The study explored why macroeconomic volatility continued during the 1990s and why growth rates in the region hovered below 3 percent a year, while other emerging market regions grew much faster, especially Asia. It concluded that much of the reform efforts and institution-building at the time was undermined by policy inconsistencies, continuing structural rigidities, and corruption. “The emphasis needs to be not on short-term policies but on taking the time to develop the institutional structures that will ensure the sustainability of policy,” Singh said.
What should Latin America do to make the region more crisis resistant? The study cites six priority actions, beginning with improvingfiscalmanagement. During the 1990s, rising debt ratios were symptomatic of deeper weaknesses in fiscal systems. But the current cyclical upturn has allowed countries to improve policies and has yielded stronger fiscal positions and room in budgets to provide additional support to the poor. Singh added that almost all countries are focusing their policy mix on bringing public debt down and improving its composition to build sustainability, accommodate social spending, support growth, and reduce poverty.
Second, central bank autonomy needs to be increased to bolster the credibilityofinflationtargeting. Many countries have exited exchange rate systems, adopted inflation-targeting regimes, and taken steps to improve institutional frameworks.
Latin America must lower its public debt
Debts ratios drifted up in the 1990s.
Data: IMF, World Economic Outlook database.
Third, most Latin American countries should continue to strengthentheirfinancialsystems, revive and sustain credit flows, and create greater resilience to shocks. Financial sector reforms in the early 1990s often focused on deregulation, privatization, and liberalizing foreign entry but, too often, underlying prudential frameworks proved inadequate to avert crises. “Financial systems have been the sources of vulnerability in the past,” Singh said. “They need to be the sources of growth, and that is the challenge that the region is currently facing.”
Fourth, in the area of structural reforms, countries need to stepuplabormarketreforms—an issue that was virtually absent in the 1990s but began to attract attention in recent years. The study found that with greater trade integration and more international competition, labor needs to be able to move across employment sectors. “Those countries that are able to facilitate and bring about shifts between sectors will benefit most from globalization,” Singh said.
Fifth, thestateshouldrefocusitsrole in reducing corruption, providing social safety nets, reforming the judicial system, and helping with transitional problems arising from more liberal labor markets. “This is not a laissez-faire world. This is not a world where things are left completely to markets,” Singh said, adding that states also need to set up the legal infrastructure for private investment to take place and for a business environment to thrive.
Finally, the region needs to expandtrade with the rest of the world. Although most Latin American economies liberalized trade in the late 1980s and early 1990s, the impact in terms of increasing openness was typically limited. In recent years, considerable progress has been made by many Latin American countries in reducing the mismatch between low trade openness and high capital account openness.
Copies of Stabilization and Reform in Latin America, IMF Occasional Paper No. 238, by Anoop Singh, Agnès Belaisch, Charles Collyns, Paula De Masi, Reva Krieger, Guy Meredith, and Robert Rennhack, are available for $25 each ($22, academic price) from IMF Publication Services. See page 48 for ordering details.