FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to join the Bretton Woods Committee for a timely discussion about events in Latin America and prospects for the future.

I appreciate today’s perspectives on Latin America and want to begin by noting the diversity and promise in the region.  Countries range from extremely poor nations confronting difficult development challenges to economies with sophisticated financial markets.  Some states in Latin America are performing well economically.  Others are just beginning to implement good policies, and have much to look forward to.  Still others have recently experienced crises and stresses.

Since taking office, this administration has sought to promote both growth and stability in Latin America and throughout the world.  The high costs of macroeconomic policy failures are particularly evident in this region at this time, arguing for renewed efforts to prevent and address financial crises so that they do not wipe out hard-won gains.  It is critical, though, that the region be equally focused on growth strategies.  While it is easy to see how a crisis can set back growth, it is also important to recognize how a sustained, day-in and day-out commitment to policies that achieve higher growth can reduce vulnerability to crisis.  With even slightly faster economic expansion, debt burdens become more manageable, fiscal adjustment is less painful, and investor confidence increases.

The evolution of economic prospects in Latin America this year calls for steps to accelerate growth and highlights the need to do a better job of preventing and managing financial crises.  Conditions throughout the region became more difficult this year with economic growth likely to be zero at best.  This is in contrast to other developing and emerging market regions where growth is positive this year – about 6% in Asia, 3% in Eastern Europe, and 3% in Africa. 

Clearly raising economic growth in the region must remain a high priority.
The United States has emphasized three pillars that should underlie growth and development strategies:  ruling justly, investing in people, and promoting free markets.  These pillars are very much relevant for Latin America and shortcomings in these areas help to explain erratic growth performance.

 As we look at the region, it is important to keep in mind that geography is not destiny in Latin America.  For example, Chile – which enjoyed 6.8% average annual growth throughout the 1990s – has distinguished itself by pursuing strong macroeconomic and structural policies and has performed well despite turmoil elsewhere in Latin America.

Promoting Trade and Financial Links

Raising living standards and expanding support for democratic institutions in Latin America depend critically on achieving higher levels of productivity growth – a key concern in a region where one-third of the people live on less than two dollars per day.

 Increased trade is one of the most important ways to raise productivity and growth.  The United States is committed to comprehensive trade liberalization in the region through the Free Trade Area of the Americas (FTAA).  Indeed, with recently approved Trade Promotion Authority, the United States has outlined an ambitious agenda of trade opening initiatives.  These include the recently finalized free trade agreement with Chile, the Andean Trade Promotion and Drug Eradication Act, negotiation of a Central American free trade area, and the United States proposal to eliminate agricultural subsidies and lower agricultural tariffs as one element of the Doha global trade negotiations.

At the bilateral level, the United States and Mexico have worked together through the Partnership for Prosperity initiative to strengthen Mexico’s economy through a number of measures to improve access to capital, build capacity, and stimulate private investment in areas that do not yet fully benefit from NAFTA.  One key element of the Partnership for Prosperity that could greatly facilitate the flow of capital to Latin American countries involves a project to reduce the cost of remittances sent from abroad.  The Inter-American Development Bank estimates that Latin Americans living in the United States send an average of $200 to their native countries an average of seven to eight times per year.  These remittances surpassed $23 billion last year – about one fifth of total worldwide remittances – and represent an enormous resource transfer to families and businesses that can make direct use of the funds.  Although remittance charges are declining, they still range from 6-15% of the remitted amount plus an exchange margin that ranges from 3-5%.  Increased competition as more and more traditional financial institutions offer remittance products should help to lower costs.

We are also seeking to boost private sector activity and enable businesses to take full advantage of opportunities for trade by working with the IDB to facilitate access to trade finance.  Recent crises have made clear that once reliable sources of finance for private firms may be less certain in times of financial stress.  Facilitating access to trade finance should help reduce the depth of crises and improve country resilience in the wake of economic turbulence.

Promoting Stability and Preventing Crises

In recent years, a marked increase in the frequency and severity of financial crises in emerging markets has contributed to deep recessions, instances of high unemployment, volatile exchange rates, and high interest rates that cause real hardships for people.  The uncertainty caused by economic instability reduces foreign and domestic investment – there have been steep declines in net private capital flows to emerging markets – and has negative implications for productivity and growth.

It almost goes without saying that the best way to deal with crises is to prevent them from happening in the first place.  This requires close monitoring of country vulnerabilities, and taking appropriate action to reduce those vulnerabilities.  At the U.S. Treasury, for example, we have developed a “Blue Chip” index based on numerical crisis indicators from a variety of public and private sources.  We are also asking that the IMF pay more attention to vulnerability in emerging market economies to help detect potential trouble earlier.  The multilateral development banks are contributing to crisis prevention efforts by helping countries strengthen financial sectors and institutions, thereby making their economies more resilient.

The emerging market countries themselves, of course, have the primary responsibility to help prevent crises through strong policy actions.  These policies include credible and sustainable fiscal, monetary, and exchange rate policies, responsible debt management, reforms to strengthen financial sectors, and greater transparency.

In cases where difficulties cannot be avoided and countries turn to the official sector for assistance, experience has shown that lending programs that lack strong ownership by a country’s leaders are likely to fail; we should not support such programs.  We must lend to countries whose leaders are willing and even eager to take responsibility for making policy decisions that will have a long lasting positive impact on economic development.

This Administration also has emphasized that contagion should not be considered “automatic” and that support for large scale financing through the IMF would not be based on claims of contagion without evidence that there were fundamental links between countries.  We have worked to distinguish between direct links from one country to another – which clearly exist in neighboring countries like the United States and Mexico – and unfounded claims of an automatic spread of bad market events from one country to another without such links.

While working to discourage unjustified contagion, the United States has supported assistance for countries that are following good policies but are negatively affected by a nearby crisis.  We saw this when the United States welcomed an IMF program for Brazil in August 2001 as a cushion against increasing difficulties in Argentina.  Similarly, United States support for Uruguay early this year was aimed at limiting the impact of the Argentina crisis due to the direct or fundamental interdependence between the two countries.  In contrast, the alternative of supporting bad policies in a crisis country due to fear of contagion effects undermines incentives to follow good policies.

At the same time, we are working to increase discipline in terms of access to IMF resources to reduce the size of IMF packages and thereby reduce the risk of moral hazard – i.e., the belief that in a crisis, large-scale IMF assistance will protect investors from the consequences of their decisions.  The United States has refrained from providing longer-term bilateral loan assistance in recent crisis cases, as was done in the past, and has emphasized that the IMF must be the key source of emergency support, thereby limiting official assistance to IMF resources.  The United States has moved gradually in implementing limits on financing – accepting a waiver in Argentina in the spring 2001, and then agreeing to an augmentation – so that investor expectations can adjust smoothly to new official sector policies.

In terms of program design, the IMF should work to structure international financial packages so that strong incentives for good policy performance are maintained.  Prior actions that must be completed before a lending program begins, for instance, can sometimes be a useful means for a country to demonstrate its commitment before international funds are disbursed.  The United States is encouraging the IMF to concentrate more on the areas most central to its expertise:  monetary, fiscal, exchange rate, financial, and debt management policies.  Narrowing the range of conditionality in this direction should help achieve more focused programs with increased country ownership. “Backloading” financial assistance, with smaller amounts of money provided initially and larger amounts provided later on, can help to ensure that a country’s performance does not weaken over time.

In addition, we are working to create a more orderly and predictable process for debt restructuring for cases where debts are unsustainable.  The aim is not to reduce the incentives for sovereign governments to pay their debts in full and on time.  Rather the aim is to reduce the great deal of existing uncertainty about restructuring processes that currently exists and that complicates decision-making.  A more predictable sovereign debt restructuring process for countries that reach unsustainable debt positions would help reduce this uncertainty, thereby leading to better, more timely decisions, reducing the frequency and severity of crises.

As has been discussed in other fora, two approaches have been outlined:  a decentralized approach that would incorporate collective action clauses into bond contracts and a more centralized approach that would address sovereign bankruptcy through an amendment to the IMF Articles or through another international treaty.  We are seeking the most effective mechanism through full consideration of both of these approaches and, possibly, a combination of the two.

If there is convincing evidence that the decentralized approach does a better job of preventing crises and strengthening capital flows than the centralized or the combined approaches, then the decentralized approach will be the choice supported by the Bush Administration.  Similarly, if one of the other approaches can be shown to work better, then that option will be the one supported.  In terms of collective action clauses, given support from the private sector, from the official sector, and from key emerging market countries, the time is ripe for moving ahead and actually putting such clauses in new issues.  This would be a tremendous step forward to creating a more orderly sovereign debt restructuring process.

Through these measures, we hope to reduce the frequency and harm of crises in Latin America and other regions, increase private sector capital flows, and thereby foster stability among emerging markets.

 How then do these broad policy principles translate into specific policy actions for countries experiencing difficulties?  Let me now provide a brief update on three of the key countries in the region that have received particular attention in recent months – Uruguay, Brazil, and Argentina.

 Uruguay is an example of getting the incentives right.  The United States and the international financial institutions made an extraordinary effort for Uruguay because it was:  1) a victim of external shocks; 2) willing to pursue real financial sector reform as well as fiscal adjustment; and 3) rightly focused on preventing the collapse of its banking system.

 Brazil’s government’s has demonstrated a sustained commitment to responsible macroeconomic policy and this proven track record justified a strong response from the international community.  Official financing was rightly used to build confidence in conjunction with good policy.

For Argentina, the U.S. has strongly supported efforts to provide Argentina breathing room as it works with the IMF to develop a plan to strengthen its monetary and fiscal framework.

Fighting Poverty, Strengthening the Rule of Law, and Improving the Environment

The United States is working on a range of efforts to help increase productivity and overall economic growth in Latin America, reduce poverty, and protect the environment.

At the World Bank and Inter-American Development Bank, the United States is supporting development projects and programs that address the basic causes of low productivity, including projects to raise health and education levels, increase access to clean water and sanitation, and improve the climate for private sector development.  Higher quality education and training is particularly important to equip people and countries to take advantage of the opportunities presented by market liberalization.  We believe these and other multilateral development bank efforts will benefit from a renewed emphasis on measuring for results in order to maximize development effectiveness.  Particularly important will be efforts to improve transparency and public expenditure tracking so that resources are used well.

Beginning in 2004, the Millennium Challenge Account initiative will dramatically increase assistance from the United States to poor countries that demonstrate strong performance – those that govern justly and uphold the rule of law, invest in their own people, and create a favorable climate for private enterprise.  The total increase will reach $5 billion per year starting in 2006.  These funds provide a powerful incentive for countries to create an environment conducive to growth.

One specific area in which the United States has pushed for progress to raise living standards and productivity is access to clean water.  The United States strongly supports efforts toward achievement of the objective for water under the Millennium Development Goals, which call for reduction by half of the proportion of people without sustainable access to clean drinking water.  The IDB has estimated that there is potential for about three-quarters of Latin American countries to reach this goal by 2015.  However, we must work together to ensure that all of Latin America can achieve and even surpass this target more quickly.  This will mean a strong commitment by the countries themselves to provide an enabling environment conducive to sustainable water services for cities and rural populations alike.

Through the HIPC initiative, the United States has joined with other countries and the international financial institutions in a comprehensive effort to provide debt relief to the Heavily Indebted Poor Countries, including Bolivia, Guyana, Honduras, and Nicaragua.  The HIPC initiative is addressing the unsustainable debt burdens in these countries, and helping to increase investments to spur greater productivity, economic growth, and poverty reduction.

Through the multilateral development banks and other efforts, the United States has encouraged lending to small businesses as an effective tool to provide credit to the independent entrepreneurs who help drive growth in Latin America.

 For a number of Latin American countries, illicit drug cultivation and production rivals the legitimate economy, deprives the state of potential revenue, and undermines government stability.  Bilateral assistance and preferential trade access from the United States are geared toward drug eradication and the promotion of alternative development strategies – critical steps toward putting countries on a path of rising growth.

The United States also has sought to link debt relief for developing countries to environmental conservation.  Building on the Enterprise for the Americas Initiative, the Tropical Forest Conservation Act offers eligible developing countries reduction on concessional debt in exchange for a commitment to fund tropical forest conservation activities.

Conclusion

In spite of recent turbulence, there is good reason to be confident about the region’s prospects. First, the current economic cycle of slow or negative growth will improve, especially as the U.S. economy continues to gain strength.  At roughly 38% of GDP, exports comprise a large percentage of income for the Latin American region as a whole. 

Many countries within the region have made important progress over the past decade in strengthening the economic institutions and policies that will improve their growth prospects.  In a number of countries, for instance, central banks have focused more on keeping inflation low. And many countries have abandoned soft exchange rate pegs and maintained floating exchange rate regimes, helping them to adjust more easily when faced with economic shocks.  Others, such as El Salvador, have been successful with full dollarization.  

Across the region, the private sector now contributes a larger percentage of GDP than it did during the 1980s, which will help Latin American economies regain their dynamism more quickly.  Many countries now have more extensive trade and financial linkages among themselves and with developed economies – such as the United States and Europe – than they did in the past.  This is a factor that will help to accelerate their recovery once conditions improve.  Latin America also has a strong human capital and resource base that provides a solid underlying foundation for future growth.