Media Center



June 13, 1995 - Rio de Janeiro

" We arrived at a situation in which the realities of the debt crisis forced the region to understand that markets are essential and that bureaucracies make too many costly mistakes."

I want to thank the World Bank and the Getulio Vargas Foundation their invitation to reflect on the future of economic and social development in the Americas. There is probably no other issue in the Hemispheric agenda that generates more interest and that requires more analysis today than the one that inspires this conference.

How are we going to face the future of the region at a time when people have the feeling that economic reform is exhausted ? How can we put this continent on a path of high sustained and balanced growth ? Is there any way to change the fate of the growing number of people living in poverty in our countries ? All those are some of the most pressing questions.

Of course I can only provide some suggestions to contribute to the necessary debate needed to shape the answers to these dilemmas. But certainly our collective thinking --stimulated by the solid research and ideas gathered in the papers to be discussed here -- can open roads and offer new insights.

Let me say first that the debate on development strategies in Latin America has changed significantly in recent years. In the past the discussion was almost completely polarized between economic liberalism and governmental interventionism as two antagonistic policy options. While we spent a lot of energy and paper in that tug-of-war, we finally arrived at a situation in which the realities of the debt crisis forced the region to understand that markets are essential and that bureaucracies make too many costly mistakes.

Probably the most important economic lesson of the eighties was to recover the status and role of markets and price mechanisms. Behind us are the times when in Latin America it was sacrilegious to advocate free markets as an effective and socially convenient organizing principle for the economy.

This recognition was accompanied also by a second equally enlightening re-discovery about economic policy. The region learned, certainly the hard way, that tackling fiscal imbalances, defeating politically induced monetary expansion and creating a stable macroeconomic environment, was at the core of any successful development strategy. Inflation accentuated poverty to such oppressing levels and made economies behave so erratically, that along with the return of democracy also came a widespread popular demand for price stability.

Preserving that political and technical consensus around the fundamental desirability of free markets and of macroeconomic stability is an essential component of any successful development strategy for Latin America and the Caribbean.

Certainly, these are trying times for the economies of our Hemisphere. Because of the cyclical nature of capital markets, the excesses of optimism are inevitably followed by a surplus of pessimism. What happened in Mexico shook the faith of the international financial community and scattered doubts around the globe about the future of emerging markets.

The decades of the eighties and the nineties witnessed enormous change in Latin America. In the process, a profound structural reform took place and, almost without being noticed, the level of integration and linkage among the Latin American countries and among them and with the global capital markets grew significantly. Meanwhile, the financial and capital markets in Latin America opened their doors enthusiastically to foreign investors attracting billions of dollars in direct and portfolio investments.

In the process, the nature of Hemispheric economic relations changed dramatically. Governments and institutions lost their predominance as the main financial actors in the region and were effectively replaced by entrepreneurs and private investors, acting through very fluid and open financial markets. This quantum leap in the magnitude of cross-border market-induced trade and financial flows created a new reality for both the international financial actors and Latin-American economic authorities.

The first consequence of having open economies is that they became more efficient yet at the same time less "manageable" and certainly less predictable. Implementation of development policies in market oriented economies is much more complex than in the centralized, bureaucratic, and regulated environments of the past.

And we should not be surprised when under these new set of rules, a country is forced to adopt policies and take difficult decisions that are induced by global market dynamics. This means that we should introduce in our expectations the recognition that markets more often than not are brutal and unforgiving when imposing discipline among their participants.

The countries still willing to play by those tough rules -- despite the fact that they had to stand the pain and the cost of the adjustments -- are certainly the best candidates to became the dynamic economies of the future.

In fact, when adjustment processes respond to market conditions and are designed to preserve a market-oriented macroeconomic environment, usually they result in more stable structural reforms. Mexico is a case in hand. The recent crisis sparked a new round of deeper reforms and resulted in the opening of broader areas to private initiative, therefore guaranteeing the long-term health and prosperity of the Mexican economy. Sometimes countries have to be dragged, kicking and screaming, into prosperity.

Now, when the shock of an unexpected crisis seems to be behind us, is a good time to think about the future and to make an effort to address the long term issues surrounding Latin American and Caribbean economies. We may then ask : Are the political tendencies in Latin America favoring the breakdown of the fundamental consensus in favor of market-driven economies and macroeconomic stability ?

The recent and up-coming elections in Latin America can also be interpreted as a referendum of reform versus a return to the past. If that is the case, voters have already cast their ballots in favor of macroeconomic stability and economic reform. President Zedillo of México, for example, was elected on a platform that strongly favors modernization of the economy and - above all - monetary and fiscal stability. The Argentinean people once again chose rightly between the old regime of hyperinflation and the stable and market oriented economy built by President Menem.

President Fujimori was also re-elected due to his succesful program to recover institutional and economic stability. And just look around and you will see the millions of Brazilians that enthusiastically voted for President Cardoso - as the symbol of economic stability. And the recent approval of the constitutional reforms that effectively ends governmental monopolies in the mining activity, is a significant example of the strength that reform is gathering in this country.

This widespread and renewed political mandate is a unique opportunity to reinvigorate the scope and depth of our economic reform agenda for the region. We should use the opportunity offered by the fact that commited governments with popular support are devoted to guide their societies towards prosperity through a combination of the right policies. We have the luxury of having a second chance to move forward.

But first we have to acknowledge the lessons of the recent past. There seems to be consensus on the fact that expansionary credit policies, under circumnstances of diminishing external reserves, can breed disaster. Also, that disregarding cronic current account deficits can be devastating when relying on short-term debt to finance both public expenditures and cover the current account deficits. When the international capital markets react adversely, this situation can easily become a nightmare, leaving economic authorities with very little room for maneuver. Using unflexible exchange rates to stabilize the economy without a strong commitment to parity and the sacrifices it entitles, can be unsustainable. On the institutional level, inadecuate supervision of financial agents and the lack of effective accountability of public finances, can turn-off the early warning system of the economy.

The nature and focus of the economic reform process has to be adapted to overcome the frustrations and encourage the successes of the last decade. As Shahid Burki and Sebastián Edwards advocated in their recent work, we need to enter into a phase of consolidation.

The reform processes experienced by Latin America and the Caribbean during the eighties were designed under the need to respond to severe external sector and public finance imbalances. The resulting "Shock Therapy" addressed the most protuberant distortions and urgent macroeconomic desequilibriums. The policies were aimed at avoiding the collapse of the economy and set the general ground rules for long-term systemic change. Although some economies could be lagging behind or require further progress in that front, for many others it is time to move to a new stage.

During that "second wave", the goals of reform should become wider. Without leaving aside the macroeconomic objetive of stability, I believe, achieving dynamic and growing economies, reduced poverty levels, and effective and democratic states, should become our goals.. Let me comment on some of these challenges.

Stephan Haggard's paper rightly identifies institutional and governmental transformation as increasingly becoming the core of the reform process. Probably the most critical questions for the "second generation of reforms" is the issue of how we deal with the State.

In fact, throughout the papers prepared for this conference one can find constant references to the need of major institutional changes as the critical variable to accelerate economic growth and to promote equality and social justice. Without doubt political and institutional reform should be placed at the core of our efforts to craft a new development strategy.

Moisés Naím offers a good description of how enormous is the job in front of us. He argues that "In this new stage, governments will have to do much more than ensure that macroeconomic stability is maintained. The pending agenda of Latin America is overwhelming both because the list of tasks is long and because the needed changes are technically, politically, and administratively complicated."

Each country and each case will demand specific policy mixes. But certainly in all cases we will need less of what makes a State an obstacle; more of what makes institutions that provide services efficient, focused and specialized; and, in between, a State that is firm and stringent in its regulatory responsibilities.

But there is another side to the debate of State reform that goes beyond the concern for governability or the search for fiscal prudence. I am refering to the need to construct democratic states not only stable and efficient but also legitimate.

The task of the coming years does not have to do only with fine-tuning specific reforms, or with improving the transparency of markets, or with achieving appropriate legal frameworks for private investment. Those things are very important -- no one denies that -- and we must defend them. But it is equally important to foster the legitimacy and the institutional strength of the democratic state.

If we do not complete the task of consolidating the hold of democracy throughout the Hemisphere, anything else we seek to achieve in the economic front will be meaningless.

This is an area in which organizations such as the World Bank, the IDB and the OAS --which has mandates and capabilities to participate in the promotion of democratic institutional development in the Americas-- could jointly craft innovative approaches.

We used to blame governments, with good reasons, for much of the difficulties experienced by our region in its path towards development. But I am increasingly under the impression that in our eagerness to promote private initiative, we have overlooked the problems and distortions affecting the development of a sound and dynamic entrepreneurial spirit in the Americas.

In our region, the presence of a relatively high degree of monopolization, corporativism, and concentration of property of productive assets, creates entry barriers to new firms and discourages the enthusiasm of many entrepreneurs and potential investors. Thus, the euphoria created by the recovery of economic freedoms can be followed by frustration.

The access to competitive markets is denied not only by governments. Private actors can become serious obstacles to a wider and more dynamic entrepreneurial class. That is why we should include the reform of the private sector as part of the agenda in the discussion of the development of Latin America and the Caribbean. We need a revolution of entrepreneurship, to unleash the growth potential of private initiative, often tamed by the abscence of competitive environments.

In policy terms, this means that a deliberate and strong anti-trust effort, combined with measures to encourage a broader access to asset ownership, can have a significant impact on the investment potential of the economies of Latin America. This aspect has generated less attention in the reform process and it could emerge as a critical obstacle for translating structural adjustments into long term growth.

However, as now everybody appears to know, the fundamental vulnerability of the economies in Latin America lies in the fact that the level of domestic savings and investment can not support a growth rate congruent with the expectations and needs of the peoples in the region.

The dramatic boom and bust nature of economic cycles in Latin America has a lot to do with this inadequacy of the savings rate. The structural inability to finance capital formation --both physical and human-- with internal resources, leads to a dependency on external finance.

These exogenous capital movement cannots usually be sustained because eventually those resources have to be paid back; because we have a strong tendency to over-indebtedness; and because the flows can be unexpectedly reversed by the uncontrollable dynamics of the highly volatile international capital markets.

Hear me correctly. I am a believer in the advantages that come with the opening of our economies to foreign investment and international financial flows, but they will never be able to substitute the positive effect of strong savings generated domestically.

In conclusion, if we want to see a successful Latin America we need to develop a strategy that creates the conditions for a permanent and structural increase in savings. No one knows yet the precise recipe to increase the possibility or the willingness of a society to save. But the paper by Sebastian Edwards is a starting point and provides useful insights into that matter.

The experiences of Chile and Colombia suggest that increasing the efficiency and the coverage of private social security systems capital accumulation. Also, allowing for a more efficient and reliable financial sector, able to protect and better remunerate the individuals' savings effort, acts as an incentive.

The final revolution that Latin America and the Caribbean urgently needs is a revolution in education and social services. In Juan Luis Londoño and in Ernesto Schiefelbein's papers, it is evident that the problems in that area are acquiring the profile of a crisis. Inequality and poverty are not been alleviated and, on the contrary, the situation seems to be getting worse.

In the front of social development we have to simultaneously address deeper structural problems as well as the issues related to the quality of policy formulation. Despite the increasing efforts to allocate resources to social expenditure in Latin America and the Caribbean, the target population -the poorest sectors- have not seen substantial improvement in their situation.

The evident lack of effectiveness of the systems in use suggests a better way to do things. As the World Bank has advocated, instead of subsidizing the supply of services and creating huge governmental bureaucracies to provide them, countries should directly subsidize the demand for these services. Thus, only the poorest will benefit from the efforts made by society on their behalf. Also, by allowing the individual to excersice greater discretionality on selecting the services or goods, the response will be closer to his or her real needs.

For decades we left social policy-making in the hands of weak institutions, un-interested bureaucrats, and inadecuately prepared professionals. That has to change. We have to be able to devote the best and the brightest to think about the most basic problems affecting the lives of the poorest of their countrymen.

If we wanted to define the topic with the most profound implication on development, economic growth, and the alleviation of poverty, probably it would be education. Education has decisive effects on all the key variables related to economic growth, poverty, and political participation.

Despite the relevance of the issue, Latin America and the Caribbean are not only doing poorly in comparison with other regions, but also as the dramatic statistics gatheed by Londoño suggest, we are rapidly loosing ground.

The region has allowed significant segments of its population to remain without the necessary skills to improve their income and to contribute to a more dynamic economic growth. If Latin America and the Caribbean wants to join other areas of the world that have shown persistent high rates of growth, a dramatic and swift transformation of that sector has to be achieved.

Dear friends :

To consolidate economic reform in Latin America, to sustain structural reforms, and to guarantee development and growth, we need to enhance and enrich the political life of the peoples of the Americas. We need promote more democratization, wider participation, local democracy, and a strong involvement of the people in the oversight of the policy-making process.

At the end, economic growth, no matter how fast or slow, will mean nothing for the people if it does not promote simultaneously more freedom, more democracy and better conditions of life for the poorest of the Hemisphere. I am sure that this Conference will be a very positive contribution for our region in its quest for answers that will lead to development and social justice.