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January 6, 2003
Council on Foreign Relations
[Note: A transcript of this meeting is unavailable. The discussion is summarized below.]
What We Know:
Historically, Latin American countries have been more susceptible to crises than have other emerging market economies. The region’s recent economic difficulties have been due primarily to vulnerabilities within Latin America, but have been exacerbated by global problems. Domestic vulnerabilities include large external financing requirements; currency mismatches in government and economy-wide borrowing; consequent constraints to counter cyclical policy; contagion from neighboring countries, especially Argentina and Brazil; and the accumulated costs in terms of availability and cost of funds from a history of poor performance.
External factors, such as the collapse of equity markets, geo-political concerns and the global economic slowdown have contributed to the very weak position across much of Latin America today. The failure of institutions over time has contributed to instability and weak performance.
Despite the economic turmoil of the past few years, it is important to recognize that many Latin American countries pursued sensible policies in the last decade and that this was rewarded by better performance as is evidenced by higher per capita growth, lower inflation, and greater openness to trade and investment. Even in the current climate, two countries that have implemented strong policies --Mexico and Chile -- are recording positive growth and may be able to make sustained progress. Unfortunately, the rest of the region is still experiencing difficulties, which runs the risk of encouraging more widespread disillusionment with pro-market economic policies, which in turn could undermine further reform efforts.
What We Don’t Know:
First, there are a number of deep-seated problems that may account for Latin America’s poorer performance relative to Asia, but it is unclear how to assign weights to such differences and about what policy implications have flowed from them. Secondly, although there have been improvements in some of the key countries, significant near-term uncertainty remains, not least because of ongoing concern about debt sustainability in Brazil, the region’s largest economy.
Some participants argued that the government should be prepared to be more aggressive on fiscal policy; for example, by raising the primary surplus perhaps to above 5 and a half percent of GDP in order to help restore financial market confidence and ultimately lower the debt burden. Others stressed that since further fiscal adjustment may be difficult to carry out politically, debt restructuring could ultimately prove necessary.
It remains unclear how Latin American countries might overcome political obstacles to achieve needed reforms such as healthier fiscal positions, thus reconciling their domestic goals with the expectations of international investors. Many participants expressed concern that the current Bush Administration’s trade strategy will not be sufficient to address the region’s problems.
What Are the Next Steps?
The countries themselves need to take various steps to address the major weaknesses in the region. A key challenge, however, for most Latin American countries will be to implement fiscal reforms to reduce deficits, such as running budget surpluses in the good times so that they will be in a better position to weather future slowdowns.
The further development of domestic capital markets is critical for reducing reliance on external sources of finance, and the appropriate IFIs must take steps to support such reforms. They were urged to take a more pro-active role in encouraging reform and engaging with Latin America. Some participants were more doubtful that any swift progress could be made.
In terms of the role of the international community, the focus on a sovereign debt restructuring mechanism is misplaced, such a focus could even have worsened the outlook for the emerging market asset class.
Finally, the importance of the region for the United States was emphasized, and the need for a coordinated trade and finance strategy as part of a diplomatic outreach to the region was advocated.
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