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This report introduces a new World Bank publication which will review and analyze on a yearly basis the most important developments in Latin America and the Caribbean (LAC) during the preceding 12 months. This year's report places emphasis on the Mexican peso crisis, its impact and the challenges that lie ahead. It contains a detailed discussion of the causes of the Mexican crisis, of the March 9 adjustment program, and of the likely effects of this episode on some of the largest countries in the region. It presents an analysis of the main economic and institutional challenges for LAC in the years ahead, as well as medium- and long-term growth prospects. The report states that leaders from a growing number of countries in the region have concluded that deepening reforms--and doing so more rapidly--is the only way to: (i) counter the skepticism that emerged among international financial analysts after the crisis and, more importantly, (ii) to move firmly toward prosperity and social harmony. Rebuilding the state and reducing poverty and inequalities are critical for the consolidation of the reforms that have already been advanced as well as for future growth. Top reform priorities now include raising domestic savings rates, encouraging private investment in infrastructure, reforming the labor codes and education systems, and deregulating and de-bureaucratizing lower levels of government. In addition, new institutions must be created to perform efficiently those tasks that the private sector cannot undertake, such as the maintenance of law and order, the provision of basic social services to the poor, the establishment of modern, independent, professional regulatory bodies, and the provision of basic infrastructure. The report projects that if a set of plausible conditions for deepening the reform process is met, the region will grow, on average, at rates in excess of 6 percent per annum between 1998 and 2005, possibly leading to medium- and long-term sustained economic growth in LAC.

Publisher: World Bank

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