IMFSurvey Magazine: Interview
GLOBAL CRISIS AND THE AMERICAS
Latin America Can Minimize Crisis Impact
By Sergio Negrete Cardenas
IMF Survey online
February 12, 2009
- Global crisis will slow Latin American growth
- Several countries in better position to face crisis
- IMF ready to help region as needed
Latin America and economic crisis were practically synonymous in recent decades.
However, the region has shown uncharacteristic resilience to the financial turmoil that is engulfing many advanced and emerging economies.
Resilience, naturally, does not mean immunity. In his first interview since taking over as Director of the IMF's Western Hemisphere Department, Nicolas Eyzaguirre notes that Latin American countries should do more to limit the impact of the crisis, and that some may request financial assistance from the IMF, for example using the recently created Short-Term Liquidity Facility.
Noting that the crisis erupted in the United States, Eyzaguirre said that the IMF should also "give good policy advice to the United States to prevent the crisis from worsening."
Familiar with the Fund
Eyzaguirre is familiar with both the IMF and the problems that emerging economies face. He served as IMF Executive Director representing several South American countries in 1998-2000, and as Minister of Finance of Chile in 2000-06.
IMF Survey online: What impact will the global crisis have on Latin America?
Eyzaguirre: We must bear in mind what IMF Managing Director Dominique Strauss-Kahn said just a few days ago: 2009 will be the worst year for the global economy in 60 years, and so to think that Latin America will be spared any negative effects is unrealistic. What we do believe is that Latin America will continue to grow despite the sharp slowdown in the world economy, albeit at a much more modest rate than in recent years.
IMF Survey online: What can the Latin American economies do to try to mitigate the impact somewhat?
Eyzaguirre: Firstly, let me stress that they have already done a great deal. During the 1982 crisis, when the global economy grew slightly more than it is expected to grow this year, Latin America slid into a recession. GDP contracted in both 1982 and 1983. In contrast, this year we are expecting Latin America to grow by around 1 percent, so we can see how the policies adopted in recent years have prepared the region to withstand external shocks a great deal better. To be more specific, the fiscal situation, the debt position, the financial systems, and the flexibility of monetary and exchange policies are today much sounder than they were in the past.
"Our countries cannot only depend on their past achievements, but we can also take steps now that could help to minimize the impact of this crisis" (IMF photo)
But we believe that more can be done to reduce vulnerabilities, even during the crisis itself. And for this there is the need for a degree of cooperation or partnership between what the countries can do and what the IMF can do. We believe that there are still countries that can improve their financial systems and they will possibly need assistance from the IMF. There are countries that could have greater exchange rate flexibility, and here again we can provide help to protect them as they undertake this. Our countries cannot only depend on their past achievements, but we can also take steps now that could help to minimize the impact of this crisis. And we are ready to help.
IMF Survey online: El Salvador has sought a precautionary arrangement from the IMF, as a kind of insurance policy. Do you see other countries doing the same?
Eyzaguirre: El Salvador is a good example. It has sought a precautionary arrangement, with the firm commitment from the candidates in the presidential election to maintain certain economy policy thrusts. Depending on how you stabilize and avoid even worse volatility for the economy, you give economic agents a degree of certainty as to what future policy directions will be. So having a contingent line from the IMF that can be used if necessary—if, for example, the markets were to overreact—is useful.
IMF Survey online: There is another IMF mechanism that is relatively new—a short-term liquidity facility. No Latin American country has yet requested such a line, although various countries would qualify for it. Is there any explanation as to why none has done so as yet?
Eyzaguirre: Here we have a paradox.
The truth of the matter is that this crisis is recognized to have begun in the United States, and so one would expect that the country that is in the middle of the crisis would be the country having the greatest difficulty with financing, but that is not how the real world operates. The United States is a country with tremendous flexibility, with tremendous economic potential, and in times of uncertainty people seek a safe haven in the most solid assets.
The most solid assets are, paradoxically, U.S. treasury bills. So the problem begins in the United States, but in the end the financial flows go to the United States, to the Treasury, which is why it can take the economic measures that it has taken and that the new administration is planning. But as capital flows to the United States, it flows away from somewhere else. From where? From Latin America and other regions. And when there is less capital in Latin America and other regions, economic activity contracts.
"We can see how the policies adopted in recent years have prepared the region to withstand external shocks a great deal better."
This is the idea behind providing liquidity lines. The liquidity lines are for countries with impeccable economic policies that are affected by this flight to quality, when capital flees to more secure assets in the United States and causes the capital markets in our region to tighten. In this way, the IMF provides assistance to countries with short-term liquidity.
Why have countries not had recourse to this liquidity line in this crisis? My best interpretation of the situation is that it is a process of trial and error. The IMF needs to look after its resources—which effectively are member countries' reserves—and so it needs to offer this liquidity line with some certainty that it will be repaid. But for the countries that are not in a position to accept some preconditions, which they may not find advisable, there has been a process of rapprochement between the conditions that are seen as acceptable for the countries and those which would be acceptable to the IMF. And we hope that this process of give and take will lead to a meeting of supply and demand.
IMF Survey online: Do you see any significant backsliding on the poverty reduction successes achieved in recent years, owing to the crisis?
Eyzaguirre: Looking to the future, I would say no. There is no doubt that in Latin America, as elsewhere, the poor are the most vulnerable, both in absolute terms and in relative terms. They are the ones who suffer most during macroeconomic crises or during a slowdown.
Given that the slowdown will be moderate this time, some of the achievements in reducing poverty will be less impacted than on other occasions. In any case, the IMF has insisted that if there is any need for fiscal consolidation, this should not be at the expense of poverty reduction programs, which have been expanding very successfully in many countries.
IMF Survey online: Do you see the global crisis negatively affecting the policies adopted in recent years, particularly pro-market policies? Do you think that there could be a backlash against these policies?
Eyzaguirre: This is a formidable challenge, because when countries that have made an effort to improve their policies see a crisis emerging elsewhere, in the United States, and despite their efforts to improve they see their economies contract or poverty worsen, it is truly discouraging. For this reason in our dialogue with the authorities we are insisting that they do everything possible to mitigate the effects of the crisis so that it will be clear to everybody that the policies they have been following will ensure that this time the impact of the crisis will be significantly less than on other occasions.
IMF Survey online: This is your second stint at the IMF, the first being as Executive Director representing Chile and various other countries some ten years ago. Do you see significant changes from the way the IMF was at that time?
Eyzaguirre: Well, I have only been back a short while, but what I do feel is that the Fund is now putting much greater emphasis on its openness, on its transparency, and on poverty reduction. These issues are always the main concern in the programs it is supporting.
IMF Survey online: You have just taken up the position of Director of the Western Hemisphere Department. What are your priorities?
Eyzaguirre: At the moment: helping to prevent the global crisis from worsening and hitting Latin America hard, and this is related to the fact that my Department covers the United States as well. We need to give good policy advice to the United States to prevent the crisis from intensifying, and also have financing instruments, timely and adequately designed, so that countries can receive assistance from the IMF and minimize the effects of the crisis.
Later, the time will come to draw some conclusions and see what changes we must make, both in the countries that originated the crisis and in those that have in various ways been affected by it.
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