Alberto Arenas, Minister of Finance of Chile, with IMF chief Christine Lagarde. The conference brought together over 500 people from 30 countries (photo: Stephen Jaffe/IMF)
Santiago Conference
“This conference presents a timely opportunity to examine the current pressure points and to discuss policies to support quality growth and financial stability in the entire region,” said IMF Managing Director Christine Lagarde in opening remarks. “At this critical moment, it is more important than ever to foster growth that is inclusive, balanced, and sustainable,” she noted.
“Sustainable development and inclusive welfare should not work against each other but should be dovetailed,” added Chilean President Michelle Bachelet. During the past two decades, Latin America doubled its per capita income and greatly reduced poverty, Bachelet said, but she pointed out that the “structure of our development still faces pending tasks.”
Changes in global and regional economic conditions, social progress in Latin America and its implications for economic policy—as well as the potential role of region-wide solutions to address long-standing problems—were key topics discussed at the two-day conference “Challenges for Securing Growth and Shared Prosperity in Latin America” in Santiago, Chile. The conference is part of a series of IMF-related events in Latin America in preparation for the 2015 IMF and World Bank Annual Meetings in Lima, Peru.
The December 5-6 conference, jointly sponsored by the IMF and the Finance Ministry of Chile, brought together over 500 people from 30 countries, and included leaders, policymakers, prominent academics, opinion leaders, financial sector executives, and civil society representatives to discuss economic approaches to strengthen the entire region.
The future of the region
Over the past 15 years, most countries in Latin America have become stronger, with significant advances in reducing poverty and inequality. However, in many places, the provision of public goods and services is not adequate to meet the needs of the growing middle class. Conference participants examined the main social and economic challenges facing the region, and looked at ways that economic policy can boost potential output and advance employment growth and social progress more widely.
Noting that Latin America has a greater number of young people compared with other regions, Alberto Arenas, Minister of Finance of Chile, pointed out that governments need to invest more in human capital to increase labor force participation.
Blaming too many “stop and go policies,” which had generated uncertainty and hurt investment, Alejandro Werner, Director of the IMF’s Western Hemisphere Department, noted that future growth will increasingly depend on strong investment. “Investment is the bridge between the short and medium term,” pointed out Alicia Bárcena, Executive Secretary of the Economic Commission for Latin America and the Caribbean.
Lagarde observed that “Latin America is experiencing a double transition: first, commodity prices are falling and external financing conditions are becoming less favorable; second, a rising middle class is demanding better public health services, education, and infrastructure.”
According to Carmen Reinhart, a Professor at Harvard University, the three worst decades for Latin America were the 1820s, 1930s, and 1980s. All those decades, she said, were characterized by rising real interest rates and declining commodity prices. “But I am more worried about commodity prices than about U.S. interest rates,” she observed.
Conference participants discussed the challenges in the region associated with the normalization of U.S. monetary conditions. They agreed that the process of adjustment should be smooth, noting that the markets have priced in the rate increase. “This is the most anticipated event that I’ve seen in a long time,” said the IMF’s Chief Economist, Olivier Blanchard. “The yield curves already reflect an increase in short-term interest rates in the future,” he added.
“The process of adjustment will be helped by strong fundamentals and coordination with fiscal policy,” said Agustín Carstens, Governor of the Bank of Mexico. While Alexandre Tombini, Governor of the Central Bank of Brazil agreed, he cautioned that countries should be prepared for small bouts of volatility.
Stronger productivity growth
With regional economic growth expected to remain modest and most economies facing capacity constraints, participants discussed deeper structural reforms to raise productivity and strengthen the quality and reach of public services, particularly improving educational outcomes and upgrading infrastructure.
While most countries in Latin America have achieved almost universal primary and secondary school coverage, Jorge Familiar, World Bank Vice President for Latin America and the Caribbean, said that the quality of education is not sufficient. “Where a child is born determines where he will spend the rest of his life,” noted Familiar, referring to the gap between private and state schools.
Andrea Repetto, a Professor at Chile’s Adolfo Ibáñez University, agreed and added that employers are not finding the skills they require. “There is a disconnect between what the schools teach and the skills employers need,” she said.
The panelists also mentioned that the region needs to increase investment in infrastructure, from both the public and private sectors. Familiar gave a stark example to highlight this point: the average speed of a truck in Central America is 9 kilometers per hour because of the poor infrastructure.
Banking for development
Financial inclusion—making financial services more accessible to the general population—can play a crucial role in promoting broad-based growth and reducing income inequality, conference participants noted. They stressed that both public and private sector involvement is needed to improve access to financial services.
Financial inclusion can also contribute positively to financial stability, said José Viñals, Director of the IMF’s Monetary and Capital Markets Department. But when financial stability breaks down, Viñals warned, it has tremendous consequences, as the poorest segments of the population are affected the most.
Mauricio Cárdenas, Minister of Finance of Colombia, described two very successful initiatives that have significantly increased the number of people with access to banking services in his country. The Colombian government, he said, subsidized commercial banks to set up agents in every single municipality and it also makes payments for all public subsidies (such as conditional cash transfers) through the banking system. As a result of initiatives such as these, Cárdenas said that 70 percent of Colombians have access to banking services.
The inequality puzzle
During the past decade, Latin America’s middle class has been growing in size and confidence. For the first time ever, more Latin Americans were part of the middle class in 2011 than lived in poverty. Despite this progress, participants pointed out that the region trails other emerging markets in terms of inequality and social indicators.
Winnie Byanyima, Executive Director of Oxfam International, said that inequality in Latin America can be reduced by increasing public spending in health and education and improving its quality, expanding the coverage of public pensions, and by progressive taxation.
Santiago Levy of the Inter-American Development Bank noted that the high degree of informality—economic activity that falls outside the view of labor laws, tax regimes, and other “official” regulations—in Latin America’s labor market has stagnated the region’s productivity. “If we don’t improve productivity in Latin America, the region will not be able to grow faster,” he stated. This informality, and the associated narrow revenue base, has also deprived the state of the resources to enable the provision of public services needed to advance society further.
Byanyima also made the case for bringing more women into the workforce. “We need to remove barriers that keep Latin America women out of employment so that these countries can deliver higher growth and productivity,” she said. “Women are an untapped resource that can be leveraged,” added Lagarde.
Finally, during his keynote address, Professor Jeffrey Sachs from Columbia University ended the conference with an upbeat, sweeping vision for the region. He encouraged Latin America to let sustainable development be the guiding principle while embracing technology and natural sciences. He said “redistribution policies are working and education is spreading―these are the most fundamental drivers of equality.” He concluded that, with its vast natural and human resources, and with more investment in people and infrastructure, the region will be well placed to navigate challenges ahead.
