By Christine Lagarde, Managing Director, IMF
The eyes of the world are locked on Europe these days. This is understandable. After all, the storm in the euro area casts a long shadow over the entire global economy.
But the IMF has 187 members, and my job is to serve each and every one of them as effectively as possible. For this reason, I am making it a point to visit the different regions of the world—to discuss, to listen, to learn.
This week, I am visiting three important countries in Latin America—Brazil, Mexico, and Peru—a trip coinciding with the transfer of leadership in the Group of 20 to Mexico. Like so many in the region, these countries have done remarkably well over the past few years. They have harvested the fruits of strong fundamentals, sound policy frameworks, and prudent macroeconomic policies and are now enjoying sustained growth with reduced vulnerabilities—an enviable sweet spot.
It wasn’t always like this. In the old days, a disruption on the scale of the 2008-09 global financial crisis would have triggered major upheavals. Latin America tended to be one of the most exposed and vulnerable regions. Not any longer. In fact, the new Latin America can provide some lessons to the advanced countries—such as saving for a rainy day, and making sure that risks in the banking system are under control.
Of course, Latin America is not immune to any storms that come out of Europe. No one is. In our interconnected world, there is simply nowhere to hide. And so countries in the region should take all necessary precautions and make all needed preparations.
They should continue rebuilding buffers, including by maintaining prudent fiscal policies—this would create room for maneuver should the economic situation turn sour. But fiscal consolidation should not come at the expense of either needed social programs or productive investment in education or infrastructure. Better to explore the scope for mobilizing more revenues, where tax collections are low, or making spending more focused and efficient.
For its part, the IMF stands ready to support and assist countries with sound macroeconomic management that might be affected by the global crisis as bystanders.
The challenge for the region going forward is to sustain growth in a very volatile environment. Mexico will need to keep a keen eye on conditions in the United States and Europe, and implement structural reforms to unleash its growth potential. A key challenge for Brazil will be to increase domestic savings to reach higher and sustained growth. And Peru would benefit from continued reforms to achieve more inclusive growth while preserving its hard-won macroeconomic stability.
But growth alone is just the first step. The region in general needs more socially inclusive growth, which means efforts to build fairer societies based on shared opportunities and social justice. Historically, inequality has been the bane of Latin America. Not only did this prevent large swaths of the population from sharing in the gains of growth, but it also contributed to social and political instability—which in turn hurt economic prospects.
Indeed, recent IMF research has shown that more equal societies are associated not only with greater economic stability, but with more sustainable growth over time. So growth and social inclusion are really two sides of the same coin.
We can see this playing out in real time in Latin America. One of the factors behind the region’s recent economic progress is its social progress. In countries like Brazil and Peru, indicators of poverty, inequality, and human development have improved dramatically over the past decade or so. Brazil’s Bolsa Familia and Mexico’s Oportunidades programs have enjoyed particular success in breaking the intergenerational transmission of poverty—so much so that they are now models for the rest of the world.
One final point: as the global economy is transforming, Latin America is definitely on the rise. And the three countries I am visiting represent—each in their own way—the next generation of global economic leadership.
Mexico and Brazil are now major global economic engines. Mexico is about to take the helm of the Group of 20 and so is in a unique position to shape our collective economic destiny over the coming year. Brazil is a one of the world’s leading emerging markets, and is deeply integrated into the global economy. It will play a central role in the global economic debate, and will be instrumental in harnessing the global cooperation needed to address the urgent challenges of the day. And Peru is a new rising star—surely among the new wave of leading emerging markets.
I believe Latin America is now on a firm foundation, and can look ahead to lasting prosperity and stability that can lift the living standards of all.
From the vantage point of the IMF, I look forward to a new partnership with a new Latin America.