Introduction and Overview
Latin America is showing the world a face with attractive new features: more stability in its macroeconomic environments, and greater pragmatism in policy and institutional reform. Regional success, measured in terms of economic growth, foreign investment inflows or export dynamism, may not yet be as impressive as in parts of Asia, but many significant developments are quietly under way.
Policy Coherence for Development
Fiscal legitimacy — the trust people place in their government’s fiscal policy — matters for economic development and democratic governance because it affects the quality of a country’s fiscal policy. Many countries in Latin America suffer from a vicious circle in which poor-quality fiscal policy hinders the generation of tax revenue and the effectiveness of public expenditure, thereby weakening fiscal and democratic legitimacy, which in turn undermines the quality of fiscal policy. Brazil and Mexico illustrate: Brazil collects and spends much, Mexico collects and spends little, but neither performs well in terms of fiscal quality. In the 1990s, fiscal reform in Latin America focused with some success on insulating fiscal policy from politics, but many reforms ultimately failed because they did not take local political realities into account. Today, politics is returning to the front of the debate on fiscal and especially tax reform, with the link between fiscal policy and democratic governance beginning to gain the attention it requires. Decision makers need to exploit the linkages between fiscal policy and democratic governance to successfully implement fiscal reform and address Latin America’s urgent social challenges. Local think tanks can contribute by stimulating a debate on policy options and so play a crucial role in enhancing transparency, but they require financial autonomy to ensure their intellectual independence.
Finance for Development
Latin America leads the developing world in pension reform. Chile launched the process in 1981, followed since the 1990s by nine other countries in the region and some outside. The reform constitutes a transition from publicly managed "pay-as-you-go" to privately managed, fully funded retirement systems. Its objectives, in addition to providing a reliable source of retirement income for workers and reducing the fiscal drain on governments from existing systems, include two on which this chapter focuses: the enhancement of national savings, where overall results are not encouraging; and the deepening of local capital markets, where results are encouraging. Policy recommendations include measures to improve the alignment of incentives amongst pension-fund members (active and retired workers), sponsors (employers) and managers. Countries should re-examine regulations that hamper a healthy diversification of pension assets, while maintaining high prudential standards. Some countries must give attention to the excessively high administrative fees and costs that pension funds charge members. Better governance of pension funds can also enhance their role as agents for improved corporate governance outside the pension sector, contributing to long-term economy-wide productivity growth for the considerable benefit of workers, active and retired, and employers alike.
Business for Development
Since the early 1990s, foreign direct investment has increased dramatically worldwide. Latin America has been a major recipient of such investment, notably in conjunction with privatisation in the region during the 1990s. The emergence of new Latin American multinational corporations means that the region has also become a source of such investment, especially in the 2000s. The importance of both inward and outward foreign direct investment is particularly visible in telecommunications, a sector dominated in Latin America by two multinationals, one from each side of the Atlantic. Many countries in the region have taken great strides in building modern telecommunications infrastructure thanks to the combined effects of technological progress, the spread of mobile telephony and the market-seeking thrust of the leading competitors’ investment behaviour. The strength of a few corporations has, however, given rise to concerns over the nature of competition in the sector. Greatly expanded user access to telecommunications services increases the contribution of this sector to economic growth, but key challenges remain in establishing and ensuring contestable markets that will close international and domestic digital gaps between rich and poor segments of the population and provide telecommunications services to all. Effective access-promotion policies with clear and stable rules are needed together with well-regulated, open and competitive markets that promote innovation and encourage multinational corporations to maximise their collective contribution to the region’s long-term development.
Trade for Development
China and India represent trade opportunities rather than trade competition for the bulk of Latin American countries. Most of China’s increased exports raise stronger competitive challenges to its Asian neighbours than to Latin American countries, although some of the latter, such as Mexico, do face substantial Asian export competition. Chinese and Indian growth also opens Latin American export opportunities to new markets. For a few countries, notably Mexico and Brazil, this includes intra-industry trade, though for a majority of Latin American countries, the foremost trade opportunities are to be found in commodities exports. Already, the Asian Drivers’ heightened demand for oil and minerals has increased both revenues — through the rising prices of commodities — and direct trade with Latin America. Commodity-export specialisation can, however, have some unwanted effects on the economy unless it is managed by responsible macroeconomic policies and well-governed and efficient institutions. Most Latin American economies appear to be coping well, but the challenges will persist. One of the important factors for ensuring long-term diversified growth is investment in innovation. Brazil and Chile are among the prime innovators in Latin America but are still behind OECD-country levels, mainly because innovation in the private sector has remained limited. Another important factor that would help long-term competitiveness and growth is well-functioning and efficient infrastructure. In 2007, this is one of the most important drawbacks in Latin American economies. Investment in infrastructure is therefore also a golden opportunity for improving export competitiveness and, particularly for Mexico and the countries in Central America, for capitalising on their favourable geographic position.
LEO 2006-2007 Activities and Publications
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