Latin America in a Globalized Economy: The Chilean Response
Remarks by Michel Camdessus
Managing Director of the International Monetary Fund
at the Round Table organized by the Government of Chile on
Institutions and the Market in the Era of GlobalizationParis, France, March 14, 1999
Mr. President, Excellencies, ladies and gentlemen:
Because the institutional dimension is complex, I will confine my remarks to the economic dimension. In the turbulent financial markets of the past few years, each new crisis has led to a new wave of contagion. No country has been completely immune, although some countries have suffered quite severely while others have weathered the storm much better. As a whole, Latin America has demonstrated a remarkable capacity for resistance and resilience. Why has Latin America fared rather better than other countries and other regions, and what lessons can be drawn from this situation for our deliberations on institutions and the market in the era of globalization? To answer these questions, I would like to offer some thoughts on some of the factors that lay behind the crisis in the emerging markets, perhaps most striking and unexpected in Asia. This may give us a better understanding of the situation and outlook of Latin America in general, and Chile in particular.
During the past decade globalization has given rise to three highly beneficial global trends. But each has unfortunately involved distortions that were not anticipated or that were neglected for too long. It is precisely these complex distortions that have been behind the crises. What are they?
- First: The growth of capital markets, facilitated by high technology and sophisticated financial instruments, led to an upsurge in capital flows to emerging markets. But decisions were too often—and herein lies the distortion—based on inadequate and sometimes hasty risk assessment by the investors.
- Second: Many emerging markets tried to open their capital accounts to reap the benefits of competition and the increase in international finance. But too often the sequence of liberalization was not appropriate, and supporting policies proved to be too weak. The liberalization of more stable, longer-term flows lagged behind the rapid de facto freeing of short-term flows, as domestic borrowers scrambled to avail themselves of the copious new financing opportunities.
- Third: Economic policy in most countries has leaned toward freer markets, a smaller role for the state, and the use of indirect instruments of macroeconomic management. Excellent! But countries failed to satisfy certain essential preconditions for running open market-oriented economies. They did not strengthen public sector governance or corporate governance, and, worse yet, problems such as corruption and nepotism arose in some of them—leading in the case of Indonesia to widespread student unrest. The IMF's programs tackled these problems head-on, and although we have been widely criticized, I am far from feeling apologetic; on the contrary, we in the Fund are proud of having decried such abuses.
A moment’s reflection on all the recent crises reveals elements of each of these factors, in varying proportions. In Asia the dominant factors were shortcomings in governance and financial sector soundness. In Russia, the few years of uneven reform following seventy years of Soviet rule left deficiencies that were too widespread for the economy to withstand major external shocks and policy shortcomings. And in Brazil, the concerns related to the sustainability of fiscal policy. I mention these countries because they are the ones most hurt by crisis, but no country in the world is immune to this kind of vulnerability. Globalization makes it essential that every country ensure that its policies are sound and forces every country to guard against the possibility of changes, sometimes quite abrupt, in its external environment.
* * * * * Having faced the debt crisis in the eighties, Latin America countries have been making determined efforts for over a decade to reform their economies, implement sound economic management, and integrate with the global economy. These efforts redoubled after the Mexican crisis and strengthened further in the wake of the Asian and Russian crises, as external financing dried up and commodity prices slumped. Most Latin American economies have not retreated behind protectionist barriers, nor have they rolled back liberalization measures introduced earlier; instead, they have shown a commitment to act decisively and to carefully adapt their policy stances.
What were the key features of this adaptation? First, and critically important to Latin America’s resilience, has been the progress made by most countries in the region in strengthening their financial systems. The measures adopted have included restructuring bank assets; establishing higher capital requirements; privatizing banks and opening them up to foreign participation; and adopting better risk assessment procedures, disclosure systems and accounting standards. Chile, Argentina, and Brazil have gone very far in this regard. Mexico has recently taken major steps in this direction.
Second, great strides have been made towards improving governance. Not only has participatory democracy spread throughout the region, but greater emphasis is being given to increasing transparency and accountability in government and corporate affairs, simplifying tax regimes and improving tax administration, reducing unproductive government spending, and redirecting expenditures towards basic health, education and essential infrastructure. Unlike Asia, close, non-transparent ties between corporations and governments were not common. Government involvement, where it existed, was overt in the form of direct state ownership. Once the tough political decision to privatize was made, it was easier to ensure a clean break between a corporation and the state. And the operations of corporations are increasingly being held to high standards; Argentina for instance has made strong efforts to bring the securities market, insurance, accounting, and auditing into line with internationally accepted standards.
Similar progress has been observed in many Latin American countries, but—if I may be so bold as to say so from the vantage point of the IMF—I am particularly glad to see that in most of the advances in the region, Chile has been in the forefront in terms of innovation and leadership.
Chile’s notable economic expansion during the 1990s, accompanied by steadily declining inflation, has attested to the sound stance of its economic policies. To solidify these achievements, it has persisted with structural reform—in such areas as privatization, trade liberalization, and pension reform—extending them into a second generation of reforms of education, health, and the legal system. But there are some specific features of Chile’s record that deserve special note, for these have clearly contributed in some measure to its success. I will mention six:
- It has maintained an adequately regulated and thoroughly supervised financial sector, such that the financial sector now has very few nonperforming assets and is capitalized in excess of the Basle minimum capital adequacy standards.
- In the area of governance, where deficiencies were so evident in Asia, Chile has done much to emphasize transparency, accountability, and efficiency in the provision of public services.
- Chile has managed its external debt prudently, especially with respect to its short-term debt exposure.
- Although Chile had long abandoned direct controls on capital outflows, it has regulated short-term capital inflows flexibly, using market-based criteria. In this respect, it has given us all food for thought as we consider measures appropriate for external debt management in the current climate of international financial flows.
- In common with many other countries in the region, Chile was prompt to respond to deteriorating external conditions, by adjustments in its macroeconomic policy stance.
- Finally, there is one other element in every government’s policies that must be kept high on the agenda—social policies. Here too, we may have some lessons to draw from Chile’s experience. Millions of human beings in many countries have suffered severely as a result of the turbulence of the past few years. Chile shows us that the best solution to poverty is growth, and that the most sustainable forms of social protection are well-targeted programs.
I have placed Chile’s performance in the spotlight today, and there are certainly lessons for other countries, in Latin America and elsewhere, to be derived from Chile’s experience. Based on Chile’s performance, which is in many ways exemplary, and on the resistance to the crisis observed in several other countries, it seems not unreasonable to conclude that, although the region faces severe challenges at present, it will emerge from this difficult period ready for stronger growth.
* * * * * What I see emerging from this "trial by fire" is a strengthened region, a region better adapted to globalization and one whose features we can already discern. It will be a region that will have understood that in a globalized world, reform is a never-ending process and not a necessary and painful interval between two periods of calm; a region that preserves its openness and competitiveness, rejecting protectionist temptations; a region that maintains its record of sound macroeconomic policies and its high rates of domestic saving and efficient investment. It will be a region that promotes sound financial systems and an independent private sector that strives for excellence in corporate governance; a region that maintains high standards of public sector governance, transparency, and institutional effectiveness; and a region that applies an orderly strategy to open its capital markets.
And, as a result of these achievements, it will be a region that will be able to combat income inequality effectively and enhance social welfare and environmental protection; a region whose advances will make it increasingly able to help poorer countries—as Chile has so generously begun to do—and to play its part in the emerging new world architecture.
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