Economic Development

Q&A with Enrique García: The economic outlook for Latin America & emerging markets in 2016

February 17, 2016

Latin America

February 17, 2016

Latin America
Irene Mia

Regional director, Latin America and the Caribbean

In Irene Mia’s current role, she provides intellectual and strategic leadership to the regional editorial team within the The Economist Intelligence Unit’s (EIU) Country Analysis division, fostering intellectual debate and publishing high quality and timely forecasts, reports and articles on economic, political and business developments within the region. Previously, Ms Mia was director and senior Economist within the Centre for Global Competitiveness and Performance at the World Economic Forum and prior to that she worked at the headquarters of Sudameris Bank in Paris for a number of years, holding various positions in the international affairs and international trade divisions. 

Against the current backdrop of global volatility and an uncertain economic outlook for emerging markets and Latin America in particular, CAF- the Development Bank for Latin America and the London School of Economics, held their third annual conference in January to discuss shifts in global governance and the role of the Global South. The Economist Intelligence Unit sat down with Enrique García, CAF's president and CEO, to get his views on the outlook for the global economy and emerging markets this year.

The interview below has been condensed and edited for clarity.

Irene Mia: The global economic outlook for 2016 appears full of uncertainties with concerns centred around China's economic deceleration and global volatility. How do you see the year ahead and its main challenges?

Enrique García: 2016 has started amid much volatility, with notably China experiencing a new sell-off of the stock market and depreciation of its currency. China is decelerating from double digit annual growth rate and this is a reason of concern for commodity exporters, whose economic performance in recent times had been boosted by China’s sustained demand. These more challenging external conditions will constrain growth in Latin America, especially South America, but at the same time it is not a crisis of the magnitude experienced by the region in the eighties. It is more an opportunity to re-evaluate the development model which has been followed until now, based on static comparative advantages, and lay the bases for a new model which will be driven by dynamic comparative advantages (built on technology and innovation among others) and aimed at creating increasingly value added exports.

For this to happen, a number of issues need to be tackled. Investment in infrastructure (which is also a source of employment in an economic downturn) needs to duplicate from its current 3% averages in order to support the productive transformation described above. A strong strategic vision is needed, as well as the involvement of the private sector and foreign investors.

Education systems (in particular for secondary and tertiary education and vocational technical training) need to be overhauled to make sure the region has the talent it needs for the new model to work.

Last but not least, public and private institutions, as well as the rule of law need to be reinforced in the region and on a related note, it is essential that governments and civil society agree on long term priorities which can inform a strategic vision that should not change with every change of government.

Irene Mia: Another potential challenge for emerging markets and Latin America in particular is the normalisation of monetary policy globally.

Enrique García: Yes, the period of unprecedented liquidity at very low interest rates which we have experienced in recent years is gradually ending. This highlights the need for developing countries to mobilise internal resources while improving access to capital. Additionally, development banks need to play a role in mobilising resources.

Irene Mia: Focusing on emerging markets, BRICS' Brazil and China are both facing important domestic challenges. What is your view on their outlook?

Brazil finds itself in a very delicate position, having to battle with a host of political and economic challenges. The political side is particularly problematic. The question is how to create a consensus across the political spectrum and civil society on the need for economic stabilisation and how to reactivate growth and keep it going at a reasonable rate. I'm an optimist though. Brazilians have historically had a better ability to reach compromises and mediate on issues which initially have appeared hard to overcome, in comparison to the rest of the region. The fact that judicial power has proven its full independence is also a positive factor. The stabilisation of Brazil is important for Latin America given its economic and political weight in the region.

My outlook for China is also fairly positive, despite concerns about its economic deceleration and its currency. Its deceleration is the consequence of a political decision to balance the growth model away from the past over-reliance on exports and investment, and towards internal consumption. An adjustment is ongoing but I don't expect it to have dramatic consequences.

I would stress once again less favourable conditions should be an incentive for emerging markets to re-think their growth strategy and improve their domestic fundamentals of competitiveness. Reinforcing institutions and the rules of the game are a big part of the solution.

 

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