Journal Issue

Interview with Agustín Carstens: Latin America needs “back to basics” approach

International Monetary Fund. External Relations Dept.
Published Date:
September 2003
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IMF Survey: Can you give us more insight into your background and how it will help you in the job of Deputy Managing Director?

Carstens: Given that my professional life has been concentrated in three institutions—Mexico’s central bank, its finance ministry, and the IMF—I have been exposed to a wide array of issues related to public finance, monetary policy, exchange rates, and financial systems, which pretty much cover the core business of the IMF. In addition, Mexico’s economic history over the past 23 years has been extremely rich from a learning point of view. Often, Mexico has enjoyed good access to capital markets and led the way in carrying out certain reforms, as it is currently doing in the management of external debt. Yet, at other points, it got into trouble, losing access to the very same markets. Not that this is an honor, but we were the leaders in the debt crisis of the early 1980s and in the financial crises of the 1990s.

My experience on the IMF’s Executive Board was also critical in giving me an excellent idea of different countries’ needs. As Executive Director for an eight-country constituency, I was responsible for promoting the interests of countries ranging from heavily indebted poor ones (Nicaragua and Honduras) to emerging market economies (Costa Rica, El Salvador, Guatemala, Mexico, and Venezuela) to an industrial country (Spain) that is a major member of the European Union. I got to know how the institution functioned—and, frankly, it is extremely well run. I also came to appreciate the importance of the Board as the main decision-making organ of the IMF.

IMF Survey: You are the only member of the current management team from a developing country, although these days Mexico is usually referred to as an emerging market. Do you see yourself as being a voice of developing or emerging market countries?

Carstens: Undoubtedly, the fact that I come from Mexico and from an emerging market has had an impact on me, personally and professionally. I hope that my background and experience will help the IMF deal more effectively with problems in developing and emerging market economies. However, I will be very careful not to let that perspective bias my work, because my obligation now is to all of the IMF’s member countries.

IMF Survey: What was particularly important in your economics training, and which areas of economics do you consider your specialty?

Carstens: Ever since I was an undergraduate, I’ve been especially attracted to issues relating to international finance and monetary policy. In fact, my graduate dissertation at the University of Chicago was on international finance. This education was extremely valuable in that once you start working in a central bank or a ministry of finance or the IMF, you find that you often need to go back to basic economic principles to come up with a solution or a policy recommendation. I was also fortunate to have spent a good 18 years at the Mexican central bank, where there was great emphasis on improving the human capital of its staff. This meant not only that I had hands-on experience in learning central banking and financial issues but also that I was allowed to continue to do research and debate issues with very skilled people from Mexico and other countries.

IMF Survey: Most of your career has been spent helping to guide Mexico’s economy. Were you involved in the management of the 1994–95 crisis, and how did Mexico manage to recover so well from it?

Carstens: In 1994, I was chief economist of the central bank and head of its research department, and I was appointed to the team negotiating the financial packages with the IMF and the U.S. Treasury. How did Mexico manage to recover so well from that major crisis? As is well known, Mexico’s crisis was a twin crisis, involving both the balance of payments and the banking sector. The solution centered on working out a strong program with the IMF on fiscal and monetary policy, adopting a floating exchange rate regime, increasing transparency with private sector creditors, and facing head on the problems in the banking system. The program was supported by the IMF. In addition, when Mexico signed the North American Free Trade Agreement in 1993, it was encouraged to take actions that would enable it to take as much advantage as possible of globalization. This led to key reforms in a number of sectors, a process that continued after the crisis. These structural changes enabled the economy to grow quickly again once the main macroeconomic and financial problems were addressed.

IMF Survey: You mentioned transparency, and Mexico has been known for its efforts to boost the transparency of its central bank and institutions generally. It now has, for example, one of the best and most current statistical systems in the world. How important is transparency?

Carstens: It’s a key issue for all countries. As Mexico has become a more modern, democratic country, it has become clear that good, timely information is an essential ingredient for making sound decisions in both the public and private sectors. For that reason, the Mexican authorities have embraced this big push for transparency, and they are encouraging the private sector to do the same.

IMF Survey: You were heavily involved in the 1994 package. Do you have any thoughts on how the IMF should engage with countries in similar straits?

Carstens: I think that the IMF team we dealt with was very professional, and we reached a positive agreement. In the end, neither side got everything it wanted, but that’s probably an indication of good negotiating on both sides. And history has proved that it was a good program because Mexico recovered from the crisis very quickly—just five months later, it managed to tap the markets again. Since that crisis and since Mexico repaid the IMF in 2000, without following up with a precautionary or staff-monitored program, Mexico’s relationship with the IMF has been very frank and smooth. I think that Mexico learned a lot from interacting with the IMF in those difficult years, and the IMF learned a lot from its engagement with Mexico.

IMF Survey: Has Mexico’s recent adoption of CACs [collective action clauses] in bond issues set a new market standard?

Carstens: I would say so. The adoption of CACs should benefit both borrowers and lenders and thus has the potential to really improve the workings of the financial system. Of course, the need for CACs was recognized for a long time, but emerging market countries were concerned that the markets would penalize them for including these clauses. Mexico decided to be the first one because it was in a unique position. It was an emerging market that had been granted an investment grade rating, and it had a very strong balance of payments position with a floating exchange rate regime. As a result, the probability that the markets would read the adoption of CACs as a preemptive move by Mexico to deal better with a future bankruptcy was extremely low. Reality proved Mexico right. It managed to break the ice without being penalized. Now the markets feel comfortable withCACs, and this has enabled other countries to follow through.

IMF Survey: How is Latin America doing after the late 1990s financial crises, as it tries to find its way in an increasingly globalized world? Is there a danger that it will retreat to old populist formulas? And where does the Washington Consensus fit in?

Carstens: To some extent, I’m glad that a reevaluation of the Washington Consensus is appearing in different forums. Ultimately, the Consensus is a set of policy recommendations, and, overall, they remain valid. Latin America ran into trouble not because it tried to follow the Consensus but because many countries didn’t follow the prescribed measures or didn’t implement them fully. So I don’t think we should judge the Washington Consensus from Latin America’s experience, at least not on the assumption that Latin America implemented its recommendations. That would be like failing to follow the prescribed dose of an antibiotic and then blaming the medicine for the problem. We are passing through a period in which many Latin American countries are facing major political and economic challenges. At this stage, extreme prudence is required to fend off the temptations of populist measures. The challenge for international financial institutions—the IMF included—is to engage in a meaningful dialogue with the governments of these countries and help them return to the path of sustainable growth. The key is for them to adopt policies that facilitate growth while preventing debt unsustainability, balance of payments problems, or financial system distress. If we were to put a label to this, it would be a “back to basics” approach.

IMF Survey: Should the IMF have handled the 1990s financial crises differently?

Carstens: The IMF has a solid track record in handling crises. Most of the emerging market economies that it has helped in the last decade—like Brazil, Indonesia, Korea, Mexico, Russia, and Thailand—are back in the capital markets and doing pretty well. Without the IMF, those countries wouldn’t be where they are now. Moreover, the policy initiatives and principles that the IMF has been pushing as a result of its diagnosis of what went wrong, not only in the countries themselves but also in the international financial system, are the right ones and have helped make the international financial system more resilient. These include improving transparency in policymaking and implementation—mostly through the Reports on the Observance of Standards and Codes and the Financial Sector Assessment Programs—and making adjustments in the IMF’s lending instruments. The main message is that the IMF constantly needs to watch for vulnerabilities through its bilateral and multilateral surveillance. But, in the end, there will be crises, no matter what the IMF does. Take, for example, a recent Latin American crisis that stemmed from fraud in the banking sector—something the IMF couldn’t have foreseen or prevented.

IMF Survey: What will be the new sources of growth in the region, and, on the trade front, can it compete effectively with countries like China?

Carstens: In many Latin American countries, the export sector can become a very important engine of growth, but countries first need to make more decisive progress with their structural reforms to become more competitive. When that is done, they will be better positioned to compete with countries like China.

IMF Survey: What has NAFTA done for Mexico, and can it be translated into a future free trade agreement for the region? Wouldn’t it be better if countries focused on global trade liberalization?

Carstens: A coordinated move toward global trade liberalization would be optimal, but realistically, progress will probably be faster on the regional level. As long as regional openness provides the right incentives and increases access to markets in the region, it will improve welfare. But policymakers need to be sure that they can eventually redirect the regional openness toward a wider opening. NAFTA has been a good example for the region because it has shown that a small emerging market economy such as Mexico can successfully take advantage of open trade with a large industrial economy such as the United States.

IMF Survey: Are you hopeful about the Doha trade round under way?

Carstens: Yes. But it’s like moving a big stone. If the international community can move it even just a few inches, that’s good.

IMF Survey: Turning back to the IMF as an institution, do you think it needs to shift direction at all to keep up with the changing world—with the greater emphasis on financial markets and financial sectors—and the changing international agenda, now heavily focused on reaching the UN Millennium Development Goals?

Carstens: In recent years, the IMF has increased its outreach to financial markets and nongovernmental organizations, resulting in smoother communications and more productive relationships. This should be continued and even stepped up. Second, the IMF should continue to enhance its technical assistance, which, for many countries, is the IMF’s main calling card. Third, the institution has to continuously strive for excellence in two other key activities—surveillance and financial assistance to countries. The bottom line is that the IMF will always need to adapt to new challenges, and I think that we have what it takes to do so.

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