John Taylor looked at the last two years in Latin America and stated that market spreads between sovereign debt and US treasuries have come down, there has been an increase in capital flows, the number of current capital accounts is improving, and exports are growing. Taylor believes that this is not so much due to the low interest rates in the US but rather to the fundamentals of good economic policy. There has been improvement in the global economy in terms of uncertainty - the war was shorter than many worried and oil prices did not rise. In addition, less contagion in emerging markets makes the environment safer. The ‘moral hazard’ problem, where countries believe the US will ‘rescue’ them economically, is being reduced.
The Bush administration is clear that support will go to countries that are doing the ‘right thing’ regarding policies that are conducive to economic growth and reducing poverty. President Bush proposed the Millennium Challenge Account - a 50% increase in foreign aid to countries that follow growth oriented economic policy in terms of good rule of law, openness in trade, good policy with respect to education, corruption, and health in the income category of Honduras and Bolivia. If good policies are not being followed, the administration will abandon MCA support, maintaining only humanitarian support and other traditional sources of assistance. For the most part, this is working well in the region. The administration is trying to deal with contagion by creating policies that focus on contagion. In addition, countries should put collective action clauses in their debt agreements that describe what would happen in the event of restructuring. This adds certainty and prevention to crises.
Finally, stipulations to set and clarify limits of support in the event of a crisis in capital or current account are necessary. Despite what is happening in the Middle East, the Bush administration is focused on the region. A free trade agreement with Chile is being signed tomorrow and it will move ahead through Congress. A free trade agreement with Central America is under way as well as the Free Trade Agreement with the Americas. The region is still growing at lower rate than the US - it should be growing faster. Billions of dollars in remittances are sent from the United States to Latin America each year - approximately $12 billion to Mexico alone. We have tried to reduce the costs of remittances, starting with Mexico, through the Partnership for Prosperity, to find ways to reduce the cost. And we have already done so through better ways of doing banking and sending money.
Q & A following John Taylor's presentation:
Q) How do you explain the discrepancy that the US is engaged with Latin America and the perception that there is no engagement?
A) This is not the first time perceptions are different than the reality. In this case there is a limited capacity for coverage of issues, right now it’s the Middle East and that’s good since there are important things happening. But at the same time, we have people working on free trade issues in Latin America.
Q) What is the biggest challenge that Latin American countries face and how does the US government intend to interact with governments to deal with those challenges?
A) The biggest challenge is economic growth. Part of factor is better macro policies, good fiscal policy, and keeping debt levels down. Structural change to make small businesses start up easier is also important. That’s where effort should be focused where private sector can deliver better lives for people.
Q) What are the priorities that the new government of Argentina should do regarding economic policy?
A) Continue good policies on monetary side, and develop their fiscal policy. More can be done to plan for regarding their debt. They also should find ways that the private sector can create jobs and thrive more—give more certainty. There’s no difference in terms of country in what they need, but the implementation process will be different--different laws and customs but the strategies are very much the same.
Q) What will the US bring to the table to stimulate growth in Brazil?
A) The US will focus on things that we find useful. For instance, reducing the time it takes for small business start-ups. What are the rules and regulations? In addition, how can the US experience with program of food stamps help with poverty? We can study it as a way to provide a social safety net that won’t impede growth or flexibility in market. I’m sure we will get a lot of advice from the Brazilians also.
Q) Regarding Argentina’s transitional agreement, how do you see it affecting prospects for reform and the difficulty in implementing it?
A) The transitional program we worked on with Argentina and the IMF took a lot of effort and time. It was not popular but was the right thing to do. Argentina had to focus on the monetary and fiscal side, they moved ahead with a central bank governor, and they are dealing with the quasi-currencies. The agreement is meant to be transitional and there needs to be a substantive program that goes beyond this phase.
Q) Regarding Venezuela, could you comment on what the foreseeable future is with the economic relationship between the US and Venezuela? Second, can you comment on the disputes that are taking place between oil companies and the government—what role are US companies and the US government taking?
A) The Venezuelan economy is in bad shape since the Chavez government. There has been a lot of disruption, and it is not good for the people as well as its neighbors. We would be happy if that was turned around. That is political. The oil market is global even if there are direct sales to the US. We don’t focus on a single country at a single time, especially if you consider the bilateral effects of it.
Q) The IMF seems to have shifted from bailout to crisis prevention and advising. What role does the US treasury have in future debt default or renegotiation specifically?
A) The US treasury wants to find a way to make future debt default/restructuring more predictable, set ground rules and structure. Advocating the use of collective action clauses does this. This adds predictability and certainty about what happens in the event.
Q) Tell us more about the Millennium Challenge fund.
A) Eventually it will have $5billion in disbursements per year. This is large compared to our foreign aid budget that is $10-11 billion right now. The funds go to countries that rank high on policies that raise growth by objective evidence. There are 16 indicators, some put out by Freedom House, the Heritage Foundation, and World Bank. This is a better way to do foreign aid. So far there are already productive effects. Finance ministers have come through saying they have looked up how they are doing based on the indicators.
*John Taylor was appointed Under Secretary of International Affairs at the U.S. Treasury Department, on June 1, 2001. He serves as the principal advisor to the Secretary of the Treasury on international economic and financial issues and leads the development and implementation of policies in the areas of international finance, trade and investment, economic development, international debt, and U.S. participation in the IMF, the World Bank, the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development.