Press Release No. 08/102

Press Release: IMF Managing Director Strauss-Kahn Calls for Policies to Sustain Latin America's Achievements

May 7, 2008

Managing Director Dominique Strauss-Kahn of the International Monetary Fund (IMF), speaking at the Council of the Americas today, welcomed the impressive economic achievements of the last decade in Latin America but also called for action both from the region and the international community to sustain the region's gains from globalization.

During the last decade, Latin America has seen the most vigorous and sustained expansion since the 1970s, Mr. Strauss-Kahn said in a speech at the Council of the America's 38^th Washington Conference. Prudent macroeconomic frameworks have lowered public debt by one-third on average and inflation has generally fallen in the single-digit range. "Greater integration into the global economy has helped cement these achievements," he added.

However, Mr. Strauss-Kahn cautioned that that concerns remained about the sustainability of some of the region's achievements. In particular, too much of the recent export growth reflected a boom in commodity prices, thereby increasing dependence on a volatile sector. The rise of the commodity sector and of import competition had crowded out manufacturing, whose share in the region had generally declined since the 1980s.

Perhaps most importantly, despite recent positive trends, long-term progress in reducing the region's inequalities and poverty has been limited in much of the region, which has kept social tensions high in a number of countries and acted as a brake on further reforms. Mr. Strauss-Kahn particularly underlined his concern over the recent surge in food prices, which " has placed an additional burden on the poor, who proportionately spend the largest share of their income on food."

Looking ahead, to sustain the momentum of stability and growth, Mr. Strauss-Kahn urged a focus on the following priorities:

• Raise investment and increase productivity, where Latin America has lagged other dynamic emerging markets: more investment is needed in industries that add value to the region's commodity exports, and diversify the export base. The region can also better exploit its significant comparative advantage in energy.

• Strengthen infrastructure: public investment is less than 5 percent of GDP—well below other regions.

• Improve education: education levels are not out of line in Latin America, but perceptions of educational quality are below average.

Mr. Strauss-Kahn said that "these actions will reduce poverty over the long run, but meanwhile we need to help keep Latin America's recent growth on track."

In the global context, strains in world financial markets and the U.S. economy mean that the region remains exposed. Mr. Strauss-Kahn welcomed action by the US to counteract these strains but also warned that if growth elsewhere in the world—especially in China which is a key new player in the region—were to falter, the impact on Latin America could be severe.

Sustaining growth in China will entail reducing its dependence on exports and investment growth and rebalancing demand toward greater domestic consumption. Mr. Strauss-Kahn said this rebalancing would entail many policy changes, including to health and pension systems to reduce precautionary saving and to the cost of investment. However, as its leaders recognize, it would also importantly involve appreciation of its currency. He said that although there has been progress in this direction, it has been slow, and has forced sharper changes between free-floating currencies. "The world needs China to go further, and faster, if new misalignments among the major currencies are to be avoided," Mr. Strauss-Kahn declared. He stressed that the IMF is the most appropriate forum for an objective global discussion of this kind of issue.

On surging food prices, Mr. Strauss-Kahn said it was essential that the world take meaningful steps to manage the economic effects and cushion the impact on the poor. The IMF is already advising governments and central banks in Latin America on how to limit the second-round effects of the price shocks and the impact on the poor, he said. He noted that some Latin American countries, such as Brazil and Mexico, already have well-targeted and cost-effective public programs to protect the poor that could be adapted and emulated elsewhere.