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AmericasOctober 2 2005

Global equality begins at home

Ending global poverty is each nation’s responsibility – but the global policies also have to be right, says President Ricardo Lagos of Chile.
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In the past, it was sometimes argued that growth and development were one and the same thing. Today, such a position is no longer tenable. At a global, regional and national level, growth figures give grounds for optimism, but indicators of social development reveal ever greater and more pressing challenges. A political system must be built around social cohesion. Public policies must take advantage of the opportunities afforded by economic growth to ensure greater equity for the most under-privileged members of our societies.

According to the IMF, growth in the world’s emerging economies averaged 5.5% last year, driven partly by strong commodity markets. That was its highest level in 20 years.

In Latin America and the Caribbean, growth also averaged 5.5% last year, ahead of all expectations, but did little for poverty. In our region, 18.6% of the population live in extreme poverty. As the World Bank has pointed out, an estimated 125 million people lack access to drinking water and the figure rises to 200 million for those served by proper sewage services. Moreover, one in seven of the region’s inhabitants still lack access to a modern form of energy supply.

Missing element

The answer to the problems, of course, lies in economic growth, but it must go far beyond the principles set out in the so-called Washington Consensus. In Latin America, we applied those principles and, over two decades, introduced far-reaching macroeconomic reforms, opened our markets to international trade, privatised state enterprises and liberalised capital flows. But there was an element missing – policies to reduce inequality, with the state providing what the market alone is unable to provide in education, healthcare, housing and employment.

Today, Latin America is growing strongly. And the outlook for this year and next is promising, providing us with an opportunity to implement an agenda that seeks to reduce poverty and improve the living conditions of our region’s inhabitants.

Each country must, of course, take responsibility for designing and implementing the appropriate policies. Sensible management, clear goals and consensus medium and long-term policies will serve as a basis for collaborating with others.

Chile has learned that the liberalisation of trade and capital flows results in export growth and opens up an additional source of saving through which to finance new investment. However, it can also increase an economy’s exposure to external shocks.

Benefits undone

Protection of agricultural goods, high tariffs on manufactured goods in which emerging economies have comparative advantages, and the abuse of, for example, anti-dumping measures by developed countries undermine the benefits of trade liberalisation and create uncertainty as regards access to export markets.

This is why the Doha round is so important. If its outcome addresses these problems, it will not only benefit emerging economies but, by deepening their commitment to trade liberalisation, will also be to the advantage of developed economies. Trade liberalisation undoubtedly has costs as well as benefits. And how can we expect a relatively poor country to shoulder those costs if those who would potentially benefit – its exporters – cannot obtain access to markets in the developed countries? It is vital that we use the framework of the WTO to improve trade disciplines and the rules by which trade is governed.

Structural surplus

We know that international capital flows are volatile and, in our economies, this is reflected in cycles of expansion and crisis, which hinder the reduction of poverty. We believe the right road is one that requires political prudence and perseverance. That belief is reflected in Chile’s decision, taken in 2000, to maintain a structural fiscal surplus equivalent to 1% of GDP.

To calculate this central-government structural surplus, we adopted the criteria used by the IMF in developed economies, with a special adjustment to take account of fiscal income from copper. When the international copper price was low, we could, under the fiscal surplus rule, spend as if it were higher. But at times when the price is above the medium-term average, we spend as if it were lower. That requires discipline, but it has served to increase Chile’s international credibility as reflected in its country risk level, which has a direct impact on our ability to implement social policies. The less the government has to pay to service its foreign debt, the more it has available to invest in social policies.

In today’s globalised world, we must not only implement the right policies at home, we must also be assertive and active in seeking the right global conditions.

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