"Latin America towards the 21st Century
Beyond miracles and stereotypes:
The quest for sustainability and long-term growth."

Let me start by congratulating ING-Barings and the organizers for their success in gathering the "best and the brightest" of the entrepreneurial and financial world of Latin America. The ING Barings Annual Latin American Conference has become one of the key events in the discussion of the current and future trends affecting our region's economic and financial future.

This meeting could not be more timely. For both public and private decision-makers, these are not easy times. The burden of rapid change and mind boggling shifts in regional economic and financial trends are certainly difficult to assimilate. Thus, the immense value of the open and insightful dialogue that is starting here tonight.

We know now that simple interpretations, simple answers and simple solutions are not useful anymore to succeed in contemporary Latin America. The times when stereotypes made Latin America easily predictable are certainly something of the past.

Latin America is again at a juncture. After a decade of painful adjustments, the Mexican crisis of late 1994 reminded us of the fragility of what has been achieved. And those like you, who have been betting heavily on a prosperous Latin America, are justifiably baffled by the strategic dilemmas confronting all of us.

Will Latin America maintain its commitment with structural reforms? Will integration lead toward freer trade or to isolated regional trading blocks? How rooted is the democratic process? And, how strong is the political consensus in favor of market economics? Are the recent symptoms of social unrest manageable or are they the beginning of widespread popular malaise? Is Latin America entering a virtuous cycle of growth and stability, or are we instead witnessing a new chapter in the dramatic "boom and bust" history of the region? Is privatization exhausted? Can macroeconomic prudence last? Of course, I cannot provide definitive answers to all of these dilemmas.

But by thinking together, we can open new roads and offer new insights.

What is happening in the Americas is not unlike the phenomena that has occurred in the recent political and economic evolution of Eastern Europe and the former Soviet Union. Until a few months ago, we thought that globalization, prosperity, progress, and economic reform were permanent trends because everyone shared basic economic values. In reality, many underestimated the impact of political and social problems. We were swept along by a wave of euphoria. But now, we have come to realize that there can be no gain without pain.

I do not believe that the countries will choose to go back to the abandoned and restrictive concepts of the past. We are not returning to the bad old days of isolationism and protectionism—that would be impossible. Anyone who attempts to ignore global realities will suffer the consequences. Rather, I think that we have a new down-to-earth attitude strengthened by a healthy skepticism about economic miracles and magic formulas that claim to ensure painless growth and well-being.

In some of our countries, public opinion seems restless. Our people are no longer satisfied with public debates that devoted exclusively to free markets and economic reform. There is no doubt that the greater economic freedoms, prosperity and the stability brought on by economic reform are appreciated by the electorates of Latin America. However now, they are demanding that their leaders concentrate their efforts on institutional reform, democratic participation, the fight against corruption and social policy.

It would be pointless to move forward in economic and market reform if democracies are crumbling because of corruption, or if people are rising up against free enterprise because they mistakenly blame it for the inability of their governments to carry out social policies that really improve the standard of living of the poorest.

We should not be surprised that in some of our countries people no longer want to hear only about privatizations, fiscal deficits, trade policy, and all the other economic problems we are here to discuss.

So far, that attitude is not rejection. It is merely the reflection of their demand for solutions to the problems they now feel are more urgent.

Reform and opening up of economies continue to be welcomed and appreciated. However, beyond the economic adjustments , we must work to improve the well-being of our people through the combined action of the market, the government, and the private sector. We should not interpret it as a rejection of the reform and modernization strategies if citizens raise new questions about the convenience of reducing the role of government and the impact it should have on their lives. This subject has always been, and will continue to be, in Latin America and elsewhere, the central issue of politics.

Those who dogmatically see economic reform as a step toward the demise of the state, in which the most vulnerable sectors are abandoned to the vagaries of the market, are laying the groundwork for an avalanche of protest and loss of electoral and political support throughout the Hemisphere for market opening and stability. Citizens are interested in the manner in which the government will defend their economic and political freedoms. But, they also want to know how it is going to ensure equality and social justice, new rights, more democracy, greater participation, and better public supervision over the conduct of public affairs.

We must not forget that in order to advance in integration and the promotion of free trade in the coming decade, while defending economic reforms in the Americas, it is also indispensable to strengthen democracy and freedom, clean up our political machinery, and overcome the various forms of violence.

Not only the political economy of secondary reforms in Latin America is going to be more complex, as has been illustrated by recent setbacks in some countries, but during 1996 and 1997 the policy environment in the U.S. and the industrialized world will contribute also with its own uncertainties.

The problem is with public opinion. The industrialized world's commitment to free trade and anti-inflationary policies is under assault by their own social tensions. The adjustment to the rules of global competition, with its cascade of layoffs, structural unemployment in some countries and the end of bountiful labor conditions, has created significant challenges to the leaders of the largest economies.

Protectionism and economic nationalism is on the rise. With unexpected frequency now-a-days we are witnessing attacks on the objectives of moderate growth and low inflation sought after by current economic policies. The pressures for expansive fiscal and monetary policies are also gaining some momentum in the political arena.

Those forces are far from turning back the commitments with implementing responsible policies and build a long-term healthy economic environment. But we have to be very attentive and not dismiss the risk of a potential political backlash fueled by economic anxiety in industrialized countries. If during the coming decade protectionism gets larger audiences in the North, it will be more difficult to keep the economic and market reform in Latin America.

If common sense and self-interest prevail, as they should, we can expect an engaged industrialized world able to provide leadership and support for a new wave of progress towards stronger democratic institutions and market oriented economies in the Hemisphere. The business community, particularly firms like yours who have large and growing stakes in a prosperous Latin America, cannot be passive spectators at this crucial moment.

Frankly, I think isolation is no longer a realistic option. I am very optimistic about the future of integration and collective action in the Americas. NAFTA, the Summit of the Americas, the Trade Ministerial Summit in Cartagena and the New Agenda of the OAS are all steps towards closer and stronger political, trade and economic relations among all our countries.

It is also very interesting to note that the financial markets appear more confident, than some of the politicians, about the prospects of Latin America. After an almost complete halt in private capital flows during early 1995, both governments and firms are successfully returning to the markets to attend their financial needs.

In contrast to the liquidity crunch of the early eighties, this time the global financial environment supported an accelerated recovery in the region's access to international markets. In fact, the markets have acknowledged the rapid response and the willingness shown by policy makers to adopt the right measures in order to preserve credibility and adjust briskly, despite significant political punishment. Low interest rates, high liquidity and more discriminating investors were able this time to tame the natural "herd instinct" of the financial community.

Recent research by the IDB confirmed, once again, that capital flows into Latin America are significantly dependant of U.S. interest rates. And, the coming years will foster a still stronger participation of Latin America in the global debt and capital markets if we can assume that the current increase in interest rates is temporary, that the Federal Reserve will be able to continue its successful "soft-landing" and "fine-tuning" interest rate policy,and that the American economy will maintain a moderate growth path while gradually restraining its fiscal deficit,.

The capital needs of the region are and will be immense. Although current account deficits will diminish considerably during the coming years, the infrastructure, technological and productive capacity needs are such that there will be no other option than to rely heavily on the global capital markets. Latin America is back into the markets to stay for a long time.

But the lessons learned in 1994, by countries, financial institutions and investors, will transform the ways things are done. The first notorious change is the adoption of tougher restrictions by Latin authorities to external portfolio investments and short term capital inflows. As a consequence, we will see more fixed-income long term instruments in the market to finance private and public needs. Also equity issues will rely increasingly on ADR-type instruments that provide investors with greater liquidity and some protection from exchange rate risks.

Although the above-mentioned trend is strong, it would be a mistake to discard the emergence of improved local capital markets. Probably with the exception of Chile, Brazil and few others, there still is a long way to beofre the local "bolsas" really transform themselves into efficient, long-term capital raising mechanisms. But that transformation will probably take place during the coming decade as social security reform and private pension systems develop throughout the region. Also, an increased internationalization of the activities of the "bolsas" can be expected, with new trans-border electronic trading linkages and convergence of regulations and standards between countries.

Economic reform and integration has as well sparked a second promising trend in the region's financial landscape. Latin American countries with high levels of savings, such as Chile, are transforming themselves into net exporters of capital to neighboring economies. A significant portion of the privatizations are won today not by powerful industrial-country multinationals but by investors from the region. A deepening of regional integration --as can be expected from the recent announcements of Chile, MERCOSUR and the Andean Pact—will certainly encourage a quantum-leap in the levels of intra-regional capital flows.

The third major shift in finance will be the movement away of traditional bank and lender credit. Greater financing through direct foreign investment can be expected in the coming years. Several countries are considering additional reforms to promote that kind of direct investment as a way to guarantee a long-term commitment from investors and reduce volatility of capital inflows. And certainly the figures show that there is ample room for improvement. During 1995 the Asia-Pacific region received three times the amount of direct investment channeled to Latin America.

And as an essential part of the strategy towards attracting greater external financing and reducing fiscal pressures, Latin America will continue vigorously with its privatization programs. There is some skepticism in the markets towards the coming phase of privatization. Many argue that the best opportunities are already gone and that what is left has little business potential. Those views seem to reflect more the attitudes of speculators than those expected from real entrepreneurs.

In many of the largest economies of the region, privatization has barely started. In Mexico, Brazil, Venezuela, Colombia and Central America, for example, there are significant portions of the economy still under governmental control. In those countries, much of that pool of assets has been targeted for privatization because of macroeconomic, fiscal and productivity reasons. In that area we have barely scratched the surface of what is possible.

And, even though it is completely legitimate to scan the economic landscape of Latin America in search of undervalued and under-performing assets with potential, I encourage you to also look at privatization from a different perspective.

The underlying assumption behind privatization is that many of the roles traditionally played by governments can be done more efficiently and productively by the private sector. As a result, many countries have gone through profound regulatory changes that opened a whole new universe of possibilities to entrepreneurs. Yet, the sale of assets is not the only issue that matters.

The relinquishing by the State of a significant portion of the economic landscape which was previously inaccessible to private initiative is equally essential . Water treatment, garbage collection, sewage systems, health care, education, urban transportation, consumer financial services, are areas in which probably the removal of entry barriers is equally or more important than the auction of state-owned assets.

We are used to blaming governments, with good reasons, for much of the difficulties experienced by our region in its path towards development. But I am increasingly convinced 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 Latin America.

In our region, the presence of a relatively high degree of monopolization, corporativism, and concentration of property and productive assets in a few hands, creates entry barriers to new firms and discourages the enthusiasm of many entrepreneurs and potential investors. Thus, the enthusiasm and hope created by the recovery of economic freedom could be frustrated.

Governments alone do not deny access to competitive markets. Private actors can also create 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 discussions of the future of our region. We need a revolution of entrepreneurship to unleash the potential of private initiative, so often restrained by the absence of competitive environments.

In policy terms this means that a deliberate and strong anti-trust effort, combined with measures to encourage a broader and more equitable access to finance, capital and asset ownership, can have a significant impact on the investment potential of the economies of the region.

Latin America devoted much energy to creating the macroeconomic structure required to build market economies. But Governments have paid much less attention to the institutional, regulatory and legal framework that is needed for private initiative to occur. The strong economic incentives unleashed to encourage the flourishing of private initiative can be frustrated by the old fashioned and, in many cases, corrupt environment in which entrepreneurs have to operate.

Regulatory, administrative and procedural reforms are often messy and apparently less exciting, but without them we will loose much of the potential for change and growth generated by economic reform. I certainly will encourage you to actively participate in convincing decision makers that reform has to leave the heights of structural adjustments and macroeconomic policies to profoundly transform the still archaic regulatory environment in which businesses are forced to conduct their daily real-life struggle.

Leaving behind the tribulations of the private sector, let me address some issues related to free-trade and integration in Latin America. After unilaterally liberalizing their economies several countries witnessed the rapid expansion of bilateral and intra-regional trade. Open markets uncovered latent complementarities and a tremendous synergy between the economies of Latin America. Governments reacted positively trying through free-trade agreements to organize and foster this initial revitalization of regional markets. And the result was an explosion of new or revamped integration and free-trade arrangements.

All these developments allow us to be confident that for the first time we really have a chance to create a Free Trade Area of the Americas. The key element in the process so far that justifies hope that an integrated Hemisphere is politically and economically feasible is that freer trade has demonstrated its power by producing exceptionally positive and concrete results.

The figures speak for themselves. The average tariff of the ten largest Latin American countries plunged from more than 50% a decade ago to 25% in 1991, and 12% during 1993. Intra-regional trade within MERCOSUR has been increasing at an average rate of 30 per cent per year since 1992. Trade between Latin America and the Caribbean increased by 20% last year, and intra-regional exports in general doubled between 1992 and 1995. Exports among the Andean Group countries, as a share of their total exports, have doubled U.S. trade with Latin America and the Caribbean in 1995 was US$202 billion, which is a 12% increase over the previous year and a 72% increase over 1990. U.S. exports to the Americas have increased twice as fast as those to any other region of the world. Canada's exports to Latin America and the Caribbean increased by 30% last year. To illustrate this point, today the United States exports more to Costa Rica than to all of Eastern Europe, and Brazil buys more US products than China.

These realities and the undeniable growth potential of regional markets guarantee a strong political will to defend what has been achieved until now in terms of free-trade between the different countries and groups of countries. What is less clear is how we will move from sub-regional free-trade to hemispheric-wide integration. Let me present to you two possible scenarios. The critical variable here is U.S. attitudes towards hemispheric-wide free trade. If the current intolerance towards greater U.S. involvement becomes permanent, NAFTA will continue loosing its "gravity pull" on the other major Latin American trade players.

On the contrary if the U.S. shows the same enlightened self-interest that has been displayed by the Clinton administration, and pursues a path of strengthening and expanding NAFTA while seriously negotiating the creation of the American Free Trade Area (AFTA), then the rest of the continent will align its expectations with this strong signal. Under such scenario regional and subregional integration will be seen as ascending steps leading towards the more ambitious goal of achieving free trade and economic integration in the Americas early into the 21st Century.

We must move decisively to sustain and enhance this dynamism. The recent Trade Ministerial Summit in Cartagena clearly signaled that there is no obstacle, circumstance or uncertainty capable of derailing the trade integration process in the Americas. The concrete results of integration and economic opening reaffirms our faith.

In terms of the business climate in the coming future, we can safely assume continuous progress in trade liberalization throughout Latin America, a further consolidation of MERCOSUR and the Andean Pact, and an increased convergence among South American free-trade agreements as well as a gradual but firm advance towards Hemispheric integration.

The next concern that investors usually have in relation with Latin America has to do with political stability. The democratization of the region is certainly a recent phenomenon. But practically all the Hemisphere has shown a firm commitment to democratic institutions and respect for civil liberties.

For the first time in decades there is a very strong consensus that effective democracy is the condition "sine qua non" to participate in the benefits and opportunities offered by the hemispheric community of nations. In contrast with the past, departure from democratic rule will be strongly censored by the international and the hemispheric communities. Additionally, the OAS, as the regional multilateral organization, has a renewed strong mandate to defend and promote democracy in the Americas.

Isolated crises will come and go, but I see a strong will to press forward with the consolidation of democracy. Certainly there are political problems, but governments are choosing to confront them with more opening, more democracy and more institutional reform.

Hence the importance of elevating the priority assigned to the struggle against poverty and of focusing our reform efforts on improving social policy in Latin America. This will not be a simple task because in general governments are not properly equipped to meet social needs. This is because nearly all of our countries –including the U.S.- continue to rely on the same jaded investment and social policies of the past. With very few exceptions, reform of the state in Latin America has not reached the critical area of social policy and institutions. Poverty remains the worst enemy of democracy at home and integration in the Hemisphere. We have to join hands and start now on a crusade to improve the conditions of the poorest of the continent.

Dear friends :

As you can see I am on the side of those who find sufficient political, economic and social arguments to believe that Latin America will leave its past history of volatility and uncertainty and will enter a phase of sustained growth and stability. The Americas have entered confidently into a new age full of possibility. But I am not a utopian. I understand that there are many huge problems yet to be solved.

We need to promote more democratization, wider participation, local democracy, and a strong involvement of the people in the oversight of the policy-making process. We have to empower our societies with the ability to transform themselves. That is the most essential task to ensure a never-ending revolution in which democracy and economic freedom become the answer, the only legitimate tool, to overcome the challenges of the future.

Thank you