Speech

The Compendium and the socio-economic reality of America, Address by Mr. Agustín Carstens, Deputy Managing Director, International Monetary Fund

November 21, 2005

Your Eminences, Dear Bishops, Ladies and Gentlemen,

I am delighted to be here today. It is an honor to be invited to speak at this important first in a series of regional meetings. It also gives me much pleasure to have the opportunity to do so in my own home country of Mexico.

A Welcome Initiative

The Compendium of the Social Doctrine of the Church by the Pontifical Council for Justice and Peace is a most welcome initiative. This much anticipated work brings together the invaluable contributions of bishops and scholars from every part of the world, and will undoubtedly make for a deeper understanding of the Church's social doctrine by all who read it. With refreshing clarity, it provides everyone—believers and non-believers alike—with a true synthesis of the Catechism of the Catholic Church, and an entire panorama of the Catholic faith. The Pontifical Council is to be commended most highly for bringing this magnificent work to fruition.

Particularly relevant to my institution is the Compendium's call to international organizations to perform their function of guidance in the economic field effectively. This, of course speaks directly to the role of institutions like the IMF. International agencies, it emphasizes, must guarantee the attainment of the common good, which is the basis of the right of all to participate in the process of full development, duly respecting legitimate differences.

Working toward a Common Objective

At first, many people will wonder what the Catholic Church and the IMF can possibly have in common. The truth is that our two institutions share some common objectives. The Church has long been a tireless advocate for socio-economic development and poverty reduction around the world, and its efforts find deep resonance with us at the IMF. The IMF was made responsible for ensuring the stability of the international monetary and financial system. In this capacity, the Fund promotes economic stability and helps prevent or resolve crises when they occur. But it must be made clear that these goals are not ends in and of themselves, but a vehicle for achieving higher objectives, such as promoting economic growth and overcoming poverty. It is this poverty reduction dimension that is perhaps the most important area of common endeavor between the Catholic Church and the Fund.

The Compendium discusses the fight against poverty in such a refreshingly poignant way that it almost gives it new meaning as it calls all parties to action. It indicates that fighting poverty is part of the essence of the Church's social doctrine. At the beginning of the new Millennium, it notes, the poverty of billions of men and women is the one issue that most challenges our human and Christian consciences. It goes on to make what I consider to be one of the most important statements that we should keep uppermost in our minds: "the poor should be seen not as a problem, but as people who can become the principal builders of a new and more human future for everyone." The IMF fully subscribes to this statement.

Economic Outlook for the Americas

As the year 2005 draws to a close, it makes sense to wonder about recent developments and the economic outlook for the Americas today. This is of particular interest as macroeconomic issues have a clear bearing on socioeconomic and human development issues. Like the rest of the world economy, countries in the Americas experienced very strong economic growth during the past two years and the outlook for next year continues to be promising. Of particular note is the strength of the U.S. economy, which, along with the economies of China and other East Asian countries, has been the primary engine of growth in the world economy, despite an environment complicated by high oil prices. Canada, for its part, has been growing at rates higher than those of most of the other industrial countries.

In Latin America, growth for 2004 was 5.6 percent—the highest rate since 1980—while projections for 2005 and 2006 continue to be favorable, with growth rates of around 4.0 percent. The region has certainly benefited from high world growth and rising prices for the commodities produced and exported by many of the region's countries, but it has also benefited from the persistent application of sounder macroeconomic policies.

Despite higher prices for oil and some commodities, inflation has remained relatively low, averaging 6.5 percent last year, with a projected further decline to 6.3 percent for 2005. The region's external position has continued to turn around and improve, and many regional governments have taken advantage of the favorable economic conditions, and the associated revenue boost, to strengthen their fiscal positions.

Considering the region's history of macroeconomic instability, these have all been welcome developments. Nevertheless, now is not the time to be complacent, for a closer look reveals a less optimistic picture. For instance, although the last two years have seen economic growth in all regions and in all developing countries, Latin American growth was among the least vigorous. And while we applaud the success in reducing inflation, some countries in the Americas still face price pressures. Further, unemployment and poverty remain unacceptably high, and severe income disparities persist.

I highlight these limitations, not to discount the achievements of recent years, but rather to suggest that unless underlying weaknesses in regional economies are addressed, we risk wasting the important recent accomplishments. For leaders in the Americas, the key priority now is to build upon the recent gains and promising outlook for next year by implementing economic reforms that will generate stable, sustained, and faster growth, as the foundation for economic security and poverty reduction. I would like to briefly discuss the nature of these reforms.

A weak spot for many developing and emerging economies, especially in Latin America, has been high public debt levels. A significant portion of the debt in the region stems, in fact, from banking crises. A first wave of banking crises hit several Latin American countries starting in 1994, first affecting Bolivia, Brazil, Mexico and Venezuela, followed later by Argentina, Paraguay and Ecuador. A second wave of banking crises occurred in the late 1990s, affecting countries like Uruguay, and later Argentina and the Dominican Republic. Banking crises in the region led to substantial borrowing, and contributed in no small way to the high public debt levels. This leads me to the first proposed reform: it is essential that the Latin American countries strengthen the institutions that supervise and regulate their financial systems to provide societies with the security that recurring banking crises can be avoided.

The excessive debt levels of many countries have also resulted from a poor allocation of public resources—in short, the resources that were borrowed have sometimes been wasted. For this reason, fiscal responsibility on the part of the authorities is essential. The authorities must respect the sanctity of contracts, manage resources judiciously, ensuring that they are used in the most efficient, productive and transparent way, and are not subject to waste or corruption. This brings me to a second essential reform: laws on fiscal accountability and efficiency and transparency of public expenditure must be promoted to create an institutional framework for avoiding excessive debt and wastage of public resources.

It is important to recognize that sound macroeconomic and financial policies alone will not be enough to spur the desired level of economic growth and poverty reduction. These policies need to be accompanied by structural and institutional reforms that reduce impediments to investment, trade, and the efficient allocation of resources. In this regard, weak rule of law and judicial systems in the Americas continue to undermine property and contractual rights. Procedural complexities and regulatory burdens to starting a business in this region are, according to some studies, the highest in the world. Together, these factors make the Americas one of the least attractive locations for investment. For this reason reforms that tackle these problems are essential. To put it simply, without higher investment it will not be possible to achieve higher growth.

Additionally, labor market reforms remain neglected in the region, with Latin America and the Caribbean continuing to rank unfavorably in international comparisons of labor market rigidities. Experience shows that such reforms can play an important role in raising investment, growth, and employment. Removing impediments to employment in the formal sector can also yield considerable social benefits, since workers in the formal economy enjoy legislated labor market protections which do not exist in the informal sector.

It is also striking that, despite recent gains, the Americas remain much less open to foreign trade than other fast-growing regions. This lack of an outward orientation handicaps the region's ability to reap the benefits of globalization and take full advantage of the global expansion, including in China. Increasing the region's export orientation-by further liberalizing trade policies-can play a critical role in both stimulating growth and reducing vulnerabilities. Regardless of progress in the multilateral Doha round, Latin America itself can, on its own, do quite a lot by reducing external tariffs, limiting the use of non-tariff barriers, and relaxing restrictions on trade in services.

Political Economy

As you can see, the reform agenda for the Americas is long and challenging, though it is clearly not uniform. The region is diverse, with countries at many different stages of development. While the circumstances of each economy will have to be considered separately, any country launching reforms will need to address one important issue—how to ensure success by building broad support for, and ownership of, the required policy measures. There will undoubtedly be resistance to some of these measures, as could be expected in all dynamic societies. Governments will therefore have to work hard to build support for reform. The Catholic Church should continue to play an important role in the civil society dialogue that is necessary to build such support.

The fact that many countries in the Americas will hold elections before the end of 2006—including the largest Latin American countries—poses both challenges and opportunities. For many decades, elections in this region were often associated with instability and economic turmoil. Fortunately, the recent experience has been much more encouraging, thanks to the increased social awareness in the region of the importance of preserving macroeconomic stability as an essential factor for growth, job creation, and poverty reduction. At the risk of oversimplifying, I could say that the main economic policy challenge facing new governments in the region is reconciling the response to the clear and urgent need for support that stimulates human and economic development with the inevitable caution that any government must show to ensure that the progress in all areas is sustainable over time.

The IMF's Role

Now let me share with you a bit about how the IMF is involved in helping to support many of the efforts of countries in the region—both low-income and middle-income countries, as middle-income countries in Latin America collectively encompass the largest number of the region's poor.

The IMF endeavors to assist the low-income countries essentially through technical, advisory, and financial assistance to enable them to achieve the basic macroeconomic conditions that serve as a foundation for accelerating economic growth in a sustainable fashion and reducing poverty. An important qualitative change in our interaction with the member countries is that we try to ensure that our assistance at all levels is adapted as closely as possible to the specific needs of each country.

Our basic support program—the facility specifically intended to promote growth and reduce poverty, the Poverty Reduction and Growth Facility (PRGF)— consists of a concessional financing program underpinned by comprehensive country-owned poverty reduction strategies. Our work in this area involves close collaboration with civil society, and here the contribution of the Church to the poverty dialogue has been extremely important.

It is also worth mentioning that just a couple of weeks ago our Executive Board approved a new financial facility that will helped the poorest countries face temporary exogenous shocks that could have a broad impact on economic growth and the well-being of the population in the short term—such as abrupt changes in the prices of commodities such as oil and grains, or natural disasters.

A second dimension of the IMF's support for the low-income countries is its participation in ongoing international initiatives to solve the problem of excessive debt levels in these countries. The Compendium of the Social Doctrine of the Church is quite specific on this topic. It acknowledges the complexity of debt issues, and notes that when considering questions related to the debt crises of many poor countries, the right to development must be taken into account. It reaffirms the principle that debts should be repaid, but suggests that ways must be found that do not compromise the fundamental right of peoples to subsistence and progress.

Debt relief is important, as it plays a significant role in giving low-income countries a needed boost. At the center of the IMF's debt relief efforts has been the Heavily Indebted Poor Countries Initiative (HIPC). The initiative was first launched nine years ago by the IMF and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. The initiative has entailed coordinated action by the international financial community, including multilateral organizations and many industrial and middle-income country governments, to reduce the external debt burdens of the most heavily indebted poor countries to sustainable levels.

The IMF has also enthusiastically welcomed the proposal for debt relief proposed by the Group of 8 nations (G-8) earlier this year. This proposal calls on the IMF, the World Bank and the African Development Bank (AfDB) to cancel 100 percent of the debt owed to them by certain heavily indebted poor countries. The initiative aims to complete the process of debt relief for heavily indebted poor countries—including some in this region—by providing additional resources to help these countries reach the Millennium Development Goals (MDGs). Accordingly, it will be vitally important that the beneficiary countries apply the resources efficiently and transparently to programs in the health, nutrition, education, housing and other sectors that favor human development.

The IMF has been expanding its role in middle-income countries as well. After all, most of the countries that make up the Latin America and Caribbean region are middle income countries. A lot of our work in the region has contributed to crisis prevention. It is to the credit of many middle-income countries of the region, working closely with the IMF and drawing on Fund advice, that they have been able to steer clear of the kind of crises that was so common in the late 1990s and have withstood the contagion from such crises in other countries. We encourage governments to adopt sound economic policies and strong regulatory regimes that will reduce their vulnerability to sudden capital outflows. Where crises do occur, countries have the assurance of the Fund's readiness to provide financial support.

We continue to work closely with governments of the region to promote stability and sustained growth, and to address broad socioeconomic issues like income inequality that are still prevalent in many states. I would like to add that in all these endeavors the IMF does not act alone. We work closely with the World Bank and the IDB, achieving synergies that make our work in the region more effective.

Conclusion

In conclusion, I would like to say that the Church will always be an invaluable player in the development process. Its influence is essential in helping to build broad ownership across society of the economic, political and social reforms necessary for more rapid and inclusive development, ownership that extends beyond government and policy circles to civil society more generally. Building ownership requires more effective communication on long-term goals. It requires convincing people that policies designed to reduce vulnerabilities are necessary for achievement of the broader social objectives of poverty reduction and greater income equality. There is no doubt that the problems of poverty and human development must be effectively addressed if reforms are to win broad support and if they are to endure.

The Church is well placed to help communicate these messages. Making reforms and dealing with budget constraints is not an easy task for any government. People are often impatient, and usually want to see results within a very short time. But development does not happen overnight, as reforms take time to yield fruit.

Finally, once again, I want to commend the Pontifical Council for an outstanding job in ensuring the completion of the Compendium of the Social Doctrine of the Church. Given the undeniable wisdom of its words, its richness of ideas, and the all-encompassing perspectives on human and social issues that it offers, I have no doubt that this work and its dissemination will be a major catalyst to mobilize political, social and economic forces in favor of economic developed based on human development. As for the IMF, you have our commitment to maintain a continued dialogue and close collaboration with the Catholic Church in the quest for a world of peace, growth, and prosperity for all.

Thank you.