Can Latin America win in globalisation?

Speech by Mr Alexandre Tombini, Chief Representative, Representative Office for the Americas at the BIS, at the JP Morgan investor seminar in Washington DC, 17 April 2024.

It is a pleasure to be here today. Thank you to Joyce Chang for the invitation.

Today I'll discuss four global megatrends, and what they mean for Latin America. I'll then discuss domestic strengths and weaknesses that countries must grapple with. Finally, I'll close with some thoughts on the policies to help Latin America win in a more globalised economy.

Global megatrends: challenges and opportunities

Latin America stands at a crossroads in the era of globalisation. Global megatrends present countries with both challenges and opportunities. Understanding these megatrends is crucial for assessing Latin America's prospects in the global economy.

First, the energy transition

One of the defining challenges of the 21st century is the shift from fossil fuels to green energy (Americo et al (2023)). This will have profound macroeconomic effects. In Latin America, the use of fossil fuels is still pervasive, but the use of renewable energy is rapidly increasing. The region benefits from a rich supply of renewables including biofuels and hydroelectric, solar, wind and geothermal power. It is also rich in minerals like lithium – a crucial input for electric vehicle batteries. Investing in renewable energy infrastructure can not only address environmental concerns; it also offers economic benefits, including job creation, energy independence and an improvement in current account balances. In addition, a green transition can also reduce the region's vulnerability to the effects of climate change while opening new, future-oriented market opportunities.

Second, the demographic transition

Latin America has a still young population compared with most other regions of the world – but it is now ageing fast. Most economies' demographic dividend is coming to an end. This means that there are fewer active workers to support a growing number of dependents. An ageing population poses challenges such as increased healthcare costs, growing pension expenditures and a shrinking workforce. However, there are opportunities to mitigate these challenges, for instance enhancing female labour force participation, promoting formal employment and implementing gradual reforms in pension and healthcare systems. This can include raising the retirement age and promoting employment by older workers. These measures can alleviate strain on government budgets while ensuring fair access to healthcare and sufficient pension provisions.

Third, digital transformation

Digital transformation continues to make headway because of greater connectivity, wider adoption of digital technologies and sizeable growth in digital services. Latin America has witnessed rapid digitalisation, particularly in the financial sector and payments. Successful partnerships between the public and private sector – the former providing the infrastructure and the latter driving innovation – have resulted in a heyday for retail fast payment systems (Frost et al (2024)). This has boosted financial inclusion, promoted competition and increased overall economic well-being. Yet significant gaps still exist in the use of, and access to, digital technologies. Ensuring widespread access to digital infrastructure and fostering digital literacy remain critical for inclusive growth. Research conducted with BIS colleagues (Aguilar et al (2024)) shows that greater use of digital payments may be related to greater growth and productivity and to a reduction in informality.

Fourth, geopolitical and economic fragmentation

The increasing frictions between the great powers are having reverberations across the globe. Latin America finds itself in a position where it can leverage geopolitical shifts to its advantage. The region may benefit from nearshoring or friend-shoring as companies seek to diversify supply chains and mitigate risks. However, the prospect of a divided world presents risks, as Latin America could become ensnared in geopolitical rivalries and economic sanctions.

Domestic strengths and weaknesses

Strengths and achievements

Latin America is buoyed by substantial progress in strengthening macroeconomic and financial stability made over the past two decades (Tombini et al (2023)).

Since the late 1990s, Latin American countries have undertaken significant reforms to fortify their macro-financial stability frameworks. These measures included strengthening financial regulation, enhancing capital buffers, consolidating fiscal accounts, granting central banks greater autonomy and opening trade and financial accounts. The latter helped to gradually integrate their economies in the era of globalisation. By enshrining fiscal discipline with fiscal responsibility laws and strict limits on monetary financing, authorities have fostered a more resilient economic environment.

On the monetary side, central banks adopted inflation targeting and renounced exchange rate pegs. This provided clarity and stability to monetary policy frameworks across the region. These measures have enabled many Latin American economies to effectively deploy countercyclical macroeconomic policies in response to global shocks.

Challenges ahead

However, despite these achievements, Latin America faces several pressing challenges that demand sustained attention and concerted action (Tombini (2022)). Bringing inflation back to target remains a priority, as the "last mile" of the road to achieving targets has proven challenging. Fiscal authorities face challenges, too, in the face of higher sovereign debt levels after the pandemic and ageing populations. Fiscal prudence is needed to prevent future debt crises and volatile capital flows (Aguilar et al (2023)). Given limited fiscal space in most countries, improvements in the quality of public expenditure and of tax systems are paramount. By rebalancing the tax mix, Latin American economies can achieve more just and efficient tax systems and reduce income inequality.

In the medium term, a key means to improve debt sustainability is to promote economic growth. Yet Latin America's output and productivity growth have been lacklustre in recent decades. This poses a significant policy challenge. The reliance on fiscal and monetary stimulus since the Great Financial Crisis has reached its limits, necessitating a shift towards structural reforms to support sustainable growth (Carstens (2022)). Investment in human and physical capital, and the adoption of new technologies, will be vital to drive productivity and output growth in the years ahead.

Need for reforms to the strengthen the supply side

Achieving higher growth requires comprehensive reforms, particularly in education, infrastructure and institutional frameworks. Improving the quality of education and incentivising formal employment can boost productivity. Similarly, investments in infrastructure, including transport and energy systems, are essential to underpin trade and foster economic development. Further development of capital markets in Latin America can also help. Compared with emerging market economies in Asia, capital market development is still lagging in our region, despite recent progress.

Moreover, strengthening institutions, promoting political stability and the rule of law and fostering competition are crucial to support domestic and foreign investment. Reducing income inequality is also key, given its implications for social stability and access to opportunities.

Navigating the path to successful globalisation

Overall, Latin America's success in globalisation hinges on its ability to adapt to and capitalise on global megatrends – namely the energy transition, population ageing, digital transformation and geopolitical and economic fragmentation. At the risk of creating a very tall order, let me discuss some policies that can specifically address these megatrends.

First, policymakers must prioritise investments in renewable energy infrastructure to drive sustainable development and capitalise on the energy transition.

Second, addressing demographic challenges requires targeted policies to harness the potential of the working age population while ensuring adequate support for retirees.

Third, embracing the digital transformation entails fostering innovation ecosystems, expanding access to digital technologies and enhancing digital skills training. Governments and businesses must collaborate to bridge the digital divide and unlock the full economic potential of the digital economy.

Fourth, in the face of geopolitical and economic fragmentation, Latin America must pursue a strategy of diversification and resilience. Strengthening regional integration mechanisms in the Americas can enhance economic cooperation and mitigate the risks of isolation in a divided world.

But Latin American countries are not alone – they have one another. In particular, the green transition presents several opportunities to promote better collaboration and regional integration. Moreover, fostering diplomatic relations with multiple global actors can provide Latin America with greater flexibility and leverage in navigating geopolitical tensions.

Conclusion

Latin America possesses inherent strengths and opportunities that position it to thrive in an increasingly interconnected world. Yet realising its potential requires bold leadership, strategic investments and concerted efforts to address pressing challenges. If Latin America embraces the opportunities of globalisation, it can emerge as a dynamic and resilient player on the global stage.

References

Aguilar, A, C Cantú and R Guerra (2023): "Fiscal and monetary policy in emerging market economies: what are the risks and policy trade-offs?", BIS Bulletin, no 71.

Aguilar, A, J Frost, R Guerra, S Kamin and A Tombini (2024): "Digital payments, informality and productivity", BIS Working Paper, forthcoming.

Americo, A, J Johal and C Upper (2023): "The energy transition and its macroeconomic effects", BIS Papers, no 135.

Carstens, A (2022): "A story of tailwinds and headwinds: aggregate supply and macroeconomic stabilisation", speech at the Jackson Hole Economic Symposium, 26 August.

Frost, J, P Koo Wilkens, A Kosse, V Shreeti and C Velásquez (2024): "Fast payments: design and adoption", BIS Quarterly Review, March.

Tombini, A (2022): "Don't take resilience for granted", in The Bulletin, OMFIF, autumn.

Tombini, A, A Aguilar, J Frost, C Upper and F Zampolli (2023): "Central banking in the Americas: lessons from two decades", in A Tombini, A Aguilar, J Frost and C Upper (eds), Central Banking in the Americas: lessons from two decades, Bank for International Settlements.