Latin American and Caribbean Regional Consultation on Financing for Development

It is with great pleasure that I welcome you to the Latin American and Caribbean Regional Consultation on Financing for Development. I want to express our deepest appreciation to the Government of Colombia, particularly the Minister for Foreign Affairs, the Minister of Finance and Public Credit, the Colombian Ambassador to the United Nations and all those officials of the Government of Colombia who have helped make this meeting possible. I also want to acknowledge the support provided by the Inter-American Development Bank, and especially its President, Enrique Iglesias, and the United Nations Conference on Trade and Development, both of which are also cosponsoring this event. In addition, I would like to voice a special words of thanks to the delegations of the many countries represented here today, the members of the Preparatory Committee for the worldwide Consultation and the different agencies that have sent their representatives to this meeting.

This Consultation is being held pursuant to resolution 54/196 of the United Nations General Assembly, by which it decided to convene in the year 2001 a High-Level International Intergovernmental Event on Financing for Development. We trust that the conclusions of this Regional Consultation will be set forth in a document reflecting the views of Latin America and the Caribbean which will serve as a fundamental input for the world meeting.

This meeting will focus on four main issues. The panels that will begin the discussions on each issue will include ministers, deputy ministers, other government officials of the region and representatives of international agencies. These initial presentations will serve as the basis for an extensive debate among all the participants. The ECLAC secretariat has prepared a document entitled 'Growth with stability. Financing for development in the new international context', which reflects the institution's views on the issues to be addressed at this Consultation. We trust that this paper, whose main conclusions are summarized below, will help enrich the discussions.

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Throughout the 1990s, our region experienced renewed access to external financing. This paved the way for progress in macroeconomic management, in reducing inflation and in resuming economic growth. With few exceptions, however, the Latin American and Caribbean countries failed to achieve the savings and investment rates required to fuel high rates of growth in production. Not only was the average annual growth rate of 3.3% for 1990-2000 lower than the 5.5% figure recorded for the 30 years prior to the debt crisis, but it also fell short of the 6% rate identified by ECLAC as being necessary in order to meet ambitious goals for economic and social development, particularly with regard to poverty reduction.

At the same time, international capital flows have given rise to concern in two areas. Firstly, with the sole exception of foreign direct investment, these flows have been very unstable. This, along with national policies that often accentuate rather than attenuate the cycles of external finance, has been reflected in a strong correlation between capital flows and economic cycles in our countries. Secondly, a significant group of countries, especially the relatively less developed ones, have been excluded from the more dynamic types of resource flows.

These developments pose important challenges which must be faced by all the countries of the region; nevertheless, a positive international context is also needed in order to ensure the success of the countries' efforts. If they are to grow at a rate of around 6% per year, the countries must achieve investment rates between four and six points higher than the average levels of the 1990s. In order to avoid exacerbating the existing level of external vulnerability, additional investment financing must come, basically, from a parallel expansion of national savings and must be accompanied by an adequate level of national financial development in order to ensure that such savings are transferred to productive investment in the most efficient way possible.

The study stresses the importance of the reinvestment of private enterprises' profits and of public saving in this effort to raise national saving levels. It also underscores the contribution that households and individuals can make to this objective, especially by saving for specific purposes, such as pension funds, housing or education.

The dynamic development of the financial system and the capital market demand reliable ground rules and strong regulatory frameworks in order to guarantee the stability of the relevant systems and the adequate protection of savers. In particular, although the region has already taken up the challenge of adopting international standards for financial regulation and supervision, much remains to be done in this area. An essential aspect of this undertaking is the promotion of new agents and instruments to help complete non-existent or underdeveloped segments of the capital and financial markets, including sound secondary markets, investment and risk-capital funds and guarantee funds, credit insurance and other hedging instruments. In developing these new mechanisms, it is essential that appropriate regulations for financial governance should be in place so as to guarantee the rights of savers by enforcing rules on transparency and the timely provision of full, accurate information.

Public development banks have an important role to play, as they can channel resources into areas in which the volume or terms of the resources offered by the private market are suboptimal, as in the case of financing for both rural and urban micro- and small enterprises, low-cost housing, sustainable development, productive restructuring and technological innovation. In order for this effort to bear fruit, however, there must be maximum transparency regarding the fiscal cost of the subsidies provided through development banks, and every effort must be made to ensure that obligations are met on time, preferably through the use of private institutions as first-tier agents for the channelling of resources.

Boosting export capacity is essential in order to achieve an adequate level of external resources and to reduce external vulnerability. It is important, therefore, to generate a pro-export environment based on competitive exchange rates, active export promotion policies and the creation of conditions of systemic competitiveness through the development of quality infrastructure and dynamic chains of production. In order for such an effort to be successful, as we shall see, it is essential to improve conditions for access to external markets for goods and services.

Higher investment and savings rates, financial development and the expansion of exports must be combined, at the national level, with efforts to reduce the extreme vulnerability of the region's economies to external financing cycles. This means, in particular, that booms in financing must be managed on the basis of clearly defined prudential criteria, since the seed of economic crisis is sown during periods of excessive capital inflows that gradually undermine the macroeconomic fundamentals of the receiving countries.

This and other studies published by ECLAC suggest that such situations should be dealt with through a combination of general public-revenue stabilization funds; tight monetary and credit policies during booms; prudential regulation of the capital account, preferably through price-based instruments; strong prudential regulation and supervision of financial systems and their active management during booms to forestall the accumulation of excessive risk; and a 'liability policy' designed to improve the maturity profiles of public and private debt, both internal and external. In addition, although there is no such thing as a perfect exchange-rate regime for every country in every circumstance, the study discusses the advantages of a managed flexibility that is designed to reconcile the conflicting demands for stability and flexibility that must be met by today's exchange-rate regimes.

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The external context should provide three essential elements: first of all, access to markets for our exports; secondly, a new international financial architecture which, with improved governance, will ensure greater stability for capital flows; and thirdly, mechanisms to ensure that the relatively less developed countries also have access to adequate amounts of external resources on satisfactory terms.

The effort to boost exports must go hand in hand with access to external markets. The industrialized countries are still applying highly protective policies to agricultural products and 'sensitive' manufactured goods from developing countries, and they often display a protectionist bias in applying contingency rules and erecting technical barriers against our exports. In addition, the island countries that have seen a significant erosion of their trade preferences need to receive adequate resources and technical support so that they can modernize and diversify their export base.

The tremendous instability of the international financial system is associated with the sharp asymmetry that exists between the world's burgeoning financial markets and the absence of suitable macroeconomic and financial governance at the international level. Better governance can only be achieved through an improved coordination of macroeconomic policies on the part of the main developed countries so as to guarantee greater global macroeconomic stability and the acceptance, on the part of all countries, of mechanisms for ensuring prudential surveillance of macroeconomic policies. International financial stability also depends on the existence of an appropriate global institutional framework that includes minimum standards for prudential regulation and supervision of the financial and information systems that are essential to the proper operation of financial markets. Finally, appropriate institutions are needed to deal with crises.

These institutions may be of two types. Firstly, it is important to improve the countries' capacity to offer emergency financing in times of crisis and to develop suitable mechanisms for providing liquidity to countries with strong macroeconomic fundamentals when they are faced with problems of contagion. In both cases, the objective can only be achieved if the International Monetary Fund has been supplied with resources of its own through temporary issues of special drawing rights (SDRs). It should be noted, of course, that an increased use of SDRs within the international financial system is an end in itself which has long been advocated by developing countries. In order to avoid problems of moral hazard, however, such special financing mechanisms must be tied to the creation of instruments for permitting private agents to become involved in the solution of crises. Without detriment to the principle of voluntary negotiations between creditors and debtors, international rules must be designed to guarantee the participation of all parties in such negotiations and to prevent them from continuing indefinitely; this can be done by developing suitable multilateral arbitration mechanisms.

Ensuring access to resources entails the development of mechanisms for enabling all the countries to benefit from foreign direct investment and private credit flows. Foreign direct investment is fairly well distributed in the region, although priority attention still needs to be devoted to its linkage with the local economies involved. Private credit flows are much more concentrated, and mechanisms must therefore be developed to provide for guarantees or cofinancing by multilateral development banks as a means of facilitating access to the market for countries that have not benefited from these flows. Such efforts are already being undertaken in some new areas of private investment, especially infrastructure.

The multilateral banks have made a significant contribution to financing for the region, and they will continue to play a decisive role in the future. First and foremost, they play an essential role in the mobilization of resources for the relatively less developed countries. Their loan portfolios for all the countries of the region are diversified and reflect the priority these institutions give to social development, sustainable development, State reform and the channelling of resources to micro- and small enterprises, among other activities of high social priority. They also offer better terms, as regards both costs and maturities, than private financial institutions, even in the case of countries in the region that have higher relative incomes; this circumstance indicates that private markets may sometimes overestimate risk, especially ?but not only? in times of crisis. Finally, multilateral banks provide financing on a countercyclical basis, thereby helping to mitigate external shocks. In particular, they provide the only source of long-term financing that is available during a crisis. This support has been essential even for countries that have higher relative incomes, and it has been decisive in renewing trust in the countries affected.

Official development assistance, for its part, continues to play a key role in providing financing for less developed countries and in providing global public goods or goods with strong externalities, such as peace, sustainable development and the struggle against the worldwide problem of drugs. The main priorities for the future should include the effort to meet the goal, agreed upon within the framework of the United Nations, of supplying 0.7% of the GDP of the industrialized countries and the need to ensure that the use of those resources is more transparent and efficient. For its part, the Heavily Indebted Poor Countries (HIPC) debt initiative, for which four countries in the region may be eligible, should be made more flexible, and adequate resources should be provided for its financing. This must be done in order to ensure that other developing countries are not required to shoulder a disproportionate share of that financing, either directly or through wider interest-rate spreads and reduced availability of resources for technical cooperation from multilateral banks.

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In the construction of this global edifice, three requirements must be borne in mind. The first is to ensure the adequate participation of the developing countries in the relevant institutions. The second is to uphold the countries' autonomy in adopting whatever policies they deem appropriate for their development. The third is to ensure that international standards take into account the absorption capacity of the individual countries, given their different levels of institutional development.

Finally, I would like to stress the decisive role that the region's institutions play in the positive interaction between national efforts and an adequate international context. These institutions address a wide range of concerns, including trade integration agreements, which are crucial to the diversification of the export base of our countries; the large network of development banks formed by the Inter-American Development Bank and the subregional development banks, which are the main source of multilateral financing in our region; the Latin American Reserve Fund, a nearly unique institution in the developing world, which has performed so well in the Andean Community over the last few decades and has begun to expand its membership; and recent efforts to coordinate macroeconomic policies. The region must strive to consolidate all these processes and institutions and to deepen regional cooperation as a whole. The development of sound regional institutions does not work against globalization. On the contrary, it contributes to the construction of a much stronger global edifice.

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Ladies and gentlemen:

We are confident that this Consultation will offer you an opportunity for holding well-documented, wide-ranging discussions on the issue of financing for development. On behalf of ECLAC, I would like to invite you to participate actively in these deliberations with a view to making major strides forward in an area that holds out the potential for improving the living conditions of the region's peoples in the new century that is now beginning.