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- [00:00]
A
Good evening everybody. Thank you for coming on a very cold, wintry London evening to join us in this very important occasion. I'm here. My name is Chris Alden. I'm with the International Relations Department and I'm part of an initiative looking at south south cooperation based in that department. But it is my distinct pleasure to be able to introduce to you a distinguished speaker from Latin America. This will be the first of our lectures and discussions on south south topics. And that speaker is of course Enrique Garcia, President of caf, which is a Latin American Development bank, the largest bank in the region. If President Garcia is here to speak on the challenges of Latin America and the new Global south, he has a very long and distinguished career. I am going to just touch on a few highlights by way of introduction, but I am not going to go through all the details. He is president, of course, and CEO of the CAF. The CAF since 1991. CAF, of course, is a multilateral financial institution based, headquartered in Venezuela. A Bolivian national, he was his country's Minister of Planning and Cooperation and the head of the Economic and social cabinet between 1989 and 1991, had played a role at the Bolivian Central bank and has also served as an officer of the Inter American development bank for 17 years, was governor of his country in the World Bank Group, the IDB and the the Financial Fund for the River Platte and the Development Committee of the IBRD and the imf. He's also Vice President of Canning House, our neighbor, relatively speaking, and a member of the Board of the Inter American Dialogue. He holds numerous honorary doctorates and has fellowships at various universities across the globe. Well recognized in circles not only in the Western Hemisphere, but beyond. And indeed, as I said, he's going to speak to a globalizing Latin America facing the challenges of today. President Garcia.
- [02:27]
B
Okay, well, thank you. Well, thank you very much for your kind introduction. It's certainly a great pleasure to be here in London, especially this wonderful school. This is not the first time I come and speak. I have been here a few times in the past. But I'm very pleased that we are doing this on this occasion because today we have signed a memorandum of understanding with the school so that we have a cooperation in the future in order to explore strategies, to have the possibility of having visiting professors, to have a large conference in Latin America on a yearly basis and of course, to stimulate Latin American students to come to do some postgraduate work. So this is a very, very good opportunity to be here. What I intend to do is to try to give you an overview of how do we see Latin America today? And perhaps from my experience in several years and almost decades, I can tell you that perhaps Latin America today is quite different to what it used to be 25, 30 years ago. If I had to, to make this presentation, maybe 25, even when I was head of the economic and social cabinet of my country, probably I would have been quite apologetic to try to justify why we were in a financial crisis, why we have such high deficits, why we had a debt problem, we couldn't pay our debt and all those things, and why the financial systems were in bad shape. That was the type of speech we probably would have done. When I say that these things, probably you young people, younger people, you see, these are the things that are happening now, not in Latin America, they are happening in Europe. You know, the figures are, you know, to have a 7, 8, 10% of deficit on fiscal deficit, the current account deficits of, of 10%, debt to GDP of over close to 100. Well, those things and financial crisis in the financial system. Well, the fact of the matter is that Latin America has made substantial changes in these last 30 years. And what has happened is that due to the bad experience that we had in the region, especially in the late 70s and early 80s, in terms of overspending, getting too much debt. The crisis came in the early 80s. You remember, there was precisely 30 years ago the Mexican debt crisis. There was the trigger of a very serious problem in the region. And many countries went to, to situations of macroeconomic instability, conducive in many cases to inflation, high inflation and even hyperinflation. I tell you, for instance, I go to my country, I'm from Bolivia, Bolivia, the last month of the inflationary process, the hyperinflation, if you took the annual rate of inflation, you know how much it was, the annual rate at that day, 28,000%. And I take one extreme. But other countries have 8,000, 9,000, something like that. So this situation forced Latin American countries to make a very serious adjustment in their economies. And that's why the 80s are better known as the lost decade of Latin America, because country after country had to undertake very serious adjustment measures that obviously had implications in growth and unemployment. And that was the situation in the 80s. But that on the positive side was a good medicine, I would say a good medicine that allowed Latin America to get into a very positive cycle starting in the 90s. And what we see now, it's very interesting to see that Latin America, notwithstanding the difficulties that Europe and the United States have had in recent times, has Been a region quite resilient to the situation. Well, and why is that the region has been resilient? It has been resilient, first, because, notwithstanding differences in approaches, in ideology, because obviously to speak about Latin America is not a region that you can say is homogeneous. There are difference. One thing is Mexico, another thing is Central America. The thing is the Caribbean, another thing is South America. And even in South America, one thing is the Pacific countries, another thing is the Mercosur countries. But in general, there are certain things that are common. And in that sense, I think that what was important is that the countries undertook the necessary measures and that permitted to have reasonable stability. And that's one thing. If you look at the figures of Latin America in recent years, you'll see that you have very low fiscal deficits. You have current account, in some countries, even surplus or very low deficit in current account. Debt, which was the crucial issue in the 80s, is not an issue. Most countries are in ratios of debt below 40% of GDP. There are many in 10, 15% reserves. International net reserves, just to give you an idea, today, are over $800 billion in the region. Well, those figures were impossible to think about 10, 15 or 20 years ago. Well, that was one part of the thing then. The second thing is that most countries undertook very serious reforms in the financial sectors because Latin America has, In the last 30 years or 25 years, it has had 30 financial crises. And financial crises are normally the trigger for macroeconomic disequilibrium. And for that reason, most countries undertook very severe reforms. They established in many cases independent central banks or quasi independent central banks, supervisory boards regulating the system that are more cautious. And that is the second thing. But the third thing which I think is very important is that we were lucky enough, I would say, that countries in Asia, particularly China and others in Asia had a very, very successful and dynamic performance in the last 15, 20 years. And that dynamic performance of China and the other ones had a direct implication in the prices of commodities. So countries, especially countries in South America, were benefited quite a bit by that. If you look at the prices of copper, of all the commodities, the prices are incredible compared to what you have. So Latin America and especially South America have a tremendous and favorable external shock that is part of the success story. So three things, good macroeconomic policies because we had to respond to a crisis. Second, reforms in the financial sectors which stabilized the economies. And third, third thing, a very, very favorable external shock. That's the good news. And that has allowed Latin America to have perhaps one of the best decades in history in macroeconomic terms, because growth has been average over 4.5%. Even last year, which was a very. The impact of the new crisis has been quite severe and had an impact on some countries, especially Brazil, which went from growth of over 4% to 1% growth. But nonetheless, you have several countries. The average for Latin America was about 3%. And of course Brazil has a lot of weight. But you have several countries with rates of growth, they're very high. You have Panama with 10%, Peru growing for several years about 6%. You had Chile, you had Bolivia, all of those with rates of growth about 5%. So the question is, is this satisfactory? Well, definitely it's good news because if you compare to what's happening in the world, that's very good news. Another good news is that thanks to this performance, one of the central issues of the region, which was poverty. The region has been effective, effective in reducing substantially the levels of poverty in most countries because of the actions that were done directly by the governments or the creation of unemployment. The issues, for instance, there were different models of attacking that. The Brazilian model or the Mexican model. But this has been part of the successful story. But now comes the question, can we be satisfied about this? What's the projection for the future? What are the real challenges that the region has? And the answer is that we cannot be satisfied. Why? Because at the end of the day, if you look at Latin America, Latin America, which was the region of the future, maybe you are too young to remember those things. Some people here, you, Jeffrey, probably remember very well. It was the country of the future in the late 50s, early 60s. And what happened is that the region was caught and with this call, the mid income drop. So when countries reach a certain level of income per capita, they have a difficulty in jumping and giving the extra jump. A concern that today is very interesting. We work, we go to China and countries in that part of the world, they are concerned about that too today that are reaching that point. So Latin America was caught in that. And how does it translate? Very concrete terms. If you look, compare Latin America, let's say with Asia. It's very interesting. We were in the 25 years ago. Latin America was 30 years ago basically represented about 7% of world GDP. Today it represents 5%. Let's take exports, export represented in world trade. Exports represented 17, 18% today represent basically about 7, 8%. If you take income per capita compared to income per capita in the OECD countries. Well, you see that things didn't want to go very well. So why is that the answer is that perhaps there are certain structural issues that have not been solved in a proper way. And that is the time to revise the strategy of development that the region has. And like I said to a group of, the group of Ministers of Finance of Latin America and the Caribbean in a meeting in Santiago de Chile about a month ago, there is life beyond macroeconomic stability. There is life beyond macroeconomic stability. This is very important. Now we have to concentrate. Of course, macroeconomic stability is a fundamental piece. Without having stability equilibrium in the macroeconomic system, you don't have a chance to have sustained growth or to really solve the issues of poverty and inequality in a sustainable manner. And so what's the answer? The answer is that now we have to emphasize much more issues in the microeconomic side and in the social side and in the environmental side. Let me give you some figures. Investment and savings, which are crucial. How much is Latin America safe? In other words, the savings of households, corporations and governments on average in the boom period I'm talking about now, it's about 20, 21% of GDP, but normal times it's below that's about 18%, 17%. Now, of course, if I compare that figure with the figures of Europe or us, it's okay, of course it's okay. But no, you shouldn't compare with Europe or United States. You have to compare it with the dynamic countries in Asia. And there savings are more than double what Latin America has and investment is almost double. So first issue, second issue. Productivity. Productivity. Of course, we have improved productivity in a substantial way, perhaps, but I don't have a PowerPoint. But if I had a PowerPoint, you will see that while Latin America has gone like this, which is good, Asia has gone like this. Okay, Third thing, concentration in exports. Latin America still, there are some exceptions, of course, but in general, if we have a profile of the region is the region that has the higher concentration in fuel sports, which it really makes the region vulnerable to external shocks. Sepal says, and I agree entirely what they say, that Latin America, one of the issues that we have in this boom is that it's returning to too much emphasis in primary products primarization of the economy. Why? Because with these prices in soybean, in minerals, in oil, in gas, so forth, there's the tendency to concentrate on that and forget about the areas in which you can provide more value added. So that's the fourth thing. Concentrate. And finally, the very serious matter is that notwithstanding the fact that as I said before, the region has diminished alleviated poverty in a very Substantial way, almost all countries. But inequality has not improved, equality has not improved. There is those of you who are in the economic profession, you know the Gini coefficient. The Gini coefficient of Latin America is unfortunately the worst of all regions in the world. So there's the challenge. The challenge is how do you move taking into account that for the time being, and I say for the time being, still the cycle is favorable to the region. This is the time to do things. You cannot wait until the end of the cycle because you know better than I do, cycles are cycles. They can be short cycles, three years, four years, medium, 10 years, long, 50. But at the end, the cycle changes. This is the time. So here, let me tell you the following. We made a study. We asked a group of people, especially with wide knowledge of Asia and other parts of the world, to make an assessment of what would Latin America look in 2040. And what's the conclusion? The conclusion is very simple. That unless Latin America can have a rate of growth never below 6%, 6%, it would be impossible to converge, which would be an ideal thing with industrialized countries in terms of income per capita. So we cannot be satisfied with average rate of growth of 4%, 5%. You have to grow at 6%. But what type of growth? That's the other thing. You can grow at 6 and be bad growth. You can grow at 5 and have good growth. Well, we are talking about is you need productive transformation. A productive transformation that will make the economies not only dependent on the basic raw material situation, but to have value added. Value added in different ways. It could be in manufacturing, it could be in new technologies, it could be in different aspects. But to do that you have to put more emphasis on certain things. And here you go more to sectors and micro things. And if you ask me, what are the three or four things that are most important in a strategy at the more micro level? Well, the first one is you have to emphasize education, human capital, which is a long term endeavor, not a short term endeavor. Education, education, education at all levels. You have to build up human capital for the 21st century, not human capital for the 19th and 20th century. With no respect to many of the persons here who are lawyers, you need less lawyers, you need more engineers, more technical people to move in the direction of the new trends in the world. Second thing very crucial, infrastructure. Without good infrastructure, you cannot be competitive. And here comes another issue, a central one is Latin America invest approximately 3% of GDP in infrastructure. Again, let's compare with Asia, 10% in our study we say and the good news is that the countries are aware of this. You have to double the investment in infrastructure. That's the second field. The third field is institutions. Institutions which refer not only to the government, not only to the parliament, not only to the political parties. It has to do a lot also with the private sector, with corporate governance, with rules of the game. All those elements are very, very crucial. If you put all the things together, then you can have a viable agenda. But what do you need is to think in a long term agenda. And here we move to a different area. It's a political area. It's very difficult to ask a government which normally in Latin America is elected for four years, five years, maybe one reelection, to thank in terms of its 20 year agenda. So how do you build fundamental consensus in society so that certain areas which are critical for development, like education for instance, or building up institutions, those principles are shared by the stakeholders in society, which include not only the governments, includes the private sector, labor unions, civil society. So that's another element which is crucial. Going back to the issues of inclusion, it is important to have inclusion that is based on solid economic grounds. What does it mean? It's not sufficient because you have a very, very positive balance of payment situation, or you have a boom because of the prices of commodities that you start to give away money? No, you have to build up real things. You have to build conditions so that you provide good education, good health for people and the most important thing, how you create employment. Employment as a fundamental element to raise the standards of living of people and at the same time a way to strengthen institutions in democracy. So that's the other. And finally is the issue of environmental sustainability. This was perhaps an issue that was not looked upon in the past. And I go back to an area which I mentioned as important, which is infrastructure. In infrastructure you have to deal with the environmental issues from the beginning. And let me illustrate what was normal not only in Latin America, in Africa, in the US and all over. Who decided about the roads, how you build the roads? The engineers, of course, it's a technical matter. And then you introduce some issues of market in, financial viability, economic viability. And at the end, when you are almost ready, they used to kind of say, oh my God, now we have to deal with the environment. So let's get these consultants to make an assessment whether, you know, the project is a project, that is, what are the issues in the environment? Well, it's too late. So the trend now, and that's something that we are promoting, is that from the beginning at the stage of high feasibility studies, you introduce the issues of environment and social impact as fundamental criteria to define alternatives, technical alternatives. I just put this in your minds so so far on this path. And the other thing that I want to leave in your hands is that Latin America, to really be a global player, to really restore its relative position in the world in the next 20, 25 years, it has to put more emphasis on a realistic process of regional integration. You want me to tell you the truth? I think there are many schemes in the region, but unfortunately they are not working very well. The Andean community is not working very well. MERCO sure has its problems. There are many other schemes working, but really I think it's missing to have the coherence, to have a regional vision. Because unless you do that, it's impossible for medium sized countries, even for Brazil being such a country, which is a continent. If Brazil wants to be a real global player with the leadership that it deserves as country, it has to play the game in the context of regional integration. And let me now briefly tell you what's the role of caf? CAF is a peculiar institution and the title is good. They were talking about South South Cooperation. Capital is a multilateral development bank in concept, similar to, you know, the Inter American Development bank, the World bank, the Asian Development Bank. It was born essentially a small bank for a sub region for the Andean community, five countries small. But what it has been done is to expand it today to 18 countries. And it has one or two characteristics that make it different. It's the only regional multilateral bank perhaps in the world that is not composed by borrowed countries and borrowing countries. When you go, for instance, to my alma mater, I've been in the IDB Inter American Development Bank 17 years in my previous life in that bank, as well as the Asian Development bank, you have the dollar countries, the United States, uk, Japan, so forth, that put the money, the callable capital or the paid in capital, but they don't borrow. And you have the borrowing countries, which are the developing countries. CAF is different in that sense. CAF does not have that. The only two countries that are outside the region as owners of the institution are Spain and Portugal, with small participation. But even Portugal and Spain are eligible to be borrowers of the institution. So this gives CAF the essence of emerging countries bank. And many people might think that this is probably you are subject to a lot of political pressure. On the contrary, there is a sense of ownership. The countries know that we are loyal to them in good times and bad times. We are normally the Banker that brings the umbrella when it is raining. Because in sunny days you don't need an umbrella. The commercial bags, in sunny days they are ready to bring you umbrellas. But in rainy days they run away, we don't. And it has paid off in the sense that sense of commitment. In the history of the institution, almost 40, more than 40 years, there has not been one country that ever has defaulted with cough. Even, you know, Remember the old times when Peru. Peru was a little in trouble in the late 80s and didn't stop paying. It was in the first life of Alan Garcia. Alan the bad guy. The second was Alan the good guy. In the first time, Alan did not pay the World bank, the IDB and other institutions, but they always pay to always pay. Caf. Why is that? Because there's that sense of ownership. So what we hope to do in the future is precisely to strengthen institutions like this one. And another effect that is very important is not only to provide financing directly, as we do, we finance. Let me give you very briefly the type of things that we do. We provide, first of all, technical assistance corporation on grant money to prepare projects for institutional building for community development. Secondly, we provide loans, short, medium and long term loans for projects for working capital for sectors, a variety of sectors. Includes infrastructure, energy, roads, water, sewers, social sectors, education, health, productive sectors, manufacturing, agro, industry, mining, technology, developing, tourism. And we deal both with clients, the government on the one side, and also the private sector without guarantee of the states. That's one type of problem. Other things we do, we play a catalytic role in the sense that we provide guarantees, partial guarantees to clients in the private and public sector so that they can have access to additional funds from other parts of the world or from the private sector. Third, we try to have agreements with other countries in the world, in Europe, in the United States, we have in Asia in different parts, so that we co finance initiatives with these countries or institutions in those countries. And one component, which is a very crucial one and one of the reasons that we are in this house is we believe in the transfer of knowledge, the importance of knowledge, to share different ways of thinking, of analysis, to try to have the positive experiences of different parts of the world and to try to take those things to Latin America in order to improve the quality of institutions, the quality of policy, the quality of projects. So that's basically what we do. And we have been successful in the sense that this was a bank that had 25 years ago, it had. Or 20 years ago it had five countries, it had assets of $500 million today has 18 countries and has assets of $25 billion. We represented about 2% of the total lending of multilaterals in Latin America compared to the World Bank Group and the Inter American Bank. Today we represent approximately 30%. And that is the story. And that's a good example of the initiatives that are happening today, I think in the what is called south south relationship. I'm very pleased that, that, you know, the London School of Economics is going to make, is making research improving the quality of analysis of the options that do exist. Because today I think the rules of the game are quite different. The governance of institutions has to be different. And I think that illustrations like the institution that we have are good example of things that can be done if you take it very seriously as a professional endeavor to build up the conditions necessary to have a successful approach to development in a pragmatic way. And many times the question is, well, how do you work in a region where you have different approaches? I said macroeconomics basically, with very few exceptions, is okay. But in terms of thinking, you might asking, I'm sure you will ask the question, say, well, one thing is to have the policies of Mexico and Chile and Colombia. Different things. The policies, they might have Venezuela have Ecuador or Argentina. How do we manage that? Well, we have the philosophy that we respect the differences in thinking, but at the same time we are very strict in only financing programs and projects that show very clearly that are feasible from the standpoint of technical, economic, financial, environmental and social aspects. So that's the essence of the institution. And to sum up then, I will end by saying the following. I think Latin America is in a very, in a positive moment, has a good platform to really undertake new challenges, new changes. And it has a few more years to really take advantage of this platform. And unless Latin America does that in the next few years, there is the risk that complacency will take you to a setback. Because the cycles are cycles and sometimes they will end. That's the first thing. The second thing is that Latin America has to strengthen the channels of cooperation and regional integration in a pragmatic way, not ideological way, taking into account that in this new world, the change of production, the globalization of things is indispensable, that you have an open mind, that you start working inside your continent in order to insert yourself in the rest of the world. The third thing I would say that institutions, development banks, which sometimes were questioned in the past, are indispensable instruments because they can solve, they can help to solve some of the inefficiencies that exist in the market and provide the catalytic instruments so that you facilitate investment, technology, transfer of knowledge and so forth. And that's part of the story. And of course, I thank you very much for your attention and I'll be very open to your questions, comments and complaints. Thank you very much.
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A
Thank you very much. Can we do. Do we have questions from the floor? If you could please identify yourself. Do you want to. Do you want me to serve as Monterey or do you want.
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B
Yeah, no, sure.
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A
Yes, there's a gentleman over there.
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C
No.
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A
There we go, over there. Can we get a mic on this side? I think the person chose not to speak this one. Go.
- [39:20]
C
Hi. My question is very simple.
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A
Sorry. Identify yourself.
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C
Christian Velasquez, economic history master in economic history, which will be the relation between United States and Latin America in the future. Because as we know historically, the relation between United States and Latin America have been almost, you know, difficult. And I don't know how the United States could be an impediment for the development of Latin America.
- [39:49]
B
Well, no, I think obviously if one looks at the world as it is today will be in the future, you have to be pragmatic in terms of having the best possible relationships with different players in the world. I think the relation with the United States has changed. It has to change not only with the United States. I think Latin America in the 50s, in the 60s and 70s, was highly dependent on things that would be decided outside the region. Today it's a different story and depends how you manage your relationship. There are countries in Latin America which are managing the relationship with the United States. In Asia, very, very positive way. In other countries you have some difficulties in the relationship. Although if you look in pragmatic way, the hemisphere is an important player. You will have to find ways. Now, the thing is, the United States, because of several reasons, I think in the last few years, has not shown much dynamism and interest in Latin America. Why? Because probably it was more concerned in issues that are much more ser for them. And so I think Obama administration the second term. I don't know if they will put more emphasis, but I think you have to be pragmatic. And there is no doubt that the proximity of Latin America with the United States with Canada makes it a necessity to establish a pragmatic and good relationship within the limits of things. There are some issues that are very serious, of course, have to be tackled. One issue, for instance, is the issue of drugs in Latin America, where you have a different approach. Sometimes you have the countries that Produce, you know, coca and the poor campesinos produce the coca. Of course they will produce coca because the crop will give you hundred times better prices than the other one. But then comes the chain of production and then comes the. The market where you sell the finished product, which is the tariff. And that is not necessarily in the region. Although nowadays you have some problems in Brazil. But most of it is going where to the United States and to Europe. So unless the countries take also measures on the side of the demand, they are symmetric to the other thing, there is no solution. So those are things. Now, Latin America depends much less on or was traditional aid money. There's before, in the past, every country was depending on aid. Today it doesn't happen because countries, many of the countries in Latin America in recent years have had investment grade ratings or they are close to that and they have access to the markets even. There are two examples, interesting examples of two smaller countries. Take the case of my country, Bolivia, and the other one, Paraguay, which is also a small country. In the last two months they went to the capital markets and they got spreads that are quite reasonable. They are better than some of the other bigger countries in the region. So it depends a lot on philosophy, on pragmatism and so forth.
- [43:16]
D
Yeah. Julie Zengast from the International Project Finance Society Association. It's good to see you again, President Garcia, and thank you very much for the overview. I'm up here.
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B
I said there's an angel coming. I don't know. Can you repeat the question now that I can see you? Okay. You touched briefly on infrastructure and the.
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D
Importance of developing infrastructure in the region. From my side, I'm keen to know to what extent you think the countries of Latin America are embracing the concept of public private partnerships, that is the governments working with the private sector.
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B
Sure. No, I think infrastructure, as I said before, if you are going to increment your investment in infrastructure from 3 to 6% of GDP, that's what you need to be competitive. First, competitive in economic terms. And secondly, also has social implications, because infrastructure, you have to look at it also as a way to improve the quality of life of citizens. If you try to do that just with public works the traditional way, you won't do it. You don't have the capacity. So you need to encourage private sector into infrastructure. And one way to be successful is to have this, what you said, private public partnership. Why? Because many times in infrastructure, if you don't have a high commitment on the government of any country in terms that are crucial, because many of These things are public services. In other words, if there is no raise in the tariffs or the toll road fees or whatever, obviously the best projection you might have on an endeavor, on a program, on a project, infrastructure will fail. If you have public private partnership, automatically you are establishing a link between the two players. So we encourage very much in several ways. First of all, in giving support through grant money or resources from CAP to have consultants to support the governments in preparing the basic rules, laws, whatever is necessary to implement that. And secondly, to finance that type of programs and projects. So I think that's a very good solution. And especially lessons that are positive in some parts of the world in this sense, lessons that we want to take them to the country. So this is an issue. And here I have the vice president of infrastructure who is sort of a king because he has 60% of the lending of carbon infrastructure. So we are working on that.
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A
Before the next. May I ask you a question which is sort of from the perspective of an armchair economist, one might say that the problems of inequality, unemployment or underemployment could be linked to a massive infrastructure drive and you could create a virtuous cycle out of that. And I wonder if that's not something.
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B
You mean that through infrastructure you're creating employment? Definitely. Infrastructure is one way to create employment. However, one has to be careful. Infrastructure is not enough. Because obviously when I'm investing in roads, whatever in the road, I have a lot of workers, you know, while I'm having the construction or let's take a. Let's go to energy, a hydroelectric plant, for instance, you build up a plant and to build a plant you provide a lot of employment. Once the plant is operating, that employment is not there anymore. So you have to move to, to productive sectors in different areas. You have to provide, you know, the incentive so that not only the large corporations, but the medium and small size corporations become part of the chain of production. Mexicans are doing something interesting on that to provide, you know, support through financing mechanism and many innovative ways so that small size firms become the providers of inputs for the larger corporations that are producing cars, TV sets and things like that.
- [48:03]
D
Hi, I'm from Mexico and I. I knew that.
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B
That's what I told you guys.
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D
Perfect. I like that. But you talk at the beginning that the benefit of Latin America was we were conservative in certain policies. So I think that give us the protection for this crisis. And I'm agreeing with that. But now that we want to private companies or we don't want. But now, due to globalization, private companies Became like higher or I think like more power than government, because they do their own rules. So how can we control that? What crisis become of that?
- [48:46]
B
No, well, you're right. I think that one of the things that's very important is in addition, when I talk about institutions, precisely one of the elements in institutional building is to have that the type of laws and regulations that will preclude the creation of vested interest influencing either for public private sector, in countries where you support monopolies on the private sector, or even the public sector, obviously you are harming the consumer at the end of the day. So part of the reforms that have to take place is to avoid to have monopoly power. And that applies to, to the private sector, but also to the public sector. So at the end of the day, you have to defend the interest of the consumer. The consumer is the majority of the population. One thing I didn't mention, which I think is very important, is that Latin America a substantial change is that Latin America has become an urban region. If you go 40 years ago, the situation was quite different. You had more rural and you have today it's urban. I was reflecting in comparing the situation between Europe and Latin America in terms of the measures necessary to adjust the economy. And sometimes we Latin Americans try to be a little patronizing in telling Europe, why don't you do the things we did? Well, then I reflected on that and I asked the following question. I said, if the type of crisis that we had in the 80s would repeat itself today in Latin America, would it be possible for those in government to take the same type of tough measures that we're taking? And I came to the conclusion that it will be much more difficult. Why? Because you have a higher proportion of population, urban population. You have another phenomena in Latin America. Growing middle classes with new ambitions, new tastes, new demands. There is technology, there are computers, and you have the cell phones, the iPhones, whatever. So you can be in any place, you are more sophisticated. So it's very difficult. And when you go to Europe, you can understand why Spain, for instance, has so much difficulty in moving because the Spaniards have been used to a standard of living and it's very difficult to ask them to change. And maybe in Latin America we would have the same thing. But going back to your point, I think what you mentioned is a very crucial element how you avoid the vested interest to take control of the situation. If you let monopolies work, either public or private, then the danger is that you will have those vested interest in managing many of the decisions that should be Taken in another army.
- [52:03]
A
Another angel up there.
- [52:05]
B
Another angel? No, no, it's not an angel.
- [52:08]
A
Not really. I come from Panama and maybe, as you know, there's a lot of infrastructure projects going on and there's a lot of talk about overpricing in infrastructure projects and other kinds of corrupted acts by the government. So I would just like to know what's the takeoff caf in preventing this kind of overpricing and other corrupt practices by governments in Latin America?
- [52:40]
B
Save me, Antonio Juan. Oh, yes, I need the expert to answer that.
- [52:54]
E
Hi, good evening. Well, Panama is a country we know very well because we are working with the government and with the private sector in several very important projects. One of them is the line one of the Panama Metro. The other one is all the restructuring of the piping of the sewerage of Panama, which is. Is a huge project in several phases to clean up all the city, because the city and the bay, and that has some important environmental consequences. We ask the government, when it's a government project to do, we require actually to do a. A public bidding for, totally open, to select the companies of the consortia that will build the project. And we hope that with this competition, the prices will balance and will reach a reasonable level. But beside that, we have our own instruments, we have models to certify for us that the prices that result from that bidding are aligned with something reasonable. That we, because of our experience in projects of this kind, know that the unit price are right, take more or tier one or tier two or some percentage, that there are local conditions that can change that. But in general, if we feel that a project is the prices or the cost, the Unicodes that are finally presented are twice or three times what our model set. We simply don't finance that project. We cannot tell the government anything because it's. I mean, we are not authority over them, but we can say that we don't participate in the project. And we have done that many times, not many, but a number of times recently. That problem, it's present in some projects, undoubtedly. But when you have a good company in the building of the project and engineering, and those are international companies, usually that cost more than when you only hire local companies. But sometimes the projects are very complex and you need that knowledge, you need that experience, and you have to pay more for that. That's what I would say.
- [56:06]
B
Well, you save your job, huh? You keep your job now. Yeah. Good. It was a test, you know, he thought he was coming just to London to have a good time to sit there. He was kind of Sleepy at the time the question came. So that's why it was a signal. You're.
- [56:38]
D
Hi, I'm Candela Said from studying international relations masters. Thank you very much for your interesting talk. I wanted to know what do you think of the austerity measures applied in countries like Spain or Portugal? Austerity measures. The austerity measures apply in countries like Spain or Portugal.
- [56:59]
A
The authority measures of blind countries.
- [57:05]
B
Austerity measures, austerity measures in general. The one in a particular country or in general?
- [57:13]
D
In general. And the ones applied.
- [57:17]
B
Unfortunately, it's a reality. If you overspent, it's like a family. If Your salary is 100 and you move to spend 150. 150, 150. Well, of course you borrow, but there's a limit and once you cannot borrow anymore, you have to adjust yourself, unfortunately. So there's not easy ride to have the cake and eat at the same time is not possible. So unfortunately that's something that the governments and societies have to think ahead of time. Export is too late and part of the problem. I know it's difficult because societies are used to certain style of living, but there is no way out. And the experience you can go around the world. There is, I don't know, one example in serious macroeconomic disequilibria that you want out of that without having some austerity. Of course you have to be tactful. You know, that's how far you go. You have to play very, very carefully. It's a tight. Call.
- [58:40]
C
Someone. Yeah, good evening, I'm he from Bain and Company. My question was South America has seen a great catch up in development, economically, technologically, etc. As you said, in the last 10 to 20 years, what do you see as the sequence of events which led to that? Why did it happen in the last 20 years and not in the last 50, 100, 250 years? Do you first need to get the political stability and then education and then abc or what is the sequence which you see and how can that be applied in the Middle east or Africa or wherever else? Thank you.
- [59:26]
B
Well, what happens is when you get in the middle income trap is that you are moving like. Let's take Latin America in the late 50s and early 60s was moving like this. So maybe you didn't build up sufficiently the productive capacity to sustain some of the areas that then you are providing many. Perhaps you are going. You are spending more on things in the social sector, let's say, without having all the soundness and you are not putting enough Emphasis. You are making a good balance between social development and productive transformation. And that has happened in many, many of the countries. If you go, remember Brazil? Brazil was the start in the 60s and then it went down. Argentina was the start. And today, you know, as I tell you, in Asia, the Chinese, for instance, are calling us in Latin America saying, let us tell us a little bit about the story, because we are worried about that, because once you get to about $5,000 or $6,000 in income per capita, then there's the danger. Now, what's the sequence? Well, I think it depends on the country, but there is no real solution that starts without having a very important work in productivity, in product transformation. And it doesn't matter, you know, not to be dogmatic. It doesn't matter whether the firms are public or private. It doesn't matter. You have to build up that. You have to put technology, you have to give value added. So you create a sustainable manner in society. That's the main thing. It's easy to say, but if you are a politician, it's difficult to do it because some, some things are. Provide more bonification in doing it in a different way.
- [61:30]
A
Yeah, over here.
- [61:40]
C
Thank you. Thank you, Dr. Alexia. My name is Joan Cordo. Basically, my question is about integration. You mentioned something about integration in Latin America. Basically, during the past time, Latin America has spent a lot of effort trying to integrate and become a big market. But what about capital integration, capital market integration? What kind of initiative can be considered in order to enhance the foreign direct investment in Latin America, become a big market for capital investment and obviously enhance the productivity and the capacity of the business and the economy in general?
- [62:27]
B
Okay, well, certainly there's a very important point, as you mentioned, and of course, to have a capital market integration, there are some requirements, important requirements. You have to have sort of homogeneous macroeconomic policies. You cannot pretend to have that if one country has, you know, very high inflation, the other one, very low inflation, if one has a free exchange rate, the other one has exchange controls.
- [63:01]
E
So.
- [63:02]
B
But having said that, there are initiatives that are working. For instance, there have been between Colombia, Peru, Chile, and we are supporting that. We're working precisely on that. That's a very, very important element, I would say, for integration in a very pragmatic way. You need good infrastructure, you need that, the flows of capital within the area. You have to have an open system there. And the third thing I think is very important to stimulate firms in the corporate sector, either public or private, to work together, not only to compete within the region, but to insert themselves outside in the rest of the world. The it's very interesting that there are some good examples of firms in Latin America that are very successful players in the global economy. Let's take two cases. One is Brazil. You take Embraer, for instance, the airplanes, that's it. World class firm, competing all over the world. But let's go to Argentina. You have one firm, I'm sure you don't know that, but is imsa. IMSA is a company that produces highly sophisticated turbines and generators in energy. And they are like the. It's like Seville Road here. You know that you go, they measure you and then you have, you know where you get your suits. My good friend, in this case you are not talking about suits, you are talking about turbines and generators and what they do. There is a building process in Malaysia, let's say they go and they see what they need, they measure the things and they provide with high technology and so forth. So there are many possibilities on that. And the multi Latinas, it's another thing, firms from different countries joining forces to try to be competitive at the world level. But the financial flows, the capital market, development, that's a very crucial one. And you can do that only insofar as you have similar regimes in macroeconomic and financial policy.
- [65:30]
A
There was someone over there, or two people, I suppose, and then there was someone else over there.
- [65:43]
C
Thank you.
- [65:44]
A
How do you say in your talk.
- [65:46]
C
Your institutional role, you like to work with all kinds of governments despite their political affiliation kind of thing. But in your personal opinion, do you think the best political economic model going forward is more towards the pink tide, the left of Latin America or the.
- [66:03]
A
Chile's color, Colombia's countries like this, or.
- [66:07]
C
If indeed if there's a country that you think stands out as the best.
- [66:10]
B
Kind of model for countries for things.
- [66:14]
C
Like development and poverty reduction and so.
- [66:17]
B
On and so forth? Well, I think that it's very, very difficult to say and to say this is the model all depends on the countries. And there are countries which have the conditions, the institutions and everything to have a more market oriented economy in which the private sector is a very important player. But not all countries are ready for that. So it is a very serious mistake. And perhaps one of the serious mistakes of Latin America in decades has been to go to extremes. When you believe in. In state oriented economy, you go to extremes. You go there or the other way around. When you think there's a market economy, you go to extremes. There's not something like that. You have to be more pragmatic More realistic. And definitely there is an interchange in linkages between the public and the private sectors, in the market economy, in the state. And you should not preclude the existence of good public entities. But at the same time, you cannot have economies growing fast and so forth just with the state. So it depends. Ideology. I think if I would give a message, it's not a political message, but a pragmatic message. You have to be pragmatic, not dogmatic. And countries which act that way. The Chinese is a good example. The Chinese, who runs China? It's the Communist Party. But what other policies they apply in economics. Which country in the world is the main recipient of foreign investment? Direct investment? The Chinese. Why not because of the flows of money, because the Chinese have extra money. I asked the Chinese, why do they do that? Of course we are interested in technology, we're interested in management, we're interested in markets. And the same applies. I'm talking about China. And that's a good lesson for Latin America.
- [68:32]
C
Hi, my name is Nicholas Nosevic, I'm from Argentina. My question is. Well, you spoke of the primarization of the economies and you saw it as a risk. And you also talk of technological upgrade. So what do you think is the role for industrial policy in the development of Latin America? And to what extent is the caf. Is it involved at all in financing industrial policy?
- [68:55]
B
Well, again, going to my previous answer, you have to be pragmatic. There has been a trend, you know, the time 70s industrial policy was the thing you pick out the winners and the losers and you decide where to invest. And you do this and you pay for. And then came the 90s, which is called neoliberal approach. You went the opposite, you say, no, you don't need that. Well, I think both things are wrong. I think you need some industrial policy. There's no doubt, because in the market economy, the market requires. Well, you are students in economics, you know, in macroeconomic one, microeconomic one, you know, what are the conditions for a market to function? And if you make a checklist of those conditions and you go to most of the countries, you'll find out that you don't have those conditions. So don't pretend that you can make the market work. If you don't have enough competition, enough of information, the monopolies that exist. You got it? So I think a reasonable thing is valid. By the same token, the concept of planning, planning, economic and social planning is very important in economy. To have a look, not planning like the Soviet Union, but planning in terms of having a vision, a Long term vision, how to allocate resources in the public sector, how to select, you know, for instance, infrastructure. It's impossible to ask the private sector to decide what are the priorities, what are the systemic way of defining priorities in a region or a country. It has to be done by the government. It's a different story to make the feasibility studies, to make the. And to implement the project. But you need that. So that combination of state and market is a crucial one in developing countries. Let's go to Asia again. Why is that? Asia has been successful. I'm not going to make a judgment on the democracy or no democratic way that many of those governments are. But what I was in Korea, for instance. How do you explain that Korea in 1965 had an income per capita of $235? It depended, that country depended exclusively of aid money. In other words, the things that you refer to the United States, this and that and that. And today it's one of the top 20 countries in the world. Income per capita is $23,000. It is a country that does not have any natural resources. Basically, what did they do? I was wondering. Well, what they did is, and I'm not judging the political side, they had a long term agenda and they defined two others as crucial. And what was the number? One was education, capital, human capital. They did something that maybe in Latin America we do, but not with many good results, is that they sent, not only they had education inside, but they sent people like you, young people to study abroad. But the difference is the Koreans returned to the country because there were opportunities in the case of Latin America. And I hope that you don't do that. I shouldn't talk, it's not real. They don't return because suddenly you have a very good professional background and you have so many opportunities in Europe, in Asia and other countries. And maybe you find out that in your country you don't have the opportunities for good jobs. So you have to combine the human capital with creating conditions for good employment, good salaries, everything like that. Sometimes our governments made a very serious mistake. They say, no, you're a public servant, salaries cut, you don't pay them, you don't pay well. So who goes to the public sector? Two type of persons. One is those who really have conviction of believing in the value of providing the service to his country. Or somebody who says, okay, I'll do that for a while. And then I run away and I go to a private sector internationally. And the third one is, well, I don't care about the salary because there are other ways to be rich and that's corruption. So it's better to go, man, don't go to the extremes. You know, I was wondering, you know, it's interesting, in Singapore, I asked them to explain me how the public service works out. I'm not saying that we should do that, but it's interesting. They, they make a survey of the 20 best paid companies in Singapore, multinationals and so forth. And on the basis of that they establish the salaries of the public sector, making a discount of 25% or something like that. So to be in the public sector in Singapore becomes a very, very profitable situation. You know, you make a profit. I'm not going to, I'm not saying we should do that in Latin America, but pay them well. The ministers of, in any cabinet in Latin America, in most countries, what they make is very, very little compared to the responsibilities, the sacrifices and the risk you run when you are in the public sector. So this is something that also has to be in the minds of policymakers if you want to build an institutional setting, a civil service, a good quality of public sector staff that will ensure that you can apply the right policies in an environment of transparency.
- [75:37]
A
Last couple of questions. One here and two there.
- [75:40]
B
No more angels. Oh no, the angels are here. No, no.
- [75:53]
D
My name is Isabel. And if we are worried about the inequality that exists in Latin America, how should be done the redistribution of resources, which should be these strategies, should we think about fiscal policy or how do we tackle this Again? You mean inequality in Latin America?
- [76:15]
B
No, inequality. Of course, there are many ways to work on inequality. A structural way to preclude inequality is education. That's the first thing. Because if you go to a young girl or young boy born in the rural area in Peru, in Bolivia, Venezuela, wherever, if that kid does not have in the first six, seven years of his life the opportunity to have some type of good education, automatically that person is in disadvantage. So that's a very important element, very crucial. Secondly, education should be looked upon in a more public good environment to give the opportunity to all people with talent to move ahead in the scale in the universities and other levels. That's another thing. And the main thing is to provide opportunities for employment. That's on the one side, but also I think the government and state has to play a role in going to the less privileged and to provide incentive for that. I think policies like the ones that were taken by Mexico and by Brazil and many other countries, Bolsa familia, all the other ones were good policies. But you have to link them, you have to design them in a way that will not be pervasive. So you need. In that sense, if you go to the Circle Professor Mass Grave framework. In fiscal policy you have three functions. In fiscal policy you have one destabilization function, we forget about that. The second, the allocation function, how to assign resources. And the third one which you are referring to is the distribution function. And distribution function, you have to use the appropriate instruments that can be taxes, subsidies, in a rational way.
- [78:27]
A
Okay, sorry, Last two. I know you've been waiting a while and then I think someone's in the middle here. Yeah, that's it. I'll have to draw two.
- [78:35]
B
No, otherwise I'll have to move to London School of Economics.
- [78:39]
A
We'll see what we can do.
- [78:42]
B
I'll have more fun, I tell you.
- [78:46]
D
Good evening, my name is Sylvia. I'm working for Shell Trading. I've got a very simple question, but it will be an opinionated answer because obviously we all know what has to be done and all of these sort of criteria that have to be met for good growth, sustained growth, like liberalization of markets and all of that. More competition, less protectionism, all of that. I just wanted to ask if you see the winner in Latin America yourself, that the country that's not relying only on resources or commodity trading, that's done good work on all of these things like education, infrastructure, policies, liberalization. Is there a player in Latin America that's ahead of the game and is a good example for everybody else?
- [79:37]
B
No, definitely. There are many countries that have done, for instance, a good example. Let me go to a small country, because normally when we talk about Latin America, you tend to go to the big ones, to Brazil and Mexico and sometimes you complain about Venezuela and this and that, but there's life beyond those countries. And let's take a country that's smaller, let's say Uruguay, for instance. Uruguay has a president who has a. What's the track record of president Uruguay? He was a man when he was young. He was very active in the guerrilla. He was in jail 11 years.
- [80:20]
C
He.
- [80:22]
B
He was that way. And today is the president of World War I. And he has the wisdom to say, what I'm interested in is to do whatever is necessary to ensure that the quality of life of the majority of the people will be rich. And he is a man who probably, if we had Talked to him 20 years ago, he would have sailed all the country. And that's the type of politicians that you need. They will look at the end result. The end result Is how do I improve the quality of life of the majority of the citizens and what are the instruments that I have to use taking into account the realities of my country. In that sense, if you go to the, the policies of that president who's in terms of right and left, he's a president in the left. What are the policies? The policies in macroeconomic policy, there is no difference with whatever you would do in any place because macroeconomic policy does not have ideology. You can be on the right from the left. The things you have to do are very similar. And what he has done is to. To implement and advocate a lot of private investment, technology development. He's quite open to moving into trade agreements with. He's pragmatic. Now of course, normally you have the story of Chile, but Chile has already done a lot of things being a small country and they done that. And so it's a question to be pragmatic. At the end of the day you are talking about politics, how you build consensus in the society in a non dogmatic and pragmatic way.
- [82:21]
A
The very last question.
- [82:27]
C
Hello, my name is David. I'm from the Dominican Republic. I have a question in regards to the International Financial center, center for the Americas. Are you aware of the project where they're redesigning the financial infrastructure of Latin America? Building a 21st century financial center that will compile all the Latin American stock exchanges into one place? In designing the Latin American exchange?
- [82:54]
B
Yeah, I was not aware of that concretely, but congratulations.
- [82:59]
C
Well, I was just going to ask you if you think that was possible in regards to the question about integration for financial market. I mean there is happening.
- [83:08]
B
We can work on that. And one of them. Wake up. You are the good man.
- [83:14]
C
I just wasn't sure if you were aware because it's a.
- [83:16]
B
No, I was not aware, but I think it's very important. Very interesting. Thank you.
- [83:22]
A
Okay. I'm afraid I have to draw to a close. I'd like to thank President Garcia for providing us with a stimulating, rich LSE style. Perhaps there is a professorship waiting for you, an office somewhere.
- [83:37]
B
I tell you what I miss in my job. Because I used to teach in universities in my country. One of the things I miss is not to be in the university. So maybe if you give me a chance, I can be teaching here.
- [83:50]
A
I see some signs.
- [83:51]
B
Yes.
- [83:52]
A
And. And thank you very much for sharing your time and knowledge.
- [83:56]
B
Thank you. Thank. You.