December 5, 2014
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As prepared for delivery
Buenos días. Good morning.
I am delighted to be back in Chile. I would like to thank President Bachelet and the people of Chile for their warm hospitality, and for hosting this very important conference.
To my mind, there are few places in the world that match the beauty of Santiago in late spring. In the words of the great Pablo Neruda, it is a time when “the whole world stretches, the whole world reaches out groping for substance in which to repeat its form.”1
This is an exciting time for Latin America, which has been stretching and renewing itself economically, politically, and socially in recent years. The immense potential of this diverse region has become tangible and will drive further progress in years to come ― only the grumpiest pessimist would bet against its long-term success.
The optimists – and I count myself among them – are well aware of the numerous challenges facing Latin America. One of which, of course, is the recent shift in macroeconomic conditions that could exacerbate underlying vulnerabilities. I believe these challenges can – and will be – met. But finding optimal solutions will require harnessing the collective will and creativity of the people and of the policymakers who serve them.
This conference presents a timely opportunity to examine the current pressure points and to discuss possible remedies to support quality growth and financial stability in the entire region. At this critical moment, it is more important than ever to foster growth that is inclusive, balanced, and sustainable.
The Fund is working hard to help you achieve this goal. What you see today is a changing IMF that is better equipped to serve its members in this changing region. This is not your grandfather’s Latin America; and it is not your grandmother’s IMF!
In this spirit, I would like to share my perspective on three topics that will be reflected in our discussions: (1) changes in global and regional economic conditions, (2) social progress in Latin America and its implications for economic policy, and (3) the role of region-wide solutions to long-standing problems.
1. A big leap forward, but risks ahead
Let me start by highlighting the key macroeconomic achievements and challenges.
During the past two decades, most countries in Latin America scored a policy hat-trick, or triplete, in the form of low inflation, fiscal discipline, and financial stability. These economies thrived because of their sound, rule-based policy frameworks, rising commodity prices, and favorable global financial conditions.
In fact, Latin America bucked the global trend. While others were floundering, this region weathered the 2008 global financial crisis with quiet confidence. It also made huge progress in reducing poverty and inequality: average real incomes have risen by more than 25 percent since 2000, and extreme poverty has been cut in half. Only twelve years ago, the population living below the poverty line was two-and-a-half times larger than the middle class. Now the two groups are roughly the same size.
I recently caught a glimpse of this remarkable social progress. In Peru, I met with young entrepreneurs and small family business owners who are benefiting from government programs like “Crea y Emprende” or “La Compania”. These programs provide training in management, finance, and product development. In Jamaica, I visited a successful employment center that trains school drop-outs and improves skills matching.
All these economic and social achievements are impressive, but the road ahead looks increasingly bumpy. For a start, global economic and financial conditions are shifting. The United States appears to be firmly on the path to recovery, but Euro Area prospects are uncertain and the outlook for China has cooled. Commodity prices, which lifted the region for more than a decade, are now falling, and the era of easy dollar financing will end before long.
Overall, the global economy is now at risk of getting stuck in what I have called a “new mediocre” of poor growth and weak job creation. This is why we need a new policy momentum. G-20 members recently agreed to implement growth strategies that would lift their collective GDP by at least 2.1 percent by 2018. That would generate significant benefits for the global economy.
Secondly, some countries in Latin America are facing underlying vulnerabilities. Their policy frameworks will surely be tested as external conditions are shifting. And several countries are facing fiscal pressures and need to reform their tax systems.
Thirdly, many economies in the region are pushing up against capacity constraints on both physical and human capital. It means that inflation and domestic demand pressures will remain significant, even though regional economic growth is expected to remain modest – 1.3 percent this year and 2.2 percent in 2015.
This underscores the need for structural reforms in areas such education, social safety nets, financial inclusion, and infrastructure. These reforms would raise productivity and allow the region to diversify away from primary sectors that have lower value added.
Change is necessary if the region is to cope with the confluence of new macroeconomic forces, and if it is to meet the rising expectations of the middle class. That brings me to my second topic – what are the policy implications of rapid social progress?
2. The growing middle class: good news, bad news
After decades of stagnation, Latin America’s middle class has been growing in size and confidence, expanding by about 50 percent since 2003. Much of this can be attributed to a reduction in labor income inequality, including through rising minimum wages.
Larger and more progressive government programs have helped, too. For example, enhanced healthcare and education in Argentina, Bolivia, Brazil, Mexico and Uruguay have reduced inequality in these countries by 10 to 20 percent between 2000 and 2007.
Unfortunately – despite this progress – social indicators remain weaker, and inequality much higher, than in comparable regions. In 2010, Latin American countries had an average Gini coefficient – a measure of inequality – of 51, compared with a range of 33 to 41 seen in other middle-income regions.
Why is this relevant right now? Because the rising expectations of Latin America’s middle class are bumping up against shortcomings in the provision of public services. Last year, we saw large protests in Brazil triggered by the rising cost of public transportation, and there were protests by farmers and other groups in Colombia. While the specific concerns may vary across countries, surveys show that many people share a general discontent over corruption and poor government accountability2.
This is a loud and clear call for action. Many governments in the region – Chile among them – are working hard to improve public services. They have launched initiatives to increase the quality and reach of public education, broaden the system of social protection, and expand the public revenue base. All this – and more – is needed to create a more inclusive and stronger society.
As the distinguished author Isabel Allende said, “We want a world where life is preserved, and the quality of life is enriched for everybody, not only for the privileged.”
Let me now turn to my third and final topic – why is it essential to step up regional cooperation on long-standing issues?
3. Regional problems, regional solutions
First on the list is violent crime. As you all know, while there are huge differences across countries, crime is affecting the entire region. According to the United Nations Development Programme, more than 1 million people died as a result of criminal violence over the past decade. During that period, the murder rate increased by more than 11 percent, whereas it fell or stabilized in other regions.3
The human cost is enormous. But crime also hurts economic development and corrodes democratic institutions. Several countries have bucked the trend by using holistic approaches and by learning from each other. Chile and Uruguay, for example, are now the highest-ranking Latin American countries in terms of transparency and rule of law.
Secondly, many countries need to significantly improve their infrastructure networks. For example, extremely high logistics and freight costs hinder Latin America’s integration into global value chains. This underscores the need for more investment and greater regional collaboration in energy, transportation, and IT.
Thirdly, regional trade integration should be rejuvenated. The proliferation of trade groupings, such as MERCOSUR, ALBA, UNASUR, and SICA, has created a “spaghetti bowl” of regimes and preferences whose aggregate benefits are unclear. Policymakers should reassess the current approach to trade and create new ways to integrate the region into global value chains – and I hope this is something we can discuss further during our conference.
Given the current challenges, Latin America certainly needs more and better integration. I would argue that it also needs new forms of integration to lift the potential growth of the entire region.
Beyond trade, you can see a host of issues that could benefit from a greater willingness to reach across borders and learn from each other. Policymakers should strengthen the existing regional agenda by including topics such as labor, security, energy, the environment, and competition. Countries already have a shared interest in these topics and should take it to the next level.
These new forms of integration would support Latin America’s growth by increasing the provision of regional public goods and services. It would also strengthen Latin America’s hand in global negotiations on these issues.
Latin America and the IMF
The idea of cooperation and multilateralism is, of course, at the heart of the IMF’s work. The Fund was set up 70 years ago to help its members prevent economic and financial crises and provide financing when they occur. The Fund is also helping low-income and transition countries get a foothold in the global economy, and it is working behind the scenes to build capacity and resilience through its technical assistance.
This is certainly not your grandmother’s IMF – we are adapting to the changing needs of our members. Here in Latin America, the Fund’s role has shifted from “crisis responder” to “insurance provider”. For example, Mexico and Colombia have greatly benefited from our new crisis-prevention tool, known as the Flexible Credit Line. And we are trying hard to provide more timely and well-tailored policy advice and technical assistance to our members in this region.
This is why we are here this week: to engage in a dialogue, learn from you, and increase our understanding of your economies and of the concerns and aspirations of the people. The IMF is your institution, and the Fund’s staff is at your service.
Conclusion
Let me conclude. As we contemplate the dawn of a new era in Latin America, I would like to suggest that policymakers take some inspiration from the poets of this region.
What do I mean? I mean that poetry has, time and again, found a strong voice in Latin America’s public life, especially in the critical moments. In the words of your own Gabriela Mistral, a poet should “create beauty not to excite the senses but to give sustenance to the soul.”4
I am confident that policymakers will find a strong and compelling voice to inspire the people of this region at this critical moment. Together, they will meet the current challenges and unlock the potential of this immensely rich and diverse region. As I said at the beginning, la primavera está en el aire – spring is in the air.
1 Pablo Neruda: “Ode to Spring”, Odes to Opposites: “Todo se multiplica, todo busca palpando una materia que repita su forma.”
2 2013 Latinobarometro Survey
3 http://www.undp.org/content/undp/en/home/presscenter/
pressreleases/2013/11/12/citizen-insecurity-thwarts-latin-
america-s-development-says-undp.html
4 Gabriela Mistral, Chilean poet [first Latin American to receive the Nobel Prize in Literature]: Decalogue of the Artist: “No darás la belleza como cebo para los sentidos, sino como el natural alimento del alma.”
