intensity of the advanced countries. However, to achieve that, it must first close its endowment gap with that of the advanced countries. The strategy to get there is to follow its comparative advantage at each stage of its development. When firms choose to enter industries and adopt technologies that are consistent with the country‘s comparative advantage, the economy is most competitive. These firms will claim largest possible market shares and create the greatest possible economic surplus in the form of profits and salaries. Because of the competitiveness of its industries, re-invested surpluses earn the highest return, which allows the economy to accumulate even more physical and human capital over time. This dynamic can lead to a virtuous circle: it can upgrade the country‘s factor endowment structure as well as the industrial structure, and also make domestic firms more competitive in more capital- and skill-intensive products over time.

20. Latin American countries‘ middle-income trap is a result of their inability to continue the process of moving from low value-added to high value-added industries.

# **_What have been the main features of Latin America’s economic performance?_**

21. Since the financial crisis in many Latin American countries during 1998–2001, Latin America embarked on a new chapter in economic reform, resulting in macro-financial stability, relatively high growth rates and significant steps forward in achieving equitable growth. Driven by high commodity prices and capital inflows, growth rose above that in the G7 and also helped for the first time to reduce poverty and high income inequality. More than 70 million Latin Americans were lifted out of moderate poverty between 2003 and 2012 and at least 12 countries in the region experienced non-trivial declines in their income Gini coefficients (World Bank 2012b). In tandem, the middle classes expanded and, as a result, income inequality fell throughout the region. High growth was significantly driven by the commodities boom.

22. The effectiveness of Latin America's economic reforms since 2000 was evidenced by the resilience of its economies during the recent crisis. The region's recession was relatively shortlived, and with the exception of Mexico, remarkably mild, partly as a result of effective countercyclical monetary, fiscal and credit policies made possible as a result of the sustained macroeconomic stabilization since 2000. This macroeconomic stabilization was the result of stronger fiscal management, changes in exchange rate policies and sound financial sectors. Fiscal management improved as a result of the adoption of fiscal responsibility laws that supported consolidation of the budget, the strengthening of monitoring of contingent liabilities and the improvement of debt management. The adoption of more flexible exchange rate policies and inflation targeting also helped macroeconomic stabilization. In addition, stricter banking supervision supported the soundness of the financial system (Singh et al. 2005).<sup>6</sup> The high commodity prices, boosted by strong demand from large emerging markets during the global crisis, also helped.

23. However, the region‘s achievements in the area of macroeconomic stabilization and higher growth since the beginning of the decade are attenuated by the fact that Latin America‘s economies are increasingly dominated by natural resources in South America, while the

> 6 Prior to 2000, inflexible exchange rate regimes had often led to large capital inflows that reduced fiscal discipline, allowed unsound financing of deficits and fueled lending booms that ultimately led to banking crises.

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