Lower growth puts pressure on inequality in Latin America

The countries of Latin America and the Caribbean have been facing different macroeconomic difficulties after the pandemic. According to the latest report from the Inter-American Development Bank (IDB), the region needs to address a triple challenge to achieve the aspirations of development and well-being of its populations.

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Among the challenges highlighted in the report, there is a social challenge, a fiscal challenge and, thirdly, a growth challenge. However, one of the great needs revolves around navigating a difficult path of volatility and slower growth.

According to the report, The region for this year could present a slowdown that awakens the specter of the deterioration of poverty and inequality. For this reason, they detail that it is a priority to avoid further losses and create conditions to recover.

Notably According to the entity’s estimates, in 2022 a growth of 3.9% was projected for the region; however, this behavior is not expected to be repeated in 2023, taking into account that the prospects for global growth are “bleak”In addition, the central banks of the different countries worldwide have struggled to control inflation, increasing interest rates.

For this reason, the nations of Latin America and the Caribbean are facing a year in which global demand may be repressed, with high financial costs.
“In some countries that are still struggling to stabilize inflation, financing costs could continue to rise. In this context, the countries of the region still have room to maneuver through policy actions and avoid deeper economic contractions.they explain.

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Within the report, it is suggested that the nations of the region have to maintain or, failing that, tighten monetary policy to ensure that consumer prices return to the goals set by 2024, establishing this fact as a priority in the economic policy agendas.

However, the IDB also suggests that fiscal policies be accompanied by monetary ones, accelerating fiscal consolidation. “This is crucial to reduce risk premiums, financing costs, the neutral interest rate of monetary policy and generate fiscal space in order to support the policies that are so necessary to promote economic and social development,” they highlight.

According to the Bank, the current macroeconomic context of high inflation, added to high interest rates raises concerns about the dynamics of the future of workpoverty and inequality.
The report details that a sustained increase in food and energy prices increases poverty and reduces disposable income, as well as real wages.

“Since 2019, increases in poverty are closely associated with price increases in the food and energy index and much less correlated with changes in minimum wages”assures the IDB.
Thus, estimate that salary adjustments have been insufficient to overcome the effect of inflation.

“How wages adjust and to what extent they offset inflation is crucial to labor market and poverty dynamics”they say.

Taking a look at the behavior of the labor market, the IDB assures that it has improved compared to the levels of the pandemic. Thus, the improvement of this type of market has been accompanied by less poverty and inequality.

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However, state that it is important that fiscal policy focus on reaching the poorest sectors of the population to offset the impact they have sufferedwhile ensuring that a fiscal consolidation is carried out that is consistent with the monetary adjustment.

“Energy and food subsidies should focus on addressing the problems of poverty and inequality in the presence of commodity price shocks. Promoting investment in infrastructure, particularly by mobilizing private sector resources through public investment, is also a key policy to reduce poverty and inequality.says the analysis.

Finally, the bank also confirmed the need to reduce incentives for formality.

The region is facing a series of challenges, but at the same time various opportunities.
In that sense, It is estimated that the countries of Latin America and the Caribbean should have an efficiency in spending that can be achieved through better targeting of transfers and subsidies, and strategies to improve the quality of public investment.

On the other hand, coordination between policies must go beyond the fiscal and monetary context. “A key example is the negotiation of public sector wages”they say.

In general, 2023 will be difficult, given the complexity of the global scenario and the uncertainty. It is expected that due to integration, especially in financial terms, since the global cycle will influence the entire region.

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