Interview With Alejandro Werner
Investing in Latin America’s Future
IMF Survey online
March 25, 2013
- Region continues to grow rapidly; needs to adapt to global uncertainty
- Capital inflows bring benefits but essential to manage risks
- Stronger social policies are key to foster inclusive growth
Economic growth in Latin America is expected to remain strong in 2013, but the region needs more growth-enhancing and employment-generating policies to reduce poverty and income inequality, said Alejandro Werner, the IMF’s new Director of the Western Hemisphere Department.
Werner also noted that large capital inflows, while beneficial for countries in the region, were generating some volatility in domestic financial markets.
Werner joined the IMF in January 2013, leaving a position as head of corporate and investment banking at BBVA Bancomer.
(Watch the full-length video)
IMF Survey online: You have just taken up the position of Director of the Western Hemisphere Department. What are your top priorities?
Werner: The Western Hemisphere covers all the countries in the Americas and, therefore, includes a wide mix of countries. Our priorities reflect this diverse mix.
For example, we have the United States, which is seeking to accelerate the pace of its recovery. Here, I think our job is to add value to the ongoing debate on options to speed up the U.S. recovery following its financial crisis, to develop a medium-term fiscal consolidation strategy and to continue strengthening the balance sheet of its financial sector.
The United States has important ties to the rest of the Western Hemisphere. Central America and the Caribbean, for instance, are strongly linked to the U.S. through remittances, exports, and tourism. For these countries, low growth and high debt are the headline issues. So the IMF has to work closely with policymakers in these countries to help them design policies that will put them on a path of higher growth and declining debt-to-GDP levels.
Then we have some countries, like Brazil and Mexico, whose economies are large and systemic. These economies have been extremely healthy and growing, so our role is to provide the best advice possible to continue strengthening their fiscal and monetary frameworks, developing their financial capital markets, and upgrading their regulatory frameworks.
We also have important commodity exporters, such as Chile, Colombia and Peru, which have benefitted substantially from positive terms of trade shocks. As a whole, these countries have grown very strongly in the past decade.
An overarching theme for the whole region will be to adjust and prepare for an uncertain external environment. Commodity prices, which have supported growth in many economies, might stagnate or drop. And world interest rates will eventually rise, which will affect the external and local debt repayments for Latin American countries. Therefore, I think we have to assist them in the design of policies conducive to increase their savings rates, continue reducing their debt-to-GDP levels, both public and private, and help them transition from a more commodity-based growth strategy to one that is more self-sustaining and based on services, manufacturing, and construction.
The IMF can help through its surveillance responsibilities, through the deployment of technical assistance that is done in the region, and also by transmitting all the knowledge that we have to our countries in our constituency.
IMF Survey online: Capital flows to the region have been increasing recently and are still very volatile. What has been the impact of such flows on Latin America?
Werner: There are important reasons why capital is flowing to these countries. First, Latin America has grown rapidly compared with the rest of the world and is expected to continue to grow rapidly. Second, this is a region where overall fiscal policy is on a stable path. And third, this is a region with a very young population, which provides a good environment for productive investment. These positive demographics translate into a growing consumer population that will be the source of large increases in demand for these products. So looking at all these positive factors, capital is flowing to these economies because economic perspectives are very good.
At the same time, monetary policy decisions in the advanced economies since the global crisis have resulted in very low global interest rates. Investors are taking advantage of these interest rate differentials by moving their money into emerging markets and Latin American assets. The money that is flowing into the region is generating some volatility in financial markets, inducing short-term lending, and putting upward pressures on exchange rates, which always presents a challenge.
The role of the Fund in these countries is to assist them in the design of the optimal monetary-fiscal policy mix, one that strikes a balance between accommodating the capital inflows and avoiding financial excesses or new vulnerabilities; macroprudential policies can be very useful to strike this balance.
The key point here is implementing a set of policies that actually allows these countries to reap the benefits of capital inflows through, for instance, more investment in infrastructure and social issues, and minimizes the negative consequences that are caused by financial market volatility.
IMF Survey online: What more can be done to continue reducing the still relatively high income disparity in Latin America?
Werner: In the past 10 years Latin America has made significant improvements in income inequality and poverty reductions. However, the region still has one of the highest poverty rates and income inequality in the world.
Going forward, strengthening economic stability and implementing growth-enhancing and employment-generating policies are key. Another important factor is continuing to design good social policies, such as conditional cash transfers aimed at the poorest segments of the population. But more than that is implementing very serious programs to enhance education and health, which, at the end of the day, are the most important long-term determinants of growth, employment generation, and poverty reduction.
IMF Survey online: Peru will be hosting the 2015 IMF-World Bank Annual Meetings and Brazil will be hosting the 2014 Soccer World Cup and the 2016 Olympics. What does hosting such events mean for these countries and the region more generally?
Werner: I think this is a great opportunity for these countries to showcase their recent social and economic achievements—reducing income inequality, enhancing development, and raising the living standards of their populations—and to continue to show that their high growth rates provide a favorable environment for foreign direct investment. These events are also a good opportunity for these two countries and for the region as a whole to demonstrate their sporting abilities, both in soccer and in other sports.
This interview is an edited version of the full length video.