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The Latin American Economic Recovery
John B. Taylor
Under Secretary of Treasury for International Affairs
Remarks at the Group of 50
Washington, DC
October 15, 2004
Thank you very much for inviting me to be here today. I look forward to a good
discussion. I always enjoy the opportunity to discuss Latin American economic issues
with financial experts and business people from the region. I particularly enjoy it when
the economic news is good, as it is in so much of the region today.
The Bleak Situation Several Years Ago
To put this good news in perspective, I would like to begin by noting how different the
current economic situation is from the bleak situation just a few years ago. I vividly
remember my very first days on the job in early 2001 at the start of the Bush
Administration. I remember being briefed about the crisis in Argentina and the latest IMF
$14 billion rescue package approved on January 12, 2001. I remember being visited by
Mexico's economic team to get the bad news about the sinking Mexican economy. I
remember getting many calls from my friends in Brazil about the knife-edge situation
there. And I will never forget the fears of contagion expressed by nearly everyone.
The Remarkable Improvement
Consider how different things are now. Economic growth this year in Latin America is
estimated to be about 4-1/2 percent--much higher than the measly 1/2 percent growth in
2001 and a big improvement over the 2-3/4 percent average of the past two decades.
Growth rates in Brazil and Mexico are expected to come in at 4 percent and Argentina at
7 percent.
And there are now no countries in the region in a recession or a financial crisis, except for
our unfortunate friends on the island of Hispaniola. They have been hit by severe shocks
ranging from hurricanes to bank fraud to armed conflict. I visited the Dominican
Republic and Haiti over the summer. I am pleased to see how the Fernandez government
is working to formulate an economic strategy. The situation in Haiti is clearly a difficult
one. We are working closely with the LaTortue government to effectively coordinate
donor assistance.
And I am happy to say that there is little talk of contagion. Many have noticed how little
contagion there was following the Argentina default in 2001 compared with the Asian
and Russian defaults in 1997-98.
Another improvement observed across the region is the low interest rate spread.
Investors and credit rating agencies have taken note of policy improvements. Brazil,
Chile, Ecuador, Paraguay and Uruguay--among others--received ratings upgrades during
2003 and 2004. Despite the increase in the federal funds rate in the United States, the
Latin America average spread is now only about 415 basis points over U.S. Treasuries.
Latin American countries are tapping capital markets with notable success. Mexico
recently obtained its lowest-ever yield and spread on a 30-year global bond, and
Guatemala issued a 30-year bond at 400 bps over Treasuries. Several large countries,
such as Mexico, Brazil, and Peru, have already met their financing needs for the entire
year. Some have begun pre-financing obligations for next year.
Another improvement, which is the culmination of continuing progress for many years, is
the decline in inflation. Inflation in the region in 2004 is now estimated to be about 6.5
percent. That compares with average annual inflation of 196 percent in the ten years
from 1986 to 1995. That low inflation bodes well for continued expansion with fewer
recessions and crises in the region in the future.
The highlights of this recovery are the rapid growth of exports and strengthened external
balances. Export growth is up across the board in the region, and is projected to be 21
percent for the region as a whole this year after 10 percent growth in 2003. This not just
a commodity price phenomenon: export volume growth is up and is actually
accelerating. The strong performance of exports has helped reverse current account
deficits, which have historically been a source of vulnerability for Latin American
economies. In 2003, for the first time in 35 years, the current account as a share of GDP
for the region swung into surplus.
The improved economic situation in Latin America is important not only for the people
of Latin America but also for the whole hemisphere, including people of the United
States. Stronger economies in Latin America create jobs in the United States by
increasing demand for U.S. exports, with exports to Latin America representing about
one-seventh of total U.S. exports. Stronger economies in Latin America reduce the
incentives for illegal migration and reinforce popular support for market-oriented policies
that create opportunity and enhance economic freedom. Stronger economies in Latin
America also help strengthen democracies, which become better allies in the war on
terror, the fight against international narcotics trafficking, and initiatives to combat
money laundering and terrorist financing.
Of course, this greatly improved economic situation should not be a time for
complacency. Oil prices are high and are a drag on economic growth in many countries.
And there is still a need for structural reform to strengthen and lengthen the economic
expansion in the region as a whole and thereby take a bigger bite out of poverty.
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Nevertheless, we should note the improvements and consider the factors that led to those
improvements.
Better Economic Policies throughout the Hemisphere
In my view, better economic policies explain much of the improvements that we have
seen in the region. First, the economic recovery in the United States is a huge factor in
the Latin American recovery. Every finance minister and central bank governor from the
region we meet tells us that. And the U.S. economic recovery was based on timely
changes in monetary and fiscal policy including President Bush's tax cuts in 2001, which
resulted in one of the shortest recessions in U.S. history, and his tax cuts of 2003, which
solidified the recovery.
There are also better economic policies pursued by Latin American governments.
Last year, six of Latin America's seven largest economies improved their fiscal policies
by increasing their primary surpluses to bring down debt levels. Primary fiscal balances
have continued to strengthen this year, helping to further reduce debt levels.
We have also seen a movement toward better monetary policies based on price stability
goals and clear systematic procedures for adjusting the instruments of monetary policy to
achieve these goals, frequently helped by flexible exchange rates. Brazil, Chile,
Colombia and Peru all have well-established monetary policies based on inflationtargeting frameworks. Mexico, Chile, Peru and Colombia have independent central
banks. Finance Minister Palocci of Brazil has declared his intention of taking up the
issue of central bank independence in 2005.
The results of more effective monetary policies were clearly displayed in the wake of
financial crises in Brazil and Argentina. Both countries experienced large currency
depreciations in 2002. All too often in the past, such depreciations produced out-ofcontrol inflation. However, prudent monetary management prevented these depreciations
from turning into inflationary spirals. The pattern that we saw in both countries is
strikingly similar: a bulge in inflation as the effects of the depreciation worked their way
into consumer prices, followed by a sharp and sustained reduction in inflation resulting
from prudent and effective monetary restraint.
Perhaps the clearest single example of how sound economic policies and management
have paid dividends in the form of robust economic growth is Brazil under the Lula
administration. When President Lula took office, he reiterated his commitment to sound
fiscal and monetary policies. Given Brazil's high debt levels, the Lula administration
established an ambitious fiscal surplus target for 2003 with the objective of lowering the
debt over time--then went on to beat the target. In light of the strong fiscal performance,
the Lula administration recently announced that it will build on this progress by
increasing the target for 2004.
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These fiscal and monetary policies have helped underpin an increase in economic growth
in Brazil. Real GDP has grown at rates of more than 6 percent for the last three
consecutive quarters. Real interest rates have fallen to roughly 10 percent today, after
being as high as 19 percent in the summer of 2003. The real and inflation are relatively
stable and external borrowing spreads are below 500 basis points. Brazilian authorities
are focused on consolidating these gains by locking-in improvements in fiscal policy
through steps like pension reform. They are also focused on advancing microeconomic
reforms critical for sustaining growth such as streamlining the process of starting a
business and working to expand credit to small businesses. And they are working to find
ways to invest in high-return infrastructure projects within responsible fiscal constraints.
There are many examples of improved policies in the region. In Mexico, the government
has been successful at achieving fiscal deficit targets. In Colombia, President Uribe is
pursuing policies to reduce inflexible government spending and streamline the pension
system. In Peru, the government has increased its efforts to improve its tax
administration and fight tax evasion. In Uruguay, the primary surplus has nearly tripled
in the first half of this year compared to last year.
Support from the United States
The Bush Administration's basic economic strategy for the region is to provide strong
support to countries that are pursuing sound economic policies. From my own
perspective and that of the U.S. Treasury, I can say that under President Bush's leadership
we have maintained a sustained and intense focus on the region, even if that does not
always get newspaper headlines. Our strategy is based on our firm belief that without
sound policies on the part of the country itself, international assistance cannot yield
successful results. With this philosophy in mind, we have worked aggressively along
multiple fronts to prevent and contain financial crises and to bolster economic growth in
the region.
An early focus of the Bush Administration was to deal with financial contagion--the
spread of crises from one country to another--and define clearly when a response from
the international policy community is appropriate and desirable. We emphasized early on
that contagion was not automatic, and that policy responses had to take this into account.
This is important because reacting to false alarms about contagion can lead to support of
countries that are not following strong and sustainable policies.
At the same time, it is important to recognize instances where countries are pursuing
strong policies but are hit by external shocks beyond their control that damage their
economies. This was the case in Uruguay in the aftermath of the Argentine crisis. The
Uruguayan government had a record of market-oriented economic policies when the
crisis in Argentina caused a bank run in the Uruguayan banking system. The Uruguayan
authorities launched strong policy steps, including floating the currency and a complete
restructuring of the banking system. The United States responded swiftly, providing a
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short-term $1.5 billion loan to bolster Uruguay's reserves until further support from the
IMF, World Bank, and Inter-American Development Bank could be mobilized to assist.
This timely financial support ended the bank run, and allowed the Uruguayan
government to keep its economic policies on track. The result has been a period of strong
economic growth in Uruguay.
Another example was the IMF program for Brazil during the election in 2002, based on
the strong commitment of the Brazilian government to economic policies aimed at
strengthening Brazil's public finances and restoring economic stability. Thanks to these
policies, Brazil was able to overcome pre-election financial market uncertainty that had
caused the Brazilian real to drop precipitously and pushed risk spreads on Brazilian
bonds to almost 2,400 basis points over U.S. Treasuries. It allowed incoming President
Lula to take office and have the space to implement a disciplined economic policy
program that has restored market confidence and boosted economic growth.
Helping to prevent and contain financial crises is not the only way the United States has
supported economic growth in Latin America. It is equally important to pursue deep
economic reforms that are aimed at addressing the impediments to the development of a
vibrant private sector. Bilateral policy dialogues focused on these very issues are a vital
component of our engagement in the region.
One example is the U.S.-Brazil Group for Growth, established at the first summit meeting
between Presidents Bush and Lula in June 2003. The Group's main purpose is to advance
policies that raise economic growth and create jobs in both countries by focusing on areas
such as increasing credit to small businesses, streamlining business registration to
encourage entrepreneurs, and improving public investment. The Group for Growth has
already yielded concrete results: our Brazilian counterparts tell us that the Group's
discussion of small businesses helped shape recent legislation submitted to the Brazilian
Congress that reduces taxation and streamlines labor and pension regulations for
Brazilian small businesses.
The U.S.-Mexico Partnership for Prosperity is another important bilateral forum, the goal
of which is to promote economic development on both sides of the border with a
particular focus on the most impoverished parts of Mexico. Launched in 2001, the
Partnership activities encompass several agencies of both governments.
At Treasury, our major area of focus in the Partnership has been on lowering the costs of
remittances from workers in the United States to their families in Mexico. Our hard work
to foster competition in the remittances industry and increase access to the formal
financial system under the Partnership has borne fruit: the cost of remittance transfers
from the United States to Mexico has been halved since 1999, and a range of new
financial products have been introduced. This means more options and more money in
the pockets of families.
The Bush Administration's development assistance policy also emphasizes support for
countries that pursue responsible policies. This administration has sought to reorient U.S.
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development assistance by creating the Millennium Challenge Corporation (MCC) and its
Millennium Challenge Account (MCA). The MCC channels aid funds to countries that
invest in people, pursue good governance and the rule of law, and promote economic
freedom. The U.S. Congress has appropriated $1 billion to the MCA in fiscal year 2004
and the Bush Administration is requesting $2.5 billion in 2005, ramping up to $5 billion
by 2006. Three countries from Latin America--Bolivia, Nicaragua and Honduras--have
been selected by the MCC Board of Directors to submit proposals. After the countries
have developed their own proposals, the MCC will evaluate and select the highest quality
proposals that also have a strong likelihood of success and measurable results.
We have also used multilateral fora to promote sound economic policies that encourage
growth. At the Special Summit of the Americas meeting held in Monterrey this January,
President Bush secured agreement among the Hemisphere's leaders to take steps
necessary to cut the time needed to start a business and to triple bank credit to small
business by 2007 with the help of the Inter-American Development Bank.
At the Summit, we also sought to expand to the rest of the region the success that has
been achieved with Mexico in reducing the cost of remittance transfers. Leaders agreed
to work together to halve the average cost of remittance transfers in the region by 2008. I
cannot emphasize enough how significant this commitment is. Annual remittance flows
are roughly five times annual official development assistance and are a considerable
share of the economy for many countries. Remittance flows are becoming increasingly
important as a source of funds that support economic development, new businesses,
alleviate poverty and provide opportunities for children to stay in school and thus build
human capital in the region.
Under President Bush's leadership the United States has also been committed to
expanding free trade in Latin America. This entails, first of all, strengthening the global
trading system and a successful outcome to the WTO Doha negotiations. We are very
pleased with the progress at the Geneva meetings this summer and optimistic that we are
again on the right track in these negotiations. At the same time, the Bush Administration
has pursued an aggressive trade agenda through bilateral and regional free trade
agreements within Latin America. In addition to pursuing the 34-country FTAA, we
have concluded FTAs with Chile and with five Central American countries and the
Dominican Republic. Panama talks are progressing nicely, and we anticipate that our
dialogue with Andean countries will deepen and accelerate now that both sides have
tabled proposals in most areas.
Conclusion
As we take stock of the amazing progress to date, we should emphasize the work that
remains. Priorities are to: (1) continue sound macroeconomic policies to keep inflation
and debt levels down and keep the expansion going, and (2) focus more on
microeconomic reforms to raise growth performance and poverty reduction over the long
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run. Governments need to strengthen the rule of law, streamline regulation, combat
corruption, and develop infrastructure.
President Bush has demonstrated his commitment to the region over the past four years
by supporting countries that follow sound economic policies and open their economies to
the world. I am confident that the United States will continue to play a constructive role
in helping the region to sustain growth and raise living standards in the years ahead.
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