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Opportunities and Challenges for Economic Development in the Americas, Remarks by Rodrigo de Rato, Managing Director, IMF
April 20, 2005
Good afternoon. It is an honor to be invited to take part in this conference. Although freedom and democracy may be considered largely social and political ideals, their attainment is inextricably linked to economic growth, job-creation, and poverty reduction. Many would even say that free and just societies can only be founded on the basis of sound economic policies and stable growth, and vice-versa.
Economic Outlook for the Americas
For that reason, it is heartening that, like the rest of the world economy, countries in the Latin American region witnessed very strong growth last year. On a region-wide basis, growth for 2004 was 5.7 percent—the highest rate since 1980! Even more encouraging are the following features which accompanied this strong performance:
• First, despite higher prices for oil and some commodities, inflation has remained relatively low, averaging 6½ percent last year, with a further decline projected for 2005.
• Second, the region's external position continued to turn around and improve, with 2004 seeing a current account surplus of close to 1 percent of GDP.
• Third, many regional governments are taking advantage of the favorable economic conditions, and the associated revenue boost, to strengthen fiscal positions.
Considering the region's history of macroeconomic instability, these are all welcome developments.
Nevertheless, now is not the time to be complacent, for a closer look reveals to us a more sober picture. For instance, although 2004 saw economic growth in all regions and in all developing countries, Latin American growth was among the least vigorous. And while we applaud the success in reducing inflation, some countries in the Americas still face price pressures. Further, unemployment and poverty remain unacceptably high, and severe income disparities persist.
I point these limitations out not to discount the achievements of recent years. Rather, they suggest that unless underlying weaknesses in regional economies are addressed, we risk wasting the important accomplishments of late. For leaders in the Americas, the key priority now is to build upon the recent gains by implementing reforms that will generate stable, sustained growth, as the foundation for economic security and poverty reduction.
Macroeconomic Challenges
What might some of these reforms be? We begin with a traditional weak spot for many developing and emerging economies, especially in Latin America—that is, fiscal policy. Public debt-to-GDP ratios in regional economies remain high, averaging about 55 percent. In the largest countries, they are well over 60 percent. These levels are far above those of the late 1990s. Bringing them down would significantly reduce vulnerabilities to shocks, especially given the heavy reliance on short-term and foreign currency borrowing. Lower debt ratios would also increase the flexibility of policymakers to respond to cyclical developments, as well as free up budgetary resources for additional spending on infrastructure, health, education, and social safety nets.
A key concern in fiscal consolidation is that it be achieved in a durable manner and in a way that promotes equitable growth. The focus should be on broadening tax bases, improving the debt structure, and strengthening public expenditure management. These should be supported by strong institutions that support prudent fiscal policy—for example, effective and clear fiscal responsibility laws. Governments should also strive to improve the efficiency of public spending programs, and better target them to the poor. Care should be taken to ensure that fiscal consolidation does not result in a deterioration of essential government services.
As I indicated earlier, impressive progress has been made in taming inflation in the Americas. This development is especially welcome from the perspective of poverty reduction, because of the disproportionate effects that high inflation has on society's poorest. Going forward, governments should aim to entrench the gains that have been made. The adoption by many countries of inflation targeting frameworks for implementing monetary policy is a positive step. This, coupled with floating exchange rate arrangements, will increase the capacity of these countries to deal with external economic shocks. However, for inflation targeting frameworks to work, central bank commitment to stated objectives, backed by credible policy action, will be needed. These in turn require strong central bank governance and independence, as well as a framework to ensure that monetary policy is implemented in a transparent manner.
Structural and Institutional Reforms
Sound macroeconomic policies alone will not be enough to spur growth and poverty reduction in the Americas. They need to be accompanied by structural and institutional reforms that reduce impediments to investment, trade, and efficient resource allocation. In this regard, weak rule of law and judicial systems in the Americas continue to undermine property and contractual rights. Procedural complexities and regulatory burdens to starting a business in this region are, according to some studies, the highest in the world. Together, these factors make the Americas one of the least attractive locations for investment.
Additionally, labor market reforms remain neglected in the region, with Latin America and the Caribbean continuing to rank unfavorably in international comparisons of labor market rigidities. Experience shows that such reforms can play an important role in raising investment, growth, and employment. Removing impediments to employment in the formal sector can also yield considerable social benefits, since workers in the formal economy enjoy legislated labor market protections which do not exist in the informal sector.
It is also striking that, despite recent gains, the Americas remain much less open to foreign trade than other fast-growing regions. This lack of an outward orientation handicaps the region's ability to reap the benefits of globalization and take full advantage of the global expansion, including in China. Increasing the region's export orientation—by further liberalizing trade policies—can play a critical role in both stimulating growth and reducing vulnerabilities. Regardless of progress in the multilateral Doha round, Latin America itself can, on its own, do much by reducing external tariffs, limiting the use of non-tariff barriers, and relaxing restrictions on trade in services. These reforms should be underpinned by improvements in infrastructure, and in port and customs administration.
The continued growth and expansion of the Americas region depend very much on strong and vibrant financial sectors. In particular, regional financial systems need to be transformed from being sources of vulnerability to institutions of economic strength, capable of allocating financial resources in a manner that underpins economic growth. Reforms needed here include further strengthening of banking regulation and supervision, improving accounting and auditing standards, and revising bankruptcy laws to enhance the ability of lenders to deal with distressed loans and assets.
Dealing with the Political Economy
As you can see, the reform agenda for the Americas is long and challenging, though it is clearly not uniform. The region is diverse, with countries at many different stages of reform and development. While the circumstances of each economy will have to be considered separately, any country launching reforms will need to address one important issue—how to ensure success by building broad support for, and ownership of, the required policy measures. There will undoubtedly be resistance to some of these measures, as could be expected in all dynamic societies. Governments will therefore have to work hard to build support for reform. The current strong performance of the region and of the world economy provides a window of opportunity to do that.
In that connection, the fact that many countries in the Americas will hold elections before end-2006—including the largest Latin American countries—poses both challenges and opportunities. In past decades, elections in this region have often been associated with instability and economic turmoil. Fortunately, the recent experience has been much more encouraging. I also have the impression that the economic teams of most Latin American countries are highly-committed to macroeconomic discipline and integrity. There has been a sea change in the region, with a broad understanding of the perils of pandering to short-term interests, and a recognition of the need to focus on growth and stability instead.
Conclusion
In closing, let me return to where I began—which is the close linkage between political and economic reforms. Although my remarks have dealt mostly with issues of economic governance, these are invariably bound to the questions of political governance that you will explore later this afternoon. To a large extent, advancing one means advancing the other.
I wish you a successful conference today. Thank you.
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