Growth and Stability in Latin America and the Caribbean: Challenges for the Epoch of Globalization -- Lecture by Eduardo Aninat
IMF News, May 26, 2000
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- Published: May 26, 2000
I. Introduction — framing and key messages
- The 1990s were, on average, much better for Latin America and the Caribbean than the "lost decade" of the 1980s and probably even better than the 1970s, largely thanks to better economic policies.
- Caveats: growth remains too slow and social progress too gradual and uneven; urgent action is needed to strengthen economic potential and cope with globalization.
- Central analytic lens: the "matrix" of interdependent relationships among policy areas and their cross-effects in a globalized world.
II. Economic and social progress in the 1990s — findings and key statistics
- Growth
- Growth rates peaked at 4 percent in 1997.
- Growth was expected to reach 2.4 percent this year and even higher next year.
- Per capita annual average growth in the 1990s remains almost two percentage points below the average of the 1970s.
- Terms of trade and exports
- Average terms-of-trade index was about 12 percent lower in the 1990s than in the 1980s.
- Average terms-of-trade index was 25 percent lower in the 1990s than in the 1970s.
- Export volumes expanded at an annual average rate of 8.1 percent in the 1990s.
- Capital inflows
- Net private capital inflows in the 1990s were similar in magnitude to the 1970s.
- Foreign direct investment accounted for slightly more than half of capital inflows in the 1990s, up from about a quarter in the 1970s.
- Stability indicators
- Standard deviation of real GDP growth fell from 2.5 percent during the 1980s to 1.8 percent in the 1990s.
- Average inflation fell from 45.8 percent in 1979 to 8.8 percent in 1999.
- Net private capital flows were slightly less volatile in the 1990s than in the 1970s despite two episodes of financial turmoil.
- Social outcomes
- UNDP Human Development Index: since 1975 the gap to the maximum value of 1 was reduced by one-fifth or more in available country data.
- Poverty: ECLAC estimates poverty rose in the 1980s and returned toward the 1980 level in the 1990s.
- Almost 185 million people were living under the poverty threshold of less than $2 per day.
- Chile cut its poverty rate by one half in one decade (1990s) through vigorous growth and well-targeted social policies.
- Income distribution: limited progress; e.g., in Honduras the income captured by the lowest 40 percent of households rose by only 2.1 percent in the 1990s (highest change among available country data).
- Country cluster results (Chart-based summary)
- 17 countries raised their average annual growth rate in the 1990s relative to the 1980s.
- 24 countries reduced GDP growth volatility in the 1990s.
- 13 countries achieved both higher growth and greater stability (upper-right quadrant); Trinidad and Tobago was among this group.
- Lower-right quadrant (more stable but lower growth): Brazil, Ecuador, Jamaica, Paraguay.
- Upper-left quadrant (higher growth but more volatility): Argentina, Dominican Republic, Suriname, Venezuela.
- Lower-left quadrant (lower growth and higher volatility): Barbados, Colombia, Haiti, St. Vincent.
- Comparing 1990s with 1970s: only 9 countries achieved higher growth in the 1990s than the 1970s; only 6 achieved both higher growth and more stability. Trinidad and Tobago achieved more stability but somewhat lower growth versus the 1970s.
III. Opportunities and risks from globalization
- Opportunities driven by information technology and integration
- New information technologies reduce information and transaction costs, raise competition, and can produce a positive supply shock boosting productivity.
- U.S. evidence: productivity growth increased to about 3 percent from 2 percent in the early 1990s and barely 1 percent during the previous 15 years.
- Goldman Sachs study estimate: electronic commerce could add 0.25 percent to the annual growth rate of OECD countries over the next ten years.
- New technologies lower barriers to market entry; small infrastructure (power, phone, bank account, shipping) can enable global market participation.
- Growing economic mobility of factors, especially in services, enables provision of services across distance.
- Financial integration and volatility
- Advances in information processing, financial innovation, and liberalization have produced dramatic expansion in domestic and international financial flows.
- Capital flows have become more important than trade flows in short-term exchange rate determination (worldwide, less than 10 percent of foreign exchange transactions are trade-related).
- Larger role for equity finance and securitization, but many flows are highly volatile.
- Risks
- Failure to exploit opportunities risks locking the Region into low productivity growth and traditional commodity dependence.
- Higher international capital mobility increases vulnerability to capital account shocks (including from external factors such as U.S. monetary policy).
- Integrated capital markets can increase exchange-rate volatility, hitting tradable and nontraditional export sectors.
- Globalization triggers deep structural change and potentially large short-run adjustment costs as labor and capital reallocate.
IV. Preconditions for success in the global epoch — five complementary policy priorities
- 1) Good governance and transparency in economic policymaking
- Provide better, open, and timely macroeconomic and financial information.
- Prioritize prudential financial regulation and adopt international best practices in fiscal and monetary transparency, banking disclosure, and accounting.
- Modernize public revenue and expenditure systems; reconfigure budgets toward cost-effective social outlays consistent with country-owned poverty reduction strategies.
- Recognize that globalization may weaken governments' ability to tax as capital becomes more mobile.
- 2) Continual modernization of the regulatory framework
- Address regulatory challenges from information economies (network externalities, temporary monopolies, locking-in effects).
- Strengthen financial regulation and supervision to manage de-intermediation and supranational financial market effects.
- Remove regulatory or fiscal distortions favoring short-term capital inflows; consider temporary price-based prudential controls on short-term flows in specific circumstances (example: Chile).
- 3) Heavy investment in education and quality improvement
- Shift from expanding coverage to improving educational quality and curriculum modernization.
- Chile example: real outlays on education increased by 150 percent during the 1990s; 30 percent increase in effective classroom time in primary and secondary schools; all high schools and half of primary schools have computers with direct links to the Internet.
- Chile expects real wages to rise by at least an additional 6 percent in the medium term thanks to productivity gains from education reforms.
- 4) Reliable, cost-efficient utilities and strong regulation of private participation
- Ensure power, telecommunications, banking, and transport infrastructure reliability and affordability.
- Privatization and concessions must be accompanied by strong regulatory frameworks (Chile given as an example).
- 5) Mechanisms to cushion adverse international fluctuations
- Establish well-designed, transparent stabilization funds to smooth commodity price fluctuations (examples: Chile and Mexico; Chile's copper stabilization fund used for almost a decade).
- Trinidad and Tobago has designed and implemented a similar mechanism for oil price stabilization.
- Support stabilization mechanisms with sound fiscal policy and build social safety nets during good times to protect against adjustment costs and volatile capital flows.
V. IMF engagement with Latin America and the Caribbean
- Current IMF involvement
- The IMF has programs in place with 13 countries in the Region, for a total of about $30 billion.
- Technical assistance totals the equivalent of over 8,000 days of staff time each year across macroeconomic management, statistics, tax policy and administration, social security reform, financial law, and information technology.
- Discussions under the "Caribbean Initiative" on establishing a Caribbean Regional Technical Assistance Center with other institutions and donors.
- Surveillance and standards
- Several countries volunteered for pilot programs on release of Article IV Staff Reports, experimental reports on standards and codes, and the Financial Sector Assessment Program.
- The IMF is streamlining loan facilities, intensifying poverty-reduction efforts, and seeking ways to help prevent and resolve crises.
- Institutional debate
- Recent reports (including the Meltzer Commission majority report) criticized IMF practices; dissenting views emphasize the historic contribution of international financial institutions to global development and crisis management.
VI. Final thoughts — globalization, human development, and labor
- Central normative question reframed: from "What do bosses do?" to "What will workers do?"
- Globalization is changing consumption, saving, and work patterns; a deep rethinking of post-modern labor markets is needed to understand changes for skilled and unskilled workers.
- The lecture emphasizes the human face of development: policy choices now will determine whether globalization produces a "smiling face" or "a face of sorrow and despair."
Lecture by Mr. Eduardo Aninat, Deputy Managing Director of the International Monetary Fund; Port of Spain, May 26, 2000.