The IMF’s role in Latin America might have changed says Anoop Singh – but only so long as economic stability prevails
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
WHAT THE EXPERTS SAY
Ricardo Hausmann director of Harvard’s Center for International Development, former planning minister of Venezuela and chief economist of the IDB
“I think that the IMF is a countercyclical institution so the fact it’s not being used right now is to be expected, and we want it to be there when the cycle turns around as, if history is any indication, it will. The IMF is a crisis management institution. Before we change too many things we should guarantee that it’s there to play a role in the future.
“I think on balance the IMF’s role in Latin American crises has been positive. The people who say otherwise have the burden of proof on their side: arguments about moral hazard and market uncertainty have to be based on some counterfactual. I want to see the IMF involved not only in crisis avoidance but also in crisis management in the future.”
Daniel Marx former Argentine finance secretary under three administrations
Governance reform is inevitable with a redistribution of power within the Board and other modifications of decision-making processes, Marx says. The Fund will reinforce its focus on international financial stability, he believes: “For Latin America that will make a difference although only at the margins in the near future,” he says.
Walter Molano head of research at BCP Securities
“I really think the IMF is an obsolete and morally bankrupt institution. People had a very bad taste in their mouths after what the IMF did in Latin America in the 1990s; it was very arbitrary in its application of policies. The biggest case in point was Argentina.
“The IMF as an institution is still the cartel of the G7, and the G7 uses it as a policy tool. As long as it remains like that, Latin American countries are going to do all they can to avoid it. For the most part the investors don’t want the IMF involved either. What’s the point? The reduced role of the IMF has made it a much clearer and plainer playing field than it was before.”
Ian Vasquez director of the Cato Institute’s Project on Global Economic Liberty
“I think the IMF should renounce big bailouts. In practice it’s moved away from those because by now everybody even inside the IMF agrees that it’s not a good policy, but it hasn’t renounced the policy. It should be explicit about renouncing that. I’m not a big fan of the IMF; I’m a critic of it and have long called for it to be shut down.
“I think the new situation in Latin America leaves it in very uncertain territory because it still exists, and mostly I think it generates uncertainty in financial markets. “I don’t know that it will be very useful even in offering advice.”
Jerome Booth head of research at Ashmore Investment Management
“In the future I think it’s very difficult to see as strong a role for the IMF in Latin America. Latin America is in a situation where it may not require huge bailing out packages any more, and the IMF will be more and more focused towards Africa rather than Latin America. The IMF should also possibly focus more on imbalances in the developed world more in line with its original mission.
“In terms of creating a forum for discussion, I don’t think the IMF is the best place for that. The IDB is in a better position. However, the Fund can help some of the smaller Latin American countries in the future in the traditional way, in terms of being able to provide balance of payments support in cases where there is a liquidity problem but not a solvency issue. I don’t see a strong regional demand for the IMF’s services though. That’s a good thing. Britain doesn’t go to the IMF as often as it used to, and I don’t think Latin America should either.”
Richard Portes professor of economics at the London Business School and founder of the Centre for Economic Policy Research
“What should the Fund be doing in Latin America? It shouldn’t be getting involved explicitly in debt default and restructuring. If a country is in a crisis, it should be able to ask for Fund support, and there should be a preventative mechanism for lending to a country when the spreads being demanded by the market go beyond sustainable levels.
“Brazil and Mexico probably don’t need Fund advice; maybe Peru and Ecuador do. And the Fund has some expertise that the IDB, for example, does not: on exchange rate policy and fiscal policy and maybe in financial sector restructuring, liberalization, reform, etc. Those are the IMF’s core competences. But its proper role is best seen as the guardian of the international financial system, with all that implies for multilateral surveillance.”