Media Center



May 17, 2005 - Washington, DC

Today I would like to talk about some of the good economic news that has been coming out of Latin America. I want to discuss the reasons for this good news, and how the United States can work with people in the region to sustain it, and thereby translate it into substantial reductions in poverty.

I recently returned to the private sector after serving for four years in the job as Under Secretary of Treasury for International Affairs in the Bush Administration. This has given me some time to reflect a bit, and perhaps provide a more academic perspective today. I worked closely with many economic officials in the region. I have good memories of trips to Latin America and the Caribbean, including the universal hospitality of the people and the many new and lasting friendships. I plan to visit the region again next week, my first trip out of the United States in my new private sector capacity.

Restoring Economic Stability and Raising Economic Growth

I remember my fist day on the job as Under Secretary four years ago in early 2001. The economic news in Latin America was not so good then. The leaders in Argentina struggled to contain an ongoing and expanding financial crisis. Brazil's high debt levels were generating growing market concerns. Mexico was feeling the brunt of the recession in the United States. These difficulties came in the wake of the crisis ridden 1990s, so they were a serious cause for concern. Naturally, I was in close touch with the finance ministers and central bank governors from the region.

I am pleased to say that things are much different now as I leave office and transition to the private sector. There are no financial crises in the region. Interest rate spreads have fallen sharply. Capital flows have risen. Investment is growing, including foreign direct investment which increased by $16 billion last year. I am also pleased to see that there is less contagion. Following Argentina's default at the end of 2001, we did not see a repeat of the contagion that afflicted the global economy following the crises in Asia and Russia in the 1990s.

And economic growth has rebounded vigorously. Real GDP for the region as a whole grew by about 6 percent in 2004—the fastest rate in a quarter century. This has translated into millions of new jobs and higher incomes for workers and their families.

What accounts for this turnaround? First and foremost, economic policies are better, especially macroeconomic policy. By macroeconomic policy, I mean fiscal policy and monetary policy.

Regarding fiscal policy, strong political and economic leaders have reduced deficits and brought down debt. Many have also lowered foreign currency-denominated debt and exchange-linked debt, two sources of instability.

We have seen a virtual revolution in monetary policy in the region. In the early 1990s, regional inflation was raging in the triple digits. Monetary policies are much more focused now on price stability, and inflation is only hundredths of what it was then. I have been pleased to see this first-hand on my visits to central banks in Santiago, Buenos Aires, Brasilia, Lima, and Mexico City. I was impressed with the technical capabilities of the staffs in the use of modern monetary policy techniques.

These good economic policies have positioned Latin America to seize the opportunities of strong global growth—which was led by the U.S. economic recovery, itself the product of good fiscal and monetary policies. The rapid export growth we have seen in the region is not just due to high commodity prices: export volumes were up a robust 11 percent last year.

In sum, better policies—defined and implemented by leaders across the region—have been the key to restoring economic stability and increasing economic growth.

What about the role of the United States? I believe that the United States played an important role in bolstering these policies and helping countries improve. For example, the United States strongly supported the solid economic program in Brazil endorsed by the leading presidential candidates in the 2002 election and supported by an IMF program. This gave President Lula and his economic team the opportunity to put through a sound economic strategy. As a result, last year Brazil turned in the strongest growth performance in a decade.

When Uruguay experienced a run on deposits associated with the crisis in neighboring Argentina, the United States worked to coordinate an assistance package and provided a short-term bridge loan from the U.S. Treasury's Exchange Stabilization Fund. I am proud to say that the government of Uruguay awarded me a medal for our work at that time.

We also backed multilateral assistance for Colombia to support a solid fiscal program to counteract the financial turbulence in 2002, including through important fiscal reforms.

In Bolivia, we supported policies that helped the government achieve significant reductions in the fiscal deficit and led the fundraising efforts during the recent period of political uncertainty. We also led the fundraising effort in Haiti and are now endeavoring to make this assistance package work. We worked closely with the IMF and our friends in the Dominican Republic to help them find a way out of their financial crisis.

In all of these examples, U.S. and international assistance was used to support good economic policies. For this reason, the support helped the governments quickly restore economic stability and generate a return to robust economic growth. They are clear examples of the U.S. commitment to Latin America.

Sustaining Economic Growth and Reducing Poverty

Now let me address the challenge that accompanies this good news. Many economic forecasters are expecting the Latin American expansion to continue this year and next, but they are predicting a slow down to about 4 percent growth. You may think this is understandable given the very high growth of last year. But forecasters are not projecting the same type of growth slowdown for many other emerging markets, especially in Asia. So Latin America and the Caribbean can do better and should aim to sustain the high growth rates of 2004. One or two years of high growth are a real accomplishment, but many more years of high growth are needed to bring down the poverty rates that are polarizing societies.

I see two major challenges for sustaining growth: First, “locking-in” the macroeconomic policy recently achieved and, second, turning more to microeconomic reforms.

How can good macro policy be better locked-in? In the area of fiscal policy, by passing laws that broaden the tax base, strengthen tax administration, lower marginal tax rates, and reduce revenue earmarking to achieve better spending allocations. Fiscal responsibility regimes are also useful. They help discipline budget planning and execution at the sub-national level where deficit spending has undermined efforts at fiscal consolidation. The clearest example here is Argentina, where provincial over-borrowing in the 1990s and the federal government's bailout of the provinces contributed significantly to the country's ultimate default in 2001.

In the area of monetary policy, countries can further bolster the institutional underpinnings of good policy by increasing central bank independence in order to lend greater credibility to their price stability mandates--as countries like Mexico, Chile, and Peru have done. I believe that monetary policy makers will face challenges in pursuing these price stability goals as the expansion continues and price pressures inevitably arise.

But it is microeconomic policy that needs to be given much higher priority than it has, and this is not easy. The real key to sustained higher growth is higher productivity growth, which leads to higher wages and decreases in poverty. Productivity growth in Latin America has been far too low, especially when compared with the productivity growth in Asia. As the IDB points out in its "The Business of Growth" study, Latin America's productivity growth averaged only 0.7 percent of GDP in the 1990s, compared to 2.7 percent in East Asia, a large, two percentage point difference.

The reasons for this low productivity growth are clear. First there is low trade integration with the rest of the world. Total trade was only 45 percent of the region's GDP, compared to nearly 80 percent in East Asia.

In addition there are rigidities in labor and product markets, weak property rights and judicial systems, and lack of access to credit particularly for small businesses. As a result of these distortions, a disproportionately high share of the region's economy operates in the informal sector. According to the World Bank's "Doing Business" survey, the informal sector accounts for 42 percent of the region's gross national income, compared to 24 percent in East Asia. This is hugely inefficient, as fewer new businesses are created, and the firms that do exist are less likely to expand, hire more people, and become engines of growth. Resources are wasted evading overly burdensome regulations, and tax bases are overly concentrated and narrow. According to the World Bank's indicators, it takes 70 days to start a business on average in Latin America; that’s the longest amount of time of any region of the world.

We know the agenda that must be pursued to address the impediments to higher productivity growth. Markets for products, labor, and capital have to be open and competitive. Governments and the private sector have to invest in high-return projects to build infrastructure and widen access to education. Property rights have to be protected. And people have to be protected from corruption. Experience in this region and elsewhere shows that, when these elements are in place, entrepreneurs will invest and create jobs.

The U.S. Commitment to Latin America

What should be the role of the United States in this effort to sustain higher economic growth in the region? Just as the United States and countries in the region worked together to restore economic stability in the last several years, they can and should work together to help translate the current economic recovery into sustained high growth.

International trade agreements can play a significant role. The free trade agreements (FTAs) that have been concluded, or are in the process of being concluded, will cover 90 percent of U.S. trade with the region. These include the U.S.-Chile FTA, the Dominican Republic-Central American FTA, as well as the FTAs with Panama and the Andean region that are under negotiation. All countries in the hemisphere should also work together toward a Free Trade Area of the Americas.

Reducing barriers to trade within countries is also important, and even here working together with the United States can be useful. At the 2004 Special Summit of the Americas, the leaders in the region launched new initiatives to triple bank lending to small businesses, to significantly reduce the time and cost of starting a new business, and to halve the cost of remittance transfers, which are a source of financing for education or small businesses. They should now make sure these ambitious goals are achieved.

There will be an opportunity to do so at the 2005 Summit of the Americas in November in Argentina. In addition, the United States and countries in the region should work to launch new initiatives to increase jobs through economic growth. They also should continue to work intensively with the World Bank and IDB to show measurable results, and insist on strong controls to track where the money goes, so that the assistance goes to improve people’s lives

In partnership with individual countries, the United States can advance ideas for raising productivity growth. For example, the U.S.-Brazil Group for Growth has helped shape legislation submitted to the Brazilian Congress that helps raise productivity and jobs in Brazilian small business by reducing taxes and streamlining labor and pension regulations. Most recently, the United States, Mexico, and Canada launched the Security and Prosperity Partnership, which will improve the legitimate movement of people and cargo across borders and improve productivity through regulatory cooperation.

Through the Millennium Challenge Account (MCA) the United States can work to help the poorest countries increase productivity growth. This initiative of President Bush is aimed at countries advancing pro-growth policies, including ruling justly, investing in people, and promoting economic freedom. I am pleased that three countries in Latin America—Bolivia, Honduras, and Nicaragua—have the opportunity to benefit from MCA assistance this year by developing proposals to use the assistance.

I believe that the United States and countries in the region should deepen and expand all these types of engagements. For example, Brazil and the United States could open up their highly successful Group for Growth to other countries that want to pursue these pro-growth policies. There is certainly a large pro-growth agenda for a broader group to help implement.


I am proud to have had to the opportunity to work with our friends in Latin America and the Caribbean over the past four years. Together, we have gone from difficult economic crises to strong economic growth, and now we must sustain that strong growth. I know that the Bush Administration is focused on the region, and will build on the successes that I discussed here. Those of us in the private sector will be cheering them on, and engaging in our own productivity raising activities.

(1) John B. Taylor is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. From 2001 to 2005 he served as Under Secretary of the U.S. Treasury for International Affairs. These remarks are a revised and condensed version of remarks given at the Inter-American Development Bank Meetings in Okinawa in April 2005.