Political Risk Latin America Blog @PolRiskLatam

Latin America: Making the Good Times Better

Posted in News and Articles, Political Risk by politicalrisklatam on March 2, 2011

by Dominique Strauss-Kahn for IMFDirect, February 25th, 2011.

Latin America has enjoyed tremendous economic dynamism and a rising quality of life in recent years. But, faced with new challenges, the question is: how best to sustain this progress?

As I travel through the region this week—visiting Panama, Uruguay, and Brazil—I’m looking forward to hearing the views of government officials, parliamentarians, and university students on the key challenges facing their countries today. Here are three questions that I look forward to discussing during my trip.

First, as the region enjoys a time of abundance—una época de vacas gordas—can there be too much of a good thing?

Latin America’s economies are growing rapidly, buoyed by good access to external financing and high commodity prices. But potentially worrying signs of overheating are popping up—rising inflation, rapidly growing credit, and booming stock markets.

We all know how this story can end if policymakers don’t act early enough to prevent boom from turning into bust. Guiding their economies to a soft landing may be the most important near-term challenge facing policymakers in Latin America today.

Withdrawing the macroeconomic stimulus adopted during the global crisis should be the first step—and some countries are already doing so. Countries should probably begin with fiscal policy, to reduce the burden on monetary policy. In some cases, however, rising inflationary pressure calls for action now on both the fiscal and the monetary fronts. Exchange rate flexibility is also important. In the current setting, appreciation can help temper capital inflows, by making foreign investors think twice about future exchange rate risk. To protect financial stability, prudential measures may need to be tightened. Finally, while capital controls may be useful temporarily in some cases, they should not be considered a substitute for macro or prudential measures. (continue reading… )



2 Responses

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  1. Per Kurowski, Rockville, Maryland said, on March 3, 2011 at 2:57 pm

    I agree with all what is said by Dominique Strauss-Kahn but would add the following:

    Latin America should make sure that their bank regulations, based on the Basel Committee´s induced risk-adverseness, does not produce additional competitive advantages for what is perceived as having low risk, and therefore creates an additional disadvantage for those perceived as more risky, like small businesses and entrepreneurs, when it comes to competing for bank credit.

    Currently “risky” clients are required to pay even higher interest rates than would be the norm in a market without regulatory discrimination based on perceived risk, since besides the normal higher risk-premium, they also need to compensate the banks for the fact that these need to hold more capital when lending to them.

    Latin-America should also be weary of the pro-government bias induced by the Basel Committee in terms of allowing the banks to hold much less capital when lending to “low-risk” governments. As an example billions of bank liquidity in the developed countries are currently painted into the corner of government debt which requires no capital, and cannot go to the corner of loans to small-business or entrepreneurs because that would require too much bank capital, which is very scarce.

    Finally, Latin-America (like the rest of the world, and the IMF) should also benefit from receiving more correct economic signals.

    Recently, in a conference on house financing reform, Alan Greenspan mentioned that before doing anything he would like to know better what would be the interest rates for house financing without any government intervention… which in other words means that Greenspan accepts as a fact that they are flying blind.

    When later (in private) I asked Greenspan “would you not like to know what the interest on public debt would be if the banks were required to have the same capital when lending to the government than when lending to a small business?” He answered “it is not precisely the same thing but it lies in the same area of interest”… in other words in the same general area of blindness.

    Ps. Since Strauss-Kahn will not travel to Venezuela I leave out here thousands of comments relative to the oil-curse.

    • politicalrisklatam said, on March 3, 2011 at 3:41 pm

      Thanks for your comment!! Keep reading us.
      Looking forward to read your blog,
      Political Risk Latam Team

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