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.

Institutional Investor: Latin America has suffered from numerous crises over the years. This time it’s bounced back relatively well. What’s different?

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 fair criticism?

I think it’s a fair concern, but certainly I believe it’s 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 that’s 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 years.

What’s 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, we’ve been way below that. It’s 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 need.

You talk about this being a decade of Latin America. Aside from infrastructure, what else is required to make this happen?

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 doesn’t 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 concentrate on.

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 now?

In this environment, where there’s 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 we’ve 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 institutions.

We have in every project today a resource framework associated with whatever we do. We’re 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. That’s a regional public good. We’ve been doing the same for the electric grid that goes from Panama to Mexico, which should be finalized this year. We’re 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.

You’ve 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. We’ve 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. We’re 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. We’ve 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 local dimension.

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. There’s 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.

We’ve seen over the past decade some reduction in economic inequality along with the increase in growth in Latin America. Those two don’t necessarily go hand in hand. How do you strengthen that link, and how do you reduce inequality in ways that increase the region’s growth capacity generally?

In 1990 poverty rates were close to 50 percent in the hemisphere; they’re 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 levels.

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. We’ve 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. We’ve made a commitment of $50 million a year for the next five years and also to raise an equal amount. We’re 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 what’s called Haiti Hope juice; that’s 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 we’ve been doing a lot of things to help the agricultural sector, where I think Haiti has huge potential.

Haiti is a huge challenge. We’ve put a very large number of professionals on the ground. And more important, we’ve been able to significantly increase disbursements. We did almost $300 million last year.

We seem to be moving into a world that’s 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 doesn’t 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 presidency?

It’s 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.  •  •