The news out of Latin America has been good for some time. Regional growth exceeded the historical average during 2004–05 and is set to continue at a rapid clip exceeding 4% this year.
This is all the more significant given that the output slack associated with the financial crises and recessions of earlier in the decade has been substantially absorbed, and some of the stimuli to growth have naturally waned over time. More broadly, macroeconomic stability in the region has been generally well maintained, and poverty indicators have shown remarkable improvement in some countries.
The accompanying improvements in exports, the current account and reserves have greatly reduced the need for IMF financial assistance. Notably, Argentina and Brazil have been able to fully pay off their debts to the Fund well ahead of time. Whereas financial commitments by the IMF reached $60 billion in 2003, this has now substantially unwound, and present commitments are just $3 billion to the region.
Promising climate
Against this background, two questions have been raised in many fora. First, will the recent good news be sustained or are we seeing another growth spurt that will be short-lived, as in many previous periods of Latin American economic expansion? Second, with the decline in the need for IMF financing, what is the role of the IMF in the region?
These are good questions, and I do believe that they are inter-related.
My sense of the first is that there is reason for optimism. Many important aspects of the current expansionary phase distinguish it from previous episodes and give hope for greater sustainability. To be sure, one major factor has been the benign external environment. This has been especially favourable for commodity-rich Latin America – as has the improved policy environment in many countries. In contrast to previous expansions, the current one is characterized by primary fiscal and external current account surpluses, with a corresponding declining reliance on external debt flows, and better competitiveness.
These improved economic outcomes are the result of better macroeconomic policy frameworks, including the growing adoption of inflation targeting regimes, more flexible exchange rates, and improvements in structural fiscal balances. This confluence of policies is not an accident. Rather, in my view, it is a reflection of the region’s own renewed commitment to macroeconomic stability – a commitment that is no longer the preserve of any single political party, or an imposition by the rest of the world. It is fundamentally an internal political and policy goal rooted, as I see it, in a deepening domestic consensus. This goal has ensured the maintenance of macroeconomic stability through the many political transitions that are taking place in Latin America.
If my understanding of the commitment to low inflation and macro-
economic stability is correct, it is a phenomenon of immense historical significance for a region that has been subject to debilitating macroeconomic instability, financial turbulence, and high and volatile inflation for much of the last century. It means that the message of the importance of preserving macroeconomic stability – both for its effects on growth and poverty reduction – has been internalized in the region.
New relationship
This, then, brings me to the role of the IMF at the current juncture in Latin America. The growing acceptance of our core message of macroeconomic stability augurs well for our continuing and future relationship with the region. The decline in the need for balance of
payments assistance also goes in the direction of improving partnership and dialogue without the political sensitivities of a debtor-creditor relationship. This changed role is already enriching our dialogue with many countries that are engaged in an effort to strengthen the institutions that will entrench macroeconomic stability in the region.
With a commonly shared goal of macroeconomic stability, it becomes easier to debate how best to ensure that macroeconomic stability becomes entrenched in the region. The region’s policy-makers will need much agility and domestic political support in keeping inflation low and their macroeconomies stable in the period ahead, given likely tests from the global environment.
Risks arise, in particular, from the continuing cycle of monetary tightening in the industrialized countries and any potential decline in the liquidity pool for emerging markets. The IMF’s growing efforts to better focus its policy advice to member countries – with much greater emphasis on the inter-relationships with financial sector issues and on debt sustainability – should provide added value to policy-makers’ own efforts. It would also help that our analysis and advice is increasingly cast in a multilateral mould, with greater attention to common issues of regional concern, as well as to the global context. And, since global financial conditions will not remain benign indefinitely, the IMF is reviewing its lending instruments to ensure that they will be as supportive as possible of crisis prevention as well as of crisis management.
Not so fast
Even if the political and economic battle for macroeconomic stability is being won, the region cannot rest on its laurels. The core challenge is to better catalyze – and leverage – the benefits from macroeconomic stability so that it can translate into much more rapid growth and poverty reduction than we have seen in the past. Addressing this core challenge is a task for the coming decades for Latin America. It is one in which the IMF can play an important role, distilling the lessons from the rest of the world and exchanging views with the region’s policy-makers about how best to apply them within the region.
At the root of the challenge is the need to raise productivity. The agenda here is still large. It involves transforming financial systems so that they are engines of inclusive growth rather than sources of vulnerability; improving legal certainty and the business environment; and enhancing trade openness and liberalization. This may look like an old agenda. But it is not. It is an agenda that has yet to be applied consistently and forcefully within the region, although important steps have been taken by many countries towards it. It is also an agenda that will be challenging politically and one that requires strong domestic ownership. Fortunately, the number of role models from within the region itself for elements of such an agenda has been growing.
The message of macroeconomic stability, it is to be hoped, has been well accepted in the region. The next challenge is to internalize the message of raising productivity so that Latin America can be a full partner in today’s globalized world.
Anoop Singh is director of the Western Hemisphere department at the IMF