In general terms, how would you say the region has changed during your tenure as IDB president?
Iglesias: First of all, the region is more stable, more open, more efficient and more sensitive to environmental issues. For many countries in Latin America, instability was a way of life. The terrible inflation rates of the past have been brought under control, and we no longer have the traumatic balance-of-payments problems we used to see. The region had also been very closed, inspired by an inward-looking rather than an outward-looking philosophy. Today it is much more open to Latin America and the rest of the world, in all directions: the United States, Europe, Asia and Africa. I also think that, despite certain frustrations, both the public and private sectors in Latin America have become more efficient. The region is also more sensitive to concerns about the environment and sustainability, as part of a worldwide trend in this direction. On all these fronts, progress has been uneven depending on the country.
What frustrations remain despite these efforts?
Iglesias: One of the biggest frustrations is that growth in Latin America and the Caribbean has not been as high as expected. It has also been volatile because it was exposed, as never before, to fluctuations on the international markets, with very serious economic and banking crises. But the greatest frustrations have been in the social sectors. We expected to have a very rapid positive response, yet poverty reduction continues to be very disappointing. It is difficult to understand why Latin America hasnÕt been able to reduce poverty any faster. Unemployment has dropped but remains too high. And inequality hasnÕt improved either; in fact itÕs gotten worse. In some countries, economic growth has made inequity worse instead of reducing it.
The period has been full of mixed results. When reforms were launched in the 1990s, they were expected to have a much more rapid impact at the international level, for instance in trade. In the early 1990s, when the Uruguay Round [of trade negotiations] closed, expectations were high that there would be a positive effect, but it never materialized. We are still waiting for the resolutions from the Doha round of World Trade Organization agreements to resolve the problem of trade, so crucial for our countries.
In the late 1990s, we began to feel the impact mainly of the financial crises in other parts of the world (Russia and Asia) that also hit us, in addition to our own crises. This was something we had seen in the past: contagion from international economic turbulence. As a result, we entered a period of stagnation in the early 21st century that was compounded by the terrorist attacks of September 11, 2001.
Fortunately, in the past year, we have begun to see economic growth rates we had not seen in many years, opening the door to new optimism. Throughout the period, the region had high hopes and big disappointments. Now we are entering a period of renewed confidence based on two years of good performance, and are hopeful that the trend will continue in the coming years.
I think that to be realistic, we cannot claim that nothing has been done in Latin America because that is simply not the case. Important things have been done, but at the same time, there have been huge gaps and great frustrations: growth has been very slow and volatile, and social issues remain to be resolved. In other words, the glass is half full and half empty, with the proportions varying by country. We need to recognize that some progress has been made, since otherwise we would be ignoring part of the actual situation on the ground.
Do you think the Millennium Development Goals set by the international community can be achieved?
Iglesias: Several of these goals are being met. IÕm concerned about one in particular: poverty reduction. IÕm afraid that if we do not see higher growth rates and if smart social policies arenÕt in place, we wonÕt be able to halve poverty by 2015 as called for under the goals. In other areas I think we are making good progress, but in poverty reduction we may be disappointed if we continue the way weÕre going. In terms of the goals for primary education, we have addressed access but are now concerned about quality and strengthening secondary and higher education. The problem is that in many cases, children drop out before completing basic secondary education, and education quality leaves a lot to be desired.
The Millennium Development Goal project is useful because it crystallizes the aspirations of society at large in certain concrete goals so that governments and the private sector can be held accountable for their achievement. In other words, the MDGs are sort of like a thermometer for expectations and frustrations. I have always told political leaders in Latin America that they need to achieve the MDGs as an important point for their social dialogue and commitment. I think that all such initiatives that provide guidance, set objectives and promote action are very good.
What is the outlook for the first decade in the 21st century?
Iglesias: As I said earlier, the big issues of the late 20th century are being addressed, to a great extent thanks to windfalls from abroad, such as the upswing in prices for raw materials for a region that is so heavily dependent on them, declining interest rates and the opening up of new markets. In addition, government policies are sounder than in the past. Even governments that havenÕt been elected on revisionist or progressive platforms have been very serious about their macroeconomic policies. Nobody is playing around with macroeconomics because they know what a very high price theyÕd pay for it.
We have stressed that governments need to take advantage of this windfall of favorable external conditions and sound macroeconomic policy to make the changes that will help us improve the internal responsiveness of the economy, thereby generating higher economic growth rates that will enable us to address the social issues.
Latin America has to learn from other regions and their experiences, such as Europe and Asia, because we all share the same economic objectives of growth and, through growth, meeting social needs. It is important to point out how the Asian countries achieved their social aspirations through growth and draw lessons from their experience. In Asia, growth was possible primarily because of much higher savings, the top priority assigned to education and the tremendous support given for technology and knowledge, the foundations for a modern economy. The Asian economies also opened up to international trade, promoting exports and maintaining a smart relationship between the State and the private sector.
The European social model also shows us how economic growth can be reconciled with social justice. This model has undergone significant changes, but in essence remains the same. I believe that supporting social development and the principle of solidarity the way the Europeans have done is crucial and demonstrates that sound economic management is compatible with social progress.
How did the Bank respond to the major challenges that arose during your tenure? How did it adapt to the changing new needs of the countries?
Iglesias: The Bank has had to adapt to all these new developments on an ongoing basis. When I first took office as President, I stated in my inaugural address that my aspirations were to see a larger Bank, a more creative Bank and a more efficient Bank. IÕm convinced that we have made significant progress in all three areas. The Bank is definitely much bigger: when I took office, we had a capital stock of US$34 billion that is now up to US$101 billion. From a portfolio of US$21 billion, weÕve grown to US$67 billion. The Bank has become more creative in the sense that we have tried new ways to address the changing economic environment and support the governments in their decision making on economic and social policy. In my opinion, we should be proud of the flexibility weÕve achieved.
We are also a more efficient Bank, although I recognize that there is always room for improvement, and I am sure it will happen. The Bank has improved its administrative practices and its relations with the countries. We have added numerous lending instruments that we didnÕt have before and are increasingly geared toward performance-driven loans and sectorwide approaches to lending, working in association with other institutions. Most importantly, we launched policy-based lending to support policy and institutional reforms, which I believe was an appropriate innovation at the time. In terms of instruments, we expanded the BankÕs involvement with the private sector by establishing the Inter-American Investment Corporation (IIC), the Multilateral Investment Fund (MIF) and the private sector window, which finances infrastructure projects. A General Coordinator position was recently created to oversee all the BankÕs private sector activities.
Social development has been a key issue since the Bank was founded under the leadership of Felipe Herrera and remained so under Antonio Ortiz Mena. Loans for the social sectors (education, health, housing and urban development) were the staple of our institution for many years. Social concerns have also been a priority during my tenure. We made the fight against poverty our overarching objective: 50 percent of our lending goes directly to social development. The Bank has the highest percentage of lending for the social sectors of all multilateral organizations.
Apart from the traditional areas of education, health and housing, we have entered new areas, such as gender issues, neighborhood improvement, urban and domestic violence, issues that are now major concerns for Latin American society. We have also tried to support governments in emergency programs to alleviate the impact of major crises. We have provided financing for innovative poverty reduction projects such as Oportunidades in Mexico and Bolsa FamÕlia in Brazil, among our ongoing efforts to meet the needs of the most dispossessed segments of the population.
A second major area in which we have become heavily involved is competitiveness. The idea is to ensure faster growth that is also of higher quality, with more job creation. To improve competitiveness levels, we launched two ambitious regional programs that have dominated our efforts in recent years: the Initiative for the Integration of South American Regional Infrastructure (IIRSA) and the Puebla-Panama Plan for infrastructure in Mexico and Central America.
We've starting working on technology and have just created an office for technology innovation. We have continued to improve public policy through regulatory system reform. We are working on promoting savings, especially through improvements in the capital markets, one of the main lines of activity the Bank should promote in the coming years.
A third area on which the Bank has focused in response to the new challenges is institutional reform, which we consider of the utmost importance, as do many thinkers and analysts of economic and social development. We have supported major institutional reforms of the State, especially financial systems, social security systems, regulatory systems, and so forth. Judicial reform in particular has taken on a central role: for 16 years we have been promoting an initiative to improve access to justice and are involved in some 20 countries in Latin America in a number of different ways, from supporting arbitration systems to reforming the judiciary. I believe that we have made tremendous progress in this area.
The Bank's fourth main line of activity is trade liberalization in Latin America, through support for both regional integration systems and opening up trade to other parts of the world (the United States and Europe). I know that this line is destined to remain a pillar of Bank action. The Bank was born of the trend towards regional integration in Latin America; Felipe Herrera called it the "Integration Bank" as a vehicle for regional cooperation and springboard for becoming a partner in world trade.
With the IIRSA initiative we are promoting regional integration through transportation, energy and communications that will increase trade among the countries in the region. For example, we now have a basic energy integration project through natural gas. The Bank is strongly committed to this large-scale 'energy ring' project, a historic event of tremendous importance now and in the future for Latin America. I think that it is much better for this type of physical investment to be done with the participation of a bank like the IDB that is concerned about preserving the environment and has transparent construction contracts that can be monitored. NGOs want the Bank to be involved in integration projects like this one in order to have a real impact on how policies are enforced and to ensure that clear principles of environmental protection are upheld, as this is not always the case when investments are financed through other public or private channels.
Looking ahead, what do you expect to be the three greatest challenges the Bank will face in the next five years?
Iglesias: I would say first of all that we need to continue to work on public policy because it will have a renewed relevance in Latin America. We have to provide clear, explicit support for reform of the State in all its different facets. This will be a great challenge for the Bank. Secondly, I think we are going to have to make progress in devising new ways of developing capital markets, which will enable us to start lending directly in local currency, for example, with certain types of loans that will enable the countries to build their capacity to generate savings in local currency. Third, we are going to have to provide a lot of support to countries that are opening up to international trade, because it will be a huge challenge for them to be competitive. This is what we are currently doing with Central America. Lastly, we will have to strengthen the social sectors. We need to provide considerable support for emergency programs to meet the most pressing needs and at the same time move forward on basic reforms in education, health and living conditions for the population. I think we have to maintain this two-pronged approach of meeting emergency social needs and supporting long-term solutions through programs for education, technology and other initiatives to train workers in other forms of production that will increase their income.
Is there any risk that the countries will stop requesting loans from the Bank?
Iglesias: The middle-income countries represent a serious challenge. They are increasingly gaining access to the international capital markets and therefore have less of a need for financial contributions exclusively from the Bank. We are going to have to keep these countries interested in working with us by opening up new frontiers. The Bank continues to lend to countries like Chile that are more economically and socially developed and interested in partnering with the IDB because the Bank provides them with experience, oversight and a degree of efficiency in how to invest resources. I think that we have to try and maintain this capacity to be useful to such countries in areas in which the Bank can provide some value added. Demand for Bank support for the private sector is also growing.
Another key factor is that the Bank is a cooperative organization that maintains relations with all the countries, large and small, more developed and less developed. The larger countries, especially those with greater access to the financial markets, want the Bank to be a useful instrument for everyone, including the smaller countries, because that improves their integration capacity and therefore improves the economic and social situation for all the countries in the region. I think that since the Bank is an instrument for regional development, it is in the interests of the larger countries that the Bank continue to work effectively in the economically less developed countries. Accordingly, the larger countries should continue to borrow from the Bank so that it can maintain its economic and financial statistics and therefore be able to support the smaller countries.
How has the concept of sustainable development been applied in the region? How has the Bank promoted and supported its implementation?
Iglesias: Sustainability means linking economic growth with nature, and social development with the environment. I worked on preparation of the 1972 Stockholm Conference on the Environment, which in my opinion was one of the greatest human initiatives. Finally taking a comprehensive approach to mankindÕs relationship with the environment is undoubtedly crucial to preserve the planet in the years to come. However, sustainability with regard to social objectives is also an important issue. It needs to be maintained throughout our region, which has such abundant natural resources, along with major social problems stemming from poverty and urban sprawl, with a dramatic environmental impact. I remember when we began to work on the conference, there were practically no NGOs involved in environmental issues in the region. They developed when the United Nations put the issue on the table. Then they began to grow, especially among young people, who are especially sensitive to environmental concerns. Currently, young people are the most actively involved in lobbying for conservation, preservation and efficient use of resources. In the future, people are going to be much more anxious to see these issues remain on national policy agendas. The Bank must therefore be increasingly responsive to this awareness in Latin America.
In its early years, the Bank worked primarily with governments, whereas now it also deals with the private sector. How did this change occur?
Iglesias: Until the 1990s, the Bank worked with the private sector through loans for global credit programs that were granted to public or private banks with sovereign guarantees. We approved billions of dollars in such loans. In the 1990s, we entered a new phase, with three key events. We established the Inter-American Investment Corporation with a capital stock of US$800 million to serve small and medium-sized enterprises. This was the first time we contributed to private enterprises directly by loaning money and making equity investments in them.
Secondly, in 1992 we established the Multilateral Investment Fund (MIF), through which we have been able to get into such innovative areas as regulation, strengthening of the State, training for human resources and business development. Through the MIF, the Bank has also actively supported microenterprise development and microfinance, which has huge creative potential that led us to new areas such as remittances from immigrants. The Bank produced pioneering studies on remittances and their economic and social impact on our countries. This increased awareness prompted by the Bank's activities put the issue on the table at the G-8 meeting, on the agendas of all the governments and NGOs, and in the public eye.
The third milestone was establishment of the Bank's Private Sector Department in 1994, when the Bank began to participate directly in loans for infrastructure project financing. In my opinion, this was a key step that helped us build up a wealth of experience in this area that will continue to grow. I think that strengthening private sector activities in the Bank goes hand in hand with strengthening the quality of government action, and that there is a crucial connection between the two.
As a step toward greater efficiency in Bank relations with the private sector, we now have a general coordinator who oversees all the Bank's private sector activities.
How have economic policy teams of IDB borrowing countries evolved since you first took over as Bank president? And how about the region's political leadership?
Iglesias: The economic teams have improved substantially in all the countries, which is why macroeconomic policy has been maintained, since there are very capable people at all levels. There has also been a great deal of innovation in social policy, with a group of people who have a genuine capacity to manage it better than before. As far as the political leadership is concerned, I would say that they have not yet entirely assimilated what globalization means or how the process can often limit the options for domestic economic and social policy. I think that sometimes this situation has led to certain political responses that are not appropriate for the difficult, competitive world we live in now. The leadership sometimes lags behind a bit in its response to the new economic, political and social realities of today's world. This question is going to put pressure on the political establishment in Latin America: how can we achieve the core objectives of social development, which are obviously the platform for all the governments, while becoming more efficient and more competitive by making intelligent use of the markets and external relations? The political establishment will have to address these many challenges in the coming years much more rapidly, responding to problems and challenges in the modern world in as timely a manner as we have seen in other regions.
It seems to me that political parties need to evolve at the same pace as the economic and social changes stemming from the complex developments on the international stage. They have to speed up their adjustments because parties are the foundation for democracy, for democratic life. This mismatch with reality has made them less relevant in certain countries, leading to new political leadership precisely because the parties have not responded in a timely, appropriate way to these domestic and international challenges. However, I'm more concerned that the countries do not seem to be fully aware of the limitations they face due to the fact that they are part of an international community that sets the rules of the game, which are imposed from the outside. The best defense continues to be political realism and joint action by our countries.