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Presentation to the Committee fro Economic Cooperation and Development of the German Parliament

Latin America and the Caribbean experienced solid growth in 2007, external indebtedness declined in relative terms, and international reserves have risen. However, inflationary expectations have started to mount, due in part to the increase in oil and food prices.

Poverty and extreme poverty are on the decline. According to the Economic Commission for Latin America and the Caribbean (ECLAC), some 220 million people in the region, or 44 percent of the total population, were living in poverty in 2002. Projections for end-2007 put the number of poor at 190 million, or 36 percent of the total.

These excellent achievements cannot let us loose the long term view.

The increase in the volume of commodity exports has uncovered the significant lag the region has in infrastructure.  Without a modern infrastructure, growth is not sustainable and the integration with the global economy will be incomplete.

The advances in education have been moderate. More children attend school now than at any other time in the past. More importantly, these children represent all socioeconomic and ethnic backgrounds.   

 However, Latin American performers participating in the 2000 and 2003 tests scored well below the best performers in other regions. For example, in Brazil and Mexico, more than 50 percent of students face difficulties in reading, performing routine or obvious tasks; this figure increases to about 70 percent in the case of math. Comparable figures for the OECD are 20 percent for reading and 25 percent for math.

These differences are important. In the knowledge economy the quality of education is essential to ensure workers with a decent standard of living and to keep pace with the demands and changes of an increasingly globalized labor market.

LAC investment in science and technology are far below international levels. The region invests less than 1% of its GDP, while OCDE countries figures are above 3%. Korea invests more than LAC countries considered as a whole. China doubles LAC in the per capita number of researchers.

An heterogeneous LAC

As LAC countries integrated themselves in the world economy with diverse comparative advantages and at different speeds, the region has turned more heterogeneous.

Today it is more difficult to talk about Latin America and the Caribbean as a building block and think that the impact of any short term shock will affect the region uniformly.  An improvement in the terms of trade for some countries is at the same time an increase in the cost of imports for others.

It is natural, for example, that a US deceleration affects countries with large flows of remittances coming from the US economy more importantly.

However, these mayor differences are good news, because more diversification means less risk; and during times of distress the most dynamic economies can help the others.

Food crises

The impact of the food crises over the region is another sign of heterogeneity. The increase in food prices presents different challenges and opportunities to LAC countries.

Central America and the Caribbean are food-importing countries. Two weeks ago, I met with Central America’s ministers of finance, and of agriculture. We analyzed the social portfolios at the IDB and evaluated policies for mitigating the impact of rising prices in those economies.

Experience has shown us that the most effective programs are the ones that make cash transfers to households that meet certain conditions related to investment in human capital. These interventions are designed to make intelligent, pragmatic use of one of the simplest yet most powerful ideas in economics: incentives.

Among other supports, the IDB is launching a quick?disbursing credit line of US$500 million to strengthen social safety nets, such as conditional cash transfer programs for poor families.

On the opposite side, the southern cone countries can position themselves as major players in the global economy, making the sub-region a preeminent food provider to the world.   

For many years, the agriculture sector has not received the (public or private) investments it needs to boost productivity. We need to improve the availability of certain public goods that would help close this productivity gap.

Our producers require greater technological support and more assistance to develop phytosanitary measures, access to transparent pricing information, and public policies that does not discriminate against the sector.

Latin America’s agriculture sector and food industry are underdeveloped. It is unclear whether food prices will remain at these historic highs given the role of certain cyclical factors, such as the drought in Australia, which are driving them upward.  However, there does not seem to be anything cyclical about the growth in demand in China and India, and the incentives created by higher food prices could position the region as the largest food provider in the world.

Bank support to LAC

The IDB was founded in 1959 and is the oldest regional development bank. It has 47 member countries, 26 of them being borrowers.

Since its creation in 1959, the Bank’s uniqueness as a financial institution has been identified as its trademark. This is not just because it focuses on pressing problems in Latin America and the Caribbean, but is also linked to the fact that the countries of the region see the Bank as an institution working very closely with them.

All the above factors have also made the Bank a very attractive institution for talented people who are interested in working in the region.

New circumstances from countries of the region have shifted government’s priorities and public policy objectives towards new areas of intervention, and therefore the Bank’s priorities. 

The need for technical and financial support to redress macro-economic performance has been progressively changed by increased demand on other topics such as competitiveness, energy, environmental sustainability, private sector development, local governments and communities, employment, the participation of low income producers and consumers in the formal economy, citizen security, and reaching the MDG’s.

These changes in the region drove a major organizational reform in the Bank. In the 2006 Annual Meeting in Belo Horizonte, Governors committed to the principle of building a Bank that is closer to the circumstances of the countries in the Region. This in turn translated into a process of change crafted under the form of realignment.

After the completion of the realignment, this year marked a decisive change in how our institution works and serves our member countries.

We have broadened and solidified relationships with new clients and partners: local governments, businesses, nongovernmental organizations, and philanthropic organizations.

We are closer to the region than ever, with strengthened Country Offices set to become a one-stop window for our clients.

We have advanced an agenda of issues and initiatives reflecting the region’s current needs, with a new menu of lending products to increase demand and the Bank’s value-added.

We have adjusted our staff profile to deepen specialization in sectors important to the countries.

We continue to lower transaction costs: we are more efficient in project preparation, and are enhancing execution and measurement of outcomes.

The IDB Group (the Bank, MIF and IIC) has maintained its relevance in an era of ready access to capital markets for many of our borrowing member countries and available liquidity in the region.

This can be seen in our record levels of approvals and disbursements, as well as in the diversity of clients and sectors, the quality and innovative nature of operations, the range of financial products, and shorter project preparation and approval times.

Loan approvals last year increased to US$9 billion, up 42 percent from 2006.

Disbursements came to US$7.1 billion, surpassing the 2006 figure of US$6.5 billion.

Private Sector and Non Sovereign Guarantee (NSG) operations have expanded dramatically.  28 NSG operations were approved, totaling US$2.3 billion (up 145 percent from 2006).

The Multilateral Investment Fund (MIF) approved 133 projects for US$135 million (up 6 percent from 2006).

The Inter-American Investment Corporation (IIC) granted 53 loans totaling US$486 million (44 percent more than 2006). Its assets have doubled since 2004 to over US$1 billion.

Bank initiatives

We launched a series of initiatives, among them, the Opportunities for the Majority (OM) Initiative. In March 2007, the Board of Executive Directors approved this initiative and created the OM Financing Facility, not to exceed a total of US$250 million.  This initiative identifies, develops, and replicates projects and partnerships with the private sector that have a broad social impact and complement public policies.

Yet the challenges are such that the work of the public sector and private enterprise are not enough. Partnerships with foundations, NGOs, and individual donors will be a key part of the Bank’s efforts, going forward, to marshall new resources, leverage partnerships, and spark innovation.

The Water and Sanitation Initiative will put this sector on the Bank’s strategic agenda and favor private sector participation.  A proposal is being developed to create a multidonor water and sanitation fund (AquaFund), and a credit line (WaterExpress) accessible by water operators based on financial, fiduciary, and transparency criteria.

The Sustainable Energy and Climate Change Initiative (SECCI) has proven a catalyst for lending and nonlending operations with considerable impact on the region.  It is also working with the Roundtable on Sustainable Biofuels (RSB) to mainstream RSB sustainability principles in the Bank’s lending process, and help bring the region’s countries into the RSB-led initiative to develop global standards for biofuel sustainability.

Private sector development and non-sovereign guaranteed operations have been Bank priorities since 2005. The excellent results in these areas during 2007 can be attributed chiefly to progress on two fronts: tighter coordination across the various windows and more flexible instruments, especially local currency vehicles and non-sovereign guaranteed operations with government entities.

Based on the experience gained in the last three years, the Bank’s Board of Executive Directors just approved changes to a number of terms and conditions of the Local Currency Facility that make it more useful and relevant. The changes include approval of loan contracts in local currency, transactional liquidity holding in some currencies, and lower fees.

Bank’s commitments for 2008

This year marks the start of the celebration of the Bank’s fiftieth anniversary, as well as a new chapter in our life as an institution.

When the region experiences spells of volatility, it is essential that the Bank address country needs with right-scaled and right sized, technically relevant support, and that it be flexible not just in terms of the sectors it should target, but in its lending and non lending product offerings as well.

The following are the challenges and tasks that await the Bank in 2008:

o       Approve a New Operational Framework tailored to the region’s needs and demands and giving the Bank flexibility and a toolkit to effectively perform its mission.

o       Strengthen the operational program, giving significant weight to the initiatives launched in recent years—such as the SECCI, Opportunities for the Majority, and Water and Sanitation initiatives, Private Sector and Non-sovereign Guaranteed Operations.

o       Promote dealings with nontraditional partners such as philanthropic organizations and foundations to pool efforts and pursue innovative approaches in the Bank’s priority areas. The launch of the Philanthropy Initiative at the last Annual Meeting is a major step in that direction.

Final Remarks

More inclusive growth, while containing inflationary expectations and pursuing structural reforms to keep their economies competitive, are the greatest challenges facing LAC’s countries in the short and medium term. 

We must stay alert in this time of economic and financial turbulence, adopting sustainable public policies to maintain growth levels, lock in welfare gains, and spread benefits further into the lowest income segments.

LAC is a larger, more heterogeneous region facing structural challenges in a turbulent economic climate. In 2008, the Bank will have an opportunity to make its work program more substantive, enhance its quality and impact, and make financial resources more flexible and available to its members. THANK YOU.