Regional Economy Poised to Grow, But English-Speaking Caribbean Vulnerable

Above: the World Bank’s headquarters in Washington

By the Caribbean Journal staff

The economies of Latin America and the Caribbean are poised to grow despite persistent global volatility, according to a new report from the World Bank.

The report, “Latin America Copes with Volatility, The Dark Side of Globalization,” finds that portfolio flows to the region have surged in the first months of 2012.

Investments from mutual funds in the largest seven Latin American and Caribbean countries, which fell markedly in the last six months of 2011, rose eight times in the first two months of 2012.

Current growth forecasts for the region as a whole stand at between 3.5 and 4 percent for the next two years, similar to that of East Asia.

According to the report, most English-speaking Caribbean countries are both highly exposed to external volatility and highly vulnerable, as their policy maneuvering room is severely limited by the countries’ size and openness as well as high levels of public debt.

“The problem is that this type of market-based, as opposed to bank-based, capital flows has not added to financial stability — as many had initially hoped. To the contrary, portfolio flows into and out of emerging economies tend to be pro-cyclical and seem to be increasingly [responsive] to global factors, rather than country-specific ones,” said Augusto de la Torre, the World Bank’s chief economist for the region. “International financial intermediation has tilted towards a herd behaviour that is focused on short-term horizons and where being able to exit rapidly dominates over patient analysis of long-term prospects.”

“In today’s financial world, more integration means more exposure to external volatility but not necessarily means more vulnerability,” he said. “The risks are not in how much you are exposed but, more importantly, in how little policy response capacity you have to cope with such unpredictability.”