Despite the onslaught of illiberal populism and a new wave of toxic economic statism across countries in Latin America and the Caribbean, there seems to be a newfound optimism emerging about the region’s economic future.
In 2023, Latin American and the Caribbean (LAC) economies are projected to grow by over 1.6 percent—far below their real potential, but up from earlier estimates.
Economic growth flows from a strong market, open trade, and robust activity in the private sector, and there are countries which have embraced a resurgence of free-market alternatives in LAC countries. The post-pandemic tourism recovery and a rebound in global trade—in part due to China’s reopening—are two reasons to adopt an optimistic view about economies across the LAC region. In certain cases, the public sector has played a pivotal role in alleviating the burden of taxes and regulations, with some elected officials favoring market activity over government bureaucracy.
Consider Brazil, where the Supreme Court is expected to validate the prior privatization of power company Eletrobras, despite opposition from the country's new leftist government under President Luiz Inacio Lula da Silva. Brazilian officials are also working with the World Bank to privatize Sabesp, a water and waste management company currently owned by the state of Sao Paulo. Given that Brazil is home to the most state-owned enterprises (SOEs) in South America, the country has taken positive steps in recent years. The strengthening of its private sector in the region’s largest economy can only reap dividends for economic growth in the years to come.
But, in Brazil and across the LAC region, significant barriers remain. While there are notable opportunities for LAC economies to seize through market-oriented reforms, obstacles such as bureaucratic largesse and poorly defined property ownership rights cannot be overlooked. Regional economic growth came out to nearly four percent in 2022 and exceeded seven percent in 2021 (which, admittedly, was a rebound year), suggesting that 2023 could bring some negative momentum. That is a cause for concern, but also a sign of the urgent need for a new wave of reforms focused on facilitating everyday trade, business, and productive investment
One key challenge for the LAC region is its high level of public debt, which amounted to 60 percent of regional gross domestic product (GDP) in 2022. The outstanding obligations of LAC economies inevitably increase the cost of debt servicing (interest payments and amortization), straining already strained public resources. The higher the government’s debt burden, the more limited it is investing in critical areas such as health, infrastructure and education.
As the recently published Latin America Macro Vista Report suggests, assuming the region’s projected economic growth, LAC economies face an increasing debt trajectory, with their overall debt-to-GDP ratio projected to reach 69 percent by 2025. Even if a more optimistic growth scenario is assumed (three percent for the following three years), the LAC region will still need to cope with rising debt, albeit more moderate in scope.
Another fundamental challenge for the entire region is the need for greater progress toward trade openness. LAC countries still have some of the most closed economies among the world’s emerging economies, with high tariff rates and low trade flows. By diversifying their trade partners and opening up to the world, LAC economies can enhance their investment possibilities and achieve their long-term development goals. Again, Brazil’s recent experience with divesting onerous state-owned concerns can be a blueprint for its neighbors to implement as well.
Whether and to what extent the LAC region taps into its trade potential will have outsized impacts on the rest of the world. U.S. trade, for instance, is inextricably linked to the success of LAC partners. American imports from LAC countries translate to almost $380 billion per year. Mexico remains America’s top trading partner (ahead of Canada and China), with U.S. exports to Mexico accounting for over $275 billion—a roughly 30 percent increase between 2020 and 2021. More than 15 percent of total U.S. exports to the world went to Mexico, while imports from Mexico amount to over 13 percent of America’s global import total.
This data underlies the recent enthusiasm with “near-shoring” and the opportunity to integrate supply chains “close to home.” But the large potential investment flows that could accrue from re-shoring different entrepreneurial ventures, plants, hardware, and other concerts requires a credible regime that respects long-term commitments and contracts, as well as a substantial investment in infrastructure and the development of qualified human capital. The entire region could reap a positive windfall if pro-market reforms are implemented in different policy frameworks.
U.S. policymakers will be watching eagerly as their LAC counterparts continue to implement these key reforms. It is essential that governments prioritize even greater economic freedom, respect for the rule of law, and open trade, rather than a reversion to centralization. The stronger the market and investment climate in Latin America and the Caribbean, the better the economic outlook for the entire Western Hemisphere.
Dr. Roberto Salinas-León is the Executive Director of Atlas Network’s Center for Latin America. The views expressed are the author’s own.
