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Latin America needs microeconomic reforms to expand its middle class, Bill Clinton says

Latin America should carry out microeconomic reforms to clear the path for more poor people to join the middle class, instead of locking itself in a debate over fiscal discipline and social spending, former U.S. president Bill Clinton said today.

In a public dialogue with the president of the Inter-American Development Bank, Luis Alberto Moreno, Clinton also commented on current issues such as immigration, alternative energy sources, climate change and the fight against AIDS.

The conversation took place during the Building Opportunity for the Majority conference organized by the IDB to mark the launching of an initiative to expand access to the benefits of economic progress for low-income people in Latin America and the Caribbean.

Clinton, who governed between 1993 and 2000, said that neither of the two main economic models Latin America has followed – one marked by extreme fiscal conservatism, the other by unbridled public spending – has managed to close the world’s widest income gap.

“If you put yourself in a position of having yesterday’s debate, that is fiscal responsibility versus more social spending, you’re going to wind up with disappointment because you won’t reduce inequality either way,” he said. “And you don’t want to just appropriate the assets of the state, or the assets of the wealthy. What you want to do is to empower poor people to create wealth and become middle class”.

According to the former president, microeconomic reforms are a process that can only be done by trial and error and requires a long-term commitment from governments and international institutions to create the right conditions for poor entrepreneurs to prosper.

Among the needed reforms he mentioned identity registration, legal recognition of property rights, elimination of bureaucratic barriers to entrepreneurship and enforcement of contracts.

Such reforms have been championed by innovators such as Hernando de Soto, president of the Lima, Peru-based Instituto Libertad y Democracia, said Clinton, who hailed the IDB’s decision to work in that same direction through its new development initiative.

“I think we need to have a triangular strategy: we need to have sufficient fiscal responsibility to get capital in, stabilize the country and not distort people’s incomes through inflation”, he said.

“Within that framework, we need to invest as much as we can intelligently in social programs that work like giving poor people financial incentives to put their kids in school,” he added, mentioning the IDB-sponsored Bolsa Familia of Brazil and Oportunidades of Mexico as examples.

“And then we need to just get every single good idea we can for microeconomic reform and the systems necessary to make them work,” Clinton concluded.

Commenting on current Latin American politics, Clinton said that when asked about Bolivian President Evo Morales’ decision to nationalize energy resources, he has replied by asking what would one do if one were a Bolivian miner working 60 hours a week, with four children to feed and no prospects of a better future. “Whom would you have voted for?” he asked.

Nevertheless, Clinton pointed out that a government may nationalize natural resources and give its citizens money, but if it does not carry out the necessary microeconomic reforms, the poor will continue living on lands without property titles, without access to formal credit and without chances to generate wealth on their own.

Costs and organization

To illustrate how producers and low-income consumers can win if markets are properly organized, Clinton described how his foundation brokered lower prices with manufacturers of AIDS drugs and diagnostic tests.

Until a few years ago developing countries bought drugs separately rather than as a group, paying widely different prices for the same products. The former president then persuaded pharmaceutical companies in South Africa and India to change their business model from low volume/high margin (“like a U.S. jewelry store”) to high volume/low margin (“like a supermarket”).

The problem, Clinton said, was that drug manufacturers had no certainty about orders or payments. When those issues were resolved, they were able to cut prices drastically. Countries now pay a fraction of what they used to spend and are able to cover more patients and conduct more tests on potential HIV carriers.

“What did we learn from that? We learned that if you get entrepreneurial partners and apply entrepreneurial practices to a social challenge, and you worry about working out the supply lines, increasing productivity and going to high volume/low margin strategies that have absolutely certain payment, you can make a huge difference,” he said.

Agriculture and energy

Clinton sees a promising future for Latin America as a source of food and biofuels for the rest of the world due to the effects of global climate change and desertification in other parts of the globe.

Brazil and Argentina, with their deep and fertile topsoil, are the only countries that have boosted substantially their grain output over the past decade, he said. But the biggest potential, in the short term, could lie in the production of ethanol from sugar as an alternative to gasoline extracted from petroleum or coal.

According to the former president, many experts in the oil industry believe the world is quickly approaching its peak crude output, a point after which production will dwindle until reserves are depleted, perhaps in 35 to 50 years.

Clinton said that like Brazil, the world’s most efficient producer of ethanol, other sugar cane-growing Latin American and Caribbean countries such as the Dominican Republic could sources of biofuels.

In his opinion, Washington should reduce the U.S. tax on imported ethanol since it is highly unlikely its industry will ever match Brazil’s productivity levels and it would be harmful to fragile ecosystems to try to expand sugar cane planting here.

Immigration and trade

Regarding the current debate over immigration laws in the United States, where some want to build more barriers on the border with Mexico and others propose temporary worker programs, Clinton said there could be no “perfect solution” but urged legislators to be both realistic and humane.

Immigration, Clinton said, helped the United States compensate for the decline in fertility rates among its citizens, a process that other industrialized countries have experienced. Additionally, he argued, almost all newcomers, legal or illegal, are working, which means that someone is interested in hiring them. And finally, he said, it is “practically crazy” to think that the government can round up 12 million people or completely seal a perimeter as long as the U.S. borders and shores.

Nevertheless, Clinton said U.S. labor laws must be enforced to ensure that foreign workers are paid correctly and do not depress the salaries of native-born workers. He also stressed the need to guard national security, although he added that Latin America had not been a source of terrorism against the United States.

The former president, who in 1994 launched a now stalled Western Hemisphere trade integration plan, said the international trade agenda should be strengthened to address the costs of opening markets to foreign competition.

“I tried to develop the idea of ‘trade plus’, that we couldn’t have trade in a vacuum,” he said. “But, on the other hand, if you stop trying to get the economies of scale that come with trade, which can benefit lower income countries, I can’t see how they’re going to be better off.”

While the net effects of trade are beneficial for poor nations, he added, international agencies such as the IDB must work with member countries to develop economic and social policies to compensate those hurt by liberalization.