The year 2018 is a particularly eventful one for Latin America. NAFTA renegotiations are ongoing, and trade talks between the South American trade bloc Mercosur and the European Union are reaching a critical point. Before the end of the year, six countries—including heavyweights Brazil, Colombia, Mexico, and Venezuela—will have held presidential elections. Peruvian President Pedro Pablo Kuczunski resigned yesterday ahead of a congressional impeachment vote over alleged ties with the Odebrecht corruption scandal. With Argentina holding the G-20 presidency, around 20,000 government representatives will gather in 10 different provinces for over 60 meetings to shape the global economic agenda. Finance ministers from across the continent are coming together this week to discuss collective solutions to the deteriorating humanitarian and refugee crisis in Venezuela.
What about the region’s medium- and longer-term challenges? Until mid-2016, Latin America faced a confluence of adverse external circumstances, including anemic growth in the U.S., Europe, and Japan, worsening terms of trade, an appreciating dollar, and declining capital flows. Since June 2016, a wave of political developments has added to Latin America’s woes. Advanced economies are witnessing a surge of political support for movements that promote illiberal protectionist and anti-immigration policies, threatening the pillars of the post-WWII rules-based international order. Meanwhile, Latin America’s potential growth has consolidated its decline, current account imbalances have widened, and fiscal space in many countries has contracted. With less flexibility of response than advanced economies, Latin America is especially exposed to the risks arising from the external policy environment.
Although sounder macroeconomic frameworks, increasing financial development, and broader adoption of flexible exchange-rate regimes relative to past decades have enhanced the region’s resilience to external shocks and offered slightly more room for maneuver, large internal and external imbalances remain. Critically, policymakers in the region must find a way to facilitate a smooth adjustment to less accommodative external conditions while: (1) making strides toward achieving long-term, inclusive, sustainable development; (2) preserving credibility in the long-term solvency of public finances, and (3) safeguarding the social safety nets instituted during the past 15 years. This policy tri-lemma must be addressed at a time when the political system in many Latin American countries has been severely weakened and delegitimized by years of lackluster performance and far-reaching corruption scandals.