SANTIAGO, Chile - Top financial officials of Latin American and Caribbean countries today analyzed the causes of their region’s poor economic performance and proposed strategies to weather the uncertainty generated in global markets by the sudden slowdown of the U.S. economy.
The seminar What is Holding Back Growth in Latin America? What can Governments Do? was opened by the president of the Inter-American Development Bank, Enrique V. Iglesias and featured top officials from Argentina, Brazil, Chile, Colombia, Jamaica and Mexico, as well as leading experts on Latin American economic development.
The forum organized by the IDB’s Research Department was held on the eve of the annual meeting of the Bank’s Board of Governors.
In his opening speech, Iglesias said that while Latin America had managed to grow slightly over four percent last year, that rate was insufficient to make a dent in its poverty and unemployment levels.
"Latin American leaders are very worried that growth will decrease again this year. In fact, the IDB and other institutions think that a 3.5 percent rate would be quite an achievement," he said.
While the IDB sees no signs of recession in the region and the economic fundamentals of most of its countries remain sound, Iglesias said, the new international conditions could hamper some Latin American economies.
The principal cause of the prevailing uncertainty is the slowing of the U.S. economy, which had been a locomotive for global growth in recent years.
The possible consequences of this drop were analyzed by the IDB’s chief economist designate, Guillermo Calvo, who argued that a recession in the United States would have disparate effects in financial and nonfinancial sectors of the region’s economies.
A one percent drop in the U.S. gross domestic product would imply an 0.4 percent decrease in Latin American output, on average, although countries with strong trade ties with the United States, such as Mexico, would fare worse than others. However, in the financial sector, a one percent reduction in U.S. interest rates would help Latin America boost its growth by 0.8 percent.
A steeper U.S. recession, if accompanied by a larger cut in U.S. interest rates, could have an even smaller negative impact on Latin America. An unusual scenario, Calvo suggested, in which the United States would catch a cold but Latin America would only sneeze.
Nevertheless, he underscored the worrisome increase in Latin American country risk premiums, reflected in the higher interest rates sovereign issuers must pay to place debt in international markets. Over the past three years the spreads between Latin American bonds and comparable U.S. Treasury bonds have doubled.
"This is a serious issue, and it is getting worse, despite the help provided by the Washington programs, as we call the (financial support) programs like the one Argentina secured recently, and the drop in U.S. interest rates", said Calvo.
The view from the region
Chile’s Finance Minister Nicolás Eyzaguirre said that he expected the adjustment of the U.S. economy to be relatively brief and voiced hopes that capital markets would learn to discern among countries in so-called emerging markets.
Nevertheless, he cautioned his colleagues to stand firm. "The world has become a less safe place for our economies," he said.
According to Eyzaguirre, if Latin American countries stick to solid economic policies, they would obtain both better results in their export markets and more favorable financial terms.
Governments should also brace themselves to withstand demands from populist and corporate interest groups that, in the event of a crisis, would press for measures that could jeopardize economic stability.
In order to strengthen confidence at home, he added, Chile was dealing with the new international conditions by reinforcing its fiscal policies, consolidating macroeconomic policies based on clear rules and deepening its capital markets, especially to help small- and medium-sized businesses.
Argentina’s Economy Vice Minister Daniel Artana explained the features of the program announced by his country on Friday to deal with a crisis of confidence and to help pull its economy out of a long recession.
The Argentine program seeks to ensure that the government will meet its fiscal goals and international commitments, while its structural measures are aimed at stimulating competitiveness and productivity, he added.
Artana, who forecast that Argentina could resume growth in two or three quarters, pointed out that his country had managed to overcome all kinds of crises in the past. "Argentina’s economy has been able to resist the seven plagues of Egypt, all at one time," he said.
Mexico’s Finance Minister, Francisco Gil Díaz, said that Latin America would continue to be exposed in coming years to the contagion effects of foreign crises. According to Gil Díaz, the region should focus on policies that help its economies increase productivity.
While Mexico has managed to boost trade to the point that its exports are larger than the rest of the region’s put together, Gil Díaz said, the Mexican economy must strive to improve the efficiency of key sectors, such as telecommunications and energy.
Brazil’s Minister for Planning, Budget and Management Martus Tavares voiced optimism about his country’s economic outlook, despite the international scenario. He said growth, which reached 4.2 percent last year, was projected at 4.5 percent this year, based on the results of the first two months of 2001.
International Financial Architecture
Tavares, along with Colombian Finance Minister Juan Manuel Santos and Jamaican Finance Minister Omar Davies called for reforms in international financial institutions such as the IDB that would allow these agencies to help member countries weather financial crises.
The Brazilian minister spoke in favor of the creation of flexible financial instruments and an increase in the IDB’s lending to the private sector. Santos highlighted the importance of instruments, such as the guarantees for sovereign bond issues, and Davies called for rapid response mechanisms to deal with financial crises.
In a similar vein, Harvard University economist Ricardo Hausmann said the IDB should change its funding rules in order to double its annual ending capacity to $14 billion and to adopt policies that would allow it to grant fast-disbursing loans to countries facing crises.
"I believe that capital markets would function in a better way if they knew that our countries were not forced to swallow the poisoned pill of high interest rates," said Hausmann, the IDB’s former chief economist.
José Antonio Ocampo, executive secretary of the UN Economic Commission on Latin America and the Caribbean (ECLAC), spoke in favor of a more ample definition of macroeconomic stability that would include not only fiscal discipline, but also stable growth rates. He also suggested that countries adopt countercyclic measures, as Chile did recently, to cushion the harsher effects of external economic shocks.
The head of ECLAC also said that Latin American governments should design public policies with their private sectors to boost exports by stimulating technological innovation and partnerships among businesses.
Former World Bank vice president for Latin America and the Caribbean, Shahid Javed Burki, proposed that the region use trade and technology as two engines for accelerating growth. Governments would have to play an important role, he said, by investing in education, research and development, and infrastructure. They should also provide market information, encourage the creation of venture capital funds and develop appropriate regulatory systems.
The private sector’s role
The first seminar was followed by one entitled What is Holding Back Growth in Latin America? What Can the Private Sector Do? organized by the IDB’s Sustainable Development Department and the Inter-American Investment Corporation. During its sessions participants discussed strategies Latin American businesses could follow to help boost output. Panelists included top bankers and industrialists from Argentina, Brazil, Chile, Mexico and Spain, as well as senior officials from the IDB and the IIC.