Latin America The World Bank: A Cautious Optimism On The Region

Tuesday, November 1, 2005 - 01:00

The Editor interviews Guillermo Perry, Chief Economist, Latin America and the Caribbean, The World Bank.

Editor: Dr. Perry, would you tell our readers something about your professional background and experience?

Perry: My career has combined public service with academic work. In Colombia, I held the positions of Minister of Finance, Minister of Mines and Energy, Head of the National Tax Department, and Deputy Director of the Planning Department. In addition, I also served as a member of the Constitutional Assembly that drafted Colombia's new constitution in 1991 and as a member of the Senate for a brief period.

On the academic side, I was head of the two main research centers on development issues in Colombia: Fedesarrollo and El CEDE (Centro De Estudios Sobre Desarrollo Economico) of the Universidad de los Andes, where I was also a professor. I was also a member of the faculty at the Universidad Nacionál de Colombia. I have published many books and articles on development, fiscal, trade and energy issues. I was also engaged in consulting work with the Harvard Institute for International Development, The World Bank and IDB.

Editor: How did you come to The World Bank?

Perry: I was Minister of Finance in Colombia in 1996, when the President was accused of receiving illegal campaign contributions. I resigned my post when I became concerned that these allegations might be true. Jim Wolfensohn then invited me to join the Bank as Chief Economist for the region. I had always had a very high opinion of the Bank's intellectual capacity and I was very glad to become part of the organization.

Editor: Can you summarize for us the mission of the Bank? Is there a particular mission with respect to Latin America and the Caribbean?

Perry: The mission of the Bank is to help countries reduce poverty. In order to reduce poverty, economic growth is essential, but we recognize that that alone is not sufficient. It is necessary to have an equitable distribution of growth, so that poverty reduction can take place as fast as possible. The Bank works both on issues related to economic growth and towards empowering the poor through human capital, access to education and health services, access to infrastructure, access to credit, to land, and so on. There is a clear recognition that poverty is more than an issue of low incomes.

Editor: You have become one of the Bank's principal spokesmen on the economic prospects of Latin America and the Caribbean. Much has changed over the past ten years or so. For starters, can you tell us about the market reforms of the 1990s? What went wrong?

Perry: The results of the reforms were positive, but somewhat disappointing, which is not the same thing as saying they were wrong. We should remember what prompted the pro market reforms. During the 1980s most of the Latin American countries entered the worst period in their economic history, and the reforms were implemented at that critical juncture. In the 1970s there was great access to international credit. Many Latin American countries abused that access, which left them in a very vulnerable position. When the United States Federal Reserve sharply increased interest rates in the early 80s, capital flows reversed and the governments were not able not pay their debts, with a few exceptions. The so called "debt crisis" resulted in negative growth for most of these countries. Countries thereupon implemented stabilization programs that constituted the obvious response to a situation that should not be permitted to occur again. Unfortunately, some macroeconomic vulnerabilities remained that led to the Mexican crisis of 1994 and that to which Argentina and Uruguay were subject in 2000/01, after the Russian crisis of 1998. Today Latin America's economies are more resilient and better able to weather external shocks. While there is room for improvement, macroeconomic policies today are managed in a responsible manner.

The second reason why the 1980s were so bad had to do with over reliance on a model of trade protectionism and generalized government intervention to provide subsidies to the manufacturing sector. That model produced significant growth during the 1950s and 1960s, in the golden decades of the world economy, although not as much as the growth in countries that followed more open trade policies, such as East Asia and the southern European countries. This model of Import Substitution began to flounder in the early 1980s, a time of very low productivity growth in Latin America. This was indicative of the obvious limitation of a protectionist model where growth is dependent solely on domestic markets. The pro-market reforms were an adequate response to these problems.

The outcomes of the reforms were not bad at all in the early years. From 1990 to 1998 Latin America grew at about 3.5 per cent a year, equivalent to 1.7 per cent per capita, which was slightly above the rate of growth of the rest of the world. During this period, productivity and investment were increasing rapidly in the region. Unfortunately, the Russian crisis came in 1998, and the following year saw a significant retrenchment of capital flows into the region. The most vulnerable countries, Ecuador, Venezuela, and Brazil, experienced currency crises, and Argentina began a protracted recession and then could not maintain its currency peg and fell into a major contraction. Argentina carried neighbor Uruguay with it.

Today the region is again growing well. Indeed, last year's growth of around 6 per cent (4.5 per cent per capita) was the best in 25 years, and this year we are going to see substantial growth as well (around 4 per cent).

In summary, it is not correct to say that the reforms failed, but it is true that they did not meet the expectations that we had at the beginning of the 1990s. They did result in additional growth, but not enough to put the region at the same level of growth as the East Asian countries, as was promised. And they did not totally insulate the countries from reversals of capital flows.

Looking back, as early as 1996, we concluded at the Bank that during the period of the early '90s not enough attention was placed on building strong institutions to anchor continued long-term growth. The Bank has ever since actively promoted institutional development along with pro-market policies. Also, the initial emphasis was too much on "deregulation" of the formerly highly intervened financial systems and on opening of the capital accounts, without enough emphasis on prudent regulation and supervision. This mistake was associated with the Mexican crisis of 1994. Latin America has learned that lesson, and there has been a major effort since on improving financial institutions and the strength (if not the depth) of the financial sector, with the support of the Bank. Finally, the critical importance of efficient social policies and social safety nets was not acknowledged initially to the extent it should have been. There were significant increases in social expenditures and coverage of education and health during the 90s, but the quality of service delivery did not increase much. Only recently have there been important efforts to establish safety nets to protect the poor from macro-economic and other risks.

Editor: Would you give us an overview of some of the region's principal economies today?

Perry: Overall the region is doing very well now. Growth last year was at an average of around 6 percent, which is the highest in the last 25 years. Most countries experienced growth over four per cent last year. This year everyone was expecting a significant slowdown, but these estimates had to be revised upwards because of the continuing strong growth in many countries. Current estimates are about 4.5 per cent. We are living a growth period similar to the one we had in the beginning of the 1990s, but with some important advantages.

First, this time growth has been led by the strong performance of exports, which have seen significant increases, and have led to trade and current account surpluses and large accumulations of international reserves. This has been the consequence of a very positive global environment and good policies in the countries concerned. In the early '90s, growth was supported by large short-term capital inflows that led to large current account deficits and major financial vulnerabilities.

To be sure, the situation varies from country to country. We expect Chile to have the highest continued growth because it has the strongest macro- and micro-economic fundamentals in place. The Chileans enjoy very good monetary, exchange rate and fiscal policies and low public debt. They also have continued to improve the efficiency of their financial markets and micro-economic policies. Most other countries have also made important improvements in their macro-economic policies and financial markets and are enjoying sound growth. Brazil has made significant progress in its fiscal management, for example. Argentina, Uruguay, and Venezuela, which experienced profound crises, have made a strong comeback and are approaching the level of production they had prior to the crisis. Some of these countries, however, need further fiscal consolidation and improvements in their investment climate and micro-economic policies.

In summary, I think the region's future looks very bright if countries take advantage of present good times to further reduce macro-economic vulnerabilities and push the micro-economic reforms that would guarantee sustained long-term growth.