Latin America and the Challenges of Globalization An Op-Ed

July 4, 2000

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Latin America and the Challenges of Globalization
An Op-Ed By Eduardo Aninat
Deputy Managing Director, IMF
July 4, 2000


Reproduced with permission of Reforma

Recent developments in several Latin American countries have prompted much handwringing about increased threats to regional economic stability. While I share some of these concerns, I believe many of the social tensions that have surfaced are a consequence of a new, positive global paradigm that is emerging—albeit accompanied by pressures and challenges—as the region moves toward full participation in a globalized economy. This shift brings with it the opportunity to achieve a quantum jump in economic performance throughout the region, provided however, that our societies prove themselves capable of consistently moving forward with modernizing reforms in the economic and social areas.

It is a paradigm full of promise, but the pace varies as each country comes to terms with often-difficult changes, creating laggards that tend to obscure the overall progress in the region. These changes are essential if the first decade of the 21st century is to be the time when the people of the region reap the benefits from the opportunities that globalization offers, while coping effectively with the risks and challenges that it entails.

First the facts. After the "lost decade" of the 1980s, the 1990s were a distinct improvement for Latin America and the Caribbean, perhaps even better than the 1970s. GDP growth rose as high as 4 percent in 1997 prior to the outbreak of the crisis in Asia and the emerging markets. It is again recovering rapidly: 4 percent is projected this year, and a somewhat larger figure for next year. In looking at country growth rates, 17 countries were able to raise their average annual growth rate in the 1990s (average per capita income in the region grew 1.5 percent per annum in the 1990s) compared to the 1980s; at the same time, 24 countries showed a reduction in the volatility of their growth performance, and 13 countries achieved both higher growth and greater stability of growth. Inflation has been tamed, and it is down to single digit levels after decades of double digit inflation. And substantial export growth and renewed net private capital inflows mean that the balance of payments is generally stronger regionwide.

This economic performance is reflected in social progress. The gap in the UNDP's Human Development Index has been reduced by more than 20 percent between 1975 and 1997, reflecting a substantial improvement in social indicators. Although the scourge of poverty still affects some 185 million people, and had been rising in the 1980s, poverty levels declined significantly in the 1990s. However, poverty remains stubbornly high, affecting 36 percent of the Latin American population. Income distribution across quintiles or deciles continues to present a discouraging picture. Nevertheless, a modicum of progress has been achieved.

The credit for this turnaround goes to the countries themselves for adopting profound reforms—and then sticking with them for the past 15 years. But, has it been enough to put the region on track for rapid growth and social development? Not yet.

First, current economic growth rates are still not enough to achieve social goals. Policymakers should target higher growth, but they must also strengthen the link between growth and equity. Equity holds the key to ensuring sustainable growth. Second, the region is not yet harnessing the full benefits of the "new economy"—the accelerating global integration fueled by the revolution in information technology.

What are the benefits and how can Latin America gain? New technologies mean sharply lower information and transaction costs. This in turn lowers barriers to entry, increases competitiveness, and raises investment. A quantum shift in overall productivity is possible as producers previously shut out of international markets seize new opportunities. In the 1950s and 1960s, isolation was the rule in Latin America; now openness and connectedness are the order of the day.

The new technologies are also changing the face of commerce by increasing capital and labor mobility. Geography is no longer an insuperable barrier to the integration of labor markets, particularly in the services sector. It is now possible for work to be brought to the workers; they do not need to migrate in search of work. But far more dramatic is the expansion in international financial flows made possible by financial liberalization, market innovation, and technological advances.

But there is a downside. If Latin America and the Caribbean fail to grasp these new opportunities, then the region faces a future of low productivity, probably reliant upon production of traditional commodities, lagging farther and farther behind the highly developed economies. Moreover, greater international capital mobility has increased the vulnerability of relatively small, open economies to shocks caused by deficient domestic policy or factors beyond their control. For instance, integrated capital markets are prone to higher exchange rate volatility. And often, countries face structural changes and transformations that carry substantial costs and dislocations—such as unemployment in some sectors—which policymakers must take into account, and mitigate.

The political difficulties and the political will required to move this process forward are very considerable. In the past decade, several countries in the region had achieved mixed results in coping with the short-term costs of adjustment. Effective and well-targeted social safety nets can provide safeguards against excessive social costs that may arise from structural change. They would also help spread the net benefits of globalization, thereby strengthening economic growth and social equity.

So the big question is whether Latin America and the Caribbean can harness the new opportunities, and simultaneously safeguard against the risks. My answer is yes, but only if the countries implement appropriate macroeconomic policies that are sustainable over time, complemented by a package of social measures aimed at making globalization work in the people's favor.

First and foremost, they need to foster good governance and transparency in economic policymaking. The pressures of globalization accentuate the benefits of sound policies and the costs of poor policies. Countries with sound macroeconomic and structural policies will attract trade and capital, and will ultimately put themselves on a path of convergence with the more advanced economies.

    Second, countries must continually modernize their regulatory framework. Information technologies pose new challenges for national regulators. In the financial area, faster progress is needed to strengthen the supervision and regulation of institutions in a world of highly mobile financial flows. This is especially challenging when countries are also trying to liberalize their financial sectors.

    Third, the demands of a knowledge-based economy make it essential to invest heavily in education. Great strides have been made in the region on increasing coverage, particularly in primary schooling. Now policymakers need to focus on dramatically improving the quality of education at all levels.

    Fourth, they need to establish a reliable, cost-efficient infrastructure. Many countries have greatly improved the supply of critical services—in the areas of power, telecommunications, banking, and transport. But they need to go much further in this direction, always within a regulatory framework to ensure that private sector participation leads to benefits for consumers and increasing competitiveness.

    Fifth, they need contingency mechanisms to cushion economies against the adverse effects of fluctuations in the international economic environment. Stabilization funds—well-designed and transparent—would smooth price fluctuations for large commodity exporters. These are, of course, no substitute for sound fiscal policy.

With economic recovery underway, and confidence returning to financial markets, most countries in the region now face an ideal setting for robust action on these necessary policies, which will determine whether the region can at last take its place among the successful societies in the world. The challenge is great, but the choice is clear. The future is now!


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