2. The world economy continues to face uncertainty. The end of the war in Iraq has lifted some of this uncertainty, and some of the risks — such as a massive rise in oil prices — are now unlikely to materialize. The central scenario of our World Economic Outlook completed three weeks ago sees global growth rising slightly in 2003 to 3 ¼ percent, with the economic recovery reasserting itself in the second half of the year. I believe this remains the most likely development. But many risks and vulnerabilities in the world economy pre-date the war in Iraq, and must be addressed if strong global growth is to be restored. First and foremost, there is a need to reduce the excessive reliance of the world economy on an economic recovery in the United States, which has contributed to a widening of global imbalances. This calls for higher growth in other advanced economies. Europe and Japan, in particular, must do more to tackle long-standing structural impediments to growth. And the United States needs to put in place a medium-term fiscal framework that allows a reestablishment of a balanced budget over the cycle.
3. After a difficult year, a recovery in Latin America is emerging. In 2002, the region experienced its worst downturn in two decades, with real GDP falling by just under ¼ percent. Growth slowed in many countries, led by sharp recessions in Argentina and Venezuela. But this general picture must not obscure significant differentiation. Mexico, for example, saw a pick-up in growth, aided by the recovery in the United States; Chile's slow-down followed several years of very strong growth; and Peru staged a robust recovery in 2002, with growth exceeding 5 percent, the highest in the region. And while the adverse global environment affected many countries in Latin America, particularly those that rely on financing from international capital markets, those with stronger policies, such as Mexico and Chile, did weather the storm better.
4. The first quarter of 2003 saw further encouraging signs of improvement in Latin America. Exports are growing strongly in several countries, benefiting from past real exchange rate depreciations, and market perceptions have improved markedly, with sharply falling borrowing spreads and a broad range of countries returning to capital markets at more favorable terms. As I speak, Brazil is launching a new international bond issue for the first time in more than a year. This is yet another positive sign that the continuity in macroeconomic policies of the new Brazilian government is beginning to bear fruit. And I also welcome the ongoing work by the authorities in Uruguay on their comprehensive debt exchange offer, which will help achieve a more sustainable medium-term debt profile for the country.
5. Political developments in Latin America have been largely encouraging. Recent polls suggest that despite difficult economic times, there is no popular desire to return to past authoritarian regimes. New governments in Bolivia, Brazil, Colombia, and Ecuador have recently reaffirmed democracy and market-based approaches, and are committed to working with the international community in finding solutions for their problems. Democracy has raised expectations — and these are not always easy to manage. But it has also increased governments' accountability for their policies, including social policies, and that I believe is very beneficial.
6. These positive developments give me grounds for optimism. Moreover, new leaders in Latin America are formulating an agenda, which I would call "growth with social equity". Three elements of such an agenda are particularly important in my view: (i) making economies more resilient, to avoid future debilitating financial crises; (ii) strengthening the institutional framework and gearing structural policies, to raise economic growth in a lasting way; and (iii) tackling head-on the excessive income inequalities and corruption, to build a solid social consensus for reform. Allow me to turn to each of these in turn.
7. First, sound and sustainable growth requires more resilience to economic crises. Achieving low levels of inflation across the region has been a striking success of the past decade. This success must now be safeguarded by more comprehensive medium-term policy frameworks:
- In Latin America, this means first and foremost placing the public finances on a solid footing. In a number of countries, high levels of tax evasion combined with inefficient spending have weakened the ability of governments to provide critical public services. It has also resulted in rising public indebtedness, often in foreign currency, raising the vulnerability to sharp changes in the exchange rate or foreign interest rates. Several countries have started to tackle their fiscal problems in a comprehensive fashion. Fiscal responsibility laws, which increase transparency and accountability in the public finances at both the central and the regional level, are beginning to play an important disciplining role, for example in Brazil and in Chile. I am especially encouraged by the recent announcement by the Brazilian government that it is committed to maintain a primary budget surplus of 4 ¼ percent over the next four years. This will be of great help to improve debt dynamics. And the fundamental tax and pension reforms underpinning the budget target augur well for the sustainability of Brazil's fiscal adjustment.
- A sound medium-term policy framework also means maintaining adequate buffers against shocks. Flexible exchange rates have played an important role, for example in Mexico and Brazil, to enable the economies to handle unanticipated shocks. Experience suggests that strong domestic financial institutions, capable of mobilizing and efficiently allocating financial savings, play an important stabilizing role. Furthermore, countries that succeed in attracting considerable amounts of foreign direct investment tend to be less vulnerable to sudden mood swings and herd behavior in capital markets than those that rely mainly on portfolio investment. The IMF is currently engaged in a joint project with the private sector to develop a better understanding of the determinants of FDI. And in a long-term approach to crisis prevention, trade integration in the world economy needs to catch up with financial integration. In Latin America, developing a strong traded sector will reduce dependence on capital flows — this has proven especially successful in Mexico, where exports rose from 20 percent of GDP before NAFTA to over 30 percent after, and in Chile.
8. Second, there is a need to strengthen the institutions that underpin a market economy and forcefully pursue structural reforms to raise economic growth potential on a sustained basis. There has been progress in a number of countries, notably in Mexico, which improved labor market flexibility and introduced far-reaching judicial reforms; in Peru, which strengthened the legal and institutional framework for fiscal and monetary policies; and in Brazil, where significant reforms are underway on central bank independence and bankruptcy reform. But there remains a large reform agenda, including:
- Strengthening property rights and the rule of law. I fully concur with Guillermo Ortiz, Governor of the Bank of Mexico, who said recently that an appropriate legal framework and an efficient judicial system are fundamental factors for economic and social development;
- Tackling the weaknesses in financial sectors, to ensure that banks become an efficient conduit for financial savings and channel resources to productive investment;
- Addressing inefficient regulatory systems, which are a burden on investors, especially on small and medium-sized enterprises. For example, the World Bank estimates that registering a new business takes 82 days in Brazil, compared to 11 days in Ireland, and 2 in the United States.
9. And finally, there is an urgent need to address issues of social equity and governance in order to underpin popular support for the reform process. Most measures of income distribution show little or no progress in reducing massive inequalities in the past two decades. Macroeconomic stability and stronger, better-functioning institutions will help the poor. But there is also a need to target policies explicitly to alleviate poverty and improve social equity, by reshaping public budgets to:
- Give priority to education, to build human capital and as a key instrument in reducing poverty, by providing more opportunity across the social spectrum;
- Strengthen critical public services, such as security, clean water, and health services. We will look to well-targeted initiatives such as Brazil's Zero Hunger program as examples;
- And combat corruption, which will yield significant benefits for economic growth by boosting investor confidence, but will also address social equity issues directly, as it is small businesses and the poor who often bear the brunt of the burden of corruption.
10. The IMF is fully engaged in supporting economic reform in Latin America. We are assisting our members in making their economies more crisis-proof through our policy advice and technical assistance work, and we are providing IMF resources in support of national economic programs. A broad-based dialogue with many groups in society is an increasingly important part of our work to foster ownership of economic policies, especially in periods of political transition.
- Outstanding IMF resources to the region are about US$42 billion, more than half of the IMF's total lending. In particular, we are actively working with the new governments in Brazil, Bolivia, Colombia, and Ecuador. We stand ready to work with the new leadership in Argentina on a comprehensive reform program, which will be needed to build on the current stabilization gains and establish a firm basis for sustained strong growth, commensurate with the country's considerable potential.
- We are also increasingly assisting countries seeking to meet international standards and codes in the economic and financial area. Strengthening fiscal transparency and accountability, for example, has been a key focus of our discussions with Brazil, Colombia, and Peru in recent years, and most countries in Latin America subscribe to the IMF's Special Data Dissemination Standard, which defines a high standard for the scope and depth of economic statistics in countries that are active in international capital markets.
- And we continue to support the poorest countries in the region through the Poverty Reduction and Growth Facility, with strong pro-poor programs, for example in Nicaragua.
11. A key challenge in Latin America will be to keep good policies on track. I agree with Ernesto Zedillo, former President of Mexico, who said that the main problem in much of Latin America has not been too much reform, but too little. And I would add: inconsistent reform. There is no single model for success. National traditions will shape individual approaches. But I have no doubt that the common thread in this agenda holds much promise for Latin America: promoting sound institutions and strengthening the culture of democratic accountability and trust are critical to ensuring sustainable long-term growth and social equity. Without social equity, there can be no social peace, and without social peace, long-term investment and sustainable economic growth will remain elusive.
12. But beyond pursuing strong domestic policies, the region also requires — and deserves — support from the rest of the world. And the first priority should be to strengthen trade. With few exceptions, the traded sectors in most Latin American countries remain relatively small. Increasing trade offers a significant potential for economic growth, as well as reducing countries' vulnerability to external shocks stemming from swings in capital flows — to which many countries in the region are much more open. For Brazil alone, World Bank estimates suggest that the liberalization of market access under free trade agreements with the European Union and the Americas could raise its exports by $18 billion, or 32 percent, the vast majority of which would be agricultural products. I welcome the initiative of the United States to establish a Free Trade Area of the Americas (FTAA). Experience with NAFTA suggests that it offers significant promise, provided it is comprehensive in its coverage and undertaken in the context of open multilateral trade. In moving ahead with the FTAA, it will be important to ensure consistency with the ongoing multilateral trade discussions under the Doha Round. Trade is critical to restoring confidence to the world economy, and the United States and Europe bear primary responsibility to ensure that the Doha Round is brought to a successful conclusion. And by supporting higher economic growth and poverty reduction, it will also enable developing countries to participate more fully in the benefits of globalization.
13. I am fundamentally optimistic about Latin America. There is an enormous potential for growth and there are leaders who know the way forward. And that way leads through investment in better integration in the global economy. Latin America deserves support — and the IMF will do its part.