World Bank warns against capital controls
The World Bank’s senior figure in Latin America and the Caribbean is concerned that smaller open economies could get hurt in the long run
The World Bank yesterday urged countries in Latin America and the Caribbean to resist the temptation to embrace protectionism in order to curb sharp rises in their exchange rates.
Hasan Tuluy, the Banks vice president for the region, acknowledged that small open economies in particular could have trouble dealing with the excess quantities of liquidity. But he said countries needed to manage liquidity while at the same time avoiding blunt instruments because they will come back to haunt you.
Many countries in the region have been addressing the issue by purchasing US dollars and keeping interest rates low to avoid sharp appreciations in their currencies.
There have also been some examples of protectionist policies that may have short-term positive impact but are highly disruptive in the long term, he said.
Protectionism is a very blunt instrument. Having complicated capital controls may be attractive right now, but cannot be sustained in the long term. That is I think the flipside of the dynamics in Latin America, said Tuluy.
A number of countries, ranging from Honduras to Paraguay, have placed paper on the market in the past year. Ecuador, which is still dealing with some issues from a 2008 default, is considering a bond for next year.
Many economies are now going to the market at spreads that are better than European spreads, he said. I worry less about Chile, Colombia and Peru going to the market, but there is a series of other countries that could face difficulties.
The upside to this story is the regions strong performance. The bank estimates that average growth in 2013 will be 3.8%, increasing to 4% the following year. Unlike past positive cycles, growth this time has been more widespread and equal.
The bank states that 73 million people have been brought out of poverty and the number of people in emerging middle class is now roughly the same size as those living in poverty.
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What is remarkable, probably exceptional, is that this growth has been accompanied by a reduction in inequality. This is fantastically important, because in many parts of the world what we have found is growth accompanied by increasing inequality, not only in developing and emerging economies, but also in the developed and industrialized countries said Tuluy.
There are a number of countries that are rapidly growing, which will change the fabric of the economy and the fabric of society whereby they will be much more inclusive and share prosperity that has eluded Latin America, he added.
The bank, however, does recognize that while average growth rates are solid, Central America and the Caribbean have not done as well as the larger economies.
A number of Caribbean countries have defaulted on debt in recent months, including Grenada in mid-March and there are even pockets in fast-growing economies that are lagging far behind.
In Peru, for example, national poverty rates have dropped below 30%, but they remain above 60% in highland and jungle regions where the state remains largely absent and unable to provide services.
Other key points that are being watched are citizen security and crime, which remains one of the principal concerns of populations as well as investors. Several countries in the region lead the world in levels of violence.
Guatemala recorded close to 1,000 homicides in the first two months of the year. This is a big problem in Latin America, and acute in parts of Central America and the Caribbean. Countries need to address this, Tuluy said.
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