Since the mid-1980s, most Latin American countries have implemented ambitious reform programmes – mainly in response to the disappointing results of import substitution-based industrialisation strategies and unsustainable macroeconomic policies. As a result, the region has made notable progress during the past two decades in achieving macroeconomic stability, greater openness to trade and capital flows and a marked reduction of distortions in the pricing system. At the same time, through privatisation of state-owned enterprises and other policy instruments, the private sector’s sphere of influence has been substantially expanded. It is noteworthy that during this period democracy has been considerably strengthened, leaving behind memories of the series of authoritarian governments that prevailed in the region in previous decades.
Despite these significant advances, the region has not been able to sustain high rates of economic growth, which are crucial to resolve social issues in a sustainable manner. Furthermore, Latin America has lost relative economic importance in comparison to other regions in the world, including the emerging economies in Central Europe and Asia, as demonstrated by marked differences in economic and social indicators. Such insufficient growth has resulted in the deterioration of social conditions: poverty has increased in most countries and income distribution remains the most unequal in the world. In this context, there is reform fatigue and a growing disillusionment with democracy and the market economy.
Pragmatism over ideology
All these elements have encouraged a strong debate concerning the effectiveness of the reforms undertaken over the past 20 years. Lines have been drawn between those who consider that Latin America adopted the wrong approach – influenced by multilateral institutions – and those who deem them to have been appropriate but incomplete or inadequately applied. No doubt the slowdown in the world economy and the deterioration of the external environment in the late 1990s – which included severe external shocks to many developing countries – affected the potential impact that the reforms could have had on growth. In addition, weak institutions, political instability, inconsistent or fragmented policies and lack of continuity in the reform process are significant factors that also need to be taken into account.
At this juncture, it is not important to continue looking for scapegoats, but to draw lessons from the past to build a constructive, less ideological and more pragmatic platform for a renewed development agenda. In addition to the need for a more symmetric environment in trade, financing and other international issues, there are at least three aspects that should be emphasised.
First is the need to conceive a comprehensive long-term strategy, in which stability, efficiency and equity objectives are simultaneously considered. In this context, the reduction of poverty and inequality should not be viewed as a spill over process, a consequence of growth, but rather as a concomitant and simultaneous process.
Second is the need to attain an adequate balance between market forces and government intervention that takes into account country differences, the existing degree of competition, institutional capacities, social priorities, externalities and, especially, fiscal, financial and other macroeconomic constraints.
And third is the need to create the conditions of trust and co-operation to build up social support for a long-term agenda, through which all relevant stakeholders can reach a basic consensus on the fundamental pillars to support a sustainable development process.
Sustaining quality growth
Latin America’s strong economic recovery in 2004 and its positive outlook for 2005-2006 present an opportunity to push forward a renewed development agenda to reduce poverty and improve social conditions in the region, for which high and sustained quality growth is the fundamental pillar. Central to this objective are higher investment and productivity levels for the expansion of Latin America’s presence in world markets. The improvement of its competitive standing through a diversification strategy, anchored on the sectors in which the region enjoys comparative advantage, is also fundamental.
In addition to ensuring macroeconomic stability, this agenda requires the development of an efficient and transparent institutional framework, improving the coverage and quality of infrastructure, investing in improving the quality of human capital and fostering innovation. Higher saving rates, the development of domestic capital markets and attracting foreign direct investment are also essential drivers to promote domestic investment, productivity and technological transfer.
Moreover, this growth-oriented agenda can only be successful if its benefits are well distributed and socially inclusive, and its risks are adequately managed. Explicit and more efficient social policies need to be implemented to create employment and other opportunities for the poor and excluded, and to enhance their voice and participation in the political process. A socially inclusive strategy should be based on improving rural infrastructure; the creation of opportunities (through access to property and by providing micro-financial services and credit to small and medium-sized enterprises); the strengthening and preservation of social safety nets; the establishment of countercyclical funds to mitigate the impact of economic downturns; and the adoption of medium and long-term policies to strengthen human and social capital.
Political viability and consensus building
The discredit of the political class, the dwindling confidence in public institutions, the disillusionment with the market economy – despite a halfhearted acknowledgement that there is a lack of alternatives – and the problems of social exclusion, all highlight the need to build a consensus platform that will guarantee an environment of political stability and democratic governance. Such a platform would not only result in greater economic development, but would also ensure the future viability of any process of reform and structural change aimed at recovering sustained economic growth.
Although sound democratic governance involves a multiplicity of parameters, two elements in particular are essential: on the one hand, voice, participation and accountability and, on the other, intermediation between the state and society. Concerning the former, political decentralisation processes and private participation mechanisms should be promoted as key instruments for ensuring fuller coverage of the needs of citizens and greater accountability. As for the latter, it is necessary to resolve the crisis of representation by reinstating political parties as intermediaries between the state and society. As shown in recent years, fragmented civil society organisations are not an effective instrument for this purpose.
Furthermore, the region needs to reform its institutions to improve the situation of property rights and contract enforceability. Corruption must be tackled in a comprehensive way, including measures to ensure law enforcement and judiciary reform, and to improve the quality of civil service and corporate governance. Although much has been accomplished toward ensuring the exercise of political rights over a large part of the region, appropriate checks and balances, accountability and transparency need to be sustained.
The political viability of any long-term development strategy also depends on the lasting nature of the reforms to be undertaken. Public policy changes will be lasting if a sufficiently large group of agents is firmly convinced that they constitute a better system – one that is more legitimate and is more beneficial to them. If the necessary resources can be obtained and the rules can be enforced for a sufficiently long period of time, the participants will begin to feel the effects of the new system.
A critical mass will be formed, with potential for political mobilisation. This will reduce pressures to reverse policies, return to the previous status quo or the temptation to try new schemes periodically.
In sum, restoring and maintaining high-quality growth, together with stability and equity, are essential to improving the living conditions of the poor and excluded. This requires joint efforts by all agents of society within the framework of a long-term agenda. Moreover, strengthening democratic institutions and social capital to build the necessary trust is an essential prerequisite. External support should be viewed as a complement and not as a substitute in this endeavour. In this regard, as a multilateral financial institution, Corporación Andina de Fomento is committed to supporting Latin America in implementing a renewed reform agenda that reconciles the objectives of stability, efficiency and equity.
