It is a pleasure to be here today to discuss U.S. economic and financial engagement with Latin America.
As those in this room know, recent economic performance in the region has been outstanding. Growth is strong, inflation has fallen, and capital is flowing back to the region. Underlying these improvements are good economic policies by Latin American countries themselves, supported by extensive and effective U.S. economic engagement.
I would like to take my time today to review where the region's economies stand, how we got here, and our priorities for the future. The Bush administration is committed to working with the countries of the region to transform the current economic recovery into sustained economic growth that will produce significant increases in income and reductions in poverty. Our agenda for achieving this is a comprehensive one, involving a range of bilateral and multilateral, financial and non-financial tools.
Economic developments in Latin America have exceeded even the most optimistic forecasts in recent months. Real GDP growth for the region as a whole was almost 6 percent in 2004. That is the highest growth rate since 1980. With the exceptions of Haiti and Grenada -- countries that experienced political unrest and natural disasters -- every country in the region registered positive growth last year. This robust growth has created millions of new jobs and raised incomes for workers and their families.
Economic stability in the region has also improved dramatically following the turbulence of 2001-2002. No countries are currently experiencing recession or financial crisis. Capital flows to Latin America have increased, with many countries already completing large portions of their financing needs for the entire year.
Some governments have even prefinanced themselves through most of 2006. Risk spreads for countries in the region remain near record lows, even as the Federal Reserve has continued its tightening cycle in the United States.
When the Bush administration entered office four years ago, the situation was not so positive. Growth was slowing across the region. Major financial crises were unfolding in Argentina, and then in Uruguay and Brazil. These came in the wake of the serial financial crises of the 1990s, starting with Mexico in 1994-95, during which financial difficulties leapt across borders even to countries that lacked direct linkages to those that were originally affected.
The contrast to the present time couldn't be greater. There was no contagion following Argentina's default in 2001, versus the contagion seen after the Asian and Russian crises in 1997-8. Mexico -- the country that typified the new generation of financial crises -- now has an investment-grade grading and among the lowest risk spreads over U.S. Treasuries among the emerging markets.
The reason for these improvements is clear: better economic policies. Governments across the region have strengthened their fiscal balances with the objective of reducing debt levels. Countries from Mexico to Colombia to Brazil have moved aggressively to reduce the proportion of their public denominated in or linked to foreign currencies. Better monetary policies -- supported by flexible exchange rates (or in some instances dollarization) -- have successfully brought inflation down and prevented large depreciations in 2002 from becoming hyperinflations. Countries have also taken advantage of the favorable environment to build international reserves to help cushion them against unexpected shocks in the future.
The Bush administration has played a vital role in supporting better policies in the region. First, we have pursued sound economic policies at home. Timely changes in monetary and fiscal policy -- such as President Bush's tax cuts in 2001 and 2003 -- helped make the U.S. slowdown mild and the recovery rapid. This has enabled the United States to continue to serve as an engine for the global economy.
Second, we have strongly supported countries following good policies in the region through assistance from the International Monetary Fund (IMF), World Bank, and Inter-American Development Bank. In 2002, Brazil, Colombia, and Uruguay faced intense financial difficulties that threatened to push these countries into default and deep crisis. In each case, the governments articulated strong strategies to restore economic stability and address sources of vulnerability.
Though success was not assured, we at the Treasury believed that these good policies -- backed by financial support from the IMF and multilateral development banks -- could underpin a return to strong growth. These assessments proven accurate: in 2004, Brazil, Colombia, and Uruguay posted growth rates of 5.2 percent, 4.0 percent, and 12.0 percent, respectively.
U.S. engagement with the region has been critical to ending this period of financial instability and putting the region back on the path of economic growth. We now look to working with our regional partners to translate this renewed growth into sustained improvements in standards of living for all the people of the region, a subject I would like to turn to now.
We think about the agenda ahead in terms of two main challenges: first, institutionalizing the important improvements in macroeconomic policy that have been achieved recently; and second, addressing the business-climate problems needed to spur higher levels of productivity growth and reduce poverty.
With respect to the first challenge, better fiscal policies in many countries have succeeded in bringing down high levels of debt. But debt levels remain too high and are a continuing source of vulnerability. So far, most Latin American governments have shown good leadership by maintaining fiscal discipline during the recent economic recovery, reversing a pattern that was all-too-frequent in the past of expanding spending during economic booms. There is a strong appreciation in the region today of how running better fiscal balances during the boom years can provide more flexibility to a country during the lean years.
But good intentions in this regard are sometimes complicated by institutional features of tax and spending systems that act as obstacles to more effective fiscal policies. Addressing these impediments requires what we call structural fiscal reforms. These include policies to strengthen tax administration and broaden the tax base; reform pension systems to ensure sustainability and solvency; reduce widespread revenue earmarking that creates "automatic" spending during periods of tax-revenue growth and inhibits adjustment during downturns; and adopt fiscal responsibility regimes to institutionalize fiscal discipline at the provincial and regional levels.
There are also actions on the monetary side that Latin American governments can take to institutionalize better macroeconomic policies. These include steps to bolster the operational and institutional underpinnings of inflation-targeting regimes. Chief among these is legislation to increase central bank autonomy and independence.
With respect to the second challenge, it is well-known that Latin America has lagged behind other regions of the world like East Asia in generating sustained growth in per capita income. The objective of economic policy in the region should be to achieve growth rates like the 6 percent attained last year over the long term. Robust growth of this magnitude is needed to generate large reductions in poverty and gains in living standards. Chile, which achieved per capita income growth of nearly 5 percent during the 1990s, cut poverty in half during the same period.
Achieving higher rates of economic growth requires countries to improve the environment for business and innovation. This means strengthening financial sectors and expanding access to financing for the private sector, especially for small businesses. It means eliminating distortions in the labor market that lead to high levels of informal employment.
It means investing in education and productive infrastructure so that society has the basic building blocks for raising productivity growth. It means opening markets and lowering trade barriers to take full advantage of the opportunities for export-led growth. It means encouraging entrepreneurship, improving the investment climate, deregulating, and fighting corruption so that there are the right incentives for starting and expanding businesses. The average time it takes to start a business in Latin America (71 days) is higher than in any other region of the world. Finally, it means harnessing the full potential of remittance transfers by reducing the cost of sending remittances and bringing these funds into the formal banking sector to expand the options for savings and investment.
The Bush administration is committed to building upon the achievements to date and advancing a comprehensive agenda aimed for raising economic growth and living standards in the region.
The Bush administration is committed to an ambitious trade agenda in the region. The United States has concluded or is in the process of concluding numerous free-trade agreements (FTAs) with Latin American countries. These include the U.S.-Chile FTA, the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), as well as our ongoing negotiations with Panama and the Andean region. These FTAs and NAFTA will cover 90 percent of U.S. trade [with Latin America] in this hemisphere. In addition to promoting trade, these FTAs promote the rule of law, regulatory transparency, and regional integration. The United States is continuing efforts to conclude a Free Trade Area of the Americas (FTAA) that would encompass all countries in the hemisphere in an integrated market.
Increased trade is critical to long-run economic growth in the region. The importance is evident in the role that trade has played as a driver of economic growth during the current economic recovery. Exports grew 24 percent last year. The growth is not merely a price phenomenon -- export volumes rose 11 percent last year. It is also not confined to commodity exports; to take one example, Brazil's exports of manufactured and semi-manufactured products have grown nearly 30 percent over the last year. This export growth has lead to the second straight year in which Latin America has run a current account surplus; in 2003, the region ran its first current account surplus in 35 years.
We have actively used multilateral fora to advance creative initiatives for increasing economic growth and creating jobs. At last year's Special Summit of the Americas, President Bush reached agreement with other leaders in the hemisphere on actions to halve the cost of sending remittances in the region, triple the amount of credit to small businesses generated by the programs of the Inter-American development, and significantly reduce the time and cost of starting new businesses. At this year's Summit, we are working to develop additional initiatives to advance economic opportunity for the people of the region. One area of particular importance is encouraging more productive public and private investment in infrastructure.
The Bush administration has made improving the effectiveness of the multilateral development banks a global priority. We will continue our efforts to work with the development banks to show measurable results in their activities by increasing discipline over budget and project lending programs to achieve quantifiable results with strong controls over where the money goes. Success in this effort is certainly important for promoting development in Latin America.
We have also ramped up our bilateral dialogues with key economies and sub-regional groupings of countries within Latin America. Through the U.S.-Mexico Partnership for Prosperity launched in 2001, we worked with our Mexican counterparts to develop a secondary mortgage market in Mexico and create the conditions for the halving of remittance transfer costs that we have seen over the past several years. In the U.S.-Brazil Group for Growth, we have shared experiences on policies like small business regulation, which has influenced the Lula Administration's approach to reforms in this area. We have reached out to smaller countries through sub-regional meetings by Secretary Snow with finance ministers of the Central American countries and the Andean countries. Most recently, we launched the Security and Prosperity Partnership of North America with Mexico and Canada, aimed at boosting productivity growth through regulatory cooperation and improving the legitimate flow of people and goods across our common borders.
Finally, we are working with the poorest countries in our hemisphere to create jobs and fight poverty through the new Millennium Challenge Account (MCA). The idea behind the MCA is to assist countries that are pursuing the right policies for promoting economic growth through good governance, promotion of economic freedom, and investments in human capital like health and education. To make sure that MCA assistance makes a difference in raising living standards, proposals for its use must be specific, measurable, and well-targeted. Three countries in Latin America -- Bolivia, Honduras, and Nicaragua -- are in the process of developing proposals for the use of MCA funds.
To be sure, this is an ambitious agenda. And the challenges for policymakers in the region are large. But I think that Latin America's leaders are ready to rise to this challenge. We have already seen what strong leadership can accomplish -- from those like President Lula in Brazil, to President Uribe in Colombia, to President Maduro in Honduras. Good economic policies embraced by these leaders and others helped take the region from crisis to stability. Good policies in the future can translate improved stability into sustained economic growth and poverty reduction.