Q: What has the Inter-American Development Bank (IDB) learned since its inception more than 50 years ago, and what are its ambitions for Latin America and the Caribbean for the next 50 years?
A: Over the past 50 years, the bank has supported the region's development. Although there has been visible progress both in the economic and social fronts, there are still major challenges for the region in the years ahead. The most immediate one is to recover from the effects of the current international financial crisis.
Looking to the future, Latin America and the Caribbean is still the most socially inequitable region in the world, which creates obstacles to faster growth, more sustainable poverty reduction and greater social inclusion, particularly for women and indigenous groups. Integration into the world economy is uneven and the trade performance in the region is lacklustre when compared with those of developing countries in Asia and the Pacific.
So for the years to come, development in the region will have to have two key components: reduce poverty and inequality, and achieve sustainable growth by broadening the economic base to improve the living standards of its citizens.
Q: After a global financial crisis and wide-reaching economic turmoil, some are wondering if the world is now slowly recovering. What are your views on the current situation in Latin America and the Caribbean?
A: Latin America and the Caribbean have done extremely well in averting a meltdown during the global financial crisis, thanks to better financial regulation and responsible macroeconomic policies. Still, the economic slowdown triggered by the crisis will have long-lasting effects on the region's economic performance. The world economy is slowly starting to grow again but the road ahead, though better, continues to be difficult. Recovery will be very unbalanced between the large emerging economies and the convalescent developed ones.
While this imbalance will create pressures on commodity markets from world demand, stimulated particularly by China, industrial goods will suffer from oversupply and remittances and tourism will remain below their peak levels of previous years. Under this scenario, fiscal policies will have to be conservative and monetary practice will have to be carefully managed. Lax monetary policy can lead to overheating and inflation, while extremely high interest rates can attract a flood of foreign capital that can lead to a currency appreciation and hurt the export sector.
Commodity-exporting countries in the region will cope best under this scenario, especially the most diversified, as will those that can rapidly jump onto the export train of fuel and mining products. In contrast, the small countries more dependent on remittances and tourism, particularly those in central America and the Caribbean, will experience low growth rates. These regions will need the IDB more than ever to protect key investments in health, education and infrastructure, for example.
Q: Some of the markets present interesting growth prospects, but much still needs to be done - such as improving infrastructure. On which areas will the IDB focus its efforts in the coming years?
A: Alongside the overarching objectives of reducing poverty and inequality and achieving sustainable growth, the bank will also focus on two strategic goals that build on its comparative advantages and are essential to it achieving its corporate mission: to foster development through the private sector and address the special needs of the less developed and smaller countries.
In this last category, I would like to note that the IDB will be heavily involved in the reconstruction of Haiti. We are already working very closely with donors and other development agencies to help the country and its government. The IDB has a lot to contribute in terms of expertise: we are the biggest multilateral investor in that country, with several ongoing projects in infrastructure and private sector development.
Q: If trade and trade financing were part of the key issues in the past year, servicing the wide unbanked population seems to be the growing concern for Latin American banks. What do you think will be the contribution of microfinance and other financial inclusion products to the local economies?
A: Microfinance allows small companies and entrepreneurs to develop and plan their businesses under a medium- and long-term horizon. Since only about 15% of very small companies (most commonly known as microenterprises) in the region have access to financial services, several entrepreneurs have to rely on very short-term and extremely expensive credit to run their business. That is bad for the economy because it diverts scarce resources that would allow them to make their products or services better. In the end it hurts the capacity of small companies in investing and creating new jobs.
With microfinance, for example, this cycle can be reversed. Entrepreneurs can get loans with a maturity period of up to a year with a reasonable interest rate. So instead of thinking in days or weeks, such business people can plan over a period of months, giving them time and the resources to organise their investment.
Q: What do you think are the main challenges that banks need to overcome when tackling financial inclusion?
A: The biggest challenge is to change their institutional culture. Traditional banks and loan officers working at branches are used to dealing with a customer who is usually knowledgeable about basic finance and goes to the bank. Information about their business is easy to find through tax records and credit rating agencies, for example. In order to tap into the unbanked population, traditional banks will have to change the way they communicate and relate to customers. They have to actively look and go where the client is.
Microfinance institutions have been very successful because they are able to translate complex financial issues to their customers and they deal with them on a very personal basis. It is the classic example of relationship banking. They really have to know their customers in order to understand their business and financial needs since a lot of information is not available through the traditional channels.
Despite such challenges, banks are using technology and alliances with non-financial institutions to offer financial services to the unbanked. These are not necessarily loans but other arrangements where scale and technology play a major role. In Brazil, banks have teamed up with supermarket chains to allow customers to pay utility bills electronically. These are interesting trends that have emerged in recent years, which are contributing to greater financial inclusion.
The IDB is also supporting the use of technology to promote financial inclusion. The bank has been financing projects to offer banking services though mobile phones in Colombia, Jamaica and Peru. In addition, last year, the Multilateral Investment Fund, an autonomous fund of the IDB, approved a $3.95m grant for a programme to promote innovative technology solutions that expand access to financial services in the region.
Haiti: The IDB will play an instrumental role in the redevelopment of the country
Q: How can Latin America contribute to the world's climate change agenda?
A: The region can make several important contributions. First, although it already gets more energy from renewable sources than almost any other part of the planet, there is considerable room for expansion. For example, about 67% of all electricity in Latin America comes from hydroelectric sources, but the region has tapped only one-third of its total hydroelectric potential. Brazil is the world's second largest producer of efficient sugar-cane ethanol, but it could double its current production by using under-utilised agricultural land. Countries such as Chile, Argentina and Mexico also have enormous solar and wind power potential that is just starting to be exploited.
A second area where Latin America can contribute is by protecting forests that serve as carbon sinks. Brazil has made considerable progress in this area, and several other countries with extensive forests are moving in that direction. Still, a lot more can be done to avoid deforestation while creating economic opportunities for local communities.
Finally, Latin America has barely begun to invest in energy efficiency - an area that has dramatically reduced energy consumption in the industrialised countries. The IDB estimates that Latin America and the Caribbean could collectively cut energy consumption by 10% over the next decade by investing in widely available technologies. And the cost of these efficiency improvements would be far lower than building additional energy capacity to keep up with forecast demand.
Q: What strategies is the IDB developing to increase its financial muscle and strengthen its countercyclical role?
A: The IDB has been reviewing over the past 12 months, at the request of the board of governors, its resource requirements. This review has identified the need for the institution to expand its capital base and concessional window to address the needs of our region for the next decade.
The main risk of not strengthening the bank's financial base is that we may be forced to reduce lending to Latin America and the Caribbean when recovery from the international financial crisis is still well under way and when development needs are increasing as a result of globalisation and climate change. This risk is especially acute for less developed countries in the region that may be faced with additional risks in the areas of food security and natural disasters.
As this crisis has shown, the IDB's resources to maintain essential investments in social programmes have been the main drivers of the increased demand from the borrowing members during the crisis. This countercyclical capacity was achieved through extraordinary measures that leveraged the existing bank resources, but have weakened our ability to provide continued support at the needed levels, and have pinpointed the constraints in addressing countercyclical needs within the existing capital base.
