Journal Issue

Sustained and consistent reforms are critical to: restoring confidence in Latin America

International Monetary Fund. External Relations Dept.
Published Date:
May 2003
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Latin America is beginning to recover from a difficult year, Köhler said. In 2002, the region experienced its worst downturn in 20 years, although there were significant differences between countries. Growth slowed in many countries, particularly Argentina and Venezuela, but picked up in Mexico and Peru. The adverse global environment affected many Latin American countries, especially those that relied on financing from international capital markets.

Horst Köhler: The IMF is fully engaged in supporting economic reform in Latin America.

Countries with stronger policies, such as Chile and Mexico, weathered the crisis better.

Agenda for success

The first quarter of 2003 brought additional signs of improvement, Köhler said, including export growth in several countries and improved market perceptions. In Brazil, the new government’s macroeconomic policies are beginning to bear fruit, and he welcomed Brazil’s successful return to international capital markets for the first time in over a year. He also wel-comed Uruguay s recent debt exchange offer, which will help achieve a more sustainable medium-term debt profile for the country. On Argentina, Köhler noted that the IMF stands ready to work with the new leadership on a comprehensive reform program, which will be needed to build on the current stabilization gains and establish a firm basis for sustained strong growth, commensurate with the country’s considerable potential. It is these developments, Köhler said, that give him grounds for optimism.

In addition, he noted that new leaders in the region were formulating agendas for increasing long-term sustainable growth while improving social equity. He pointed to three elements that he considered particularly important:

  • increasing the economy’s resilience to crisis by achieving low inflation, which will require, first and foremost, placing public financing on a solid footing;
  • strengthening the institutions that underpin a market economy and implementing structural reforms to raise economic growth potential; and
  • addressing issues of social equity and governance to buttress popular support for reform.

Köhler noted that there was no single model for success. In many cases, he said, national traditions would shape individual approaches. But he was certain that the common agenda held much promise for the region. “Promoting sound institutions and strengthening the culture of accountability and trust are critical to ensuring sustainable long-term growth and social equity. Without social equity, there can be no social peace, and without social peace, long-term investment and sustainable economic growth will remain elusive.”

The IMF is fully engaged in supporting economic reform in Latin America, Köhler said. It is helping its members make their economies more crisis-proof by providing policy advice, technical assistance, and resources to support national economic programs. Outstanding IMF resources to the region are about $42 billion, more than half of the IMF’s total lending. And, increasingly, he said, the IMF is helping countries meet international standards and codes in the economic and financial areas, an objective that is particularly important for restoring investor confidence. As for the poorest countries in the region—for example, Nicaragua—the IMF is extending financial support for their reform programs through its Poverty Reduction and Growth Facility.

Challenges for the region

Köhler agreed with Mexico’s former president, Ernesto Zedillo, that the main problem in much of Latin America had been too little reform and, in particular, inconsistent reform. “Sustained and consistent reforms are critical to restoring confidence—confidence needed for more investment and better access to financial markets.” Thus, Latin America’s key challenge will be to keep good policies on track.

But, Köhler said, Latin America also needs, and deserves, support from the rest of the world. The first priority, he said, should be to strengthen trade, which offers significant potential for economic growth and for reducing countries’ vulnerability to external shocks stemming from swings in capital flows. For Brazil alone, Köhler said, the liberalization of market access under free trade agreements with the European Union and the Americas could boost exports by $18 billion, or 32 percent, primarily for agricultural products. In that connection, he welcomed the initiative to establish a free trade area of the Americas. However, in moving ahead with the free trade area, he cautioned that it would be imperative to ensure consistency with the multilateral trade discussions being held under the Doha Round. Trade is critical to restoring confidence to the world economy, and the United States and Europe bear primary responsibility for ensuring that the Doha Round is brought to a successful conclusion. And, by supporting higher economic growth and poverty reduction, it will also enable developing countries to participate more fully in the benefits of globalization. Regional and multilateral trade initiatives share the same objective: raising economic growth and prosperity by promoting trade and cross-border investment.

Latin America has enormous potential for growth, Kohler concluded. And it now has leaders who know the way forward: through investment in better integration with the global economy.

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