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Köhler sees enormous potential for global growth

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 2003
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The world is facing great uncertainty, and the recovery in the world economy is weaker than earlier anticipated. But barring a protracted war in the Middle East, which is unlikely, I expect the tentative recovery to continue. The economic policies of the larger advanced economies remain broadly supportive, and there is further scope for monetary easing should that prove necessary. For 2003, I expect global economic growth to slightly exceed last year’s level of 3 percent.

Although full confidence is unlikely to return until the geopolitical tensions have subsided, we must avoid undue pessimism. Despite the series of large shocks in recent years, the global economy and the international financial system have proved remarkably resilient. And we are in the midst of a technological revolution that has the potential to sustain global growth for many years to come. I expect markets to bounce back.

Latin American crisis

Latin America is facing particularly difficult economic circumstances. In 2002, real GDP fell by about ½ of 1 percent for the region, led by a sharp recession in Argentina. The adverse global economic environment brutally exposed weaknesses in the domestic policy framework in several countries. But there have been bright spots, notably in Mexico and Chile. And better policies in several other countries, including Brazil, Colombia, and Peru, have allowed them to weather the storm reasonably well. I also welcome the stabilization of the economy in Argentina, although the situation remains fragile, and there is still a need for a more comprehensive medium-term economic program. Thus, the picture in Latin America is very differentiated. But, overall, there are signs of recovery. And this recovery will need to be nurtured with the right policies and decisive leadership.

The debate about the causes of the current crisis is ongoing. But let me say clearly what, in my view, is not the cause: market-oriented policies. I agree with Ernesto Zedillo, former president of Mexico, that the main problem in much of Latin America has not been too much reform but too little. And I would also add inconsistent policies. Privatization was not adequately supported by a regulatory framework that ensured competition. Fiscal policies were often not consistent with exchange rate policies. And excessive income inequality and the neglect of social safety nets meant that popular support for economic reforms eroded, an issue particularly important for several of the new democracies in Latin America.

Allow me to present four reflections on what we have learned and the direction I see for the countries in Latin America. First, they need to be more crisis proof. Reducing their vulnerability requires sound macroeconomic policies, fiscal policy foremost. This means living within their means and incurring debt (under reasonable terms) only for productive purposes. Second, sound macroeconomic policies, while necessary, are not a sufficient condition for growth. Structural reforms are needed to unleash countries’ long-term growth potential. There is considerable scope for trade liberalization, and, maybe most important, there needs to be better access to quality education. Third, there is an urgent need to strengthen the institutions that support democracy and a functioning market economy. Protecting property rights; upholding the rule of law; and providing sound regulation of product, factor, and financial markets are crucial. Fourth, it will be necessary to tackle social inequity and poor governance. Macro-economic stability and stronger, better-functioning institutions will help the poor. But there is also a need to explicitly target policies to alleviate poverty and improve social equity. And combatting corruption will yield significant benefits for economic growth but will also address social equity issues directly, as it is the small businesses and the poor who often bear the brunt of the burden of corruption.

Brazil

I am particularly encouraged by the new government in Brazil, which is charting a courageous course to restore growth and achieve sustained poverty reduction. While the demands on economic policy are clear, there is little room for slippage. And we should recognize Brazil’s enormous potential. Abundant natural resources and a potentially huge market continue to attract significant foreign direct investment. And advances in primary education achieved in recent years offer enormous promise for future economic growth.

President [Luiz Inácio] Lula da Silva knows that breaking the chains restraining the Brazilian economy is the responsibility of Brazil itself. But he rightly asks the international community for help for self-help. The main focus needs to be on trade. Brazil’s agricultural exports face considerable, in some cases almost ridiculous, barriers. Take sugar exports to the EU market. Brazilian sugar must pay a tariff of well over 100 percent on sales in the European Union. In addition, European sugar beet producers were subsidized to the tune of about 1½ billion euros in 2002, enough to allow even Finnish farmers to compete with tropical sugar! World Bank estimates suggest that the liberalization of market access under free trade agreements with the European Union and the Americas could raise Brazil’s exports by $18 billion, or 32 percent, the vast majority of which would be agricultural products. But we should not forget that Brazil’s own trade barriers remain significant in some sectors, severely shackling domestic competition and innovation. These, too, need to be tackled.

I am particularly encouraged by the new government in Brazil, which is charting a courageous course to restore growth and achieve sustained poverty reduction.

–Horst Köhler

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