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This paper presents estimates of potential output for all Central American economies. Our findings are that potential output growth has declined in recent years in most economies of Central America. Lower capital accumulation and TFP growth are accounting for most of this decline. Apart from Costa Rica, there are no indications of significant economic slack in 2015 in Central America. Looking forward, potential growth in most Central American economies is expected to continue at an average of 4 percent in the medium-term due to structural constraints to capital and employment growth, and low TFP growth. Increasing potential growth, thus, should be a policy priority and structural reforms must be directed at improving business conditions, product and labor markets, and enhancing the capacity for innovation.
Potential Output is a key factor for debt sustaintability analysis and for developing strategies for growth, but unfortunately it is an unobservable variable. Using three methodologies (production function, switching, and state-space), this paper computes potential output for CAPDR countries using annual data. Main findings are: i) CAPDR potential growth is about 4.4 percent while output gap volatility is about 1.9 percent; ii) The highest-potential growth country is Panama (6.5 percent) while the lowest-growth country is El Salvador (2.6 percent); iii) CAPDR business cycle is about eigth years.
Several countries in Latin America and the Caribbean are suffering severe economic downturns and the success of market-oriented reforms is being called into question. This report seeks to contribute to the debate by examining the nature of economic growth in the region. The aim is threefold: to describe the basic characteristics of growth; explain differences across countries and to forecast changes over the next decade.
The 2018 Macroeconomic Report, A Mandate to Grow, revisits the growth debate that has been raging in the region for the past half century. Viewing the debate from this long-term perspective allows for a focus on the structural factors that have prevented Latin America and the Caribbean from reaching the growth potential required to keep pace with faster growing regions and to fulfill the aspirations of its population.
In 2010, the Latin American and Caribbean region showed great resilience to the international financial crisis and became the world region with the fastest-growing flows of both inward and outward foreign direct investment (FDI). The upswing in FDI in the region has occurred in a context in which developing countries in general have taken on a greater share in both inward and outward FDI flows. This briefing paper is divided into five sections. The first offers a regional overview of FDI in 2010. The second examines FDI trends in Central America, Panama and the Dominican Republic. The third describes the presence China is beginning to build up as an investor in the region. Lastly, the fourth and fifth sections analyze the main foreign investments and business strategies in the telecommunications and software sectors, respectively.
Abstract: Accelerating economic growth in Central America, Panama and the Dominican Republic (CAPDR) remains an elusive task. While the region performed relatively well in the post-global financial crisis period, over the last five years obstacles to growth have become more evident and new challenges have emerged. In response, the region has strengthened macro-financial frameworks but more progress will be required to pave the way to sustained growth and prosperity. This book considers the structural factors underlying the region’s growth outlook and assesses its macroeconomic and financial challenges to help shape the policy agenda going forward. The book first identifies the structural determinants of growth in the region related to: capital formation; employment; demographic factors, including immigration; productivity; and violence. It then highlights the importance of creating fiscal space through the design and implementation of fiscal rules and mechanisms to increase accountability (better quality of public spending, adequate policies to reduce income inequality and sustainable retirement plans). Finally, it presents recent evidence on the importance of a supportive financial sector for growth (including through financial inclusion and development).
After a period of rapid economic growth associated with high commodity prices, the region had entered a phase of lackluster performance. Recent developments, including a new oil price shock, and the outbreak of the Covid-19 epidemic will push the region into recession. Many countries are struggling to contain the spread of the Covid-19 epidemic while avoiding a dramatic decline in economic activity. The report analyzes how to think about this tradeoff. It estimates the potential health costs, assesses the effectiveness of diverse containment strategies, and discusses how large the economic cost could be. The current crisis is unprecedented because it combines a fall in global demand, tighter financial conditions and a major supply shock. The response needs to consider how to socialize the losses, how to prevent a collapse of the financial sector, how to protect jobs and livelihoods, and how to manage and divest the assets that will inevitably end up in the hands of the state.
This Selected Issues note estimates Guatemala’s potential output and output gap using the production function approach, univariate statistical filters, and multivariate models based on the Kalman filter method. In the production function approach, potential output is modeled as a function of potential labor and capital inputs, and total factor productivity (TFP). Results are robust to different methodologies and suggest that its potential output growth is about 3.5 percent and the output gap is on average closed. Structural breaks in potential output were identified in 1994, 2003, and 2008, which coincide to the Mexican tequila crisis, the free trade agreement with the US, and the financial crisis. Going forward, it is critical to undertake structural reforms to strengthen capital, labor, and TFP growth in order to accelerate potential growth. Univariate statistical methods provide a simple measure of potential output. The production function approach also indicates that the absence of productivity growth is a significant barrier to potential output growth.
Was the postcrisis growth slowdown in Central, Eastern and Southeastern Europe (CESEE) structural or cyclical? We use three different methods—production function approach, basic multivariate filter, and multivariate filter with financial frictions—to evaluate potential growth and output gaps for 18 CESEE countries during 2000-15. Our findings suggest that potential growth weakened significantly after the crisis across most countries in the region. This decline appears to be largely due to stagnant productivity and weaker capital accumulation, which were associated with common external factors, including trading partners’ slow potential growth, but also decline in global trade and stalled expansion of global value chains. Our estimates suggest that output gaps in 2015 were largely closed in many countries in the region.