Latin America Disagrees with World Bank Assessment of Region

21 June 2000

By Gumisai Mutume

Perceptions of economic insecurity run high in Latin America and the Caribbean despite assertions by the World Bank that the region has emerged from the 'lost decade' of the 1980s and holds out better opportunities for its people. With the exception of Jamaica and Venezuela among countries where information is available, the World Bank says the region has seen growing consumption patterns and Chile and El Salvador are the star performers.

On average, real per capita income as measured by gross domestic product per person grew about 1.5 percent per year in the region during the 1990s compared to a contraction of 0.7 percent during the 1980s.

But Latin Americans are not convinced and there is growing unease about the social impact of liberal economic policies introduced from the mid- 1980s. These reforms have opened up their economies to speculative capital which tends to shift where profit earnings are highest. Jobs often follow.

The 1990s saw a radical change in policy in many Latin American countries away from the protected government-led development model to reliance on market forces in the context of a global economy. Latin Americans pine for the past.

In a cross-country survey by the World Bank in 1999, nearly two- thirds of respondents said their parents had lived better, and less than half thought their children would have better lives than themselves the sixth Annual World Bank Conference on Development in Latin America and the Caribbean held here this week heard.

The Jun. 19-21 meeting noted that as a result of perceived risks to job security and poverty many people in the region are demanding greater spending on unemployment insurance especially given the boom and bust cycles that have been hitting the regional periodically.

Mexico's Tequila crisis of 1994-5 and the world fallout from the East Asian and Russian crises in 1997 and 1998 punctuated regional growth with financial turmoil. Argentina, Bolivia, Chile, El Salvador and Peru grew faster in the 1990s than in previous decades while Ecuador, Haiti, Jamaica, Paraguay and Venezuela witnessed declines.

"Workers feel there is much greater volatility ... that trade reforms have loosened up the labour market and the regulations that protected them," says Bill Mahoney a World Bank economist. "Yet wage volatility is now less for most countries in the region than it was during the 1980s."

What is worrying economists is that high degrees of uncertainty tend to discourage growth-enhancing long-term commitments such as investment in physical and human capital.

"The perception about the insecurity in the region has a lot to do with the major technological changes taking place," says Brazilian government representative Edward Amadeo. " There is also the change in the relationship between the state and society, and the middle class especially, feels very vulnerable."

The World Bank, however, told the meeting that despite negative perceptions, the region has benefited from structural adjustment with early reformers such as Argentina and Chile doing best while those slower off the block such as Ecuador and Venezuela are trailing.

A new World Bank report released at the conference and titled 'Securing Our Future in a Global Economy' notes that in Latin American and the Caribbean social spending has grown dramatically since the 1980s but governments have tended to raise and reduce social expenditure in concert with the boom-bust cycle. "When government support for schools and health care for the poor is most desperately needed, it typically faces the toughest cuts," notes the report. And during a boom, when incomes rise as fast among the poor as among middle and upper classes social spending rises more than proportionately, reaching its apex when it is least needed.

The report says Latin American and Caribbean governments can best help ease the impact of economic shocks by helping families invest in education and health, to prevent hard times from eroding human capital.

"Governments need to moderate these gyrations, keeping spending under control in good times to build the creditworthiness and reserves they will need to finance schools and health care in bad times," says David de Ferranti, the World Bank's Vice President for Latin America and the Caribbean.

The report is the Bank's major annual study on Latin America and the Caribbean. It stresses sound domestic macro-economic policies, strong financial institutions and income support programmes as key to strengthening the strategies employed by individual households to cope with recessions.

While the study finds that economic volatility has not increased in Latin America and the Caribbean in the 1990s compared to a decade earlier, the region's economies remain more volatile than those of industrialised countries and East Asia especially with respect to terms of trade and capital flows.

This is partly because many Latin American and Caribbean countries depend heavily on commodity exports such as oil, minerals, coffee and food whose prices fluctuate widely. More importantly, weak financial institutions and slender ties to developed financial markets have been important factors too, leaving countries vulnerable to sudden swings of sentiment among foreign investors notes the study.

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