Transcript of a Press Briefing by Anoop Singh, Director, Western Hemisphere Department, and Charles Collyns, Deputy Director, Western Hemisphere Department, IMF
February 8, 2005
on "Stabilization and Reform in Latin America: A Macroeconomic Perspective on the Experience Since the Early 1990s"
By Anoop Singh, Director, Western Hemisphere Department, and Charles Collyns, Deputy Director, Western Hemisphere Department, on
With David Hawley, Assistant Director, External Relations Department
Tuesday, February 8, 2005
MR. HAWLEY: Good morning, ladies and gentlemen. Welcome to this press briefing. I am David Hawley, from the IMF's Press Office. This is a press briefing on the new occasional paper, "Stabilization and Reform in Latin America."
Before introducing you to two of the report's authors, I would just like to remind you, if I may, of the ground rules of this briefing.
The briefing, together with the occasional paper itself, is under embargo until noon today. That is 1700 GMT. And we are currently webcasting the briefing on the IMF's Media Briefing Center. So, if there are any of you out there watching, please adhere to the same embargo rules as the rest of us. The briefing will be conducted in English.
Let me introduce the authors. To my immediate right is Anoop Singh, the Director of the IMF's Western Hemisphere Department, and to Anoop's right is Charles Collyns, Deputy Director of Western Hem.
May I underline that the briefing is about this book rather than the other current issues. It is a study of economic policy in the previous decade.
Anoop, do you want to say a few opening remarks?
MR. SINGH: Thank you very much. I just would like to, also, introduce the other co-authors who are in the first row; that is, Agnès Belaisch, Paula De Masi, and Guy Meredith. There are two other authors who helped us with this who are not here this morning.
Let me just briefly say that when I became involved initially in Latin America in the year 2002, it was somewhat of a paradoxical situation. The region was undergoing a period of volatility in its macroeconomic situation, as you, I guess, well remember, but inflation had been contained and had remained contained for some time, but growth had not risen to the extent that we would have expected after a long period of relatively low inflation.
So, with that background, we decided to study what were the lessons from the '90s and the early 2000. We were struck, also, by the extent of reform that was evidently taking place in many countries at that time in 2002 despite the crisis of that period, and we wanted to see how and to what extent these reforms were reflecting some of the lessons of the previous 10 years, and that was the backdrop, that was the motivation of this study.
And so this has now been completed, and there are many conclusions of the past, and there are many assessments of the future. But let me focus maybe in a forward-looking way on where the region is and what we see as the priorities for the future.
We find that as countries have been strengthening their policy mix over the past few years, they have, indeed, been reflecting in these policies the lessons of the last 10 to 15 years. Therefore, we see in most countries a strengthening of macroeconomic policies, we see attention to structural reforms in areas that were not the center of attention in the 1990s, and of course the external environment has been very strong for Latin America.
So, in combination, we find that the juncture the region is currently in is extremely favorable for carrying out these kinds of reforms. In fact, as you know, the region is experiencing its fastest growth in almost a decade. And so the paper looks at broadly six areas.
The first two are macroeconomic, and the paper does conclude that inflation has come down, has stayed generally down, despite the crisis, and it finds that this is partly in response to an enormous swing in public expectations in favor of keeping inflation low. I think this widespread consensus in favor of keeping inflation low has been very important.
I will share with you one anecdote from the early days of President Lula in Brazil, when we were talking to him about the importance for the poor of low inflation. And he turned to us and told us that "You don't have to tell me about low inflation and its importance for the poor. We know this lesson acutely in Brazil."
Therefore, I do believe the lesson of keeping inflation low and its link and its importance to bringing poverty down has been well earned. And this is why we see in the region, in almost every country, steps to increase the autonomy of central banks, which, of course, is very important for entrenching the credibility that is needed for the inflation targeting that is now being pursued in the region.
This second important lesson is that public debt cannot remain high, and we shouldn't hope for the crises to the reduce it. Public debt needs to come down, its composition needs to improve, and this effort requires strengthening fiscal institutions in a number of areas. And so I do believe this lesson has also been well learned. And you'll see in virtually every country that a centerpiece of their policy mix is to bring the public debt down and improve its composition because it is needed in the end to build sustainability, to accommodate social spending and, in the end, to support growth and bring poverty down. So there, too, the links with the social side with poverty reduction are very important, and I do believe those lessons have also been well learned.
The third lesson is in the financial area, and here it is very simple. Financial systems have been sources of vulnerability in the past. They need to be sources of growth, and that is the effort and the challenge that the region is currently undertaking.
There are three more important lessons, and among them I would highlight first the low trade share, external trade share in the region [as a percentage of GDP]. The paper cites evidence of the importance of a high trade share for high growth. And I do believe there is much greater emphasis now in the region on expanding its trade with the rest of the world. Helped, of course, by today's commodity prices, we see trade [as a proportion of GDP] has everywhere already risen in the last two years in response to the changes in the exchange rates in the region.
And then we come to other structural reforms, and here I would highlight, first, which is the fifth lesson, the importance of making labor markets more flexible. And what the paper finds in this area is very simple, that in today's globalized world there is competition. Competition requires resources to shift between sectors. Those countries that are able to facilitate and bring about the shifts between sectors are those countries that will benefit the greatest from globalization. And labor market flexibility is crucial for these resource shifts between these sectors to take place. Hence, the importance of labor market reforms in any future agenda.
And then, finally, there is the importance of the role of the state. Our assessment is that this is not a laissez-faire world, this is not a world where things are left completely to markets. There is a very important and strategic role for the state, and this includes setting up the legal infrastructure for private investment to take place and for a business environment to thrive so that the resources can be secured, both domestically and externally, to support higher growth.
There is no doubt that the growing democratization that we have seen in the region in the last 15 years is one of the most important elements towards this end. And so our sense is that we are optimistic about the future. We do believe that these six lessons have not only been learned, but we have been struck by how much they are becoming part of the policy agenda. Of course, there is much work to be done, and this work is not only to be done by the countries themselves, but it is also to be done by us, by the international financial institutions, and by the governments of the industrialized countries whose involvement in world trade, in world growth, in the global economy is, of course, crucial to support the efforts of our countries in Latin America.
So that is where we are. It is a good juncture. Reforms are taking place, and I think the region has every reason to be optimistic as it looks and plans ahead.
MR. HAWLEY: Let's turn to questions.
Thank you, Anoop.
QUESTIONER: When I was reading the report, the analytic part of the report, not the part that looks ahead, but what went wrong, and as you say, there is this big disconnect between a tremendous amount of reform and very meager growth, and it is quite critical of the governments in a number of ways. But it strikes me as remarkably unself-critical of the IMF's role, and I wanted to get your comment on that; in particular, two things I was thinking about:
The report goes on and on about capital account liberalization and the problems in liberalizing capital accounts in the way in which it was done, but that was a recommendation of the IMF for years before the Asia crisis.
It also talks about pro-cyclical fiscal and monetary policy and the problems with that, but that, also, has been a recommendation of the IMF for countries in the throes of crises.
And there is nothing in here that I see--well, there's a little, and not about this, but there's a couple of things where it says the IMF sometimes gets too involved, and with this new micro agenda, might raise some political concerns in countries and has to deal with that, but there doesn't seem to be any sense here that some of the things that the countries did wrong were at the behest or at the recommendation of the IMF.
MR. SINGH: Thank you very much. Well, I think I should have said this in the introduction. This is not a paper about the IMF's role in the region. This is very important to understand. This is not that paper for the following reason: We are not the staff of the Independent Evaluation Office. We do believe that we have an office that is looking at the Fund's role, and their assessments would clearly carry credibility and have carried credibility. You have seen their report with Argentina.
Had we done a paper on the role of the IMF in every country, of the sort of the questions you asked, and the questions you asked are the right questions--there are many other questions of this sort--it would have been a very different paper. We would have been subject of the charge by you here today of it being possibly defensive, of it being focused on the IMF.
We felt that this paper should be about the policies in the region and what the countries did, and that's what it focuses on. There are papers about the Fund's role. The Fund's role is very important in the region. And that is why the last chapter goes into what role the Fund can play in ensuring any agenda is homegrown, is shared by the Congress and civil society, is not imposed from the outside, and it is really an agenda that is developed at home in these countries. But this is not a report on the IMF's role because that would be a completely different paper. It would not have focused on the policies in the region, but on our conditionality. That is not the purpose of this paper.
QUESTIONER: But don't you think you open yourself up to that criticism? I mean, you are quite critical of the governments in the region for following policies, but if the policies are linked to the IMF, it just seems that, I don't see how you can't address, in some fashion, the role of the IMF recommendations.
And, again, as you point out at the end, you do make some note of what the IMF needs to do, and I think made the critical point that sometimes the IMF has been too involved, and people rely on the IMF too much.
MR. SINGH: Well, this is not the first and last paper we will write or others will write. This is focused on the policies that prevailed and why they were sometimes incomplete and unbalanced, and why there was excessive emphasis in certain areas.
Now, the next stage is either for us, the Independent Evaluation Office, or for others to look at how these policies came into being, were these policies endorsed, were these policies proposed only by the IMF or by the countries, what was the mix? But I see this paper as starting new research, new ideas, into these very questions, and maybe we'll do it next time.
QUESTIONER: You point out in the report that when the fiscal problems came, the countries responded with cutting the social spending and that this decreased the popular support for the reforms. I would like to know how could the fiscal problems be addressed without cutting the social spending, if it would have been possible, what would other options have been, and what is the right balance, how a country can achieve a right balance?
MR. COLLYNS: It is very difficult, in the context of a crisis. You have to respond extremely quickly to fast-moving events.
One of the recommendations we make in the report is that countries prepare themselves to face uncertainty by strengthening fiscal institutions in the countries. One of the problems the countries have faced is the very heavy degree of revenue earmarking and other expenditure rigidities. So that when you are faced by a crisis, you find there is only a very small proportion of the budget that can actually be affected quickly, and often that means that social spending and public investment are the primary victims.
But I think this could be avoided in the future if countries do institutional reforms that provide much more flexibility in making decisions on expenditures, so that it is possible to take a more rational, more balanced approach. There would need to be cutbacks in some areas if fiscal policy is a major source of the crisis, but the point is that it need not fall so heavily on the social sector. Indeed, we would argue, I think, that it is important to actually increase social spending in the context of a sharp downturn, which can have very negative effects on lower-income groups in the country that are less able to protect themselves.
So, in a number of programs that we have supported in Latin America and elsewhere, we have actually tried to find ways to increase resources put into social safety net programs at the same time that we find room for restricting the growth of spending across the budget more broadly.
MR. SINGH: Let me just say one thing in respect to that question. And this is perhaps one of the key themes running through the paper, perhaps the most important one, if I can simplify it down to just one theme, and that is that crises cannot be prevented by last-minute adjustments to short-term policies. The theme of the paper is precisely that avoiding crises and setting the stage for sustained growth requires strengthening institutions over a long period, the kind of institutions Charles has spoken about in the fiscal area. That is crucial.
When a crisis hits, it is very difficult to either cut spending because things are earmarked or to raise spending. But I can tell you, in many situations, governments are, also, unable to raise social spending because they haven't developed targeted policies and the institutions to deliver higher safety-net spending.
So our message in this area and in the other areas is that not just in Latin America, but in other regions, perhaps more so in Latin America, the emphasis needs to be not on short-term policies, but on taking the time to develop the institutional structures that will ensure their sustainability of policy. So it is a sustainability of policies rather than the short-term natural policies that we focus on as an overriding theme in this paper.
QUESTIONER: You mentioned in the report that that is above present levels and must be brought down. Didn't turn around in current account that has happened recently, especially after 2003, change in any way the assessment of the debt sustainability of these countries? Do you consider the debt unsustainable, still unsustainable, and what more can be done by the countries?
MR. SINGH: Well, let me just say, partly in response to that, that we have been surprised in many countries by the extent to which the trade account and grant accounts have turned around. It has been greater and more responsive than we expected, given the starting conditions which were a relatively low trade share to GDP. And there is good news in that.
We find that a responsiveness to the exchange rate change has generally been larger than the models would have expected. That is a good sign of growing flexibility in the region. Clearly, it has been very important to address market concerns about debt, and that is why you find, along, of course, with changes in the international environment in emerging markets, you find that the debt outlook for many countries has changed and turned around not only because of what we've seen in the current account, but also I think that markets are beginning to understand that there is greater responsiveness in this area than they had imagined or thought previously, and this bodes very well for future sustainability. That is the key point here.
Now, to sustain this, there needs to be a sustained effort to bring the public debt down to a much safer level, and what we find--it is rather a commonplace assessment--is that a safe level for countries in emerging markets is probably much lower than, for example, in industrialized countries. So there needs to be continued and sustained focus in the kind of structural reforms that will both bring down the public debt, raise the trade share and sustained growth. I come back to growth because debt, essentially, debt sustainability is expressed as a ratio, and the denominator is GDP.
And there are very few countries that are going to be able to get their debt sustainable by focusing only on the numerator. They have to focus on the denominator as well. So debt sustainability depends, as much or more, on raising growth as it does on fiscal consolidation. And what we also find is that fiscal consolidation itself is one of the key factors that leads to the higher growth that affects the denominator.
MR. COLLYNS: Let me just add an additional thought, which is the importance of the composition of the debt. If you compare the debt ratios in Latin America with debt ratios elsewhere, they're not extraordinarily high, but the composition of the debt is much more fragile, much more difficult to manage. Typically, these countries are not able to issue in their own currency or, if they issue in their own currency, it is very short term. Typically, a high proportion of the debt is either foreign exchange, foreign exchange indexed or linked to short-term interest rates. And this makes a country very vulnerable to turbulent international conditions because you can very quickly have shifts in debt ratios when the external environment turns unfavorable.
I think one of the most encouraging developments recently is that countries have been able to begin to reverse what is sometimes called "original sin," and actually begin to increase their issues in local currencies and in longer terms. I think this is, also, very important in terms of reducing vulnerabilities of these countries to a volatile external environment.
QUESTIONER: Mr. Singh, I'm focusing on growth here because, if one looks at the growth levels of a lot of these countries, it is still very low, considering that the climate, the external climate, is a lot better.
What do you think, you know, what would be a good growth rate for these countries if they continued with these reforms and moved on with such things?
The other question is growth is also important for employment and poverty, and why are those levels still high after all these decades of reforms?
MR. SINGH: Well, on growth, I think it's quite stark. The average growth rate over the last 10 or 12 years or so, at least through 2002, 2003, has been under 3 percent average annually, probably 2.5 You could work up yourself what that means in terms of per capita. It's even less, obviously.
You've seen other regions have been growing at probably, and certainly in Asia, at three times that rate. When you grow at 9 to 10 percent a year every year, a country, it will double its GDP every six or seven years. So a country that grows at 9 or 10 percent doubles its GDP every six or seven years. This is what many countries have done in Asia.
When you grow less than that, you don't double your GDP, and that answers the question about employment and poverty. But here there is good news again. The news is that today the growth rate is double, on average, in the region. In 2004, the average probably came out well above 5 percent, 5.5, perhaps, and it should remain reasonably high, at least 4 percent next year, by next year, I mean 2005.
These are high growth rates. I think the intention of countries in the region is to sustain the growth rates at the levels they have recently achieved, 4 and 5 percent. If it can do that over the next few years, that is going to be a tremendous turnaround in per capita terms, and that will be also important to sustain the feel good feeling that people need to have in order to keep the reform process going.
So I think the focus is let's keep things in the 4, 5 plus range. I think that is the intention. That is eminently achievable.
MR. COLLYNS: It certainly is disappointing that all of the reforms in the 1990s didn't lead to a more dramatic change in growth. And if you look at productivity and investment, which are the two main sources of growth, both of them continue to lag behind.
I would put a lot of emphasis on the fact that the macroeconomic environment remained very volatile. Although there was strengthening in the macro policy framework, it took time. Really, only in the last few years have these countries been able to establish macro frameworks that provide a much more secure environment for investment and for business activity.
I think the combination of more stable macro environments, plus the increasing attention being paid to fully establishing the rule of law, and improving the business environment, removing impediments and increasing flexibilities does provide for sustained high growth of the sort that Anoop is mentioning.
QUESTIONER: Looking at the language in the report and your comments in the introduction, one gets the feeling that you are basically optimistic, that countries are doing more or less the right thing. But of those recommendations that you include, like labor reforms, strengthening banks and other issues, where do you see the biggest challenges or the biggest lag occurring? I mean, where are countries the weakest, if you will, out of those five or six issues that you mentioned?
MR. SINGH: Well, it's obviously difficult to generalize the region as a whole because you find some countries doing much better in certain areas and others in other areas. So it's important to recognize the differentiation that we see in Latin America and to build policies in response to that differentiation. So it is not a common picture. This is a region that has a lot of diversity in its policy mix.
Having said that, I think the challenge is in the structural areas. By structural areas, I mean the policies that will bring new resources into these economies, both domestic and external, in a sustained way and then the role of the state that allows the social safety net to be strengthened while other reforms are taking place. So I would say that the institutional, structural, these are the main areas, governance of public institutions, governance overall. I think this is a challenge.
On the macroeconomic side, I think the lesson has been well learned, and we see the process underway. It will take time. You cannot turn around vulnerability of the public debt in a single year, but enormous progress is being made.
In the structural and institutional progress is where I see the greater challenge lying.
QUESTIONER: Let me ask you one thing. What is new about what you just said? I have been hearing this for, actually, I overstayed my welcome here--I have been for too long--but this what you just said, I heard this so many times, exactly what you said. What is new about it?
MR. SINGH: We are not in the business of making conventions. I mean, we're not here to focus only on what's new. We are here to repeat a message that we see from experience remains relevant, and the message is, to some extent, quite new. And I'll tell you what could be new in this. What is new is that on the macroeconomic side the implications and the effects for poverty of macroeconomic volatility, we find these lessons have been well learned. And whether it is Country A, B or C, whether it is a crisis environment or not, we see policies focused on bringing down the macroeconomic vulnerabilities.
We see countries' economic teams, Presidents and Cabinets more aware and prepared to take policies that will reduce the public debt in a sustained way. This is new. In the 1990s, public debt rose. Now, we find much greater awareness why inflation must remain down, why central bank independence is important, why the public debt needs to come down further. This is new.
On the structural side, on the governance side, on the institutional side, this is not an old message. This is a new message because the agenda of the '90s, whether it was the Washington Consensus or whether it was any other consensus, did not focus on these kinds reforms. These reforms were not part of the agenda, by and large, in the 1990s.
The fact that you now say this is an old message, to me, is very comforting. It shows that countries have learned that these institutional structural reforms were not part of the agenda in the '90s and need to be now. So, if you say that's an old message, it makes me very happy because it shows that the lesson of the '90s has been well learned.
MR. HAWLEY: We have got time for one more question.
QUESTIONER: Just you point to the fact that democratization across the region has been one of the elements that has been impacted positively in the fact that many countries in the region have learned the lessons of the last decade.
The question is if the fact that we have seen in recent years that some of these countries had elected governments who tend to lean to the left which, on many occasions, are accused to be populist governments who spend without taking into consideration some of the things that you point, do you feel that even those governments, I mean the governments that tend to be to the left, haves learned this lesson, the fact that they had to be measured in the social spending, that they have to keep inflation low? What are your sentiments on that part of the democratic equation?
MR. SINGH: Well, I don't think you are disagreeing with what we said. The way I would respond is to say this: We think that the consensus to keep inflation low is a very strong consensus among the people. When the people vote in a democratic way, the parties that are standing and running for election realize that they need to deliver and sustain low inflation. And I think you will find that governments that do not deliver low inflation will face greater difficulty at the ballot box.
So I do feel that the mix that that democratization, by allowing the social consensus for low inflation to be translated, measured through elections, has been very important. So that whether the government is left or right in the region, it knows that the people want to keep inflation low. And I do think that the process of democracy has strengthened and sustained that consensus. It's very important. It is not just--because once you agree inflation must be low, you have to deal with the whole range of policies, and that's crucial.
MR. HAWLEY: And the last question.
QUESTIONER: I just wanted to ask you about the role of the state in establishing legal framework to attract investment. I would like to know what did you learn about the crisis in Argentina in that sense? Because we had legal framework for all the privatizations and, of course, this legal framework collapsed, and now we are trying to re-establish a new framework. So I would like to know which are the lessons there.
MR. SINGH: I was wondering why you had not asked a question, but you saved the best for the last.
MR. SINGH: You saved the best for the last, as you usually do.
Well, this is a very complex issue. I am not going to trivialize it by giving you a one-liner or a one-sentence answer. I think reviving investment in Argentina is something the government is working to do, and, clearly, the progress it has made in a macroeconomic area is a prerequisite. I think they recognize it, we recognize it. For the rest, we will save that for another day because this would take us a long time.
MR. HAWLEY: Thank you very much, Anoop. Thank you, Charles. Thank you very much for coming today. Remember, the embargo is noon today.