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IDB’s Iglesias: Latin America should use recovery to prepare for eventual adjustments in industrialized economies

LIMA, Peru – Latin America should take advantage of its budding economic recovery to address political instability and social discontent and prepare for the impact of eventual adjustments in industrialized nations, particularly the United States, Inter-American Development Bank President Enrique V. Iglesias said today.

In his opening speech for the 45th Annual Meeting of the Boards of Governors of the IDB and the Inter-American Investment Corporation, Iglesias said the region’s economy could grow by around four percent this year, after five years of disappointing performance.

However, he added, this turnaround rests largely on the rise of key commodity prices, the growth in industrialized nations, the dollar’s weakness vis-à-vis other major currencies and unusually low international interest rates.

“Externally driven improvements in an economy are rarely long-lived, as the region’s experience and world history can attest,” Iglesias said. “Sooner or later we can expect to see adjustments.”

Latin American and Caribbean countries should use this favorable phase to consolidate the reforms that have worked well, correct those that have fallen short and press ahead with pending reforms in order to increase economic efficiency and ensure a more equitable distribution of its benefits, he added.

Iglesias also voiced concern over the political turbulence that has hit some countries in the region, a sign of popular discontent with how democracies are working and the results of economic reforms.

“While the fruits of economic stabilization and reined-in inflation were shared across a broad spectrum of the population, reform and liberalization policies have not always distributed their costs and benefits equitably,” he said.

The IDB will continue to study closely who stands to benefit from its programs before it starts supporting reforms, Iglesias said, in order to design mechanisms to lower the risk of a few interest groups “capturing” disproportionate shares of the fruits of growth.

Prudence, equity and integration

In order to cushion the impact of eventual changes in international economic conditions, Latin American and Caribbean countries should manage this recovery period prudently, increase the social dividends for groups that suffered the most in recent years and strengthen its competitiveness and its capacity to negotiate in international forums.

Among the pending items on the region’s economic agenda Iglesias listed the need to bolster public finances, improve the foreign debt profile, strengthen financial systems and generate a favorable business climate.

These tasks will require efforts on the part of countries as well as of the international community. Iglesias pointed out that the IDB is studying with the World Bank and the International Monetary Fund a new methodology for treating spending on infrastructure in setting targets for macroeconomic programs. This could create more fiscal headroom for increasing public sector investments, boosting the region’s economic potential.

On their part, governments must win investors’ trust by refraining from triggering uncertainty by making unilateral changes to ground rules and agreements.

Regarding the social agenda, the region should modernize labor laws to encourage job creation, boost the efficiency of social services like education and health, promote social inclusion of indigenous peoples and Afro-descendants, and encourage citizen participation in making decisions on public policies.

Iglesias also said he trusted Latin American and Caribbean countries would press ahead with their negotiations to establish the Free Trade Area of the Americas, even though there are unresolved issues stemming from disputes over farm subsidies and trade barriers in industrialized nations.

The IDB, he added, is ready to assist borrowers in their integration efforts, from the negotiations of agreements to the implementation of structural reforms countries will have to carry out to extract full benefits from trade liberalization, reduce its costs and contain its impacts.

Support can range from strengthening institutional capacity for trade negotiations to competitiveness, basic infrastructure, customs and tax reform, and assistance for sectors adversely affected during the transition to free trade.          

Internal affairs

Regarding the IDB, Iglesias told the governors that the new capital sufficiency policy has helped preserve the Bank’s sound financial base. By virtue of its assets, the IDB charges borrowers the lowest interest rates among multilateral banks.

He also highlighted the steps taken over the past year to strengthen the IDB’s internal controls against fraud and corruption, as well as to align its governance rules with internationally recognized best practices.

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