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1. Introduction -- 2. Regional developments in 1995-96 -- 3. Troubling signs and systemic shortcomings -- 4. The tasks ahead: consolidating and deepening reform -- 5. Institutions and the search for the "new Latin American state" -- 6. Conclusion -- Appendix: Recent economic evolution in selected countries -- Tables -- Notes -- References

This paper is the second annual report by the Office of the Latin America and Caribbean Regional Vice President of the World Bank on the state of the region ' s economics. It focuses on the most important challenges the region will have to face in dismantling the old populist state and creating a new one, two elements which are essential in moving effectively toward recovery and take-off. The analysis provides a general overview of recent developments and addresses five systematic political economy issues related to the impending reforms and some of their most important ramifications. They are: (1) high real interest rates; (2) high and increasing unemployment rates; (3) low domestic savings rates; (4) a slowdown in exports growth; and (5) the need to rebuild the weakened state. The paper discusses the future of the reforms, and the need to consolidate macroeconomic stability and social sector policies. It emphasizes that improving the health, education, employment levels and wage rates of Latin America ' s populations is critical for economic recovery and political stability. In order to maintain or increase voter support for the reforms it will be necessary to achieve the following interrelated and concrete results: (a) to generate a significant revival of growth; (b) to consolidate the early achievements of the reforms, especially the virtual eradication of inflation; (c) to address some of the most pressing social concerns of the population, including the reduction or elimination of corruption, violence, and crime, and improvement in the delivery of social services, such as education and health; and (d) to reduce the extent of poverty and inequality. Achieving these goals will be possible only if the reform process includes the disassembly of the remains of the old populist structures, the creation of new institutions, and the reconstruction of the state.