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I would like to thank the Council of the Americas and the Carnegie Endowment for International Peace for hosting me today. The international financial community will travel to Lima, Peru, in mid-October for the 2016 Annual Meetings of the IMF and the World Bank. Secretary Lew plans to also participate in a meeting of the Western Hemisphere’s finance ministers to discuss the region’s economic prospects.
The Lima meetings will bring to the world’s attention the major accomplishments that many countries in the region have made toward shared prosperity, as well as the very significant policy challenges that Latin American and Caribbean economies now face. The steep declines in many emerging-market asset prices over the last week have demonstrated that it is a difficult time to be an emerging market, and that Latin America is bearing its share of the adjustment. As we prepare to visit Lima, I would like to share with you my views on the key economic challenges that our neighbors face, and how Treasury looks to be a partner.
Treasury’s Engagement
In recent years, we have seen a maturing of the relationship between the United States and Latin America and the Caribbean. President Obama has approached the region with a sense of partnership. And I can say that Treasury’s engagement with the region’s leading economic policymakers – officials such as Secretary Luis Videgaray in Mexico, Minister Joaquim Levy in Brazil, and Minister Mauricio Cárdenas in Colombia – has underscored the high benchmark for policymaking in emerging markets.
The ongoing U.S. economic recovery highlights the value of two-way partnership between the United States and the region. Those countries that are well positioned to benefit from trade and investment opportunities with the U.S. private sector will reap dividends. More broadly, we want to see governments in Latin America and the Caribbean embracing policy reforms that will enable their citizens to compete in the global market.
Engagement with the region is a priority. Secretary Lew has traveled to Mexico and Brazil. I myself travel to the region as often as I am able, having over the past year visited Brazil, Chile, Colombia, and Mexico, and am looking forward to Lima. Treasury also maintains a sustained presence in the region, with technical assistance programs in fourteen countries. Our advisors are working to strengthen capabilities in mobilizing domestic revenues, budget planning and execution, debt management and market development, infrastructure finance, promoting financial inclusion, and combating financial crimes. We are there to support governments that are committed to strong reforms, such as in Paraguay. And we will be there over the long haul to support governance reforms in countries that own their reform agenda and seek our help. The United States has a special stake in the success of our neighbors.
Successes of Economic Management
It is clear that the era of ever-increasing demand for the region’s commodities has reached an end. The adverse demand shock absorbed by Latin America over the last year has been massive, with a corresponding impact on investment. Economic growth rates, and potential growth rates, have been falling. The current consensus forecast is for Latin America’s economy to contract slightly this year, and to grow less than one percent next year.
But it is worth taking a step back and reflecting on just how far the region has come since the instability of past decades. We have witnessed remarkable improvement in the macroeconomic frameworks in many of the countries in the region. Many policymakers internalized the lessons of past crises, and have worked to put in place the policies necessary to foster stability and resilience to shocks.
First, especially given the history of Latin America, it is hard to overstate the accomplishment of having achieved low and stable inflation in much of the region. Central banks in many previously crisis-prone countries have earned credibility, and are invested in maintaining it.
Second, the region has benefited from the broad adoption of flexible exchange rates. Many countries have been able to lean on large exchange rate adjustments to absorb the impact of external shocks and help adjust the drivers of growth, while ample foreign exchange reserves provide reassurance to investors. This flexibility will be particularly critical in the current global environment to help commodity-dependent countries diversify their economies.
Third, the region has made significant advances in promoting financial stability, and banks throughout the region are generally better capitalized and have built stronger balance sheets. In the past, the currency depreciations that we have seen over the past year could have threatened financial stability in the region, but to date we have not seen such risks materialize. Supervisors and financial institutions are now more attuned to avoiding currency mismatches. Financing sources have also become more diversified, with many sovereigns and corporates now able to borrow in their own currency.
Fourth, fiscal policy, broadly speaking, has become more disciplined. A number of countries have explicitly adopted fiscal rules appropriate for open emerging markets, while still allowing flexibility to counter shocks. Improved financial management practices have seen countries like Mexico and Jamaica using financial hedges against volatility in oil prices. With support from the United States and other partners, Caribbean and Central American countries are using innovative insurance products to hedge against natural disasters, such as that recently experienced by Dominica.
While many countries in the region have significantly improved their macroeconomic management along these lines, there are still several exceptions. Countries that have done the least to strengthen the fundamentals of their economies are those currently facing the highest inflation rates and the tightest financing constraints.
Disappointing Growth and Productivity Gains
Unfortunately, even for the best managed economies in the region, growth has consistently fallen short of aspirations. During most of the past 20 years, including the boom period of the last decade, growth in Latin America has lagged other major developing regions. Since 1995, for example, average growth in Latin America has been less than half that in developing Asia. This result in many cases has come despite the significant efforts of policymakers, as earlier reforms – while cushioning against shocks – have not fueled the acceleration and broadening of growth to the extent desired. Periods of booming global commodity demand may mask this reality, but the reversion to lower growth trends following the booms starkly frames the challenge.
Looking more closely, while there has been great progress in macroeconomic management, there are a number of structural challenges in the region that appear to be weighing on growth. For example, many countries in the region have dramatically opened themselves to the global economy, including through significant tariff reductions. Yet international trade relative to GDP remains relatively low. Moreover, raw materials, with limited value-added, continue to account for a large share of the region’s exports. Intra-regional trade dramatically lags other parts of the world, despite the spread of regional FTAs, customs unions, and common markets.
Countries also have relaxed restrictions on foreign investment. By 2014, the stock of FDI in the region was equal to roughly a third of regional GDP – this share is almost four times larger than in 1990 and exceeds the current share in developing and newly industrialized Asia. This FDI, however, is disproportionately in the commodity sector, and much of the region remains relatively disconnected from the high value-added supply chains that have propelled growth in Asia.
As a related issue, the region also suffers from a low level of domestic savings, with a correspondingly inadequate level of overall investment at around 20 percent of GDP. One feature over time has been the development of a sizable infrastructure deficit. Investment in innovation also lags, with spending on research and development less than half that recorded in developing East Asia or the advanced economies.
An important implication of these structural features of Latin American economies is that productivity growth has been persistently low, again lagging the experience of developing Asia. Addressing such obstacles to growth remains an urgent need, and it will require concerted efforts on the part of policymakers. In an environment in which global growth is falling short of expectations – and the growth of global trade by even more – countries will not be able to rely on external demand as the solution.
Common Challenges but Great Diversity
The remarkable progress and notable challenges I have described can be seen in richer detail in economies throughout the region, though each has its own unique story.
Of course I will begin with our immediate neighbor. Prosperity in Mexico is strongly in the U.S. interest, for our economy and our national security. We are very supportive of the historic reforms put in place by President Peña Nieto and Secretary Videgaray to increase productivity, improve fiscal sustainability, and attract foreign investment.
Mexico and the United States are working today to deepen the connectivity of our two economies, for example by facilitating both commercial and financial flows. Through these efforts, we are creating opportunities for dynamic firms and workers in both of our countries to develop globally competitive supply chains. I was recently in Mexico City, where I met a Mexican entrepreneur who is deploying latest generation technology in small-scale oil fields in Texas. Mexico’s sustained reforms, and its continued solid economic management, are positioning the economy to contribute to and benefit from stronger U.S. growth.
Still, as the cover of The Economist this week reminds us, Mexico continues to face the challenges of integrating more of its population into the modern, formal economy, while moving forcefully to tackle crime and security issues, and to improve governance at all levels.
Turning to Brazil, Finance Minister Levy and the economic team are undertaking a tremendously difficult adjustment. Brazil faces fundamental questions about the role of the state and the affordability of entitlements. Our message to Brazil is not to lose resolve, and to remain focused on laying the groundwork for the Brazilian middle class to realize its aspirations. Ongoing investigations of economic crime in Brazil have revealed corruption that is a tax on all Brazilians. The silver lining is that Brazil’s institutions are proving to be sound. In the medium term, Brazil should emerge a stronger and more dynamic economy.
Also notable has been the development of the Pacific Alliance, as Mexico, Colombia, Chile, and Peru have created a brand of deeper economic integration, strong institutions, and openness to pan-Pacific trade and investment. We are open to broadening discussions with these countries on issues such as infrastructure financing and financial intelligence.
In Central America, migration has been driven by a complex set of factors, including lack of economic opportunity and security concerns. Addressing these issues will require sustained and focused effort – there need to be jobs for new workers, and people need to feel safe on the way to work or school. Pursuing economic integration with more vigor would allow these countries to take better advantage of economies of scale and proximity to North American value chains.
Let me also recognize the work of the President of the Inter-American Development Bank, Luis Alberto Moreno, whose leadership in the Northern Triangle has been and will continue to be a critical part of a successful strategy. Through his personal association with Plan Colombia, he understands deeply that, while foreign assistance is necessary, countries need to own strong policies to improve governance, security, and economic opportunity.
Venezuela has the largest proven oil reserves in the world, yet its economy was in sharp decline well before the fall in oil prices last year. It is clear that policy – not lack of resources – is the problem. A good place to start would be for Venezuela to honor its obligation to the IMF to permit surveillance through Article IV missions, which Venezuela has not done since 2004.
I also note that Jamaica is performing admirably under its IMF program, and deserves the support of the international community.
Finally, the historic visit of Pope Francis this week highlights that the United States has a new platform for diplomatic engagement to advance our long-held objectives for political and economic reform in Cuba. We encourage the Cuban government to move forward with reforms to increase economic opportunity for its people and provide the conditions to build a democratic, prosperous, and stable Cuba.
An Agenda for Working Together
All of this brings us to the important question of what we – the United States and economies in Latin America – can do together.
One area that needs to be part of Latin America’s growth agenda is an increased focus on investment, in both physical and human capital. Reducing the region’s infrastructure deficit should be one key part of this effort. Several countries are prioritizing plans to promote national and regional connectivity, including major efforts to mobilize private capital.
Treasury staff have informally canvassed some U.S. firms on what would be necessary to increase U.S. private sector investment in infrastructure in Latin America and the Caribbean. As you might expect, there is not a single answer. In some cases, our firms may not have the local knowledge to compete, or they may simply seek a less risky financial return in U.S. dollars. But a common theme has been the need for open lines of communication between governments in the region and foreign investors.
Another impediment cited by our firms was a lack of transparency, given their need to comply with the Foreign Corrupt Practices Act. While such concerns are in no way unique to Latin America, a number of countries in the region must tackle corrupt practices and ensure a level playing field for all potential investors, including dynamic domestic entrepreneurs.
When it comes to investing in people, it remains the case that the region’s human resources are underutilized. It clearly is not for lack of talent. For example, I recently gave a talk to economics undergraduates in Bogota, and I was highly impressed with the sophistication of the students’ questions, fortunately for me delivered in excellent English. While many countries have improved access to education, much work still needs to be done on raising standards.
Finally, a 21st century trade agenda remains essential to our joint efforts to promote prosperity. We are working to secure a final Trans-Pacific Partnership agreement (TPP) that fosters stronger economic growth in the United States and in our partner countries, and we are pleased to have three countries from Latin America participating. This agreement aims to establish an open architecture that welcomes potential entrants from the region in the future if they are willing to meet the high standards of the agreement.
The list above is not intended to be exhaustive, but there is a clear set of challenges facing the region, and standing still is not an option. Treasury looks forward to collaborating with policymakers in the region to secure important advances in reducing poverty and inequality, and in building the strong middle-class societies that are essential for prosperity at home and abroad.
Thank you. I look forward to your questions.
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