Growth with stability. Financing for development in the new international context

Latin American and Caribbean Regional Consultation on Financing for Development - Bogotá, D.C. Colombia, 9-10 November, 2000

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Summary

During the 1990s, the Latin American and Caribbean countries experienced renewed access to external financing. This paved the way for progress in macroeconomic management, in reducing inflation and in resuming, to some extent, economic growth. The region was, however, highly vulnerable to the volatility exhibited by the various sources of external finance, with the exceptions of foreign direct investment and official credits. This instability is largely attributable to factors unrelated to the countries' economic fundamentals, particularly to the volatility and contagion typical of financial markets. These phenomena have been exacerbated by shortcomings in the governance of the international financial system. In addition, the countries have not always had access to international capital markets under suitable terms and conditions, especially during crises. The relatively less developed countries of the region have had very little access to private lenders and have thus had to depend on multilateral credit and official development assistance.

With few exceptions, during the 1990s the Latin American countries failed to achieve the savings and investment rates required to fuel rapid economic growth. In addition, there has been a procyclical bias in the design of macroeconomic policies. This fact, in conjunction with the weakness of the regulatory and supervisory framework for the countries' financial systems, has been reflected in the unusually frequent outbreak of national financial crises. Raising national saving and investment, the use of medium-and long-term time horizons for the design of macroeconomic policy, and the consolidation of stable, deep national financial systems continue to constitute the primary challenges in relation to the formulation of a viable strategy for the provision of financing for development. Although the Caribbean countries' savings and investment rates tend to be high, they have not translated into high economic growth rates.Their high incremental capital-output ratios may be the result of the diseconomies of scale for investment that affect these countries as well as possible problems in terms of the efficiency of investment.

Export earnings are still the main source of financing for imports, together ?in the relatively less developed countries of the region? with remittances from emigrants. Many of the countries are still heavily dependent upon exports of raw materials and natural-resource-intensive manufactures. Access to external markets continues to be restricted by the protectionist practices of industrialized countries. The countries of the Caribbean have also been hurt by the erosion of the trade preferences that they have traditionally enjoyed; in some cases, this has created serious adjustment problems.

This study argues that progress must be made in three areas in order to generate more financing for the development of the countries of the region within the present context of globalization. First, the international financial system must be strengthened in order to prevent and manage crises and, as a complementary effort, macroeconomic policies with a stronger preventive orientation should be designed at the national level. Second, the countries of the region need to improve their trade linkages with the international economy and their modalities of access to international financial markets. Third, national savings rates must be raised and the mechanisms to transfer national resources to finance investment should be improved.