March 11, 2002

IDB PRESIDENT IGLESIAS PROPOSES ACTIONS TO REKINDLE ECONOMIC GROWTH IN LATIN AMERICA AND THE CARIBBEAN At the opening of the Annual Meeting of the IDB’s Board of Governors

FORTALEZA, Brazil - Inter-American Development Bank President Enrique V. Iglesias today recommended that Latin American and Caribbean countries undertake a series of actions to revitalize economic growth, mitigate the social costs of stagnation and reduce the region’s exposure to external financial turmoil.

In a speech opening the 43rd Annual Meeting of the IDB’s Board of Governors, Iglesias acknowledged that the region’s growth rate would probably be zero this year and said a modest recovery could take place in 2003.

Given that outlook, Iglesias proposed measures to cushion the social consequences of the region’s lackluster economic performance and to increase its competitiveness, promote domestic savings and create appropriate conditions for investments.

“An improvement in the international economic cycle will certainly be a key factor in the resumption of growth in our countries, but it cannot be the only factor,” he told delegates from the IDB’s 46 member countries. “It is necessary to accelerate actions in certain areas of the present economic policies.”

Among steps required to energize Latin American and Caribbean economies, Iglesias listed the development of regional and local capital markets and the strengthening of the legal frameworks and regulatory agencies that govern them. These measures would improve the region’s business climate and foster savings and investments.

Iglesias also underscored the importance of preserving the macroeconomic stability achieved over the past decades. “Keeping inflation under control, especially through responsible fiscal policies and orthodox monetary policies, is fundamental to this end,” he added.

As the lack of economic growth will raise poverty and unemployment levels, the IDB’s president proposed that countries consider the possibility of providing incentives for small- and medium-size enterprises and reinforcing their social safety networks.

“I am fully aware of the difficulties of launching such policies, given current fiscal constraints, as I am of the relative efficiency those government interventions might have, but in the present circumstances we already have an abundance of experiences in the region that should allow us to undertake these emergency measures to at least mitigate the impact on low-income social sectors,” Iglesias said.

While any decrease in Latin America and the Caribbean’s vulnerability to changes in the international business cycles will ultimately depend on a recovery of strong, sustained growth, Iglesias identified increasing domestic savings and diversifying exports as priority goals to protect the region from the effects of external volatility.

In that context, he suggested that Latin American and Caribbean countries step up their efforts to promote regional integration and to increase their participation in dynamic markets such as services and tourism in order to reduce their dependence on commodities exports.

Reforms under fire

Iglesias devoted much of his presentation to analyzing the deep sense of insatisfaction evident in vast sectors of civil society over the economic reforms launched over the past two decades and the process of globalization. Two out of three Latin Americans, he noted, harbor pessimistic views of their region’s prospects.

This discontent requires an objective and calm evaluation to understand its root causes, he added. As preliminary observations for a future evaluation of the results of the reforms, Iglesias listed the drop in the region’s hallmark high inflation, the initial boost of growth and the relative decrease in poverty levels as some of their favorable effects.

Although several studies have concluded that average Latin American income levels are higher today than they would be absent the reforms started in the 1980s, there is an ingrained opinion in the region that poverty and inequality have worsened.

Nevertheless, Iglesias added, the evidence available indicates that economic growth weakened after an initial burst, while poverty has remained at unacceptably high levels and reforms hurt people in the most vulnerable segments of the population.

Furthermore, preliminary observations show that the sense of despair is more widespread wherever reforms have failed or yielded mediocre and short-lived results. On the contrary, in countries that have made progress in modernizing their public institutions and achieved macroeconomic stability, higher growth rates and a greater integration with international markets, protests against reforms rise from sectors that have not seen their expectations fulfilled.

Iglesias added that the outcome of reforms also varied due to other factors such as the access to external capital flows and the coherence of fiscal, monetary and exchange policies pursued by governments. In countries where these conditions failed, reforms sparked unsustainable booms that were followed by fiscal imbalances and excessive levels of public and private debt.

“These early conclusions must be deepened and analyzed to really extract lessons from the rich experience of the past few years, leading us to address new areas of reform or modify the present ones to achieve the economic and social goals set when they were adopted,” he said.

Notwithstanding that assessment, Iglesias added, Latin America and the Caribbean will have to strive in their financial, labor, trade and taxation reforms, areas in which the state’s involvement is crucial for correcting so-called market failures and government failures. One of the issues that demands urgent attention is the weakness of public institutions, especially those that must regulate markets, supervise financial systems, collect taxes and boost competitiveness.

In order to be effective, Iglesias concluded, reforms require a cautious accumulation of political and social consensus, as well as a dose of humility on part of those responsible for carrying out these efforts. “By modesty I mean to say that we should not pretend to know as much as we sometimes have believed we knew,” he said. “There are no easy formulas for growth or to escape poverty. But there are lessons derived from successes and failures that must be adopted on a case-by-case basis, with leadership and perseverance.”