These last few years have taught us much about the meaning of globalization and the opportunities and risks that it entails. The Latin American experience in this area points up three important aspects:
Your countries seized the opportunities that came their way, and, beginning in the early 1990s, attracted sizable capital flows that played a key role in the highly desirable acceleration of their growth.
Owing chiefly to sustained efforts to overcome the debt crisis and to base their growth on macroeconomic stability, public deficit reduction, and structural reforms, your countries fortified themselves to withstand the shocks delivered by the crisis. The extraordinary resilience demonstrated by the region is largely due to the prompt, responsible reaction of policymakers and their effort to implement broad reforms that have provided the region with sound financial systems and a framework of more flexible policies. It is encouraging that investors now seem to be starting to discriminate more clearly among countries, based on their individual economic strengths and the consistent focus of their economic policy.
The hardest-hit countries—Mexico in 1994—95 and now Brazil—have demonstrated their ability to respond with bold programs capable of attracting vital international support and to create new bases for stronger and more sustainable growth.
What more, then, can your countries do, when we know you are faced with repairing the damage of horrific natural disasters and adjusting to the slowing of world economic growth, falling export prices, exchange pressures, reduced external financing, and increasing interest rates and spreads? What can be done when, as a result of all this, the prospects for near-term growth have evaporated and a drop in per capita output is expected this year, with a consequent rise in poverty?
For individual countries, there is no quick fix and no substitute for the kind of prudent, consistent management that inspires market confidence. Such management consists of the relentless defense of macroeco-nomic stability, the deepening of structural reforms, and the pursuit of a second generation of reforms to win investor confidence through good governance, transparency, and stronger market institutions.
But, in this globalized world, do regional integration efforts have a future? Yes, now more than ever. Take a few moments to think about the creation of the euro. A persistent effort to achieve macroeconomic convergence in a context of initially very different situations and perspectives has steadily created the conditions necessary for the creation of the single currency. Of particular relevance is the benefit that each economy has drawn from these convergence efforts: that of being able to join forces to gradually root out problems created by inflationary imbalances and protectionist demands. This same route is open to your countries as well. Regardless of the final monetary option chosen, the convergence and regional integration of your economies is essential to the strengthening of your countries and their ability to adapt to the new international financial environment. The fruits of these convergence efforts—the difficulties of which I fully recognize—could
provide further evidence of the region’s determination to meet the challenges of a globalized economy and to continue managing their economies in a coherent and stable manner;
allow policymakers, through an exchange of information and opinions, to better assess the risks facing each country and formulate more appropriate policies;
help governments consolidate domestic political support for their policies, warding off protectionist or backtracking tendencies; and
offer a means of assessing the impact that policy changes in one country have on its neighbors, thus limiting the possibility of destabilizing unilateral decisions.
I have already said enough about macroeconomics. I need only add that just as the IMF makes itself available to the Group of Seven and other groups and regions, it can assist you in your efforts to facilitate a frank and open regional discussion of the economic policies. A convincing first step in this direction was taken last September when finance ministers and central bank governors from Latin American economies with regular access to financial markets met at the IMF to discuss their situations and policy options in the aftermath of the Russian crisis. This experience could be expanded to periodic meetings, with broader representation and with countries possibly organized into subre-gions to ensure the active participation of all. Such meetings would provide fertile ground for the discussion of novel ideas and for gradual policy convergence.
Banking. You may wish to consider a coordinated regional approach to financial supervision. If any lesson has emerged from recent crises, it is the necessity of decisively strengthening financial systems. The Basle Core Principles for Effective Banking Supervision represent an important step toward defining global standards. I urge Latin America and the Caribbean to put these principles into practice as quickly as possible.
But could you not go one step further? To give a strong boost to confidence in the region, why not consider complementary regulatory measures better attuned to the specific circumstances of the region? The Basle Core Principles recommend a minimum capital adequacy ratio, duly weighted for risk. But as the exposure of banks in the region may be greater than among more diversified international banks, a higher ratio may be needed, and indeed some countries have already come to that decision. Other regulatory issues—such as accounting standards or the proper criteria to assess banks’ internal risk-management policies—could also benefit from a regional definition based on international principles, adjusted to regional circumstances. All these aspects could in turn benefit from closer cooperation between national supervisors and renewed efforts on the part of the regional association of supervisors, with ongoing support from the IDB and the IMF.
Evidence continues to mount of the close links between export performance, the degree of trade liberalization, and economic development. This is a lesson learned long ago in this region, and most countries have remained firmly committed to open trade regimes. However, in times of crisis, the risk of trade tensions increases. Trade policy can never be used as a substitute for macroeconomic policy adjustment, and it is essential that we keep trade liberalization at the forefront of governments’ agendas. I have no doubt that countries in the region will continue to eschew protectionism and will avail themselves of existing regional mechanisms, such as Mercosur, to preserve and accelerate the liberalization of their economies. Regional trade liberalization initiatives can offer important benefits, but we must avoid the disorderly proliferation of overlapping and sometimes conflicting regional trade arrangements. It is therefore essential that we promote dialogue and make certain that regional initiatives progress in a decisive and nondiscriminatory manner toward the liberalization of trade.
Role of the IMF
What will the IMF do in these difficult times to help the IDB support its member countries? First, we will continue to fulfill our traditional role and, in particular, to increase our support to the 11 countries that already have or are negotiating programs with us, representing total commitments of as much as SDR 21 billion ($28 billion). This means bringing discussions to a successful conclusion, particularly with Ecuador and Venezuela, and playing a very active role in assisting the victims of Hurricane Mitch.
But beyond this, our mission is to contribute to the international community’s efforts to find the most appropriate response to the severe debt problem of the poorest countries and to create a new capability to grant contingent lines of credit to countries that, despite prudent macroeconomic management, are vulnerable to the volatility of financial flows. In this way, we hope to have a catalytic effect, facilitating the creation of the banking lines of defense that [IDB President Enrique] Iglesias mentioned. Indeed, this new approach could be one of the first components of the new architecture of the international financial system, which the Interim Committee will discuss in Washington in April. The objective should be to provide your countries with the stable, equitable framework necessary for sustainable, high-quality growth.
This is a time of great challenges for Latin America and the Caribbean, but with the courage of the people and governments, I am convinced the region will progress to even greater heights and will be strengthened by this crisis. We at the IMF will do all we can, in close cooperation with the IDB, to make that come to pass.