REMARKS BY MR. ENRIQUE V. IGLESIAS,
PRESIDENT OF THE INTER-AMERICAN DEVELOPMENT BANK AND CHAIRMAN OF THE BOARD OF EXECUTIVE DIRECTORS OF THE INTER-AMERICAN INVESTMENT CORPORATION,
AT THE CONFERENCE ON “ECONOMIC INSECURITY IN LATIN AMERICA AND THE CARIBBEAN”
(The World Bank, Washington, D.C. – June 21, 2000)
I wish to thank David de Ferranti for inviting me and for his kind words of introduction. This seminar addresses the very troubling issue of the underlying causes for the sense of economic insecurity that prevails in Latin America and the Caribbean today. I believe that we need to see this in the perspective of the sweep of our economic history in the post-War period and I shall be bold enough to approach this from my personal experience.
Age has given me the opportunity to have lived through what I now see as four major periods in the modern economic history of the region. When I was a university student in the 50s my generation looked to the future with unbounded enthusiasm. We had a vision. With hindsight, some people say it was a misguided vision, even while others recall it with romanticism. In any case, this vision was fundamental to a paradigm for the economic and social transformation of the region.
Main aspects of this paradigm included industrialization, substitution of imports, the strong presence of the modern State in all manner of activity, economic reform and the rekindling of the integration movement. Economic growth in those years was not bad. Actually, we enjoyed a very healthy growth of 6% during the 50s and 60s. The major lesson that I draw from my recollections of that period is that we had an overall view of the economy and confidence in our capacity to engineer basic changes by implementing so-called structural reforms.
I clearly remember the collapse of the system in the 70s following the oil shock. We can see why that model of development became exhausted. At the root was our tolerance of instability arising principally from fiscal imbalances as a consequence of placing too many demands on the State. Hirschman once told us in ECLAC: “You are asking too much of the State”. And he was right. Monetary policy freely accommodated growing fiscal imbalances, we readily tolerated inefficiency throughout our economies and, worst of all, we were indifferent to worsening inequality. Latin America lost the chance to share in the fast growth in world trade, as a result of having economies that were too-highly protected. It was a period in which the region succumbed to populism and excessive spread of economic activity by the State.
We paid dearly for this in the next stage –the debt crisis in the decade of the 80s. It was a complicated period that shook Latin America deeply, in its political, economic and social life. It was a time of high rates of inflation, dictatorships, the return to democracy, and many other experiences. It was also a period pragmatism, of a readiness to observe and learn from experiences outside Latin America.
In the fourth stage the pendulum swung towards an emphasis on economic adjustment policies, as the sine qua non –the Washington Consensus. There is a lot that can be said about the Washington Consensus. For one, the return of orthodoxy put three very strong pillars in place in Latin America. First, there is recovery of stability. When I see our countries with single digit inflation rates, I am sometimes still genuinely surprised. For my generation, this is almost like a miracle and more so for the fact that it was accomplished through sound fiscal and monetary policies. In terms of our capacity for macro-economic management, this is the equivalent of scaling Mount Everest. A second pillar is the opening of our economies, which has brought clear gains in terms of productivity and of enhancement of our capacity to compete globally. While there is still much to be done in the region, I think our competitiveness is mounting. The third pillar is the re-shaping of the State by means of privatization of commercial activity, revitalizing our bureaucracies and decentralizing power to state and local governments.
Whatever final judgements we may make about the shortcomings of the so-called Washington Consensus, these three pillars are a legacy of very solid gains in Latin America. Even so, I can understand the mounting feeling of frustration today in Latin America. Despite all the pain of adjustment and structural reform, and notwithstanding an international environment that was not hostile, economic growth reached only one percent in the 80s and a little less than 3% in the 90s. The big questions now are: why don’t we grow faster, why are we so slow in solving major social problems, and why are we so vulnerable. There is growing fatigue and widespread frustration with the seemingly meager results from all the adjustment. We therefore have critical economic, social and political challenges ahead of us.
My close personal experience of all these policy changes in the region has brought me to a juncture where I believe that we must avoid another swing to a new paradigm. The search for an answer should be directed at making a balance of what we have gained in all these years, retain the solid experience and build on that –an “incremental paradigm”, if you will.
The economic challenge is very clear. Latin America cannot continue growing at 3% since at that rate we will not be able to solve any of the problems we are confronting, particularly the social ones.
I believe that Latin America now has an excellent macroeconomic foundation and this is a very important asset. We were able to implement reforms and stick with them. I am very impressed about how in recent years, and in spite of the crisis, governments have remained on the right track. But the fact is that we still have low savings, low exports, and low investments and until we reverse these conditions, it will be very difficult to have the increase in the rate of growth that our countries need.
I am also very worried that Latin America is probably losing opportunities being opened by the new economy that is powered by information technology. It is really disappointing that Latin America, with few exceptions such as Costa Rica, is not taking advantage of these opportunities.
All in all, when we judge the efficiency of the reforms one can say that it is positive, but perhaps they were not always completed in all countries. I believe that new phases of incremental adjustment in programs are sorely needed. Our multilateral development institutions could play an important role. I have the feeling that our activities still tend to be pro-cyclical, and that we have not yet developed the appropriate instruments to function in an anti-cyclical way. Instruments and policies designed in the 50s and the 60s that still prevail in one way or another in our institutions do not fit adequately with the new realities. The challenge we face is: how to make our institutions more responsive to the new demands stemming from the need for the countries in the region to sustain a considerably higher rate of growth.
On the social side, the persistence of poverty, the unequal distribution of income, the unemployment, the conditions of life in the cities are all problems pending urgent solution. We know a lot about poverty, and there are wonderful experiences that show that it can be dealt with and it is within our capacity to do so. The compelling need to tackle poverty, inequality, exclusion and other social ills forces us to concern ourselves not just with raising the rate of growth but also with changing the quality of that growth so as to ensure that it becomes socially responsive.
Let me touch now on an area that may be difficult to address, particularly for multilateral development banks. I am referring to politics. We have already noted that fully 60% of the people in Latin America are disaffected with their political institutions and that their outlook on the future is even more pessimistic. This growing alienation can be found not only in those countries that have serious problems of poverty, but also in those that are doing better.
The political system is not well-tuned to the messages from society as a whole nor from the outside. In this context, one critical issue is that the dialogue between civil society and government is not easy. It is full of suspicion and misunderstandings. Something has to be done urgently to build bridges between them. There are two areas that I believe need our special attention: the reform of the State and the strengthening of our democratic institutions.
When we started in the 90s to work with our governments to modernize and streamline their functioning we found a bloated and weak State apparatus: inefficient institutions, lots of subsidies, bad interventions, incapacity to respond to economic and social demands. The first impulse was to insist on shrinking the State in the belief that the smaller the State, the better. Now we have the experience to be wary of such a simplistic approach. The focus is to create a strong State, a State that can properly care the areas in which it has inescapable responsibilities.
I refer to fostering truly competitive markets; designing and implementing social policies; and promoting integration, just to mention a few such responsibilities.
In this regard, there are three aspects that should be given special attention. One is the need to build a civil service, second is to strengthen the transparency of public expenditure and third to establish new rules of engagement between the civil society and the State. In the more mature democracies, the institutional autonomy of a civil service where career advancement depends on merit and ability helps to check any tendency for the executive to slide into arbitrariness. This is an important safeguard for citizens who must deal with the State for any number of essential services.
The enforcement of transparency in handling affairs of State is one of the most pressing problems in Latin America. Corruption erodes the effectiveness of the State and the functioning of the markets, and also corrodes the trust that binds electorate to its leaders in a democracy. The legitimacy of any government springs from the trust of the people.
The role of civil society must be strengthened as an integral part of the reform of the State. We cannot have a strong State if the civil society is weak. Conversely, there can be no strong civil society without the support of a strong and efficient State. Size should not be confused with strength nor weight with muscle, as Prebisch used to say. The best way to defend the public interest is to strengthen the institutional capacity of both the public and private sectors to serve as filters for collective action. Development requires that the State, market, and civil society learn to coexist and tap one another’s potential. The task of building strategic alliances among civil society, private sector and the State is perhaps one of the most pressing needs for Latin America in the years ahead.
The countries of Latin America have to recognize that they face a “democratic gap” in the sense of the lack of a broad base of participation by civil society in political decisions outside of the electoral process. This gap must be closed if we want to set our countries firmly on the path of sustainable and equitable development. A fundamental reason why poverty and inequality are still so widespread in our region is that the political systems are not functioning well, inhibiting the ability of governments to truly address the needs and aspirations of all the citizenry.
Politics is the most sensitive and visible expression of linkage between institutions and the economy. Let there be no mistake then: politics matters and we cannot ignore it. As the heads of State of the Inter-American System acknowledged not so long ago in Viña del Mar, democratic stability and social and economic development are mutually reinforcing.
There can be no efficient State without an effective democratic system in place. Therein lies the importance of politics and political systems. We need to dispel once and for all two fallacies under which our countries have labored. On the one hand, we must stop viewing as market failure the political flaws that have led to State intervention and encouraged rent-seeking in lieu of healthy competition, efficiency and productivity. At the same time, we must also recognize the weaknesses in the society that make it possible for interest groups to distort government policies and undermine the role of the State. A proper balance between the functions of the State and the functioning of the market requires an institutional apparatus that ensures the checks, balances and clear accountability to prevent capture of the State by powerful private interests.
At a recent meeting in Cartagena, President Cardoso of Brazil referred to these complex issues as crucial to the future of our societies. He said that the most urgent challenges facing us: social justice, income distribution, eradication of poverty, drug trafficking, the environment, all depend on the proper functioning of our democracies. I would even venture to say that they depend on the deepening of democracy. The people of Latin America long for, and rightly so, real equality of opportunity in economic life, security, and sustainable development. Despite many problems, Latin Americans today know that democracy is an essential means for realizing their dreams of personal fulfillment. As I said, it is not easy for us in our institutions to address the issue of politics, but we must try as it is a crucial element in our countries´efforts to advance development and thus an issue we will have to work on in the years to come.
In closing, I would like to say a few words on the future role of MDBs. I truly believe there is a role for these institutions. I think that particularly the Bretton Woods institutions and the regional banks make a very important contribution. My impression is that the world is a little better off than it would have been without them.
The public debate about the effectiveness and the urgent need to reshape our institutions is healthy. We must ourselves evaluate the relevance of our activities in a rapidly changing external environment, particularly the impact of the globalization process. In Latin America, it is obvious that we are dealing with countries that have very different needs and, therefore, that we should not expect to use identical instruments to support their efforts. The private sector is becoming a major actor in financing some activities which traditionally were undertaken by governments, often with development financing from our institutions. In all, the more I see the region, the more I believe that the most important contribution we can make to Latin America, confronted with so many internal and external problems, is in the area of non-financial services. This does not mean that we have to stop lending, for we are banks after all, but sharing the tremendous experience we have accumulated is our a major asset in assisting our countries.
As we prepare our institutions to address new challenges I can only confirm my belief that we can continue to be relevant for the benefit of our countries. Thank you very much.
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