Latin America and the Caribbean in the 1990s.

After a decade of economic adjustment and reform, many countries in Latin America and the Caribbean are enjoying their best economic prospects in years. But the reforms must be sustained and, in many cases, deepened if the remaining challenges facing these countries are to be met.

The first half of the 1990s has seen a significant change in the direction of economic policy and major accomplishments in many countries in Latin America and the Caribbean. To be sure, much had been achieved in the initial phase of adjustment that followed the onset of the debt crisis in 1982. Many countries reduced external imbalances, slowed the growth of external debt, and developed cooperative approaches with creditors to regularize their debt situations. There was less success in reducing inflation and restoring economic growth, however. In the late 1980s, a consensus began to emerge in most of the countries in the region that a firmer commitment to lasting reforms was needed to achieve a higher growth path with price stability.

Governments began tackling fiscal imbalances in a lasting way and reduced the involvement of the public sector in the economy. Controls on interest rates and prices, and cumbersome exchange rate restrictions were abolished, and import and industrial licensing schemes were dismantled. Tax systems were made more efficient, and trade and financial sector liberalization proceeded rapidly. These reforms eliminated serious distortions in relative prices and set economies on a course that rewarded efficiency.

The new strategy has produced important qualitative as well as quantitative benefits. Growth has rebounded and inflation rates have been sharply cut, but the wide-ranging structural reforms undertaken in a number of countries have also changed the way both domestic and foreign investors view these countries' long-term economic prospects. To make the most of the progress achieved, countries in Latin America and the Caribbean need to deepen the reforms already begun. Achieving higher living standards will require a significant improvement in national savings, and inflation is still too high in many countries. There is also scope for reorienting public expenditure to make more resources available for social programs, as well as for further reducing the role of the public sector in the economy to improve the climate for private sector activity.