Roundup: Experts say LatAm countries need medium-, long-term economic reforms to overcome "middle income trap"
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E-mail Xinhua, June 22, 2019
SAO PAULO/BUENOS AIRES, June 21 (Xinhua) -- As many South American countries such as Brazil and Argentina still suffer from the middle income trap, experts have pointed out that medium- and long-term economic reforms are key to addressing the challenge.
The middle income trap is a situation where a country's economic growth slows after reaching middle-income levels as it loses the original competitiveness.
BRAZIL'S "ECONOMIC SPASM"
The Brazilian economy has been hovering between "Brazilian miracle" and "Latin America trap," said Paulo Dutra, a professor at the Armando Alvares Penteado Foundation, adding that short-term high-speed economic growth achieved by loose fiscal policy and monetary stimulus is unsustainable, and has burdened Brazil's development with heavy debts.
"Brazil's economic development has suffered from 'spasm.' Every once in a while, we'll conduct small-scale reform and adjust the public accounts of the government. However, the country will again lose control of its economic situation, ending up failing to draw foreign direct investment," Dutra said, adding that then the country will step from fast development period into recession.
This kind of cycles have occurred several times in the Brazilian history.
The most typical rapid growth period is from 1968 to 1973, which marked an average economic growth rate of 11 percent, according to data released by the World Bank. Consequently, this period is called "Brazilian miracle."
In recent years, Brazil has sunk into deep significant recession. Its economic growth rate was as low as minus 3.5 percent and minus 3.3 percent in 2015 and 2016 respectively, followed by a modest rise of some 1.1 percent in 2017 and 2018, according to the World Bank.
Besides, the World Bank has lowered its forecast for Brazilian economic growth in 2019 from 2.2 percent to 1.5 percent. Thus, the biggest country in South America has not yet got rid of the middle income trap.
To free itself from middle income trap, Brazil needs to conduct medium- and long-term reforms, which is the basis of economic growth, Dutra said.
Whether the Latin American country could achieve steady economic growth depends on how its pension reform will be put forward, and the extent of the opening up of its market by eliminating subsidies to its local industries to improve Brazil's competitiveness and attract investment.
ARGENTINA'S INSUPERABLE "CURSE"
After reaching middle-class income level in the 1970s, Argentina's economy has experienced repeated fluctuations and is currently faced with a sharp decline in the value of peso among other problems.
The middle income trap seems an insuperable curse for Argentina.
The South American country lacks political and economic policies based on long-term development considerations, said Pablo Salvador, an Argentine economist and professor of Cuyo National University.
In order to gain public support, the new government tends to magnify the problems left by its predecessor, and adopt completely different new policies, which will have a negative impact on the country's investment climate and its economic development, he added.
Economy-wise, high government debt levels, currency depreciation, and heavy economic dependence on U.S. dollars constitute another factor behind the middle income trap of the Latin America's third largest economy.
Historically, Argentina had to borrow large amounts of foreign debt due to imbalance of economic structure, decline in exports and insufficient investment, but the government did not use it to improve productivity. A debt crisis would thus occur when the Argentinian government could not borrow money easily during an economic downturn.
According to experts, Argentina's dependence on U.S. dollars and depreciation of peso have formed a vicious cycle. The overseas savings of Argentinian citizens are even several times the amount in the nation's central bank. Savings of citizens failed to help the country to boost productivity and meet challenges, while currency depreciation will give rise to a series of negative effects including inflation.
On social issues, Argentina failed to deal with such problems as the gap between the rich and the poor as well as social mobility.
High costs in employment costs, transportation costs and import, among other problems, have prevented the Latin American nation from moving out of the middle income trap.
In order to be freed from the middle income trap, Argentina should reform its tax, employment and financial systems, strengthen its internal market and support small- and medium-sized enterprises, said Agustin Salvia, director of the Social Debt Observatory of the Argentina Catholic University.
Besides, the government failed to make an accurate assessment of its financial situation when setting up its welfare system, which was meant to protect employees' rights but ended up becoming a heavy burden of the government and employers, thus triggering various social conflicts whenever there is inadequate or no provision of welfare. Enditem
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