LAC Bonanza: Have We Been Here Before?

April 25, 2007— How different is the current economic “boom” in Latin America and the Caribbean (LAC) from the previous ones?  Will this boom be followed by major crises, as in the past?  What are the main challenges facing policymakers and what do they expect from the international financial institutions (IFIs) in the current circumstances? 

These are some of the questions that were discussed by private sector leaders, policymakers, academics, and World Bank and International Monetary Fund (IMF) staff at the 14th “LAC Meets the Markets” conference on April 13 in Washington, DC.

Guillermo Perry, World Bank, addresses the conference

“LAC has a unique opportunity to take advantage of the current economic bonanza to lay the foundations for sustainable growth,” affirmed Pamela Cox, Vice President for the LAC Region at the World Bank, in her opening remarks at the conference.

In the last few years, LAC has enjoyed its highest growth rates since the late seventies.  Participants pointed to many positive economic developments in the region, including a reduction in external and internal vulnerabilities due to growing current account surpluses, stronger fiscal positions, better macroeconomic policies, and improvements in  debt composition.

However, “LAC’s current performance is very good if judged by the standards of the past, but by the standards of other regions such as East Asia and Europe there are gaps and shortfalls,” commented Mario Blejer (Bank of England).

Participants noted LAC’s failings, such as the poor investment climate, the low quality of education, and persistently high levels of poverty and inequality.

Permanent or temporary?

One of the key points of debate was whether LAC’s current boom is temporary, part of a repeated cycle of booms and busts, or whether the region has entered a “new paradigm” thanks to a more permanent strengthening of policies and institutions.

Some participants highlighted the role of high commodity prices in the current boom, noting that they cannot last forever.

“Latin America’s vigorous growth in the last few years has been due to a mixture of luck and policy,” said John Lipsky (IMF), “and it is too early to rejoice.”

Guillermo Calvo (Columbia University) pointed out that what is driving LAC’s current account surplus are the favorable terms of trade. At 2002 prices, LAC would experience a deficit (and not a surplus) of about 4 percent of GDP.
However, Guillermo Ortiz (Central Bank of Mexico) affirmed that “stability in Latin America has become a more entrenched value” and others spoke of permanent policy improvements, and changes of attitude, in specific countries.

Planting in the good times

Another related issue was how LAC countries are handling the economic bonanza, with several participants affirming the need for them to “plant in the good times.”

Mario Blejer recalled the bible story of Joseph, who predicted seven years of plenty to be followed by seven years of famine, and advised the Pharaoh to store up surplus grain during the good times. 

Brian O'Neal, de JP Morgan, and Guillermo Calvo, Columbia University in the session on "Policymakers' Perspective"

One reason may be that although they have a good diagnosis of the problem, they do not have the political capital to create a consensus for reforms.

Country examples

For many participants, Chile is the only example in LAC of a country that has used the good times to prepare for the bad times, through countercyclical policies.

Ernesto Talvi (Centro de Estudio de Realidad Económica y Social, Uruguay) argued that the economic bonanza has encouraged populist policies.  He cited Venezuela, which decided to spend its wealth straightaway and had a 2 percent fiscal deficit in 2006, despite the boom.

Several speakers mentioned Brazil, where real public expenditures continue to grow even though investment in infrastructure remains low. 

For Otaviano Canuto (World Bank Executive Director), however, there are good examples of increased public expenditure in Brazil.  He cited the conditional cash transfer program Bolsa Familia which is having a significant impact on equity and poverty, and should be considered as an investment program in human capital.

Suggestions for the IFIs

Although the discussion focused mostly on what countries should do in the current situation, some ideas were also presented on the role of the IFIs.

For example, Martin Redrado (Central Bank of Argentina) proposed that the IFIs work on reserve pooling for the region.  Andrew Crockett (JPMorgan Chase) suggested the IFIs help countries find innovative ways to involve the private sector in financing physical and financial infrastructure.

Tribute to Guillermo Perry

Finally, many speakers paid tribute to World Bank Chief Economist for LAC Guillermo Perry, who has been a driving force behind the “LAC Meets the Markets” conference series since it was launched in November 2000.  Mr. Perry will be retiring later this year.

More information on “LAC Meets the Markets”