Thank you, Maria, the Andean American Associations, and all participants throughout the Latin American and Caribbean regions.
I also want to thank Juana Caicedo, President of the Ecuadorean American Association, for inviting me and organizing this event.
I’ve worked closely with your various associations, and also AACCLA, the Association of American Chambers of Commerce in Latin America and the Caribbean, and AS/COA, the Americas Society/Council of the Americas, for decades. I’ve known you all to be truly committed to living and working in the region to expand commerce, investment, and jobs. It’s good to see the participation of many friends today.
I first started working on development and the unique challenges facing Latin America in my 1984 trips to Honduras and Guatemala for the U.S. government. The region faced under-investment, superpower tensions, the aftershocks of Mexico’s peso and debt crisis, and a range of unmet health and education deficits. The damage was severe and became a lost decade in terms of development.
I was privileged to work on several projects in the 1980s that contributed to an eventual recovery including: major trade liberalization, the securitization of bank debt through Brady bonds, the capital increases for the World Bank and Inter-American Development Bank (IDB) in 1988 and 1989, and, in 1990, the Antigua Summit and Enterprise for the Americas initiative.
With the end of the Cold War, there were new leaders in the region, increased trade, and stronger financial inflows. These helped the region finally start a recovery. Turning the clock forward to today, I note the similarities in the nature of the problems, and also similarities in the fervor of our hope for a recovery process.
Beyond COVID-19, the region faces problems similar to the 1980s: weak investment and productivity, superpower conflict, inflation, and rising poverty, to name a few. The debt burden is similarly heavy and hard to restructure, though it is a different type of debt requiring a different debt treatment than in the 1980s. This time, rather than syndicated loans from external banks, the sovereign debt includes Eurobonds, internal bank debt, and large debt and debt-like instruments to Chinese institutions. Each of these debts often demands high interest rates and might not be treated under Paris Club reprofiling processes. Private markets are distorted due to barriers to market entry and exit and to competition. People face physical insecurity, which contributes to migration flows.
Such severe problems risk another lost decade. I know this is what everyone on this call and throughout the region wants to avoid. The mission of the World Bank is exactly that – to work to reverse this downturn – to alleviate poverty and help people achieve shared prosperity, meaning a broadly higher standard of living. In addition to growth rates and per capita GDP, the World Bank recognizes the importance of non-economic measures of prosperity including access to electricity, clean water, health, education, and nutrition; environmental protection, biodiversity and resilience to climate change; and connectivity to people, information, and financial services. The foundation for these is built on governance systems that foster strong institutions and the rule of law, protect human rights and small businesses, and reduce corruption and crime.
People in LAC deserve all of this, but the daily reality falls far short. Indeed, poverty rates are going up, not down, even though the people are as talented as anywhere in the world and embody innovation, hard work, and natural resources in abundance.
I should note at this point that I recognize dramatic differences in people and governments across the region, and I am only lumping everyone together in the most general way, based on their geographic proximity to each other.
In GDP terms, the LAC region contracted by 6.5 percent in 2020 according to the latest World Bank figures. This is the sharpest regional economic contraction since we have had reliable data starting in 1901. Bolivia, Argentina, and Peru suffered the deepest contractions of 9%, 10%, and 11% respectively. Debt to GDP levels have increased by about 10 percentage points in 2020 (to 72% from 62% in 2019).
The social impact has been devastating. About 24 million people lost their jobs. The informality of labor markets made the human setbacks even worse, with poor access to safety nets. The private sector was strongly affected across the spectrum from large companies to microenterprises. We estimate that 28 million people have fallen back into poverty.
While inequality is a worldwide problem, it is particularly apparent and problematic in the LAC region. Even before the pandemic, the per capita growth rate for the region was below 1 percent over the past decade, a reflection of poor productivity growth and faltering reform efforts.
I’ve commented elsewhere on the many external causes of inequality – the concentration of fiscal and monetary stimulus in the advanced economies; the channeling of that stimulus to existing assets and financial instruments, causing concentrated gains for a small group at the expense of broader growth; and regarding sovereign debt, the powerful bias in favor of creditors.
The pandemic worsened these inequalities because informal workers and the vulnerable were hit the hardest. The limited access to vaccines is adding materially to this problem, leaving hundreds of millions of people behind. And the differing effectiveness of the various vaccines compounds this problem.
In combination, the inequality has further amplified the underlying social tensions, which we are seeing in Chile, Ecuador, Peru and more recently in Colombia. General elections in the region are reflecting deep divisions, polarization, and the resurgence of populism.
I want to turn to a more positive note. For Latin America, recent years have been a time of substantial structural transformation. The COVID-19 crisis brought a surge of high-productivity sectors, including information and communications technology, finance, and logistics. As shown in our recent report Renewing with Growth, some countries in LAC have strong capabilities in this area. In a region that is home to three dozen “unicorns,” about half a dozen countries in the region may be positioned to reap benefits from recovery.
As countries allocate and mobilize the electromagnetic spectrum, it can unlock huge value. Even in Argentina, a country going through a very severe crisis, GDP shrank by US$62 billion in 2020 but the value of the three biggest ICT companies (which does not count as GDP) increased by US$66 billion.
The pandemic has shown the huge value of social safety nets that allow digital payments. This can support families and the most vulnerable at much lower cost than previous systems. We’re working to help countries build digital infrastructure and social registries. These investments allow for a vital response during crises and also benefit financial inclusion and help lower the cost of digital transactions.
These techniques can rapidly equalize the differences among people and even nations. For Latin America, the disruption may be enough to push the traditional banking sector into greater efficiency – for many countries, helping overcome an obstacle that has lasted a century.
The external environment has also become much more helpful to LAC – at least for now. Trade in goods has returned to pre-pandemic levels. Demand from China is surging. Commodity prices now exceed, in some cases substantially, their levels of early 2020. As a result, the agricultural and mining sectors of Latin America are thriving again. Meanwhile the U.S. is expected to run a very sizeable trade deficit. Its stimulus policies amount to 4 percent of global GDP, much of it in additional demand, so the LAC region will be able to fill some of the gap in supply.
Among advanced economies, there is growing interest to diversify global value chains and promote near-shoring. The LAC regions is well placed to take advantage of these global trends.
Overall, while there is a broad pre-pandemic development agenda for the region that is still valid – including improving access and quality of education and health, widening and deepening the financial sector, improving infrastructure services and bolstering institutions – it is critical to continue to strengthen the private sector as the leading driver of growth, and support post-pandemic reforms that remove impediments to growth and help markets develop faster and with more innovation. Leap-frogs in technology can materially shorten the timeline for development.
For long term growth, there is a big agenda on private sector regulatory reforms to boost competition and productivity.
First, LAC needs a supportive business environment that is conducive for entrepreneurship. However, LAC still ranks low compared to other regions on key aspects of doing business, such as the ease of getting credit, enforcing contracts, or trading across borders.
Second, in many countries it is important to address distortions induced by State ownership. SOEs still have a significant footprint in LAC, with revenues around 13 percent of regional GDP in 2018. This presence of SOEs can displace private investment, create market distortions and lead to significant fiscal costs. Market competition policies are also needed to reduce price-fixing agreements created by cartels (cartel agreements register an average price overcharges of 39 percent and are present in key economic sectors such as manufacturing, retail, transport, bid-rigging procurement).
And third, foreign direct investment (FDI) can play a big role in improving competition and productivity. FDI inflows to LAC have grown over time, but they still constitute a relatively small share of global FDI (10.6 percent in 2019). The most significant problems often relate to legal and regulatory frameworks for FDI, especially frequent changes in regulations which are not always transparent and are overall cumbersome. I’ve been pleased to see Ecuador take steps on dispute settlement in recent days. Combined with dollarization, steps to welcome investment can have a big impact on both foreign investment and, importantly, on the rate of investment by Ecuadoreans.
I’d like to briefly mention World Bank Group activities in the region. They are substantial. Since April of 2020, the start of the pandemic, we have committed nearly $10 billion to the LAC region. We have health related programs in 24 countries, and we'll continue expanding that along with vaccination programs. We work with countries to improve the investment climate and provide support for meaningful investment projects. In Mexico, one of many high priorities is helping improve its national digital ID system. In Colombia and Ecuador, we're working to bring grant resources through the Global Concessional Financing Facility – it helps provide basic services for the Venezuelan migrants and refugees that are needing support and to the communities that are hosting them.
We're working closely with the IDB and also with the IMF across the region. Productivity is very important, as is bridging the digital divide to facilitate the private sector. I’d like to mention two key parts of the World Bank Group that are working across the region to help the private sector and the business environment – namely, the IFC, the International Finance Corporation and MIGA, the Multilateral Investment Guarantee Agency,
I’ll conclude my remarks on trade – which is where I started my U.S. government career in 1984. The LAC region has a great opportunity post pandemic to expand trade through more dynamic global value chains. LAC’s economies are still less open than advanced countries or emerging Asia. For LAC, trade is 47% of GDP – for emerging Asia, 105%, more than double. Of most concern is that exports have grown only modestly, and most LAC economies continue to concentrate on commodity exports that face volatile markets and often have limited domestic multipliers. LAC’s exposure to dynamic global value chains in advanced manufacturing in services is significant only in Mexico, with some exposure in Argentina, Brazil, and Costa Rica. Deeper trade agreements can help tap global demand and nearshoring opportunities. No other region, barring Western Europe, has signed as many trade agreements as LAC. But most of these agreements are intra-regional, bringing in more photo opportunities than actual trade. However, a new generation of deep trade agreements with advanced economies is taking hold. These agreements deal with critically important behind-the-border issues such as competition, government subsidies, public procurement, ports operation, and labor and environmental standards. The word “trade” does not fully reflect their richness, as only a dozen of the more than 50 policy areas they have collectively dealt with are covered by the WTO. As shown in our report Trade Integration as a Pathway to Development?, agreements such as the recently adopted US-Mexico-Canada partnership offer significant opportunities for the region. It will be important for a strong recovery that LAC take more aggressive advantage of those trade agreements that are within reach.
In sum, another lost decade is avoidable, especially given the region’s energy capabilities, tourism, and biodiversity. Some of the biggest gains in prosperity have come in the aftermath of crisis. I’ll leave you with three thoughts: 1) The region’s future growth and prosperity will very much depend on the decisions leaders make in the coming months – political leaders and also business leaders like yourselves; 2) development assistance including that of the World Bank can provide material support, but not nearly enough to reverse the downtrend; 3) to achieve long-term sustainable growth and jobs will require a vibrant private sector.
With that, I’d be pleased to take questions.