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,
its Europe and the U.S. that are looking to juice their
sluggish economies, partly by boosting exports to Latin
The regions 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
The IADB, the regions largest multilateral development
lender, has a key role to play in trying to achieve those
goals. Under Morenos 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
IADBs 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 banks
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. Were already increasing
significantly what were doing, says Steven Puig,
head of private sector and nonsovereign guaranteed
The challenge is to make known what we do with the
private sector, he adds, because most of what
weve done has traditionally been with the public
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 IADBs 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
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 countrys 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 banks chief development
effectiveness officer. The big goal, he says, is to help some
of the regions 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
arent far behind. If things are done right, we will
be able to overcome this trap, says
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 regions economic outlook and the
IADBs efforts to boost growth and spread opportunity.
Institutional Investor: Latin America has suffered
from numerous crises over the years. This time its
bounced back relatively well. Whats
Moreno: Latin America learned from the very hard experiences
of so many financial crises. In fact, one could argue that we
have a postdoctoral degree in financial crises. In the space of
25 years, we had over 31 crises. Over time that brought about
democratic regimes, coupled with the fact that macroeconomic
balances are something that Latin American society demanded.
Macroeconomic stability is something that really matters. Latin
America was able to have countercyclical fiscal policies after
the Lehman debacle. Part and parcel of that stability was
more-flexible exchange rates. We began to accumulate reserves.
Today, Latin America has over $730 billion of reserves,
which basically have acted as a buffer.
Some economists still worry that the region is
overly reliant on agricultural and commodity exports. Is that a
I think its a fair concern, but certainly I believe
its an opportunity. We know that the prices of these
commodities will probably stay on the higher side for at least
ten or 15 years. It gives the opportunity to close many gaps
that Latin America has not been able to close over the years.
These are gaps related to inequality and productivity that can
be dealt with by higher investments in education and
infrastructure or investments in science and technology. These
are going to be more and more the kinds of things that Latin
America needs to do.
Despite its performance, Latin America has grown
significantly more slowly than many other emerging economies,
especially those in Asia. What kind of growth rate should Latin
America be able to achieve in this decade?
Probably, between 5 and 6 percent would be a realistic
target. That does not mean thats enough. Latin America
should probably grow closer to 6 or 7 percent. If that were the
case, we could really close the gaps in the space of 20, 25
Whats holding back those levels of growth? Many of the
gaps we have, for instance, in infrastructure. We need to grow
infrastructure development to be about 4 percent of GDP, not
only to keep up with Latin American needs but to be able to
compete with Asia. On average, weve been way below that.
Its cheaper to send a container from Canada to Brazil
than it is from Colombia to Brazil. Those kinds of gaps make it
difficult for Latin America to get the levels of growth that we
You talk about this being a decade of Latin America.
Aside from infrastructure, what else is required to make this
Productivity is one of the most important areas. The bedrock
of productivity hangs on the quality of education, the
flexibility of labor markets, investments in science and
technology. If you look at the overall investment in science
and technology in Latin America, it doesnt average even 1
percent of GDP. If you look at Asian countries like Korea, that
number is closer to 3 percent. So how do you increase
investments in science and technology, and how are those
investments translated into innovation at the level of the
firm? Those are some of the things we definitely need to
Where does the bank fit in here? You recently won a
big capital increase, although less than you had originally
requested. Are you satisfied with the amount of money you have
In this environment, where theres a lot of fiscal
pressures on our shareholders, the best capital increase is the
one that you are able to get. Now that this project is almost
completed, we feel that it gives the bank the opportunity to
lend on a sustainable basis for the next ten years close to
$12 billion a year. That would allow us to concentrate on
a number of areas that are basically the mandate, things like
regional infrastructure, climate change and sustainable
development, closing some of the social gaps, which means that
close to 50 percent of our lending will be devoted to
investments in the social area.
Are you doing anything differently to ensure that
the bank spends this money more effectively?
One of the key changes that weve been doing over the
past three years is the whole question of development
effectiveness. The share of projects that have rigorous
evaluation plans reached 31 percent last year. This is by far
one of the highest numbers among multilateral development
We have in every project today a resource framework
associated with whatever we do. Were moving in the
direction of having what we call Map Americas, which is a
geo-referencing tool. By the end of the year, it will help
anybody look at whatever project we are financing in any
country. Our whole focus on development effectiveness is
something that we have really been ramping up.
Everyone says infrastructure is crucial, but the
needs are immense. Brazil estimates its own infrastructure
needs over the next decade at about a trillion dollars. IADB
money is going to be only a small part of that. How do you
maximize your role?
I think our role should be to continuously facilitate
public-private partnerships. This means innovative ways of
doing a number of things: how projects are conceived, how all
the feasibility studies are done, how projects are financed and
structured, how public-private partnerships can best be done.
And here, I think, is a huge opportunity to channel a lot of
the savings around the world. A good example of that is the
recent airport concessions that were bid on in Brazil. It
showed the large premiums that companies and sponsors were
willing to pay.
We want to concentrate a lot on things like a Pacific
corridor that will connect Mexico to Panama. Thats a
regional public good. Weve been doing the same for the
electric grid that goes from Panama to Mexico, which should be
finalized this year. Were working on a similar one that
goes from Colombia all the way to Chile. These kinds of
projects are complex, and they require the view of many
governments. It is in those areas where I think the bank can
make a major difference.
Youve put a lot of accent on climate change.
Is this politically correct window dressing, or is it really
going to make a difference in the region?
We launched an initiative on sustainable energy and climate
change about five years ago. My biggest surprise is how much
awareness there is today in the hemisphere and how much desire
there is on the part of governments to do more things.
We have now moved to work not only on renewable energy but
also working at the level of cities. Weve determined that
there are about 150 cities that in the space of the next 20
years will about double in size. These are not the megacities
like São Paulo or Rio or Mexico City, but rather cities
that are anywhere from 1 million to 2 million people
that are very close to a big industrial center or a port
or a transportation center. Were working in those
cities to do a mapping exercise of sustainability that looks at
fiscal issues, looks at sustainability issues, looks at things
like building codes, ways to do incentives for retrofits that
can be augmented with property taxes, things like this.
Weve started initially in four or five cities around the
hemisphere, and we want to ramp this up over the next few
years. We think the whole question of climate change has a huge
Private capital flows have stayed relatively strong
in Latin America. What do you do to strengthen this trend? What
kind of catalyst role can the IADB play?
One of the other things that came out of our capital
increase was the notion that we could almost double the amount
of lending that we were doing to the private sector. We, of
course, do not want to be a commercial bank. Theres
plenty of funding coming from that part. Our focus is more in
being involved in large-scale projects.
For example, some of the largest wind projects that have
been done recently were done in Mexico. Using our climate
investment funds basically helped to do credit enhancements for
this project. The fact that we were involved helped bring other
lenders along. For every dollar that we put in, there must have
been seven or eight dollars coming from other institutions,
private or public. This is the kind of structure I think the
bank should be participating in, where we can help mobilize
much more resources from the private sector.
Weve seen over the past decade some reduction
in economic inequality along with the increase in growth in
Latin America. Those two dont necessarily go hand in
hand. How do you strengthen that link, and how do you reduce
inequality in ways that increase the regions growth
In 1990 poverty rates were close to 50 percent in the
hemisphere; theyre now close to 31 percent. A lot of that
change was because of the consistent growth of about 4 to 5
percent. So think for a minute: If the hemisphere is to grow at
about 4.8 percent, on average, for the next 15 years, in
essence Latin American economies would not only double in size,
but as opposed to having one out of three people in poverty,
you would soon have one in ten. So there is no question that
there is a relationship between growth and reduction of poverty
Inequality is much more difficult. Closing the gaps on
inequality requires things like education, having a labor force
prepared for the new demands that exist today. You see it today
in the huge pressures for spaces that are demanded for
university systems throughout the region.
Haiti has been a major focus at the bank. What
successes can you claim there?
There is no question that Haiti presents one of the most
difficult challenges, not only for the IADB but for the donor
community as a whole. We have aligned ourselves with the
strategy of the Haitian government. Weve focused
basically on infrastructure, in water and sanitation, road
construction and energy.
One of the new things that we started focusing on soon after
the earthquake was education moving from a system that
was private in nature to a process of having tuition be free K
through 12, through the donor community. Weve made a
commitment of $50 million a year for the next five years
and also to raise an equal amount. Were well on our way
to doing this.
The other part has to do with the development of the private
sector. We have done a partnership with Coca-Cola for producing
whats called Haiti Hope juice; thats been out there
in the market for the past year. We have partnerships with
Nestlé and with the Colombian confederation for the
production of coffee. So weve been doing a lot of things
to help the agricultural sector, where I think Haiti has huge
Haiti is a huge challenge. Weve put a very large
number of professionals on the ground. And more important,
weve been able to significantly increase disbursements.
We did almost $300 million last year.
We seem to be moving into a world thats driven
much more by trends in emerging economies. South-South trade
and capital flows are replacing some of the traditional
North-South flows. How does Latin America fit into that picture
and make the most of that change?
Look, Latin America today is a hemisphere that has no
internal conflicts, that has no nuclear weapons, that has no
ethnic violence, that doesnt have any religious
differences. This is a hemisphere that I think is very much a
part of the solution to the world economy and especially an
opportunity for developed economies. Brazil and Mexico,
together with Colombia, Peru, Chile and Argentina, are very
exciting economies. More and more, investors look to Latin
America as part of the growth for the future. That, of course,
means that over time Latin America should have a stronger voice
in more of the international institutions and on the world
stage, I hope.
Should there be a Latin candidate for the World Bank
Its hard for me to comment about another institution,
but I would say this: Bob Zoellick did a wonderful job. I think
he did great for Latin America as a whole, and I sure hope that
the next person at the World Bank can be as competent and as
good as he was.