Latin America: Making the Good Times Better

By Dominique Strauss-Kahn

(Version in Español, Português)

Latin America has enjoyed tremendous economic dynamism and a rising quality of life in recent years. But, faced with new challenges, the question is: how best to sustain this progress?

As I travel through the region this week—visiting Panama, Uruguay, and Brazil—I’m looking forward to hearing the views of government officials, parliamentarians, and university students on the key challenges facing their countries today. Here are three questions that I look forward to discussing during my trip.

First, as the region enjoys a time of abundance—una época de vacas gordas—can there be too much of a good thing?

Latin America’s economies are growing rapidly, buoyed by good access to external financing and high commodity prices. But potentially worrying signs of overheating are popping up—rising inflation, rapidly growing credit, and booming stock markets.

We all know how this story can end if policymakers don’t act early enough to prevent boom from turning into bust. Guiding their economies to a soft landing may be the most important near-term challenge facing policymakers in Latin America today.

Withdrawing the macroeconomic stimulus adopted during the global crisis should be the first step—and some countries are already doing so. Countries should probably begin with fiscal policy, to reduce the burden on monetary policy. In some cases, however, rising inflationary pressure calls for action now on both the fiscal and the monetary fronts. Exchange rate flexibility is also important. In the current setting, appreciation can help temper capital inflows, by making foreign investors think twice about future exchange rate risk. To protect financial stability, prudential measures may need to be tightened. Finally, while capital controls may be useful temporarily in some cases, they should not be considered a substitute for macro or prudential measures.

Second, are countries equipped to handle future times of lean—la época de vacas flacas?

With the global financial crisis only just receding in the rear-view mirror, it may seem premature to think about possible future shocks. But the global economy remains exposed to downside risks, and it is always good to be prepared for a possible change in the economic weather. Latin America’s experience during the crisis—bouncing back from it much better than most other regions—shows the benefit of building policy buffers and reducing vulnerabilities in times of plenty. Over the last decade, countries across the region have strengthened their policy frameworks, lowered public debt, increased foreign reserve buffers, allowed greater exchange rate flexibility, and improved financial supervision and regulation. These all played a role in the region’s success.

What about the road ahead? Let me mention two areas where countries in Latin America—and indeed around the world—would do well to focus their efforts.

First, fiscal space. One of the most important lessons of the global financial crisis is that economies with healthier public finances had more room to offset the impact of the crisis, and to protect the most vulnerable. Going forward, countries should rebuild fiscal space—and in fact go even farther, where needed, to bring debts down to safe levels. Panama is one of the Latin American countries already working in this direction.

Second, financial stability. We also learned from the crisis how quickly seemingly isolated financial problems can engulf the entire financial system, affect the broader economy, and spread across national boundaries. We need better tools to monitor risks both within and across institutions. Regulators and supervisors should be empowered to take early preventive action. Indeed, a number of countries in Latin America—including Brazil—are already strengthening macroprudential financial regulations.

Finally, how best to share these times of plenty—across society, and with future generations? Como compartir—y prolongar—la época de las vacas gordas?

The region has undergone a dramatic transformation over the past decade, lifting tens of millions of people out of poverty. In Uruguay, for example, the poverty rate has fallen by a remarkable 10 percentage points since 2004. Today, the challenge for the region is to embark on the next stage of its transformation—reforms are needed to sustain strong growth for generations to come, and allow the fruits of growth to be shared across all members of society.

Reforms that boost productivity—such as revitalizing infrastructure and improving education and training—are clearly essential. Improving the business climate and strengthening governance are also important for a pro-growth strategy.

But growth for growth’s sake is not enough. The region remains profoundly unequal, with about a third of its people living in poverty. Leaders across the region are rightly committed to tackling this problem. And making the social safety net more effective is an important part of the strategy. Here, innovative conditional cash transfer programs—for example, Brazil’s bolsa familia program—are playing an important role, and are in fact being emulated around the world. Raising social spending and improving the quality of service delivery—in education, health, and public infrastructure—are also key priorities.

Latin America has come a long way over the last decade. But the region’s transformation is not yet complete. Leaders across the region should capitalize on today’s favorable conditions, transforming their countries to the next level, and ensuring that the benefits of growth are more widely shared.

7 Responses

  1. […] this month, I had the opportunity to discuss Latin America’s regional outlook with government leaders, parliamentarians, and […]

  2. […] this month, I had the opportunity to discuss Latin America’s regional outlook with government leaders, parliamentarians, and […]

  3. […] this month, I had the opportunity to discuss Latin America’s regional outlook with government leaders, parliamentarians, and […]

  4. I fully agree with the article, as far as it is a fact that latin America need to think beyond the current favorable situation of high raw material (commodities)prices.
    On this regard, I do think it should also be important to improve financial markets conditions, to make thenm deeper and more pro growth.It is combination of real , financial and institutional variables, which latin america policie makers should take into consideration in the coming years.Otherwise growth by itself ,will not solve very much of current and expected inequality. Besides Latin America has the chance(once in a life time) of rasing itself as a new investment valley in the global economy.Thus ,it can not afford to lose such opportunity either.

  5. […] in some cases, they should not be considered a substitute for macro or prudential measures. (continue reading… […]

  6. I agree with all that is said but would add the following:

    Latin America should make sure that their bank regulations, based on the Basel Committee´s induced risk-adverseness, do not produce additional competitive advantages for what is perceived as having low risk, and therefore creates an additional disadvantage for those perceived as more risky, like small businesses and entrepreneurs, when it comes to competing for bank credit.

    Currently “risky” clients are required to pay even higher interest rates than would be the norm in a market without regulatory discrimination based on perceived risk, since besides the normal higher risk-premium, they also need to compensate the banks for the fact that these need to hold more capital when lending to them.

    Latin-America should also be weary of the pro-government bias induced by the Basel Committee in terms of allowing the banks to hold much less capital when lending to “low-risk” governments. As an example billions of bank liquidity in the developed countries are currently painted into the corner of government debt which requires no capital, and cannot go to the corner of loans to small-business or entrepreneurs because that would require too much bank capital, which is very scarce.

    Finally, Latin-America (like the rest of the world, and the IMF) should also benefit from receiving more correct economic signals.

    Recently, in a conference on house financing reform, Alan Greenspan mentioned that before doing anything he would like to know better what would be the interest rates for house financing without any government intervention… which in other words means that Greenspan accepts as a fact that they are flying blind.

    When later (in private) I asked Greenspan “would you not like to know what the interest on public debt would be if the banks were required to have the same capital when lending to the government than when lending to a small business?” He answered “it is not precisely the same thing but it lies in the same area of interest”… in other words in the same general area of blindness.

    P.S. Since Strauss-Kahn will not travel to Venezuela I leave out here thousands of comments relative to the oil-curse.

  7. Latin America: Making the Good Times Better « iMFdirect – The IMF Blog…

    Here at World Spinner we are debating the same thing……

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