Latin America: Structural Reforms Can Catalyze Growth

IMF News, August 4, 2016

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Region needs reforms to preserve the social gains of the past 15 years.
Latin America would benefit from more regional integration.
Credibility and confidence are key to reforms’ success.
Thanks to sustained growth during the last commodity boom, Latin American countries have achieved a significant reduction in poverty and income inequality over the past decade.
As the external environment has turned less supportive and policy options are becoming more limited, economic reforms are needed to preserve and deepen these social gains.
“Today is a good time to talk about structural reforms” — Alejandro Werner, Director of the IMF’s Western Hemisphere Department.

Conference jointly organized by the IMF and the government of Uruguay in late July.
Attendees included policymakers from Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru and Uruguay, as well as academics and officials from the IMF and other international financial institutions.

Latin American countries remain relatively closed compared with advanced and emerging countries in other regions.
Intraregional trade represents only about a fifth of total trade in Latin America, versus more than a half in Asia.
Benefits of deeper regional integration highlighted:
- Increase effective market size.
- Stimulate competition.
- Support development of regional value chains of intermediary goods.
- Improve risk-sharing, lower transaction costs, and ease investment financing through more financial integration.
- Support economic diversification and complexity via cross-country technology transfers and regional reorganization of production.
- Diversification can increase productivity and growth and reduce dependence on exporting commodities.

Harmonize rules of origin.
Remove remaining barriers to the free movement of goods and services within Mercosur.
Create preconditions for successful financial integration, such as implementing consolidated banking supervision.
Consider industrial policies:
- Some participants advocated activist, targeted industrial policies aimed at specific sectors with higher returns or larger market failures.
- Others cautioned that weak institutions in some countries may make targeted policies ineffective and preferred “horizontal” policies benefiting a broad range of sectors.
- Andres Velasco (Columbia University) suggested creating independent institutions to select projects or sectors for public support, entirely separate from the political cycle.
Infrastructure improvements to support diversification and upgrade existing production clusters (including services such as tourism) rather than creating entirely new clusters.

Infrastructure investment can increase the capital involved in the production process and foster upgrading and widening of production clusters.
“Investments in infrastructures are like a perfect trinity,” said Mauricio Cardenas, Colombian Minister of Finance: they improve productivity, stimulate aggregate demand, and when financed through public-private partnerships, they do not entail upfront costs for the public sector.

Public opinion’s support is crucial for effective implementation of reforms.
Such support requires:
- Continuity in economic policy-making.
- Greater transparency.
- More efficiency in public spending.
- Awareness of workers’ demand for economic security; policies must have “the capacity to deal with social expectations” — Enrique Iglesias, Uruguayan economist and former President of the Inter-American Development Bank.
Recent IMF work has shown the importance of macroeconomic conditions and timing for the effects of product and labor market reforms.

IMF News — August 4, 2016