WHEN THE U.S. SNEEZES, THE REST OF THE WORLD catches a cold. That old chestnut is well understood in Latin America. The region has suffered numerous crises over the years, many of them provoked by events elsewhere. The high interest rate policies of the Volcker Fed, after all, triggered the Latin debt troubles back in 1982.

The aftermath of the recent global financial crisis suggests a much different dynamic these days. Although Latin economic output contracted in 2009, the downturn was much more modest than in developed Western countries, and the region has made a much faster and more vigorous recovery. Private sector capital flows remain strong, and buoyant commodity prices are helping most countries maintain solid trade surpluses. Suddenly, it’s Europe and the U.S. that are looking to juice their sluggish economies, partly by boosting exports to Latin America.

The region’s good fortune is largely self-made. From Chile to Mexico, Brazil to Colombia, most Latin countries have embraced macroeconomic stability as the bedrock principle of their economic policies, keeping debt and inflation down and creating more space for the private sector to flourish. That framework put the region in a good position to benefit from rising commodity prices over the past decade, allowing it to amass large foreign currency reserves. So when the crisis hit in late 2008, most countries were able to cushion the blow by stepping up spending and easing monetary policy. The Latin American and Caribbean region grew by 6.1 percent in 2010 and 4.6 percent in 2011, according to the International Monetary Fund. Although economies have cooled off lately, output is still projected to rise by 3.6 percent this year.

The challenge for Latin policymakers is to build on that progress with a fresh wave of reforms designed to sustain a high rate of growth and extend opportunity and prosperity more broadly in the region, says Luis Alberto Moreno, president of the Inter-American Development Bank. By pursuing policies to improve education, boost investment in technology and innovation, and raise productivity, governments could make this the decade of  Latin America, one that lifts several major countries into the income category of advanced nations, Moreno contends.

The IADB, the region’s largest multilateral development lender, has a key role to play in trying to achieve those goals. Under Moreno’s leadership the bank in 2010 won agreement from its 48 member governments for a $70 billion capital increase, which it will begin to implement this year. The additional capital will allow the IADB to extend an average of $12 billion in loans and grants each year for the next decade, about 50 percent more than precrisis levels.

To make sure the money is spent wisely, the bank has adopted a new strategy that focuses lending on several priorities, including strengthening social safety nets, improving education and health systems, financing infrastructure investment, fostering the development of renewable energy sources and promoting the growth of trade and capital flows. “The bank cannot do everything,” says Gustavo Arnavat, the IADB’s U.S. executive director. “It has to pick and choose those sectors where it can do the best work.”

A top priority for Moreno is increasing the bank’s involvement with the private sector through loans and public-private partnerships. The IADB committed some $2 billion to private sector projects last year, up from $1.2 billion in 2010. “We’re already increasing significantly what we’re doing,” says Steven Puig, head of private sector and nonsovereign guaranteed operations.

“The challenge is to make known what we do with the private sector,” he adds, “because most of what we’ve done has traditionally been with the public sector.”

The IADB is stepping up its efforts to measure the effectiveness of its lending, both before committing to projects and after they are completed. As part of the capital increase, the bank adopted rules requiring a more rigorous evaluation of projects before they can win board approval, and careful measurement of whether they actually produce the intended results. At the IADB’s annual meeting in Montevideo, Uruguay, this month, executives will present the latest “Development Effectiveness Overview” report, which will show that the organization is on track to meet key performance targets for education projects, housing renovation, renewable energy and climate change mitigation efforts but is lagging on programs to create jobs and improve water supplies.

The report finds that IADB grants built temporary classrooms in earthquake-ravaged Haiti that allowed 70,000 children to go back to school, but it notes that the quality of that education is questionable: Fully 80 percent of the country’s 60,000 elementary-school teachers have no diploma or training. In a bid to address that shortcoming, the IADB is drawing on experimental programs used in South Sudan and financing a project that will use interactive radio to broadcast supplemental lessons into classrooms; the bank also will monitor whether those broadcasts help students learn. 

“We are managing by results,” says Koldo Echebarría, the bank’s chief development effectiveness officer. The big goal, he says, is to help some of the region’s major economies break out of the so-called middle-income trap: the tendency of economies to stagnate when per capita incomes hit $15,000. Argentina and Chile are close to that frontier, and Brazil, Colombia, Mexico and Peru aren’t far behind. “If things are done right, we will be able to overcome this trap,” says Echebarría.

Moreno, 58, a former Colombian ambassador to the U.S. who has done everything in his career from producing television news programs to working in private equity, won a second five-year term as president in 2010 and shows no signs of slowing down on the job. He spoke recently with Institutional Investor about the region’s economic outlook and the IADB’s efforts to boost growth and spread opportunity.