Sunday, April 25, 2004

According to a report in the Mexico City daily La Jornada, the IMF and World Bank have agreed that Latin American countries need to invest more in social and infrastructure development, in lieu of focusing on repayment of debt. According to the article in La Jornada:

Washington, DC, 24 de abril. En una discusión promovida principalmente por Brasil y Argentina, América Latina logró incluir en la agenda de la reunión anual de primavera del Fondo Monetario Internacional (FMI) y del Banco Mundial la necesidad de que los gobiernos hagan más inversión social y en infraestructura en lugar de concentrarse en generar excedentes para pagar la deuda pública, como ocurre hasta ahora.

En un cambio de su discurso tradicional, el FMI aceptó que es necesario aumentar la inversión social en América Latina, luego de hacer manifiesta su inquietud por el creciente malestar social en la región, especialmente en los países ubicados debajo de la línea del Ecuador. El organismo consideró que debe buscarse un equilibrio entre elevar el monto que los presupuestos públicos destinan a inversión social y de infraestructura, pero también buscar que la deuda pública mejore su perfil en cuanto a plazos de pago y tasas de interés.

The news item indicates that pressure from representatives from Brazil and Argentina led to the decision by the IMF and Bank to shift emphasis. The IMF and World Bank have usually recognized that the state should provide public infrastructure and social services like education and health care. That part is not new. I guess what is new is the recognition that the limited shares of the budget going to these services in most Latin American countries is not nearly enough. In many cases, social spending committments in Latin America have not recovered from the 1980s debt crisis. Though social spending has increased in most countries during the 1990s, it is no where near the levels of the late 1970s in most places.

The full article can be found here.

In another version of the story, studies suggest that IMF lending policies are actually in part responsible for the deteriorating infrastructure of many Latin American countries. According to an article posted on Bloomberg,

The International Monetary Fund's lending programs may have hurt some countries' ability to invest in roads, ports and utilities and other public works, said Anne Krueger, the IMF's acting managing director.

IMF board members ``generally supported'' plans to change accounting rules to allow governments to spend more on such projects when under IMF loan programs, Krueger said in a statement issued from the Washington-based lender....

...The IMF board said the limitations ``may be an impediment to growth,'' Krueger said in the statement. The lender's policies ``may have contributed in some instances to insufficient spending on infrastructure, at least in the short run.''

It will explore ways it can help boost investment from private industry as well increase spending on these projects even when the lender requires measures to cut budget deficits.

The full article is online.

Interesting that the Bloomberg article focuses on infrasture, while the Mexican article talks also about social expenditures. So, I went to the transcript of the press conference at the IMF website, which is
online. Early in the press conference, there were questions about infrastructure investment.

Anne Krueger said:

Obviously, getting good infrastructure is important for economic growth, and this is something that everybody recognizes. There can, however, also be some projects that are not necessarily so good. So, the first step always is to check and make sure that what is currently being undertaken is, indeed, the highest-return sorts of activities. There are some cases that I can—but won't—name, where that is clearly not true.

That much said, the second thing is that, also for growth, macroeconomic stability is important. Obviously, in cases where there is room and there is financing available, and where there are no macroeconomic difficulties of either two kinds—and I will come back to that in a minute—then there is no problem. The problem arises in countries where either there is already enough macroeconomic pressure or where there is a debt sustainability issue and where, for whatever set of reasons, countries cannot raise taxes or find other room within their budget to finance the appropriate infrastructure.

Now, the trouble is that, of course, if you increase infrastructure and you destabilize the macroeconomy, you might gain a little bit of growth on the one hand, but you lose probably a lot over here by the time you have to restabilize it. So, the question is, in circumstances where a country's debt is sufficiently high so that, even though it could borrow, it would do so only at the risk of getting its debt situation worse, what is the appropriate balance? That is where we have been grappling. We are trying to look and see if we can't find more ways to be constructive in terms of redirecting expenditures to other things within the fiscal accounts.

And the discussion of social spending was in reference to a question about Argentina. The Argentine President, Kirschner, has been taking a hard-line stance with the IMF regarding Argentina's debt. His position is that the debt cannot be repaid at the expense of the welfare of Argentines, especially given that the standard of living in Argentina was devastated by the 2001-2002 economic crisis. This stance is very popular with most Argentines, so Krirshner is unlikely to back down much.

So, one of the journalists asked Krueger "Coming back to the questions on the fiscal surplus and the social expenditure, in the case of Argentina there is this debate now about increasing the fiscal surplus, but the Argentine government is resisting this idea because of the social problems. How do you see the relationship between the social problems in Argentina and the payment of their debt?" And she replied:

Well, clearly both things came out of the Argentine social crisis earlier in the sense that there was a debt problem, and meanwhile one of the reasons that real GDP plummeted as rapidly as it did, especially in 2002, was precisely because of the default on the debt. So, in that sense, they are related in causation.

I guess if I have a disagreement with the Argentine authorities, I believe that in addressing the issue of poverty and social needs, the most important thing that can happen—not the only thing; social programs are important, and so on—but a very important thing is, of course, to get accelerated growth on a sustainable basis. I believe that getting a resolution of the difficulties with the debtors is going to be critical, because Argentina is going to need to increase investment as it goes forward if it is to sustain anything like its current growth rates, simply because it has had excess capacity and, as that capacity goes down, bottlenecks will appear without that investment.

So, I see addressing the issues, getting the debt issue behind, getting a stronger primary surplus, as related in the sense that that is what will give better assurance of the sustainability of growth. The authorities talk about these as being contradictory and then we look at, for example, Turkey, where they had a crisis that, in many respects, was as severe as Argentina, and they chose to maintain debt service and, in so doing, have been running a primary surplus of 6 1/2 percent of GDP while getting growth rates at around 8 percent and getting their inflation rate way down. It seems to me the record is not that these are opposing objectives but that getting economic growth back on a sustainable footing is an objective that requires, on the one hand, addressing the debt issue and, on the other hand, enables the alleviation of poverty.

You can view the entire press conference online.

posted by Michelle @ 1:40 PM,

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