FROM THE OFFICE OF PUBLIC AFFAIRS
June 5, 2003
js-2078
The Bush Administration’s Approach to Latin America: Prospects and Policies
John B. Taylor
Under Secretary of Treasury for International Affairs
“Latin America 2003: Economic and Financial Predictions”
Council of the Americas, New York City
It's a pleasure to be here today to talk about Latin America, especially right now, because we see a lot of positive change and a lot of improvements in the region. I am going to discuss some of the developments that I think are important and the factors that underlie these developments.
Recent Economic Developments
If you look back over the last few months, you will see some important changes. The spreads between sovereign debt and U.S Treasuries have come down dramatically--from over 1400 basis points on average for the region to under 700 basis points in a few months time.
We have also seen an increase in capital flows. These numbers bounce around a lot, but you see a noticeable improvement from the sudden stop of 1998-99 when flows dropped dramatically. They are moving in a positive direction.
Along with the capital flows, a number of current accounts are improving. Exports are growing by 30 percent in Brazil and Peru.
When we talked about Latin America a year ago, we would talk about two trends: one positive (notably the economic success stories in Mexico, El Salvador, and Chile) and the other not as positive. But now--with the exception of Venezuela--we are really talking about a positive trend for the whole region. Brazil and Uruguay are certainly on that list, and we are beginning to see positive trends in Argentina.
To give a personal perspective on this, I have been on my job for two years. I came in at the beginning of the Bush Administration. One of the first issues we had to face was how to deal with the ongoing crisis in Argentina. Domingo Cavallo had just come into office and began putting forward one proposal after another to try to improve things. We worked with and assisted the Argentine government during this very difficult period.
I remember my first trip to Argentina as a public official in August 2001. It was a very difficult time--and in Argentina, it was a highly publicized trip. When I arrived there, I saw caricatures of me dressed as a comic book hero bringing bags of money. My feeling at the time was that something must be wrong if an Under Secretary of the Treasury is given such a billing, rather than the country's own economic policies. I am pleased to say that I think that has changed. I think there is now less of a focus on Under Secretaries from other countries, and more on the economic policies that need to be in place.
The search for yield is another possible reason for the changes that we see in the financial markets, with the spreads on emerging market debt coming down. Interest rates are down to low levels in the United States, and the ECB cut interest rates again today by 50 basis points to 2 percent.
The search for yield could be a factor, but not be a big one because interest rates have been low for quite a while in the United States. The Federal Funds rate went down to 1.75 percent back in December 2001, and the improvements we are seeing in Latin America are much more recent than that. If you look at the trends, it is hard to attribute the improvements in financial markets only to the search for yield.
It seems to me that there are fundamentals in the region that account for the improvements. One example is the change in policies that the new Lula administration and his economic team, especially Minister Palocci, have articulated. Both of their inaugural addresses were remarkable. They outlined strong visions for their country in terms of good economic policy.
Another factor is the surprise improvement in the global economy. There was a lot of uncertainty before the war in Iraq that the war would have a large negative impact on the global economy. In fact, the global impact was much less than many people worried it would be. Global economic conditions have been a positive factor for those who are concerned about uncertainties in emerging markets.
Another factor is that there has been less contagion in emerging markets. An example is the increase in spreads that occurred last summer in Brazil. That increase did not have a big impact in other parts of the world, nothing like what you saw in the 1990s. The impact of the 1998 Russian default around the world--including Latin America--was huge. The Russian default caused spreads to skyrocket in Brazil and Argentina. In contrast, when Argentina defaulted in December 2001, you did not see this contagion. Yields in other parts of the world continued to go down. Less contagion represents a safer environment because there is less chance of crises spreading.
Some people tell me that one of the reasons for the increase in flows and reduced rates might be moral hazard--that is, the feeling that the official community, the IMF, the United States, and the G-7 will come to the rescue no matter what happens. I think that is a mistaken view. The way in which policy is developing, investors should not rely on automatic responses in the official sector.
Bush Administration Policies
With that overview of recent developments, let me review the policy principles that have guided policies in the Bush Administration, and how they have applied to the region in practice.
Support to Countries with Good Policies
The Bush Administration has tried to be very clear that we believe in supporting countries that are doing the right thing on economic policy. We do not believe it is productive to provide economic support to countries that are not following policies that are conducive to economic growth and poverty reduction.
We put the stress on accountability and ownership. Decisions about policy should be made by policymakers within the countries themselves. But the decisions have consequences. Pro-growth polices will lead to more economic growth; there is evidence of that around world. Policies that are stifling to growth will have the result of lower living standards. We would like to be clear about supporting good economic policies and not supporting bad economic policies.
If you look across the Bush Administration's policies, this particular way of thinking is clearly evident. For example, President Bush proposed the Millennium Challenge Account last year. We are now working hard to get it through Congress. What is the Millennium Challenge Account and what are the principles that the President outlined?
The President proposed giving 50 percent more foreign aid--an increase of $5 billion each year--to countries that are following sound, growth-oriented economic policies. The MCA is for the very poor countries--countries in the income per capita category of Honduras, Nicaragua, and Bolivia. The philosophy is that if a country is following good policies with respect to the rule of law, openness to trade, anti-corruption, education, and health--as best as we can measure them, and there are increasingly good quantitative measures of these things--then we are going to provide funds to the country from this Millennium Challenge Account.
If good policies are not being followed, then of course we won't abandon the country: humanitarian support remains an important part of U.S. policy. But with respect to MCA assistance, aid will only go to the countries that are following good policies.
Another example--not in Latin America, but an important and tricky issue since the beginning of the year--has been our large economic support package to Turkey. While the difficulties had to do with the conflict in Iraq, we were very clear in public and private that support was contingent on good economic policies. In this case, the policies were very closely attuned with what the IMF had prescribed for Turkey. It doesn't always have to be that way--there are plenty of ways to get good economic policies with or without the IMF--but the key is that aid was contingent on those polices.
The same principle is at work in Latin America. We did not advocate a continued IMF program in Argentina at the end of 2001. Funding stopped when it was clear that economic policies in Argentina were off track. We did not withdraw support in a drastic way: we provided support in August 2001 but tried to signal what we were concerned about debt sustainability. When policies continued to go off track, the IMF review was not completed.
In contrast, when countries have good economic policies, the United States will be there to support them. U.S. support for Brazil during the difficulties they have experienced is an example. Our support for Uruguay in the aftermath of the Argentina crisis also focused on the good policies that the government was taking. Early this year, when Argentina put together the elements of an economic program that could serve as a transition to a more substantial economic reform program, we supported that with a transitional IMF program.
Dealing with Contagion
Another principle is related to contagion. Early on in the Bush Administration, we talked a lot about the nature of the contagion phenomenon. Fears of contagion may rationalize support to a country that is not following good policies because of the feared impact on other countries. We spoke out on this issue saying that we should not act as if contagion is automatic. Rather, we should look carefully at contagion making sure it is based on fundamentals.
For example, when Uruguay was hit by Argentina's crisis--due to the close economic linkages between the two countries--we were there with a very substantial support package. We provided a short-term, $1.5 billion loan to support Uruguay's banking system. We supported a financing package from the IMF, World Bank, and Inter-American Development Bank in August of last year. Once the amount of those funds was specified, we stuck to those numbers and the Uruguayan government initiated a market-based debt exchange, which has been very successful.
Another example is Brazil. In the summer of 2001--when things were at a difficult time for Argentina--Brazil asked for a new IMF program. We were very positive about it because of the concerns about contagion. This was a situation where we looked at the direct impacts. But that does not mean that we are going to automatically respond because we fear some effects in another part of the world that does not have these fundamental connections.
The evidence is quite dramatic in showing that contagion has been reduced substantially. This is related to changes in the nature of these markets, as investors differentiate more clearly between countries. For example, when Turkey's spreads recently rose on developments related to the new government, it had very little impact on other parts of the world.
Debt Restructuring
The third principle is to develop more orderly ways to deal with debt crises. In April of last year, we proposed that countries should put new clauses--collective action clauses--in their bonds that would describe what would happen in the event of a restructuring.
The reality is that restructurings do occur. But when they do occur, it is best that they are orderly. Disorderly restructurings, or uncertainty about what happens during restructurings, adds uncertainty to the policy process. It also adds uncertainty to decisions about how much support to provide a country, and it adds uncertainty to the decisionmaking within a crisis country. Our view is that more predictability would contribute to the management and prevention of crises.
The Collective Action Clause proposal has moved forward in a dramatic fashion. This spring, just one year after we first proposed collective action clauses, Mexico led the way by issuing bonds with the new clauses. And now we are seeing Brazil, South Africa, Korea, and Uruguay following suit. In all of these cases, the fears that people had about collective action clauses did not materialize. There was no premium in pricing, and the market reception has been favorable. These clauses are becoming part of the standard mode of operation of debt issuance in New York. This is a very favorable development.
Clarifying Limits on Exceptional Access
The last principle that we have tried to advance is clarifying limits on official support in the event of a financial crisis. Early on, we emphasized that we were going to focus our support packages through the IMF, so that the IMF would be the instrument that provides support during crises. We have held to that principle.
More recently--through discussions with the G-7 and the IMF--there are now clearer limits on exceptional access to IMF resources. If exceptional access to IMF resources is granted, a report now has to be written and made available justifying the exceptional access. Just as inflation reports are frequently good devices for communicating and making clear things about monetary policy, we feel that this kind of exceptional access report will make things clearer about what the limits are regarding IMF policy.
An Economic Focus on the Region
I would now like to review the specific ways in which the Bush Administration has been engaged, and continues to be engaged, with Latin America on economic issues. First let me note that I have had the opportunity to be in many meetings with President Bush and leaders of Latin American countries. There is a strong sense of friendship that has emerged from all these meetings. The meeting between then-President-elect Lula and President Bush was remarkably positive in this regard.
I have also had the opportunity to visit Latin America many times since I started this job, and I can say that the Bush Administration is highly engaged with this region--a point I cannot emphasize enough. Just take the trade area. The free trade agreement with Chile is going to be signed tomorrow, and then is it going to go to the Congress. That free trade agreement has been in play for a dozen years; this administration has moved it ahead. At Treasury, we spent a lot of time on the agreement because the provisions covering investment are a key part of it. We worked closely with the Chilean finance ministry to reach an agreement that is good for both sides.
There are also negotiations on a free trade agreement with Central America. The target is to finish the agreement by December. All of the Central American presidents involved in the free trade agreement came to visit President Bush. It was another one of those electrifying meetings, with the tremendous amount of enthusiasm on both sides. Secretary Snow also met with the finance ministers of all the Central American countries to discuss their efforts to lock in good economic policies.
There is also the Free Trade Area of the Americas (FTAA). Ambassador Zoellick was just in Brazil talking about how to move the FTAA forward, and things are moving ahead. I know there is great enthusiasm about trade in the region. When Secretary Snow traveled to the region, he came back and told me that he heard about trade at every stop--everyone was interested in finding a way to move ahead on trade. This is a very positive development. The FTAA is not there yet--there remains a lot to do. But we are still focused on that deadline of January 2005, which is ambitious but doable. More trade is critical to raising economic growth rates.
Let me close with two other examples of the ways in which the United States is engaging with Latin America to achieve higher rates of economic growth. It is true that the region is still lacking in strong sustainable growth. Chile has been doing fine, Mexico is coming ahead, but as a whole the region is still growing at a lower rate than the United States. Latin America should grow faster than the United States--any area where productivity levels are lower than the United States should be growing more rapidly.
Improving the environment for entrepreneurs and small businesses is central to raising growth rates and we have discussed this with many finance ministries in the region. It is important to find ways to encourage small businesses to expand and create jobs and introduce new products. One way to do this is to make it easier to start up a business quickly, not in months but in days. We are creating a new bilateral dialogue with Brazil to discuss policies like this on a bilateral basis, so that we can find ways to increase economic growth in both of our countries.
Finally, one of the most moving ways that we have engaged with the region has to do with remittances. There are billions of dollars of remittances sent from the United States to Latin American each year. We estimate about $12 billion of remittances go to Mexico alone. In El Salvador, as much as one-third of the national income is remittances from the United States. Many countries in the region are like this.
Starting with Mexico in the U.S.-Mexico Partnership for Prosperity, we have worked to find ways to reduce the costs of remittances. We have already seen success in these efforts. By finding better ways to do banking, better ways to send the money, these remittance costs are coming down. Remittances flows like this serve a critical development purpose. For example, there are studies that show that families in El Salvador that get remittances from the United States can allow their kids to stay in school longer. That is effectively a way that these remittances are subsidizing their education and laying the foundation for a brighter economic future.
Conclusion
We have seen a great many improvements in Latin America in recent months, which I believe are attributable to fundamental improvements in the global economy and economic policies in the region. U.S. support for countries with good economic policies has also played an important role in helping Latin America through turbulent times. The Bush Administration is committed to building on this progress and further deepening its engagement to raise living standards and reduce poverty in the region.