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Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

• IMF Survey Interview

IMF Survey: Latin America Needs Faster, Durable Growth

January 29, 2007

In December 2006, Murilo Portugal of Brazil joined the IMF's four-member management team as Deputy Managing Director, with broad responsibilities in running the IMF—including overseeing the technical assistance (TA) initiative.

Murilo Portugal: "To improve social conditions a country needs to maintain macroeconomic stability" (Photo: Stephen Jaffe/IMF)

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INTERVIEW WITH MURILO PORTUGAL

Portugal, who until recently was Brazil's deputy finance minister, had previously served as an IMF Executive Director (1998-2005) representing a Latin American constituency and as a World Bank Group Executive Director (1996-2000). He shared his thoughts with Laura Wallace of the IMF Survey on Latin America's economic outlook and the TA effort.

IMF Survey: The whirlwind round of about a dozen presidential elections in Latin America is nearly over, just Argentina later this year. How do you see the political economy landscape shaping up? Any thoughts on negotiating programs with Peru and Nicaragua, now headed by 1980s presidents who had been extremely vocal critics of the IMF?

Portugal: Democracy is thriving in Latin America—in fact, it's one of the most positive changes in the region of the past two or three decades—and presidential elections are a vital part of the process. Elected leaders not only have greater legitimacy, but they also have greater political strength to implement needed reforms. And the strengthening of democracy has gone hand in hand with better macroeconomic management and sound macroeconomic policies. Inflation has fallen, the increase in the public debt has been halted and even started to be reversed in many countries, and the region is more open and integrated with the world economy.

In addition, there's a widespread understanding that to improve social conditions a country needs to maintain macroeconomic stability. This thinking has held up even when there's been a shift in political power to more left-leaning governments, as in Chile, Uruguay, and Brazil. The two leaders you mentioned—President Garcia of Peru and President Ortega of Nicaragua—also exemplify this situation because they've both given very encouraging statements about the need to maintain macroeconomic equilibrium as a basis to continue to make progress on social issues. In fact, the IMF just concluded negotiations with the new Peruvian authorities on a new precautionary loan. And we've had very good initial contacts with President Ortega.

"The IMF's priority now is to help countries overcome the problems identified in our surveillance or program work, especially macroeconomic and financial sector vulnerabilities."

IMF Survey: When Uruguay last year followed Brazil and Argentina in paying the IMF off early, there was talk of Latin America choosing to distance itself from the IMF. How do you see the IMF's relationship now with both the big and small countries in the region?

Portugal: Early repayments to the IMF should not, and need not, be interpreted as a choice of the country to distance itself from the IMF. Rather, it should be seen as a sign of financial strength that a country wishes to give to the markets. Some countries have made a deliberate effort through public statements to indicate that early repayment shouldn't be interpreted as an abandonment of existing policies or a distancing from the Fund. In fact, Uruguay insisted on having the last review of its program—which contained an important new tax reform—finalized.

As for the IMF's new relationship with countries in the region, whether large or small, I expect it to be based increasingly on surveillance, which is the bread and butter of the Fund, and technical assistance. That's why it's important that we continue to strive to improve the effectiveness of our surveillance—providing the highest-quality policy advice based not only on solid theoretical ground but also on a wealth of cross-country experiences.

IMF Survey: Can Latin America as a whole maintain the 4-5 percent growth of the past few years, and will that be enough to make a dent in poverty and inequality? And can the region finally claim victory over out-of-control inflation, especially in light of recent developments in Argentina and Venezuela?

Portugal: Some Latin American countries have maintained a very high growth rate—higher than the 4-5 percent range. But the region's average growth record so far is still disappointing, considering its potential and its needs. Higher growth is essential for the region to improve social conditions, maintain political support for sound macroeconomic policies, and further reduce vulnerabilities. But this growth has to be achieved while preserving macroeconomic stability or it won't be durable. And for that to happen, countries have to move faster in carrying out structural reforms and social policies that would contribute to social inclusion and poverty reduction.

As for inflation, there's been major progress in the region, with a declining trend since the mid-1990s. There have been periods when inflation increased, as a result of either external shocks or domestic shocks, but it was soon brought back to a declining path. It has certainly helped that there have been a series of institutional improvements in the framework for monetary policymaking—such as the adoption of inflation targeting and greater independence for central banks. Price controls are more an exception than the rule. We know that they work, at best, only temporarily and only in exceptional circumstances when there are substantial market failures, such as natural monopolies. They're not a lasting solution because they only repress inflation, rather than eliminate it, and lead to a buildup of cost pressures, create inefficiencies in the use of economic resources, and depress investment.

IMF Survey: How high a growth rate does the region need?

Portugal: It will need to go higher than the 4 percent range—maybe 5, 6, or 7 percent—but there's no magic number.

IMF Survey: You've worked with the IMF in many different capacities—as an Executive Board member, as Brazil's deputy finance minister, and as a government official in one of the IMF's most active program countries. What have you learned from these interactions that will guide your dealings now with member countries?

Portugal: The first lesson is that you need to have the right set of policies to deal with the situation. If the policies aren't appropriate, the program won't work. A good example is Brazil's 1998 program, which was based on maintaining a fixed exchange rate. There was strong government ownership, but the policy was inappropriate. As a result, the program didn't work until Brazil shifted to a floating exchange rate. The second lesson is that there needs to be strong government ownership. Otherwise, even if you have a well-designed program, there's a chance that the implementation won't happen or will be weak. The third lesson is that countries also need financing. Economic policies take time to generate results, so there's a gap between the time a country starts to implement policies and the time the results start to appear. And if the IMF puts its own money at risk, that also sends a positive message to economic agents that may not have sufficient information to judge whether the policies are appropriate or the government has strong ownership.

IMF Survey: You mentioned TA, which currently takes up about 25 percent of the IMF's budget. Do you expect it to continue at that level?

Portugal: I don't see any reason why the level of TA we provide would be reduced. TA is a core output of the IMF (see Box). While it helps mainly the recipient country, it also has elements of an international public good in the sense that improvements in the performance of the recipient country may benefit its neighbors. And although the IMF is a relatively small provider of TA compared with other donors, it works closely with them to increase synergies.

IMF Survey: About 25 percent of all TA is externally financed, and for field delivery only, it's about 50 percent. Do you expect external finance to play a more important role in TA?

Portugal: There has to be financing, whether it comes from donors or recipients. Thus, it's vital that the IMF continue to mobilize external financing. We've got to strengthen our dialogue with donors and continue to improve the quality of our TA—which is why we've been working hard to implement the suggestions from the IMF's Independent Evaluation Office in its review of our TA in early 2005. We also need to prove to donors that we're cost-effective in delivering TA, and we need to perfect our mechanisms to monitor, manage, and evaluate TA.

IMF Survey: How do you see the IMF balancing its own institutional priorities with those of donors and dealing with donors' expectations to see concrete and monitorable results?

Portugal: I don't see a major problem, because the IMF is a multilateral organization and our priorities are established by the Executive Board, on which the donor countries are represented. But TA, even when it's financed by donors, must continue to be driven by the priorities of the recipients and the institutional priorities of the IMF—not the priorities of those who are financing it, if those happen to be different. The IMF's priority now is to help countries overcome the problems identified in our surveillance or program work, especially macroeconomic and financial sector vulnerabilities. Another important aim is to help them build or strengthen economic institutions. TA has an important role to play to help achieve these two aims.

IMF Survey: The IMF has taken an increasingly regional approach to TA by establishing regional TA centers, most recently in central Africa. How well is this approach working, and are there any plans for more centers?

Portugal: It's working very well. Once you have a local center, it allows you to respond more quickly to country requests and better tailor the TA to the country's needs. It also allows for greater ownership by the recipients, because they participate in the center's steering committees. We're now in a period of consolidating our six centers. I know that there have been requests for additional centers, but we've haven't decided about them yet.