Spotlight Latin America: Key trends and challenges for the region in 2018

The year 2018 is a particularly eventful one for Latin America. NAFTA renegotiations are ongoing, and trade talks between the South American trade bloc Mercosur and the European Union are reaching a critical point. Before the end of the year, six countries—including heavyweights Brazil, Colombia, Mexico, and Venezuela—will have held presidential elections. Peruvian President Pedro Pablo Kuczunski resigned yesterday ahead of a congressional impeachment vote over alleged ties with the Odebrecht corruption scandal. With Argentina holding the G-20 presidency, around 20,000 government representatives will gather in 10 different provinces for over 60 meetings to shape the global economic agenda. Finance ministers from across the continent are coming together this week to discuss collective solutions to the deteriorating humanitarian and refugee crisis in Venezuela.

What about the region’s medium- and longer-term challenges? Until mid-2016, Latin America faced a confluence of adverse external circumstances, including anemic growth in the U.S., Europe, and Japan, worsening terms of trade, an appreciating dollar, and declining capital flows. Since June 2016, a wave of political developments has added to Latin America’s woes. Advanced economies are witnessing a surge of political support for movements that promote illiberal protectionist and anti-immigration policies, threatening the pillars of the post-WWII rules-based international order. Meanwhile, Latin America’s potential growth has consolidated its decline, current account imbalances have widened, and fiscal space in many countries has contracted. With less flexibility of response than advanced economies, Latin America is especially exposed to the risks arising from the external policy environment.

Although sounder macroeconomic frameworks, increasing financial development, and broader adoption of flexible exchange-rate regimes relative to past decades have enhanced the region’s resilience to external shocks and offered slightly more room for maneuver, large internal and external imbalances remain. Critically, policymakers in the region must find a way to facilitate a smooth adjustment to less accommodative external conditions while: (1) making strides toward achieving long-term, inclusive, sustainable development; (2) preserving credibility in the long-term solvency of public finances, and (3) safeguarding the social safety nets instituted during the past 15 years. This policy tri-lemma must be addressed at a time when the political system in many Latin American countries has been severely weakened and delegitimized by years of lackluster performance and far-reaching corruption scandals.

With those challenges in mind, the Brookings Global-CERES Economic and Social Policy in Latin America Initiative (ESPLA) is releasing Spotlight Latin America, a new collection of essays outlining what Brookings experts and colleagues identify as key issues and priorities for the region in the upcoming year and beyond.

During the so-called “golden decade,” Latin American countries saw substantial increases in public spending that are socially and politically costly to reverse in the current low-growth environment. Carlos Vegh and Guillermo Vuletin explore under what circumstances fiscal deficits may be acceptable or even desirable, and ask whether Latin American countries ought to engage in fiscal consolidations.

In much of the continent, unfunded pension spending poses the single greatest threat to long-term fiscal sustainability. Augusto de la Torre and Heinz Rudolph analyze the root causes of the problems afflicting pension systems in Latin America and outline a reform agenda. The success of pension reforms will hinge largely on whether countries across the region are able to transition more workers from informal to formal labor markets.

But the problems caused by informality are not limited to pension reform. Santiago Levy argues that, in the case of Mexico, high informality creates widespread resource misallocation, which in turn lowers productivity and depresses demand for educated workers. This explains why the returns to education in Mexico have been decreasing for 20 years, even while the supply and the quality of educated workers has increased.

On the flip side, even if shortages of human capital are second to misallocation in constraining economic growth, Latin American countries still need to improve their education systems. Rebecca Winthrop and Adam Barton highlight how the region currently falls short and explore existing innovations with the potential for “leapfrogging” in education. Similarly, Emiliana Vegas looks to the success of Chilean education reforms to draw lessons for other countries in Latin America.

Latin America still boasts some of the world’s most closed economies. In a world of increasingly cross-border flows of goods, services, capital, and people, the region must find creative ways to leverage globalization and take advantage of emerging opportunities for further integration. Antoni Estevadeordal suggests that Latin America broaden and deepen its trade ties with Asia, which remains the world’s fastest growing region. Geoffrey Gertz argues that, contrary to popular belief, potential changes to NAFTA’s investment rules could actually be beneficial to Mexico. David Dollar sets the record straight on the magnitude and evolution of Chinese investment in Latin America. Dany Bahar and Ernesto Talvi explore how the continent can take advantage of its growing diasporas to improve competitiveness and productivity.

Finally, improving access and quality of public services remains a high priority for Latin America. Daniel Ortega takes aim at the conventional view of the relationship between police and society and addresses the challenge of improving police behavior. Jeffrey Gutman and Nirav Patel ask what Latin American cities can do to overcome spatial inequity and ensure equal access to opportunities.

While the range of issues discussed in this collection is highly diverse, our goal is not to cover all of the region’s salient themes. Rather, we aim for Spotlight Latin America to serve as a starting point for dialogue that will foster sound, evidence-based policymaking in the continent. It is our hope that the conversation will continue through the year and for years to come.