Beyond Macro Reforms

Since 2002, Latin America and the Caribbean has achieved its best economic performance in 30 years.

• In the last three years, the annual growth rate for the region as a whole has averaged close to 5 percent.

• Though many of the countries have yet to fully enter the mainstream of world trade, exports have risen 59 percent in the last three years, due largely to rising commodity prices.

• Most countries have amassed considerable foreign currency reserves, which can help them ride out shifts in global conditions that will inevitably come.

• Inflation, viewed in the past as a chronic scourge of Latin America’s economies, appears to be under control. The average inflation rate in the region has fallen from 12.2 percent in 2002 to 6.3 percent, the lowest in decades.

• Countries have trimmed their fiscal deficits as well. In 1982, the most difficult year in recent decades, the average deficit was 9.3 percent of GDP; last year it was barely 1.4 percent.

• Globalization has made abundant capital available to the countries. Latin American sovereign bond spreads have held at record lows for months; for example, averaging just 230 basis points over U.S. Treasury bonds in recent days.

• Most countries have seen an expansion of credit. The region’s financial systems are much sounder today than during previous periods of economic growth.

• Though the region’s debt stock is still considerable, it dropped from 72 percent of GDP in 2002 to 53 percent in 2005.

A ll these facts and figures put an optimistic face on the region. But I feel obliged to tell another side of the story.

Latin America and the Caribbean carry less weight today than when the Bank was founded. In 1959, we accounted for 6 percent of global output, and there we remain. In those days, our trade represented 7.3 percent of the combined world total; this has slipped to 5.1 percent today. We have not narrowed income gaps with the developed nations.

Much of this relative decline can be traced to the powerful reemergence of the Asian economies. The first Asian economic miracle was Japan’s after World War II, rooted in the changes of the Meiji restoration, which had already made Japan an economic force to be reckoned with in the early twentieth century. The Asian Tigers—powerhouses such as Korea—began to emerge from 1960 onward, about the time the Bank was founded, and their success has left its indelible mark on contemporary economic thought.

And yet, the Tigers were relatively small countries. Since 1990, the big economic story has been the reemergence and the boom of market-based economies in China and India. Of every ten people on the planet, two are Chinese, and another two are Indian. These two giants are growing by leaps and bounds.

The question is whether China is a partner or a competitor. Should we only supply raw materials, or pursue joint ventures as Brazil is doing? We must ask ourselves the same questions about India, which is making increasing inroads into business service outsourcing.

Asia presents us with a challenge, but also an opportunity.

I use the word “reemergence” because what China and India are doing is regaining the world economic primacy they held before the Industrial Revolution. To speak only of the Christian Era, China has dominated world trade in 18 out of 20 centuries.

B ut we still face enormous challenges and unsolved problems.

• In Latin America and the Caribbean, 213 million people live below the poverty line on less than two dollars a day. While poverty has declined worldwide over the last two decades, very little progress has been made in our region.

• The region lags far behind in technology and know-how, the keys to modern competitiveness.

• Five years ago in its Human Development Report, the United Nations identified 47 “nodes” or hubs of technological creativity in the world. Only one was in Latin America and the Caribbean, and it did not rival the world’s great hubs in size or strength. Our region’s lag can be seen in the number of new patent awards in comparison with Asia, Europe, or especially the United States, which leads the world in innovation.

Our region carries some heavy baggage:

• Little physical integration between our countries.

• Significant shortcomings in educational quality.

• Shortfalls in technology and few—if any—hubs of technological creativity.

• Weak legal institutions and an uncertain commitment to the rule of law. Many in our region are skeptical about the transparency and effectiveness of their national judicial systems.

• Little social cohesion or the structural funds to build it, so Latin America is following an integration model completely contrary to the most successful contemporary example in Europe.

• A sizable share of the population without basic utility services. Some 68 million people in Latin America and the Caribbean lack access to safe water, and 110 million are unserved by public sanitation systems. This is one reason why 1,200 children under five die each day in our region. In the time it takes to deliver this address to you today, 25 children will have died.

These unmet needs explain the discontent, desperation, and even rage that take hold among the vast majority and regularly erupt in Latin American politics, bringing new forces into play. These demands of the many are legitimate and deeply felt.

T here is no off-the-shelf model for development, no magic formula or miracle prescription. It is a process of trial and error.

Of course, there are reasonable things we all must do, and, generally, we know what they are.

It was wrong to believe that a sound macroeconomy by itself, or simply movement toward more open economies, would work development miracles. These are necessary but not sufficient foundations for development.

To borrow a useful distinction from Thomas Friedman, we have concentrated too much on the “hardware” of development, and not enough on the “software:” institutions, education, and research. We need to place a similar emphasis on this other key component of development.

Institutional obstacles in the way of economic and social development are keeping wealth from flowing to the society at large. Keeping the wealth within just one segment of society lessens the legitimacy of reforms, the market economy, trade, participation in globalization, and the “modernity” worldview.

Why, after all, would “history’s losers” have an interest in pursuing reforms? Without some commitment honored by all, not just the weakest, the political and social pendulum will continue to swing back and forth, and Latin America and the Caribbean will never become a stable and credible place to invest, work, and do business.

W e need to democratize trade and credit, broaden access to technology, and create new employment training and entrepreneurship mechanisms. Inequality is a drag on development, an impediment to progress.

My esteemed friend and fellow Colombian Gabriel García Márquez entered posterity when he said that those condemned to one hundred years of solitude had no second opportunity on earth. But perhaps nations do have a second chance, if we can begin today to shape a new, long-range hemispheric consensus. Rather than a hundred years of solitude, we could embark upon a hundred years of inter-American and international solidarity—the very causes that the Inter-American Development Bank has championed for nearly fifty years.