SAN JUAN – The Inter-American Development Bank (IDB) and the Inter-American Investment Corp. (IIC) held their annual meeting in the Bahamas this weekend. The gathering is a forum for discussion among the institutions’ governors, most of whom are finance ministers, presidents of central banks or other top authorities of the member countries. Representatives of multilateral financial institutions, development agencies and private banks also attended. Participation at the meeting was by invitation.

The IDB conducts research and provides policy advice, technical assistance and training to public and private sector clients throughout the region, and released Sunday its yearly Latin American and Caribbean Macro Report. It suggests how policymakers can reduce risks and protect social gains.

Among the many topics covered, the report puts the region’s activity in the context of global developments, highlighting its risks. Its chapters delve into everything from the region’s weaker activity and inflation to its output and unemployment, and concludes with policy suggestions for growth.

In his forward, IDB Chief Economist José Juan José Juan Ruiz says the region’s growth is expected to be negative this year and then to recover relatively slowly, adding that countries should review both spending and taxation.

“Time to Act: Latin America and the Caribbean Facing Strong Challenges” argues that more private investment is needed and that the region isn’t making use of local trade agreements and should work “towards a true regional common market.”

Weak global growth, a fading demographic boom, lower commodity prices and deteriorating fiscal positions are underscoring the urgent need for major reformulations in fiscal policies of Latin America and the Caribbean, according to the macroeconomic report.

Most countries need to trim fiscal spending. However, the report argues against cutting capital investments but rather undertake more fundamental reforms.

The report notes that commodity prices have returned to their levels of the 1990s and are unlikely to bounce back anytime soon.

The region will experience flat to slightly negative growth in 2016, the report finds. However, Ruiz notes that “the reality is heterogeneous. While the region as a whole faces negative growth this year, almost a quarter of the IDB’s 26 borrowing countries are registering growth of 3.5 percent or higher.”

Besides lower commodity prices, Latin America and the Caribbean region faces a demographic shock, too. An aging population and other demographic trends mean that in 2011-2020 the increase in the employment share may only contribute 0.6% to growth rather than 2% in the 2000s – a potential loss of 1.4 percent.

IDB reportThe upshot is that in the post-commodity boom period of 2014-2020, average annual growth is expected to be 1.7 percent, far below the 4 percent registered during the exceptional commodity boom of 2003-2013.

“Most forecasts predict only moderate increases for commodity prices,” said Andrew Powell, IDB’s principal economic adviser and the lead author of the report, “but we should note that commodity prices are virtually impossible to predict. Countries need to find better ways to manage commodity price uncertainty”.

There are additional downside risks. According to IDB calculations, every 1 percent in slower growth in China reduces growth in Latin America and the Caribbean by 0.6 percent. Every one percent reduction in the growth of the U.S. economy trims additional 1.5 percent off growth in Latin America and the Caribbean. “Adding China and the US shocks together will delay the region’s recovery by one year,” Ruiz said.

The report analyzes announced fiscal budgets of 15 countries. Revenue is expected to increase 1.1 percent while cuts amounted to 1.7 percent, of which one percentage point comes from reductions in capital expenditures, which will impact future growth.

There is an opportunity to rebalance spending in favor of public investment such as maintenance and infrastructure repair programs. Developing nations should invest at least 5 percent of GDP in infrastructure to boost growth. Over 2008-2013, the average for 16 countries in the region is 3.7 percent of GDP.

Better infrastructure will also help improve the region’s export performance, something that can be further helped by deepening regional integration to increase scale and allow firms to compete in global markets.

The report details fiscal reforms in four countries – Jamaica, Honduras, Mexico and Chile – that promote sustainability over the longer term.

The report also recommends trimming current spending by better targeting subsidies on gasoline, electricity and public transportation, which tend to leak to higher-income households. Targeting in conditional cash transfer programs can also be improved. Low international oil prices are an opportunity to levy more taxes on gasoline.

Read the full report here: https://publications.iadb.org/bitstream/handle/11319/7533/Time-to-Act-Latin-America-and-the-Caribbean-Facing-Strong-Challenges.pdf;jsessionid=4CD070729E7491555ED9E86AC1960EFF?sequence=1