IMF Surveillance -- A Factsheet
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Opening Session of the ECLAC-IMF Round Table Seminar on Building Prosperity in Latin America and the Caribbean: Macroeconomic and Reform Priorities
1. Good morning. It is a pleasure to be with you once again. Last night I spoke about our shared goal of increasing prosperity in Latin America and the Caribbean, and my hope that we can develop ideas to help achieve that goal. I'd like to elaborate on this theme today, beginning by talking a little about the past--what we have learned from the achievements and setbacks of recent years. Then I'll look to the future, and make some suggestions on how Latin American countries can build on the successes and overcome the remaining challenges. I'll also talk about the role of the Fund in helping members in this process, and about the strategic review of the Fund that is currently underway.
2. In the economic sphere, among the greatest achievements has been progress in taming inflation in the region. In sharp contrast to the late 1980's when many countries experienced high and even hyper-inflation, by the end of the 1990's only two Latin American countries had inflation rates of more than ten percent, and the regional average was in the single digits. In addition to providing an economic climate more conducive to growth, this has helped to improve living standards, since the costs of high and volatile inflation are borne disproportionately by the poor. Equally encouraging, these gains in inflation have endured despite economic disruption, external shocks, and political transitions. There is also much greater policy flexibility than in the recent past, to buffer against external and domestic shocks.
3. However, many challenges remain, and some have become more pressing. Despite the impressive economic expansion in 2004, growth performance in the LAC region has consistently lagged that in other parts of the world. The region still suffers from vulnerabilities, including exposure to shifts in financial market sentiment and movements in commodity prices. And only limited progress has been made in improving social indicators. This has contributed to difficult political conditions in many countries.
4. Governments must take advantage of the current period of relatively strong growth to advance macroeconomic policies and reforms that will promote sustained high growth. In the area of macroeconomic policies I see three priorities:
-- first, reduce debt. This will require maintaining primary surpluses in many countries from some time, but it will reduce vulnerability to crises, provide more room for maneuver to deal with shocks and over the long run will create more space for social spending and investment;
-- second, strengthen fiscal frameworks by enhancing budget transparency and flexibility, improving expenditure management, and broadening the tax base; and,
-- third, entrench gains made in taming inflation, including by further elaborating the institutional framework for inflation targeting.
5. While macroeconomic stability is a necessary condition for strong and sustainable growth, a more vigorous pursuit of structural reforms is also essential. Latin American countries remain much less open to trade than countries in other regions. Its external trade constitutes a little under one-fourth of GDP, compared with over one-third in Asia and Africa, nearly one-half in Central and Eastern Europe, and about three-fifths in the European Union. Latin America also remains a less friendly environment for private investment than other regions. The regulatory environment is burdensome and the legal environment weak in many countries. Financial systems need to be transformed from sources of economic vulnerability to institutions of economic strength. Institutional problems also remain, from rigid labor markets and corrupt bureaucracies to undisciplined provincial governments. These create uncertainties and costs, which undermine productive investment and growth.
6. So what can be done to tackle these problems? What are the policy priorities, and what can policy makers learn from each other's experiences?
7. Governments should make more ambitious efforts to enhance trade openness. Of course, the greatest potential benefit would arise from successful multilateral negotiations that bring about improved access for key exports from Latin America and the Caribbean. But Latin American countries can also encourage trade opening by easing their own restrictions in the flow of goods and services, especially reducing tariff escalation and non-tariff barriers and liberalizing trade in services. More broadly, countries can develop the institutional framework to support trade. For example, Costa Rica and other Central American countries have developed a strong institutional framework to promote and assess conformity with technical standards. This offers lessons for other countries.
8. In the area of financial sector reform, governments and central banks need to enhance the soundness and efficiency of financial systems by strengthening bank regulation and supervision, improving accounting and auditing standards and revising bankruptcy laws to enhance lenders' ability to recover value from distressed loans.
9. Labor market reform is also crucial for growth and for job creation, and governments can create a better environment for labor market reform by improving education and retraining and shoring up social safety nets.
10. Last, but certainly not least, governance reforms are needed to improve the business environment and promote investment that will bring high sustainable growth.
11. It is also essential to build broad ownership of reforms, ownership which extends beyond government and policy circles to civil society more broadly. Building broad ownership requires more effective communication on long-term goals. It requires convincing people that policies designed to reduce vulnerabilities can also support the broader social objectives of poverty reduction and greater income equality. It requires paying more attention to the distributional consequences of policies, since a broad constituency in support of reform can best be developed if no group is seen as bearing an undue burden of adjustment. And the problems of poverty and human development must be effectively addressed if reforms are to win broad support and if they are to endure.
12. I hope we will hear more today on all of these issues, and gain new insights from our diverse group of participants--policy makers, journalists and leaders of civil society--on what are the policies that hold out the most promise to invigorate growth, create employment and attack poverty. The seminar also provides me with an opportunity to gain insight into how the Fund can help you in pursuing these objectives.
13. A constant goal of the Fund is to do the best possible job of serving our member countries. In recent months we have begun examining the institution's strategic direction, with the aim of making the Fund more effective in addressing global imbalances, preventing crises, and promoting stability and sustained growth. I have already received some guidance from the Executive Board and IMFC. As we move forward, it will be important to remain open to voices outside the Fund, and this seminar is an important opportunity for me to hear your views.
14. Let me share with you some of the conclusions we have reached so far. First, the Fund's responsibilities for promoting stability and growth in member countries, and international cooperation to solve shared problems, is more relevant now than ever. The challenge for the institution is to adapt to the forces that are expected to shape the global economy in the coming years.
15. Second, it is clear that the enhancing the effectiveness of surveillance and crisis prevention will be a central task for the period ahead.
16. Third, we will need to improve the Fund's capacity to carry out financial sector surveillance, including work to understand better capital account developments and vulnerabilities, a subject with which many in this room are all too familiar. Our future work program will include deeper treatment of capital account issues in surveillance, and advice to members on ways to strengthen their financial sectors, prepare for access to international capital markets, and increase their resilience to shocks.
17. Fourth, the Fund's lending role remains vital for many countries, including many in Latin America and the Caribbean. We will continue thinking about the appropriate circumstances and scale of Fund lending, and exploring possible adaptations in the Fund's policies and instruments--particularly those related to capital account crises.
18. Fifth, the Fund's Executive Board and management are committed to making the most effective use of resources entrusted to them by the membership. We will follow through with a deepening of the budget reform process; the review of the Fund's human resources practices; further work on risk management, auditing, and the financing of the Fund; and the realization of additional efficiency gains.
19. Finally, we must make sure that the Fund's assistance to low-income countries fits their particular needs and circumstances, and helps them to achieve stability, debt sustainability, and stronger growth. In these ways, the Fund remains committed to helping members to reduce poverty and achieve the Millennium Development Goals. This region is not immune to the scourge of poverty. Indeed ECLAC estimates that almost half of people in the region live in poverty and one in five live in extreme poverty.
20. These are sobering statistics, and I hope they will help to focus our discussion today. The work of our members and the work of the Fund must be directed towards identifying the means by which stability and shared prosperity can be assured. But the end, the goal toward which we all strive, is a better life for the citizens of the region, and especially for its poorest citizens. If by the end of the day we can leave here with new ideas, better analysis, and a clearer sense of how to bring about reforms that will improve people's lives, then this will have been a day well spent for all of us.
IMF EXTERNAL RELATIONS DEPARTMENT