Singh on crises in Latin America
IMF Survey: What are the main lessons the IMF should draw from Argentina’s collapse in 2001-02 and earlier IMF financial support for the country’s policies?
Singh: There are many lessons—for policies and for our own surveillance role—and we are still assessing them. But some are already clear. Argentina’s exchange rate arrangement, which was a very hard currency peg (a currency board), worked well in the early years to anchor inflation reduction. However, during the 1990s, key parts of the macroeconomic policy framework, as well as structural policies, became increasingly inconsistent with sustaining the currency board—in particular, the rising level of federal and provincial debt. One clear lesson for other countries is that high public debt increases vulnerability, especially if there is a high degree of dollarization. The safe level of debt for many emerging market countries is almost certainly much lower than earlier perceptions.
IMF Survey: Where do we go from here, and how do you assess the January debt rollover agreement?
Singh: All the parties involved have been trying for at least a year to develop a strong policy framework that will allow Argentina to recover from the crisis and rebuild a basis for growth. This has taken much longer than anybody expected—partly because the crisis is very deep and partly because it is difficult, in the middle of such a deep crisis, to get the consensus needed across the community to carry forward a strong recovery program. The government has formulated a transitional program as a step toward a more comprehensive program that could be developed soon after a new government assumes office in late May. The hope is that this program will help maintain macroeconomic stability during the political transition, thereby helping bridge the period until a more comprehensive program can be developed by the successor government.
One lesson that the IMF has learned is that, in our own policy advice, we need to pay even more attention to sustainability.
IMF Survey: There’s a lot of criticism in the press that the motivations for this were a bit suspect. Was the IMF simply responding to pressure from its major shareholders or trying to avoid IMF arrears?
Singh: As I said, we have all searched for a comprehensive program that would give strong assurances not only about immediate macroeconomic policies and their implementation but also about economic restructuring—of the banking system, fiscal relations with the provinces, tax reforms, and debt, to name a few. All this could not be achieved at this time, but we hope that the transitional program will be a bridge to that comprehensive program. I don’t think it is very productive to speculate about motives. All parties have shared the same objective for Argentina—a full and durable recovery—and the IMF is committed to making the transitional program work.
IMF Survey: Why does Latin America seem to have benefited so little from the policy improvements that the IMF has been hailing since the 1980s?
Singh: Much was achieved in the 1990s, especially in reducing inflation, and I think we should resist looking at the region as a whole, even though there are many common elements. Several countries were able to strengthen their policy frameworks and maintain growth, whereas others proved more susceptible to recurrent crises. Those in the former group emphasized fiscal strength and institutional reform, while other countries remained crisis prone because of inconsistencies in the policy framework. High or growing dollarization—of banking systems and debt—was another key factor. In many countries, the benefits of reform and growth were not broadly shared, labor reform remained a problem, and the targeting of social spending did not improve sufficiently—this meant that income inequalities remained high or that previous gains began to be quickly reversed as growth faltered later in the 1990s.
One lesson that the IMF has learned is that, in our own policy advice, we need to pay even more attention to sustainability. We must also coordinate better with the World Bank and the Inter-American Development Bank so that, together, we look across macroeconomic, structural, and institutional policies. Political coherence and consensus are, of course, also essential, and often these have tended to overshadow the economic factors.
IMF Survey: Is the worst finally over in Latin America?
Singh: There are some positive events and trends in a number of countries. But the international environment remains difficult for the region, and many countries must still adequately address significant weaknesses and vulnerabilities.
On the positive side, take Brazil, which has completed a complex political transition in an exemplary fashion that must clearly rank as a model for others. Markets have welcomed this, and risk indicators have improved. We have established an early dialogue with the new economic team—which is preserving economic policy continuity even as it prepares to address social and income inequities—and the IMF’s Managing Director and I had our second meeting with President Lula da Silva a few days ago. I would like to believe that the IMF has played a supportive role in Brazil’s transition. A few months before the elections, the IMF approved a new loan through 2003 in support of a program whose core elements were endorsed by the major presidential candidates. Since the new government has taken office, it has begun to follow through with announcements and policies that are consistent with the program. And, as markets have realized in the last few weeks that economic continuity is being assured and that the new president aims to do this with a much stronger emphasis on social equity—an emphasis with which we completely agree—many market indicators have improved considerably. Brazil is not the only example, of course.
Many countries remain vulnerable because of high debt, dollarization, low growth, and high income inequalities.
IMF Survey: Is Brazil’s transition model one that Argentina might want to emulate?
Singh: Each case is, of course, different. Argentina now has a program for its period of political transition, with the expectation that the successor government will quickly develop its own program. Nevertheless, there are important aspects of Brazil’s transition that should be highlighted—especially, how the presidential candidates came together to emphasize the broad consensus in the community for core economic goals. Another example is that of Korea in late 1997, when the incoming government endorsed the key policies in the economic program that was being put together in record time.
IMF Survey: What are the other promising signs in Latin America?
Singh: Certainly, Colombia. The government has been successfully steering strong economic policies through congress—recently securing support for some difficult fiscal measures, tax reforms, pension reforms, and labor market reforms. This was a major landmark. In the past month, Colombia has regained market access, showing that markets differentiate and respond to good policies. Granted, Colombia faces very difficult problems—economic ones as well as the problems from the civil conflict. But we see a government prepared to make difficult economic decisions, which is why the IMF Board agreed in mid-January to a new loan. Let me also mention Peru, which has managed to maintain relatively high growth in a difficult external environment while carrying forward essential economic reforms. We are also encouraged by the early steps taken by Ecuador’s new government.
IMF Survey: So the worst is over.
Singh: That’s difficult to say. Many countries remain vulnerable because of high debt, dollarization, low growth, and high income inequalities. The external situation also remains difficult, with many downside risks. There is no doubt that countries everywhere need to persevere with economic reforms, extending these to strengthening institutions, but this requires a consensus across the community—which is tough to secure in an environment of low growth and high inequality. Even so, markets can be expected to respond positively to countries that are able to carry out these changes.
IMF Survey: To what extent are Latin America’s fortunes tied up with those of the United States?
Singh: The importance of the United States can be demonstrated in at least two ways. First, there is the trade link. Take Mexico, in which the North American Free Trade Agreement has helped increase U.S.-Mexican trade to almost half of Mexico’s GDP from around one-fourth before the pact. For other Latin American countries, the trade link is less important, but the United States still accounts for almost a third of their total trade. Second, there is the financial link. A significant proportion of capital flows into Latin America come from the United States. And, given that Latin America has tended to depend heavily on portfolio inflows, U.S. interest rate changes have a major effect on Latin American interest rates. Plus, don’t forget the important role that the U.S. economy played in the 1997-98 Asian crisis—it helped accelerate an export-led recovery for the Asian economies and insulate Latin America from some of the worst effects of the crisis.
IMF Survey: What more can be done to enhance Latin America’s trade prospects? Any insights from Asia?
Singh: Latin America’s share of trade in its GDP is generally much lower than in many Asian countries, giving rise to considerable imbalance between its trade openness and its capital market integration. Typically, Latin American countries have been much more open on their capital account than on their trade account, making it difficult for real depreciations to result in export-led recoveries out of financial crises. How can trade openness be increased? Many Latin American countries are still quite protectionist. But the industrial countries, also, need to ensure better market access, along with maintaining robust global growth. We are giving increasing attention to these issues as we look at Latin America’s medium-term growth prospects.
IMF Survey: With a variety of economic plans being floated, do you have any words of caution for the U.S. administration?
Singh: As we prepare for the annual consultation with the United States in May, I would just note that we’ll be assessing current initiatives against key themes raised in last year’s consultation—including preparing for the fiscal and other challenges expected to arise from population aging and aiming to balance the budget (excluding social security) over the cycle.
IMF Survey: What lessons did you learn in dealing with the Asian crises that you’re trying to use in dealing with Latin America?
Singh: Although every crisis is different—this is an important lesson in itself—the Asian crisis underscored the links between the financial and corporate sectors and the external situation. We now have a better understanding of how capital account crises develop, the need to maintain financial sector soundness, and the need to act decisively with insolvencies—to have in place efficient mechanisms to deal with nonperforming loans and facilitate corporate restructurings. Alternatives are needed to resolve corporate insolvencies—the court process would take too long—hence the importance of developing out-of-court restructuring procedures with balanced incentives for creditors and debtors. There is also now a better understanding of the need to ensure consistency and coherence between different parts of the policy framework. So, if a country has a fixed exchange rate, it has to adopt economic policies that are consistent with this kind of arrangement.
IMF Survey: Is it feasible for Latin America to put more energy into attacking poverty and income inequality while it’s trying to sort out its finances?
Singh: It isn’t a question of whether it’s feasible. It needs to be done. It isn’t possible to have economic sustainability without social sustainability. The challenge is to tackle social inequities while maintaining macroeconomic stability. Many countries have budgetary revenue and expenditure rigidities that, if unlocked, would allow a better targeting of social spending. Let’s take Brazil—whose tax ratio exceeds 30 percent of GDP. However, a large proportion of revenue is earmarked for certain uses, leaving little room for discretionary outlays. In other countries, where tax ratios are low, raising social spending does entail raising revenues, but again this can be done to some extent by eliminating exemptions and concessions. It does not always mean higher tax rates, but it does mean building a culture of tax compliance, which is difficult.
IMF Survey: Are you hopeful?
Singh: Yes, I am, but I’m aware that it will require a strong consensus in many countries to overcome vested interests and take all the steps that are needed to build fiscal sustainability and growth. This isn’t easy to do, especially in an environment of weak growth.
IMF Survey: What are your plans for the Western Hemisphere Department? Should we expect any changes in the way the IMF works with countries in the region?
Singh: It’s only been a few months, but many challenges are clear. We held an early retreat with staff and have set certain principles for good management. Even so, the risk remains of getting excessively preoccupied with some countries that demand immediate attention—and we have been trying to maintain an even balance across the department. We are also looking to build research capacity and learn lessons from the recent experience in Latin America. We have begun work on a paper, which should be done in the first half of this year, that will assess the current situation, draw lessons from the 1990s, and develop proposals for improving our policy advice. We are also planning to hold a conference on Latin America this spring.
As far as our relationships with countries are concerned, we must reach out to broader sections of the community. In my initial visits to Argentina, we made a major effort in this direction—we met with provincial leaders and administrators, trade union leaders, bankers, representatives of the church, and others. I think this effort was extremely helpful in enabling us to more fully understand the depth and complexity of the Argentine crisis. Obviously, we can’t make this kind of effort in every country, but we would like to.
IMF Survey: You’re the first head of Western Hemisphere not to speak Spanish. Is that proving to be a major hurdle?
Singh: I’m trying to change this but it will not happen overnight, and it’s actually proving to be much less of a hurdle than I had feared. English is spoken extremely well across Latin America, and everyone I have met has been very understanding about my obvious lack of Spanish. And when it’s necessary, IMF translators provide excellent support.