Overcoming Latin America’s Growth Frustrations: The Macro and Mesoeconomic Links

Whereas the moderate rates of economic growth of 1990–97 generated positive evaluations of Latin America’s reform efforts (see Edwards, 1995; IDB, 1997; and World Bank, 1997), the return to very slow rates of growth in 1998-2003 (a phenomenon that ECLAC characterized in 2002 as a new “lost half-decade”) brought an extensive reevaluation of these early assessments (ECLAC, 2003a; Kuczynski and Williamson, 2003). The new development strategy has been effective in generating export dynamism, attracting foreign direct investment (FDI) and increasing productivity in leading firms and sectors. In most countries, inflation trends and budget deficits have been effectively brought under control, and confidence in the macroeconomic authorities has increased. Nonetheless, economic growth has been frustratingly low and volatile, and domestic savings and investment have remained depressed. Overall productivity performance has been poor, largely as a result of the growing underutilization of both physical capital and labor. Increasing production and labor market dualism has become one of the most distinctive effects of the reform process, with the expansion of “world class” firms (many of them subsidiaries of multinationals) coinciding with increasing unemployment and labor market informality.