Taxing Wealth for Equity and Growth

Latin America and the Caribbean (LAC) is close to winning the battle on inflation and turning the corner on the macroeconomic dislocations wrought by the pandemic. Monetary authorities in the region have managed the multiyear challenge at least as well as their counterparts in the advanced economies, yet another sign of competent macroeconomic management. Interest rates, both in the region and now in the United States, have been falling, relieving stress on households and banking sectors and offering some prospect of more vigorous economic activity.

Challenges remain, however, to redress fiscal imbalances and reduce debt, recover lost earnings power, and regain the advances in reducing poverty of the previous decade. Nor is there any prospect for substantially higher growth, which would help address those challenges. Investment, both public and private, remains depressed, and data suggest that the region is potentially missing the boat on “nearshoring” or “friendshoring,” the practice of bringing offshore operations to close or friendly countries. Both challenges point to a substantial agenda of growth-related reforms that have been put off for decades in infrastructure, education, regulation, competition, and tax policy which success in managing the post pandemic macroeconomic disequilibria provides an opportunity to now address. In the short run, the stubbornness of poverty and inequality is leading some governments to recur to take more direct measures, such as raising minimum wages as a means to support the poor—with both positive and potentially negative consequences if not pursued with caution. Concerns have also surfaced about one particular dimension of poverty—food insecurity and the cost of unhealthy diets.