agenda, it was crucial for countries to implement measures to strengthen their fiscal capacity and to incentivise greater private sector participation in development.

“In turn, a stronger fiscal sustainability framework will be essential to ensure the viability of the public spending required to promote structural change in development patterns. The framework should prioritize domestic resource mobilization, in particular through public revenues, which have historically been insufficient to meet the demands of public spending,” it said.

ECLAC noted that tax collection in the region was low compared with that of the countries that are members of the Organisation for Economic Co-operation and

Development (OECD) and with that of other countries with a similar level of development.

“Direct tax collection is low, in particular for personal income tax, which limits not only resource mobilization but also the redistributive power of the tax system as a whole. However, this framework must include and streamline efforts to encourage private investment, creating an institutional framework to adequately regulate tax incentives for investments that support emissions reduction, and to foster private green and social investment from national and international financial markets,” it recommended.

ECLAC acknowledged that the sharp slowdown in economic growth in the region has been accompanied by continued inflationary pressures, while cautioning that although inflation is not expected to accelerate, it will remain high in 2023 and therefore influence monetary policy measures, especially policy rates in the region.

“On the fiscal side, although the primary deficit has narrowed, debt levels are still high. Fiscal space may therefore be expected to continue to determine public spending patterns. Added to these macroeconomic complexities are a decline in creation of formal jobs, a rise in informality, stagnation or falls in real wages, drops in investment and growing social demands.

“All this puts pressure on macroeconomic policy, which must reconcile efforts to promote economic recovery through investment and job creation, on the one

hand, and to control inflation and pursue fiscal sustainability, on the other,” it said.