Latin America’s Tendency to “Tolerate Inadequacy” Hinders Reform

When Enrique V. Iglesias looks at the present state of the economies of Latin American nations, he views them with decidedly mixed feelings. “The glass is forever half full and half empty,” the president of the Inter-American Development Bank told an audience at the Latin American Conference, part of Wharton’s 2001 Global Business Forum on December 1. “No one who lived through the 1980s in Latin America would ever want to go back to that. But we have lots of things that still must be done.”

The Inter-American Development Bank (IDB), which Iglesias has headed for 13 years, is the primary source of financing for a variety of development projects in Latin America. In its 40 years, the IDB, headquartered in Washington, D.C., has lent more than $106 billion for everything from the building of schools and hospitals to agricultural projects, road construction and telecommunications infrastructure.

When Iglesias arrived at IDB, Latin American economies were generally in turmoil, he said, a situation caused by what he called the Latin American tendency to tolerate inadequacies. “There was a toleration of instability, of lack of discipline on the part of central banks, which led to a severe run-up of inflation,” he said.

“Then there was a general tolerance of inefficiency, especially in trade,” he added. “One of the best indices that I can give you is that in the 1950s, Latin America had 10% of world trade. By the 1980s, that was down to 3%. We tolerated the inefficiencies of our markets too long.”

Finally, he said, there was a toleration of inequality. “Latin America became a completely unequal region. The degree of poverty is staggering. Perhaps 36-38% of the area’s people live in poverty. If we have 500 million people, that’s 200 million poor. That is intolerable.

“It was a lost decade for Latin America. Politically, there were still dictatorships. Socially, there were these problems of education and poverty. And economically, by 1990, the per capita income in many countries was lower than it had been in the 1970s.”

The debt crisis of the 1990s eventually brought about the need to get serious reform going in the region. Iglesias said reform rested on what he called three pillars. The first was the move of central banks in most countries to crack down on inflation. The second of his pillars was the decision of Latin America to reconnect with the rest of the world by joining treaties such as GATT and lowering tariffs. Third and most important among the pillars, he said, was the reduction in the size of the state, helped in part by the spread of democracy throughout the region. It was a vitally important development.

“Now we can get on with the reforms of the second generation, things like transportation improvements and more financial reforms and better social security,” Iglesias said. “But that is what I mean by the glass being only half-full. There are a number of problems that are deep in Latin America.

“While three percent growth seems pretty good in some places, it is really not very high,” he noted. Latin American countries in general have low savings rates and their exports have dwindled precipitously. Mexico, for example, because of its link to the United States, exports twice as much as Brazil and Argentina, the two largest South American nations, combined. “But what is bad is that it goes from zero percent growth one year to four percent in another and one percent in the next. That volatility is not good for investment.”

Particularly disturbing for the long run, according to Iglesias, is Latin America’s dependence on commodities and raw materials for exports. Those raw materials exports are based too much on short-term whims of the market; when slowdowns occur within various regions of the world, that can cause chaos in the Latin American economy.

Iglesias is worried about social issues as well, and feels they can bear as directly on the economy as any central bank action. “We have political weakness in Latin America. The democracies we have are better than what we had before” and government has shrunk its role in many economies, but that is only a small part of the problem. “People tend to talk about the state of government as being too big or too small, but what they should be talking about is how efficient it is … We are still not very efficient in most of Latin America,” he said.

Education, too, has fallen woefully behind in the region. “In the 1970s, we were educating kids at the same rate as Korea and Thailand. It was not impressive – we would average three years of school – but it was moving forward,” he said. Now, while children in Korea and Thailand attend school on average for 12 years, Latin American nations are only sending children to five years of school. “This results in a lack of technologies in the end. And that means a lack of flexibility in the work force.

“We definitely have to work on the efficient quality of expenditures,” Iglesias noted. “We need education, housing, hospitals. We need to cut down on governmental corruption. We have to integrate our economies more with the United States, Canada, the European Union. We have to convince our private sector actors to become less insular, less protectionist. There are still too many suspicions on all sides.