News Brief No. 02/122

News Brief: IMF Managing Director Horst Köhler's Remarks in Chile

December 12, 2002

International Monetary Fund Managing Director Horst Köhler made the following statement on December 12, 2002 in Santiago. The meetings in Chile, including with President Ricardo Lagos, came at the end of a week-long trip that also took Mr. Köhler to Brazil and Colombia:

"The purpose of this—my second visit to Latin America as IMF Managing Director—is to indicate IMF support for the region at a critical time. At the end of this trip, I remain convinced that lessons from successes in the region can help point the way forward for other countries currently experiencing difficulties.

"In Chile, where we expect economic growth to accelerate and inflation to remain low, the authorities have established a strong and credible macroeconomic policy framework based on a floating exchange rate, inflation targeting, and clear rules on fiscal policy. This framework has been supported by low public debt, a strong belief in free trade, and the virtual absence of dollarization. Thus, Chile—like Mexico—has been able to better protect itself from adverse external shocks and maintain positive growth even during periods when international capital markets have been unsettled.

"An important lesson from Chile´s experience is that a good macroeconomic framework still needs to be underpinned by the strength and integrity of political and economic institutions. I am impressed by the vigor with which the authorities in Chile are safeguarding and strengthening institutions in key areas such as central bank independence and corporate governance, and ensuring financial stability. The Chilean authorities have also told me their conviction that issues of social equity need to be decisively addressed to reap the full benefits of globalization.

"Other countries in Latin America are also carrying forward important political and economic changes and reforms. In Brazil, a historic political transition is being completed with exemplary cooperation between President Cardoso and President-elect Luis Inácio Lula da Silva. As you know, the President-elect in Brazil has stressed that fiscal and monetary stability is a prerequisite for the attainment of his social agenda. In Colombia, there is a renewed political consensus in favor of President Uribe's pledge to maintain macroeconomic stability while addressing the civil conflict. Both leaders have emphasized their determination to reduce corruption and give strong assurances of legal certainty.

"Based on these and other important lessons from the experiences in Latin America, I believe that, for sustained growth, the policy frameworks in many countries need to give greater priority to policies that would lower public debt, orient monetary policy to low inflation with exchange rate flexibility, deepen domestic financial institutions, and increase trade openness so that it is better balanced with capital market integration. Such a policy framework needs to be pursued consistently with full attention to prioritization and implementation.

"For lasting success, these efforts need to be supported by strong domestic ownership of policies, a strengthening of political and economic institutions, and respect for contracts.

"However, maintaining popular support for such a framework also requires much greater attention to poverty and equity issues. Thus, in many countries there is a paramount need to push decisively forward with social reform programs that would improve human capital, improve the distribution of income, strengthen social safety nets and ensure that extreme poverty and inequity conditions are reduced over time.

"I intend to work closely with President Wolfensohn of the World Bank and President Iglesias of the Inter-American Development Bank to ensure that such an agenda of reforms for Latin America has the fullest support from the international community."