Latin America, Balance and Perspectives, Progress, Difficulties, Challenges

High-Level Expert Group Meeting

27 February 1998

Mexico City, Mexico

Chaired by Miguel de la Madrid Hurtado

1. A high level-expert group meeting on ''Latin America, balance and perspectives, progress, difficulties, and challenges.'' was held in Mexico City on February 27, 1998.

Democracy and "Governability"

2. Progress in democracy has created a severance between democracy and government in several national cases, which holds potentially dangerous implications that democracy is merely superficial and that governments will not change. There is also a widespread feeling that official utterances and public actions do not take into account social needs and that institutions are unable to cope with impunity. Consequently, it is necessary to integrate political "governability," economic competitiveness and social integration as interdependent variables. In order to achieve this goal, the Latin American society must simultaneously increase its capacity for a democratic self-government, improve its economic competitiveness and face up to the main problems regarding social exclusion and poverty. Otherwise the region will face more difficulty in having a presence amongst democratic and modern nations.

3. Latin America, like other non-OECD regions, is going through a process of institutional transformation. Fundamental to the process is not to neglect programs which are actually working but to create what is still lacking. Within this context, it is important to strengthen normatively and operatively market institutions so the market will genuinely function and make progress. With regard to foreign trade, for example, Latin American economies have opened up, but the productive foundation must still be reinforced so that production and trade can be more reconciled and integrated compatibly.

4. A market economy needs the participation of the State to set required rules and guidelines and to create the institutions required by efficiently functioning markets. Furthermore, the State has to overcome market shortcomings, to redistribute income and to combat poverty. Consequently, an adequate balance between State and market is an absolute requirement.

5. Latin America needs to improve democratic institutions, because their prestige has plummeted and has been punished with a whole series of demerit. Institutional improvement is a priority in Latin America. It means making political reforms so that legislative bodies can counterbalance the Executive Power and make the respective legislative process more efficient. Coexistence and obligatory norms should be established for political parties so they can, instead of exacerbating problems, help solve them. In the Latin American experience, political parties have not been able to respond to one of its primary functions -- the interrelation of social demands. Labor unions, in turn, have become anachronistic and lost legitimacy. Political reforms, including a clear and efficient system of sanctions against offending parties that do not abide by terms agreed upon, are likewise indispensable.

6. One of the greatest challenges Latin America has to meet is to combine the legitimacy of origin and the legitimacy of performance in order to guarantee governability.

7. Democratic practices and trials without a critical and controlling basis and disregarding historical experience may lead to ungovernability. Limiting the faculties of the government and giving more power to the legislative branch may lead to excessive "parliamentarianism" and its negative consequences. On the other hand, parliaments lacking effective involvement in the law-making process are prone to rhetorical behavior.

8. The growing importance of the media is a matter of great concern because they only take into consideration the interests of their owners. Consequently their increasing power does not always yield positive results.

9. It is advisable for people in the government to keep an eye on polls, although it is always dangerous to subordinate public action to the changing trends of public opinion, because it shows considerable fickleness and great dependence on media messages.

Growth and Economic Reforms

10. The process of structural changes should be complemented because present strategies have proven insufficient to lead to sustainable and equitable growth. This challenge must be met: to carry out reforms and growth policies, but with due respect to recent achievements in stability terms. It is imperative to undestand how macro and microeconomic factors interact, how macroeconomic consistency restrictions condition each other, and also to comprehend imbalances generated along the reforming process and the consequential changes in the productive groundwork.

11. The worldwide concept of developing policies must be changed, because Latin American problems cannot be separated from those of the rest of the globe. In this context, the revision of the function of international organisms carries great importance. In the contribution of the effort to renew governments and societies, international institutions show obvious deficiencies regarding problems under their care.

12. It is indispensable to arrive at long-term consensus formulas assigning responsibilities to all concerned, because no single country can have everything. This means recognizing the complementarity of all economies.

13. Internal shocks arising from changes in economic policies of the most important countries or in the world economy directly affect Latin American economies. This means that governments must face deeply assailable situations in order to create and apply suitable policies to neutralize adverse effects. Governments cannot, but take appropriate measures doing their best to avoid isolation.

14. During the 1980s and 90s a world-wide change came about which inevitably had an influence on Latin America. The transformation process in the region cannot come overnight. Consequently, Latin America is experiencing the benefits and also the cost of the said structural change.

15. In many countries, the privatization process has not brought about a deep transformation, because this is a complex task that is supposed to conciliate real -- some times opposing -- objectives. Nevertheless, the basic questions to be considered are social equity and efficiency.

16. There is no conflict between growth and equity, provided economic policy bolsters complementary areas between one and the other; namely, maintaining macroconomic balance within tolerable margins, investment in human resources, policies seeking increased and sustained productive employment, rapid and massive technological know-how.

17. It is necessary to put into practice wide and carefully planned financial deregulation measures that will allow the adaptation of national economies to the dynamics of financial globalization. This raises the need to reinforce financial systems in order to have solvent and efficient financial organizations. In this manner, financial deregulation complements organized financial development. The answer to the question "does capital control make sense?" is far from simple, because the globalization of finances and of the movements of capital affects Latin American countries regardless of controls. At any rate, the answer is affirmative, especially where short-term speculative capitals are concerned.

18. It is to be desired that Latin American central banks study ways to reduce the region's financial vulnerability, and that they create mechanisms to furnish operational content.

International Insertion and Competitiviness

19. Transformations in the world economy affect Latin America because of the economic interdependence we now live in, which presses governments to obtain, simultaneously, the permanent arrival of capital, macroeconomic stability, competitive exchange rates and the strengthening of the saving-and-investment process. Although it is true that vulnerability is in proportion to the risk that sovereign governments take, it is also true that little can be done with the decisions that other countries take to protect themselves, or in view of the dynamics of the world economy.

20. The Asian crisis puts before Latin America external imbalances and their destabilizing danger. It is a clear warning that fiscal austerity is a need that is here to stay, and that it is the way to neutralize, at least in part, the effect of internal shocks. For the present year, the impact of the Asian crisis through the fall of natural resources and energy prices, and consequently on its internal sector, will increase the vulnerability in Latin America with regard to the volatile international capital markets. The external financing requirements in Latin America for 1998 are expected to be in the neighborhood of l00 billion dollars, or 25 percent more than in 1997. It will not be easy to obtain them.

21. Financial speculation affects the real economy and is linked to phenomena regarding the solidity or deterioration of national economies. Even solid economies and fine administration can be affected by a financial turbulence. It is not possible to remain completely isolated from the effect of such a turbulence, although a high level of internal savings and international reserves, fiscal austerity, avoidance of outdated exchange rates and, in particular, rigorous regulation and supervision are proven key elements to reduce vulnerability when financial turbulence crops up.

22. Even though Latin America is now better prepared to defend itself against external factors, such as the current Asian crisis, or, in the 1980s, the debt crisis, this is not enough. However, lessons learned from the the Mexican crisis in 1994 diminished the impact of the new crisis in 1997-98.

23. Regional integration is important and should be strengthened in order to define joint positions. If Latin America is united, we can obtain more. This way, Latin America would be able to handle with increased efficiency its international insertion, a goal already reached by some countries. Among the various integration initiatives now undergoing a consolidation process in Latin America, five are particularly important because of the great weight of the economies involved: the free trade agreement (NAFTA) signed by the United States, Mexico and Canada, Mercosur, the Andean Pact, Common Central American Market (Mercado Común Centroamericano or MCCA) and the Caribbean Community (Comunidad del Caribe, CARICOM). Participation in trade blocs has repercussions on the development of productive sectors. In view of the hazardous fragmentation of economic spaces considered desirable, attention has been given to the need to structure subsystems or economic spaces. The structural format frequently proposed for the region could be called mutual convergence, in view of the way subregional economic spaces are formed.

24. Inside Latin America, it is necessary to go deeper into intercountry relations. What is going to happen to countries which have not as yet integrated?

25. Latin American competitiveness has decreased, which makes the region vulnerable, especially in the case of "one-product countries." This must be corrected through the diversification of exports, product by product and market by market. Competitiveness based on low wages, or in ecological deterioration, which only yields one-time benefits, should be rejected as pseudocompetitiveness or spurious competitiveness.

Productive Transformations and Technical Progress

26. Productive transformations are nowadays concentrated on the promotion of competitivenes in the context of open economies, but they have weak points as far as the treatment of sectoral aspects and fostering small or medium-sized industry are concerned. This makes it necessary to formulate productive encouragement policies linked to internationalization and to export orientation.

27. Foreign investment complements national efforts, and its associated technological content should not be underestimated. It increases the capacity of industrial and technological know-how, as the basis for indigenous innovation and dynamic increase of international competitiveness. On the other hand, national savings are decisive for the generation of investments required by the productive transformation process.

28. Latin American manufacturing industries have undergone various transformations in the last few inars. Performance in the export field has been favorable, but growth in production and of investments has been slow, considering the weak recovery of internal demand and the increase of external competition. Consequently, it is indispensable to continue promoting exports, adding new products and exploring new markets. It is likewise important to increase competitiveness in the internal market, which still is the main demand factor for the industry of the region.

29. The farming sector (cattle and crop raising) has fallen behind considerably, and this situation demands productive reconversion, regarding modification of crops and areas under cultivation, and the incorporation of profitable technology.

Human Resources, Poverty, Inequality

30. The creation of physical infrastructure, as basis for development, is essential; but basic education is likewise essential to improve the quality of human capital that buttreses development. No country can be competitive or equitable if it does not assign proper teaching and training to its human resources. Education has become a fundamental element of the modernization process, because in view of the changes the production system has gone through and all the corresponding challenges, Latin America will have to live up to its capacity for adaptation, greatly improving the education system.

31. Latin America gives top priority to matters regarding macroeconomics and neglect social policy priorities. This makes more acute the imbalance between income and wealth, which may lead to disorders affecting previous achievements. Social imbalances cannot go on indefinitely.

32. Latin America must create demandable social rights as a redistributive and social cohesion measure.

33. Inequality and poverty levels have not decreased. Social compensation policies have, so far, been limitedly effective. Social outlays have been curtailed by measures meant to achieve budgetary discipline, and the application of social policies has not been sufficiently renewed.

34. The demographic problem is still very serious. There are countries -- especially in South America -- which have substantially reduced population growth. Other countries -- such as Mexico and Central American nations -- have not reached that goal. The former has established with good results moderation programs and, on the other hand, their demographic growth has been traditionally slow. In general, the problem arises from the fact that even when there is real progress, population-growth rates are high when compared to employment possibilities and social service coverage.

35. Fairness cannot be reduced to fighting against poverty. The main goal is to avoid inequality in order to arrive at "all embracing societies."

Looking Ahead

36. In practice, financial interests, macroeconomics and short-term benefits take precedence over environmental problems. But the truth is that the environment, the space we inhabit now and will inhabit in the future, is supremely important both globally and regionally. Most regional economic analyses say almost nothing about the environment and natural resources; they barely touch on environmental quality with regard to population centers and the fluctuations in the availability of natural resources (especially renewable resources) despite their crucial importance for regional development options. Moderate incorporation to technical progress, intensified world trade, and deterioration of the price of regional products in international markets have increased the pressure on natural resources. Adding demographic growth and increased internal demand to the foregoing facts, one arrives at the conclusion that development strategies, in practice, hardly take into consideration the environment and natural resources.

37. Crises in South America affect countries in North America. That is the reason why long-term trends must be examined from a global viewpoint. Starting from this point, what is required to avoid regional imbalance should jointly be defined.

38. Sustainable development, by meeting of present needs but without endangering the capacity of future generations to satisfy their own needs, must be considered. Building on this ground, changes in development policy must be brought about.

39. Real economy requires careful consideration: macroeconomic analyses are not enough when planning is concerned. Sectoral analyses of national economies are indispensable, covering the steel, mining, petrochemical and automobile industries, among others, as well as subcontractors ("maquila"). Similarly, it must be remembered that small- and medium-sized industries absorb most of the available labor force. These analyses are essential for structuring productivity policies in the context of open economies. The same applies to closer cooperation between the public and the private sectors when consensual decisions are concerned; to the strengthening of social security and health systems; to savings and pensions having a redistributive function; to the interrelation between national and multinational enterprises as a consequence of interrelations at a worldwide production level.

40. Foreign debt is no longer considered a problem, due to policy changes and progress already made. But several sequels of the crisis have not as yet been overcome, because interest payments are still an obstacle that precludes applying resources to real economic growth, particularly in the case of relatively smaller economies.

41. At present, privileged attention is given to short-term problems, to the detriment of long-term ones. Consequently, consensual strategic planning, answering basic questions asked by public opinion, falls in the sine qua non category.