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More growth or less inequality?

Increased investment, low inflation, an improved fiscal situation, decreased unemployment. Latin America and the Caribbean have been hearing plenty of good news the past 18 months.

A group of renowned economists analyzed the situation at a seminar hosted by the IDB Research Department to honor IDB President Enrique V. Iglesias, who will retire on September 30. Iglesias himself opened the seminar, which was chaired by IDB Chief Economist Guillermo Calvo, with the participation of Ricardo Hausmann, Michael Mussa, José Antonio Ocampo and John Williamson.

The IDB chief economist held on to his prediction of an economic growth rate of 4.6 percent for Latin America and the Caribbean in 2005—others said 5 percent or more—along with rises in the region’s stock markets, better employment rates and increased investment. But much of the current boom is due to external factors, Calvo warned, such as the steep drop in international interest rates, depreciation of the dollar, demand for commodities and better terms of trade.

The international outlook of Latin America has improved a great deal, said Hausmann, former IDB chief economist and professor at Harvard University. But despite the upswing, Latin America grows more slowly than Asia and other regions in the world. Why? Hausmann asked.

If we thought that the economy moved forward like a horse, Hausmann said, "we might think that the reins are what is braking the horse and it is necessary to release the reins so that the horse gallops. But when one releases the reins, the horse walks as a donkey.”

Having the reins relaxed is not enough; governments must take key decisions that the market cannot take. Growth requires more planning, he emphasized. In an infrastructure project, for example, it is necessary to determine what type of infrastructure is needed and where and why. In an education project, what kind of education is going to be offered, what university is going to be established, what type of workers will be trained, and which abilities and activities are going to be targeted? It is not only a question of increasing the production factors; it is necessary to think more about how production develops.

In this matter, Hausmann pointed out, “governments in the region unfortunately are going to have to choose within these areas if they want to accelerate their growth."

The executive secretary of the Economic Commission for Latin America and the Caribbean of the United Nations (CEPAL), José Antonio Ocampo, put emphasis on social inequality. "Fighting inequality is more important than concentrating on economic growth," he emphasized.

But Hausmann underscored the case of Chile, where the quality of life of all the citizens has improved due to its economic growth, although this country has a level of social inequality similar to that of Brazil and Guatemala.

To conclude the seminar, Calvo praised Iglesias for his contribution to economic investigation in creating the IDB Research Department. "Iglesias established in the Bank the capacity for economic investigation," Calvo said. After 17 years, the quality and the magnitude of the Bank’s resources have improved, and its size has grown while economic investigation has helped to transform the region, which is very different today from what it was in 1988, when Iglesias assumed his post at the Bank.