The Latin American Expansion - Benefits for the United States
The Latin American Expansion - Benefits for the United States
John B. Taylor
Under Secretary of Treasury for International Affairs
Meeting with Leaders of the South Florida Business Community
Organized by Florida FTAA, Inc.
Biltmore Hotel
Coral Gables, Florida
August 23, 2004
Thank you very much to Jorge Arrizurieta for inviting me to speak to this distinguished group. It is always a pleasure to talk to businesspeople who are involved in Latin America, since it is the private sector that is the engine for creating jobs, raising incomes, and reducing poverty in this region and around the world.
Stronger economies in Latin America benefit not only the people of the region, but also the people of Florida and all citizens of the United States. Growing economies in our Hemisphere create jobs in the United States by increasing demand for U.S. exports: last year, exports to Latin America represented about one-seventh of total U.S. exports and nearly one-half of Florida's exports. More vibrant economies and rising living standards in Latin America also reduce the incentives for illegal migration, strengthen democracy, and reinforce popular support for market-oriented policies that create opportunity and enhance economic freedom. In addition to reflecting American values, stronger democracies in Latin America are better allies in the war on terror, the fight against international narcotics trafficking, and initiatives to combat money laundering and terrorist financing. The cooperation of America's closest neighbors is essential to our success in these efforts.
Today I would like to take the opportunity to highlight the steps that the Bush Administration has taken and continues to pursue to support economic growth in the region, open up further opportunities for international trade, and work with the governments in the hemisphere to put in place sound economic policies that promote entrepreneurialism and investment. I am pleased to say that we are already beginning to see the beneficial effects of those policies in the form of stronger economic growth in the region.
Free Trade Area of the Americas (FTAA) and our Trade and Investment Agenda
Since this is the FTAA Roundtable, let me begin with the FTAA and our trade agenda. Trade and investment are critical to providing opportunities for job creation and economic growth. The Bush Administration has been committed to strengthening the global trading system by re-starting the WTO Doha negotiations. We are very pleased with the outcome of the recent WTO Ministerial and optimistic that we are again on the right track in these negotiations. At the same time, we have pursued free trade and improved trade and investment rules through bilateral and regional free trade agreements.
Nowhere has our negotiating agenda been fuller than in Latin America. In addition to pursuing the 34-country FTAA, we have concluded an FTA with five Central American countries and the Dominican Republic. Panama talks are progressing nicely, and we are hopeful that our dialogue with Andean countries will deepen and accelerate now that both sides have tabled proposals in most areas. U.S. trade turnover with these ten countries was over $50 billion in 2003, and the potential for growth is substantial.
Of course, the capstone of our efforts to integrate and strengthen the economies of the Hemisphere would be a successful conclusion of the Free Trade Area of the Americas. We are hopeful that the spirit of the recent success in Geneva will carry over to the FTAA negotiations. As you know the FTAA negotiators have been working to translate the decisions reached at the November 2003 Miami Ministerial meeting into instructions for negotiators that will lead to the resumption of the FTAA talks. The Ministers agreed that there would be two negotiating tracks in the FTAA and the senior level Trade Negotiations Committee is charged with developing general guidance for the common set of obligations and procedures for negotiation of higher level plurilateral agreements. We are pleased with the work that we were able to do with Foreign Minister Amorim and his team in Geneva on the Doha Agenda. They played a constructive role in that process. The U.S. co-chair of the FTAA process will continue to consult with the Brasilian co-chair and the other countries to determine the best way forward. As the FTAA is a negotiation among 34 participants, it is hard to predict how the decisions taken in Geneva will impact the FTAA negotiations. Failure to resume negotiations toward a high standard FTAA would be a great loss for the entire region. We are hopeful that negotiations will resume soon and that the vision of economically integrating the entire Hemisphere will be realized.
At the same time, we continue to move ahead on our bilateral and regional negotiating agenda. It is worth noting that our trade agreements broadly encourage change in the economies of our partners that will set them on course for faster development and increased prosperity, as has been the case with Mexico. Beyond removing barriers to trade, these agreements provide for increased regulatory transparency, investor protections, effective dispute settlement, and customs reform and automation. They were developed through intensive and public engagement by civil society and industry groups that buttress democracy in these nations. For example, at the last round of our Andean FTA negotiations, about 440 negotiators from the Andean countries participated, and about 600 businesspeople, and some legislators, participated in parallel activities. This is tremendous engagement and a great opportunity for dialogue and education.
In addition, the United States instituted a parallel trade capacity building process that accompanies all of our FTA negotiations that provides our partner countries with assistance in preparing for the negotiating process (such as compilation and analysis of statistics, negotiator training and making available lap top computers), as well as assistance with anticipated trade adjustment needs. A trade capacity working group was institutionalized under the CAFTA agreement and will continue to coordinate assistance.
The Bush Administration's Growth Agenda for Latin America
Of course, trade is only one element of a broad and active agenda in the region. Since coming into office, the Bush Administration has worked through a variety of channels to bolster economic growth in the region, as well as contain and prevent the disruptive effects of financial crises. Our approach is built on the idea of providing strong support to countries that are pursuing sound economic policies. Without sound policies on the part of the country itself, no amount of international assistance can yield successful results.
Let me give two examples of how U.S. efforts to support countries with good policies were critical to helping the region through the economic difficulties of 2002 and laying the basis for the accelerating recovery that the region is currently experiencing. In August 2002, the United States supported a $30 billion IMF program for Brazil. This support was instrumental in helping Brazil to overcome severe pre-election financial market volatility--which had pummeled Brazil's currency and pushed risk spreads to near 2,400 basis points above U.S. Treasuries. It enabled President Lula's administration to take office and have the room to develop a strong policy program. Likewise, our actions with respect to Colombia provide a good example of successful crisis prevention through a combination of effective domestic policies and strong U.S. support for engagement by the international financial institutions. With risk spreads on Colombian bonds rising sharply during fall 2002, President Uribe took bold measures to restore market confidence, passing important tax, pension, and labor market reforms and defining a strong economic program for the future. In turn, the United States supported budgetary assistance by the multilateral development banks and approval of a two-year, $2 billion IMF program--paving the way for Colombia to reaccess international capital markets and to achieve its strongest real GDP growth performance in eight years in 2003.
Understanding financial contagion--the spread of crises from one country to another--and the circumstances under which it is appropriate to respond was an early focus for the administration and is critical to implementing our policy of supporting strong performers. Overreacting to false alarms about contagion can lead to support for countries that are not following strong and sustainable policies. At the same time, it is important to recognize instances where countries are pursuing strong policies but are hit by external shocks that impact their economies. We found that to be the case in Uruguay when the Argentina crisis caused a run on deposits in the Uruguayan banking system. The United States responded by extending a short-term $1.5 billion loan to bolster the government's reserves until additional support from the IMF, World Bank and Inter-American Development Bank could be mobilized. The result was an end to the deposit run, and continued sound government policies have ushered in a renewed period of strong economic growth in Uruguay.
As important as preventing and containing financial crises is for sustaining economic growth, deeper economic reforms aimed at knocking down the impediments to a vibrant private sector are just as critical. Discussions of such issues are a prominent part of our engagement with the countries of the region. Perhaps the best example is the U.S.-Brazil Group for Growth, which was established at the first summit meeting between Presidents Bush and Lula in June 2003. The purpose of the Group is to advance policies for raising economic growth and creating jobs in both countries by focusing on areas such as expanding credit to small businesses, streamlining business registration procedures to make it easier to start a business, and improving public investment. At their meeting in New York in June, Secretary Snow and President Lula discussed the continuing work of the Group in moving forward policies needed to raise productivity growth and improve living standards.
Another important bilateral forum has been the U.S.-Mexico Partnership for Prosperity, which was launched in 2001 with the goal of promoting economic development on both sides of the border with a particular focus on the poorer parts of Mexico. The Partnership activities cut across several agencies from both governments. A major area of focus for the Treasury Department has been on remittances from workers in the United States to their families in Mexico. Work to promote increased competition in the remittances industry and expand access to the formal financial system under the Partnership has helped halve the cost of remittance transfers from the United States to Mexico since 1999, and led to the introduction of a range of new products.
The emphasis on supporting countries that are pursuing responsible policies extends to the Bush Administration's approach to development assistance. The Bush Administration has sought to reorient U.S. development assistance by creating the Millennium Challenge Corporation and (MCC) and its Millennium Challenge Account (MCA). The MCC directs aid funds to countries that invest in people, pursue good governance and rule of law, and promote economic freedom. Congress has appropriated $1 billion to the MCA in fiscal year 2004 and the Bush Administration is requesting $2.5 billion in 2005, ramping up to $5 billion by 2006. Of the sixteen countries selected by the Board of Directors eligible to submit proposals, three--Bolivia, Nicaragua and Honduras--are from Latin America. These countries are now developing their program proposals. The MCC will then evaluate those proposals and select proposals that contain quality programs with a strong likelihood of success and measurable results.
The MCA is one of several specific initiatives that the administration has advanced to boost economic growth in the region. At the Summit of the Americas--a meeting of the hemisphere's leaders held in Monterrey in January 2004--President Bush secured international agreement on several U.S.-proposed initiatives to raise living standards in the region. Leaders at the Summit agreed to take the steps necessary to cut the time needed to start a business and to triple credit to small businesses by 2007 with the help of the IDB. Leaders also agreed to work to halve the average cost of remittance transfers in the region by 2008--an extremely significant commitment, given the growing importance of remittance flows as a source of funds that could support economic development, new businesses, alleviate entrenched poverty and provide opportunities for children to stay in school and build the human capital of the region. Annual remittance flows are five times annual official development assistance and are a large share of total GDP for many countries.
Seeing Results: Stronger Economic Growth in Latin America
I am pleased to say that we are already seeing the results of the Bush Administration's global economic leadership in both Latin America and the rest of the world. The global economy as a whole is the strongest it has been in decades, and Latin America has been home to some of the most significant economic improvements over the past year. Recent months have provided further evidence that the economic recovery in the region is gaining more strength after the difficulties of 2002. Real GDP in the first quarter of 2004 grew at an annual rate of more than 5 percent in Brazil, Mexico, Argentina, Peru, Chile, and Uruguay. Market forecasters are now estimating that regional GDP growth will exceed 4½ percent for 2004 as a whole, with growth in most countries expected to outpace 2003 results.
Exports and strengthened external balances are playing a key role in this recovery. Strong performance of exports has helped reverse current account deficits. In 2003 the current account as a share of GDP for the region swung into surplus in 2003 for the first time in 35 years. And exports continue to grow, up 30 percent in Brazil and Peru for the first half of 2004 compared to the same period last year. High commodity prices have played a role in these numbers, but it is striking how much has been driven by increased volumes, pointing to the possibility that enduring structural changes are taking place in Latin America that are orienting these economies toward exploiting the growth potential of their export sectors. This makes further progress on regional trade liberalization--as well as global trade liberalization in the context of the ongoing World Trade Organization talks--all the more important to the region's future prospects.
Better economic policies within Latin America--supported by the United States and the international financial institutions--have underpinned these improvements in economic performance, enabling the countries of the region to take advantage of the opportunities afforded by the global economic recovery. In 2003, six of the region's seven largest economies--Brazil, Mexico, Colombia, Argentina, Chile, and Peru--increased their primary budget surpluses to bring down debt levels and reduced or maintained low inflation. Many countries took advantage of strong bond prices in late-2003 and early-2004 to pre-finance government obligations falling due this year. Central banks have increased their accumulation of foreign reserves to provide a cushion against future market turbulence. The credit rating agencies have recognized these and other policy improvements, upgrading their ratings for Brazil, Chile, Ecuador, and Uruguay during 2003 and 2004.
I would like to highlight the achievements of Brazil as one of the clearest examples of how sound economic management has supported economic growth. Upon taking office, President Lula affirmed his commitment to sound fiscal and monetary policies. In view of concerns about Brazil's debt levels, the Lula administration established an ambitious target for the primary budget surplus aimed at bringing down the debt over time--and then went on to beat the target. The central bank carefully calibrated its monetary policy to keep control of inflation in the wake of the large real depreciation in 2002.
Now Brazil is reaping the benefits of these policies. Real interest rates have come down sharply--from about 19 percent in the summer of 2003 to less than 10 percent today. Brazil's economy grew at an annualized rate of about 6 percent in fourth quarter of 2003 and nearly 7 percent in the first quarter of 2004. Monthly economic indicators point to a strong second quarter as well, and Brazil's economy is forecast to grow close to 4 percent for the year as a whole. The currency and external borrowing spreads are relatively stable, and inflation expectations are within the targeted band of 5.5 percent ± 2.5 percent.
The Brazilian authorities are focused on cementing these gains. Last year's reform of the public pension system, this year's vote to limit the increase in the minimum wage, and the continued adherence to its primary surplus target are signs of the government's continued commitment to fiscal responsibility. The central bank's care in setting interest rates, amid occasionally intense political pressure, demonstrates continued adherence to the inflation-targeting regime.
One can cite many examples of such progress throughout the region. In Mexico, tight limits on discretionary government spending have helped the government achieve disciplined fiscal targets, while the Fox administration has also made progress on reforms aimed at putting Mexico's social security system on a more sound financial footing. The Uribe government in Colombia is advancing measures to reduce inflexible government expenditure and streamline the pension system. Peru has stepped up efforts to improve tax administration and fight tax evasion, as part of its program of strengthening government finances and bring down debt levels. Uruguay has demonstrated real success in its fiscal policy efforts, nearly tripling its public sector primary balance in the first half of this year compared to last year.
Stronger fundamentals and stronger policies have helped the region's financial markets weather concerns about higher global interest rates. Strong U.S. economic data and expectations of interest rate increases led to a rise in Latin American sovereign risk spreads during the spring, with the benchmark the Latin America EMBI increasing from around 525 basis points over U.S. Treasuries at the end of March to a peak of about 700 basis points in early May. The Federal Reserve has since increased overnight interest rates twice, its first interest rate increases in four years. During the same period, the Latin America EMBI spread has fallen back down to about 550 basis points over Treasuries. While no one can predict what will happen in the future, we have not seen the major unwinding scenario that many had feared would accompany the beginning of the monetary tightening cycle in the United States. I think that stronger fundamentals and stronger policies go a long way in explaining why.
Conclusion
Sustaining this positive trend will require continued efforts by Latin American countries to maintain the disciplined macroeconomic policies they have been following during the past two years and to advance the legal, regulatory, and institutional reforms needed to increase long-term economic growth. As those in this room know, there is much to be done to improve the business climate for investment and entrepreneurial activity in Latin America. Governments of the region need to step up their efforts to strengthen the rule of law, fight corruption, streamline regulation, develop infrastructure, improve health and education, and expand access to credit for small businesses.
I remain confident that the United States can play an important and constructive role in helping the region tackle the challenges it faces in terms of sustaining long term growth and raising living standards throughout the hemisphere. Through its policy of working with countries that are implementing good policies and supporting them through the international financial institutions, as well as further opening trade and investment flows in the region and launching innovative initiatives to jumpstart economic growth and development, the Bush Administration has shown its commitment to the region's future.
Thank you and I am happy to take questions.
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