By Ricardo Ávila
At the close of business hours on Tuesday, Alejandro Werner will end his tenure as director of the International Monetary Fund’s Western Hemisphere department, a position he has held since January 2013, and from which he had a privileged view of the hemisphere. A few hours before leaving his office in Washington, he spoke exclusively with Bloomberg Línea.
Edited excerpts from the conversation:
A balance of his management:
They were almost nine very interesting years, as any 9-year period in a region with as many economic, social and political problems as Latin America is very likely to be. When I started in 2013, the region was already fully recovered from the impacts of the global financial crisis and was also clearly benefiting from the new growth of the Chinese economy.
The Monetary Fund already saw that this was not enough to generate another chapter of significant growth. And we were wrong because, not only was it not enough, but in 2014 commodities fell again. The adjustment to living standards more consistent with a less favorable international environment was very costly, with financial problems.
The region as a whole entered a period of slow growth, more in line with productivity fundamentals, and perhaps making it clear that an era associated with favorable terms of trade was a reflection of external conditions. In the midst of these circumstances came the pandemic. I believe that at the IMF we did the job of being part of the debate on appropriate public policies, of supporting those countries that needed financing and of opening a wider range of mechanisms, such as the flexible credit line that Colombia has. More than 20 countries received resources for more than US$60 billion.
The singularities of Latin America
Having taken part in the regional debate, always from Mexico’s perspective, I did not have such a deep regional vision. At the Fund, I understood much better the economic dynamics associated with the cycles generated by commodity prices. I also understood in other countries the need to slow down certain processes or to have instruments such as capital controls or prudential measures in the financial sector. (I also understood) the issue of accompanying the measures more oriented to productivity, stability, development of a business facilitation environment, with a social policy and a more aggressive redistributive policy to achieve a sustainable economic and social balance in the medium term.
With respect to the processes of social discontent that we have seen (in the region), I think that the public policy framework has to contain a package or a number of measures that validate the legitimacy of the economic system, of the social system. These could sometimes include some taxes that are less efficient but that have a clear redistributive role. The economic system has now moved to one that generates growth, but also generates an even more unequal redistribution than we had before. And in these economies, where a more powerful middle class has developed, these inequalities also give rise to a lack of legitimacy of the system, because not everyone is benefiting in the same way.
What went right during the pandemic
In terms of macroeconomic policy, the region implemented a much stronger fiscal stimulus package than we would have anticipated.
And what did not
Wrong measures were taken, such as, for example, the withdrawal of funds from pension accounts in Chile. It’s not a targeted support and weakens the ability to withdraw in the future. It also generates volatility in the markets and was not necessary either. If it was felt that more fiscal support was needed, the Chilean government had room. So there were better mechanisms than going to break the piggy bank. Something much more powerful could have been done from the fiscal balance, as in the case of Mexico, where almost no support was given to anyone. That is probably why the Mexican economy was one of the most affected when it should have been one of the least.
Wrong measures were taken, such as, for example, the withdrawal of funds from pension accounts in Chile. It is not a targeted support and weakens the ability to withdraw in the future. It also generates volatility in the markets and it was not necessary either.Alejandro Werner, IMF Western Hemisphere Director
This was a crisis that hit the most vulnerable directly, as it hit the service sector hardest, where the least educated workers and, proportionally, more women and young people are represented. Those countries that implemented more aggressive social programs managed to lessen this impact through transfers. Obviously, as a result of the pandemic and these social effects, there are three gaps to correct. One is that we are probably four to eight years behind in terms of progress in combating poverty and improving income distribution. Secondly, the precariousness of our public health services was evident, for which more resources will have to be invested. And thirdly, education. Latin America was the region in the world with the greatest loss of classroom hours in primary and secondary school, not to mention access to technology and school dropout rates.
Non-conformism and the new normal
There was a set of economic, social and political conditions that led to processes of social mobilization. I believe that many of these conditions were aggravated during the pandemic. In a context of public finances, where we are going to come out with more debt, with higher deficits, there will be no room to correct some of these problems with greater resources in the absence of changes in the fiscal structures, both in spending and taxes. On the political side, one might have thought that the pandemic could have led to a process of greater national unification because it was an exogenous health phenomenon. But, in general, it also contributed to greater political polarization. It gives the impression that our political system is excluding very important sectors that are trying to reflect their position in the streets. I believe that in the coming years this will become part of normality and it will be very important that the governments, the opposition, the congresses, find a way to integrate these sectors into the debate on public policies so that these processes are generated in an environment of greater inclusion and there are fewer protest marches.
The region will be more vulnerable to leadership that offers easy solutions to complex problems.Alejandro Werner, IMF Western Hemisphere Director.
Populism is a difficult term to define. I believe that there is a greater risk of establishing easy, short-term solutions to problems that require more structural solutions. In that sense, the region will be more vulnerable to leaderships that offer easy solutions to complex problems.
Interest rates and lower international liquidity
Many countries have monetary and exchange systems that work well with a sufficient degree of flexibility and anchoring of expectations in terms of inflation in the medium term and also with central banks that have a very large level of reserves. So there are mechanisms on the monetary side to deal with it. On the fiscal side, the problem becomes much more complex due to the need to reach consensus in order to establish tax and public expenditure systems that guarantee sustainability in the medium term. Here I believe that things may become more complicated, since we are going to see higher rates and the interest payment bill of the public debt starts to become larger.
Opportunities for the region
(LatAm) is isolated from the major geopolitical problems that today plague the global economy and it can relate to all the major blocs. This offers opportunities with Asia, the United States, Europe and Africa. Latin America is therefore a good destination for foreign direct investment, a good destination for tourism, a good source of natural resources, and manufacturing exports. Also, being a follower in the adoption of digital technologies, it can suddenly skip a generation or two and begin to quickly adopt proven and more far-reaching technologies. Large copper or lithium deposits, key to the energy transition, are another opportunity.
Latin America is isolated from the major geopolitical problems that today beset the world economy and can relate to all the major blocs. This presents opportunities with Asia, the United States, Europe and Africa. That is why Latin America is a good destination for foreign direct investment.Alejandro Werner, IMF Western Hemisphere Director
Colombia is having a good 2021, in terms of growth. But it is framed in the reality of a region that is the furthest behind in recovery compared to 2019. Colombia falls within this diagnosis, but the recovery is stronger than we thought. The discussion that is taking place to make a tax reform is a good sign. I believe that, despite the problems, it is moving forward with a process that is a little more responsible than what we see in other countries in the region. Also from the monetary and financial side, Colombia took advantage of all the instruments, had good access to the financial markets and extended the flexible credit line it had with us. The loss of investment grade reflects the problems that had accumulated before.
Special Drawing Rights in Colombia
The Fund’s position is that, given the shock that the international economy is going through and given the instruments available, the use of Special Drawing Rights must be carried out based on the particularities of each country. Colombia has sought to maintain the pillars of its institutional framework of sound macroeconomic policy, without surprises, but using the instruments it already has to support the population. That is why it used part of the flexible credit line. And I believe that the use of the special drawing rights responds to the same thought process. It is correct, given the Colombian reality, with sufficient safeguards, to use a policy resource in the face of a shock such as we have not had in decades.
Latin America in the 2020s
The result of all these trends will lead us to see a mediocre decade in Latin America in terms of economic performance. It will be very difficult to circle the square in order to give a significant dynamism to some of the economies in the region. However, most of the economies will probably manage to find a process in which they avoid the worst scenarios: that they achieve some growth and some recovery in the fall in social indicators. Some countries will not achieve this and will be more likely to enter into crisis in the next five years. But those that have established systems and institutions that have guaranteed us a predictable, rational decision-making process will manage to avoid bad equilibria, will manage to put their economies on the road to recovery.