High-Level Expert Group Meeting
27 February 1998
Mexico City, Mexico
Chaired by Miguel de la Madrid Hurtado
1. A high level-expert group meeting on ''Latin America,
balance and perspectives, progress, difficulties, and
challenges.'' was held in Mexico City on February 27,
1998.
Democracy and "Governability"
2. Progress in democracy has created a severance between
democracy and government in several national cases, which
holds potentially dangerous implications that democracy is
merely superficial and that governments will not change.
There is also a widespread feeling that official
utterances and public actions do not take into account
social needs and that institutions are unable to cope with
impunity. Consequently, it is necessary to integrate
political "governability," economic competitiveness and
social integration as interdependent variables. In order
to achieve this goal, the Latin American society must
simultaneously increase its capacity for a democratic
self-government, improve its economic competitiveness and
face up to the main problems regarding social exclusion
and poverty. Otherwise the region will face more
difficulty in having a presence amongst democratic and
modern nations.
3. Latin America, like other non-OECD regions, is going
through a process of institutional transformation.
Fundamental to the process is not to neglect programs
which are actually working but to create what is still
lacking. Within this context, it is important to
strengthen normatively and operatively market institutions
so the market will genuinely function and make progress.
With regard to foreign trade, for example, Latin American
economies have opened up, but the productive foundation
must still be reinforced so that production and trade can
be more reconciled and integrated compatibly.
4. A market economy needs the participation of the State
to set required rules and guidelines and to create the
institutions required by efficiently functioning markets.
Furthermore, the State has to overcome market
shortcomings, to redistribute income and to combat
poverty. Consequently, an adequate balance between State
and market is an absolute requirement.
5. Latin America needs to improve democratic institutions,
because their prestige has plummeted and has been punished
with a whole series of demerit. Institutional improvement
is a priority in Latin America. It means making political
reforms so that legislative bodies can counterbalance the
Executive Power and make the respective legislative
process more efficient. Coexistence and obligatory norms
should be established for political parties so they can,
instead of exacerbating problems, help solve them. In the
Latin American experience, political parties have not been
able to respond to one of its primary functions -- the
interrelation of social demands. Labor unions, in turn,
have become anachronistic and lost legitimacy. Political
reforms, including a clear and efficient system of
sanctions against offending parties that do not abide by
terms agreed upon, are likewise indispensable.
6. One of the greatest challenges Latin America has to
meet is to combine the legitimacy of origin and the
legitimacy of performance in order to guarantee
governability.
7. Democratic practices and trials without a critical and
controlling basis and disregarding historical experience
may lead to ungovernability. Limiting the faculties of the
government and giving more power to the legislative branch
may lead to excessive "parliamentarianism" and its
negative consequences. On the other hand, parliaments
lacking effective involvement in the law-making process
are prone to rhetorical behavior.
8. The growing importance of the media is a matter of
great concern because they only take into consideration
the interests of their owners. Consequently their
increasing power does not always yield positive
results.
9. It is advisable for people in the government to keep an
eye on polls, although it is always dangerous to
subordinate public action to the changing trends of public
opinion, because it shows considerable fickleness and
great dependence on media messages.
Growth and Economic Reforms
10. The process of structural changes should be
complemented because present strategies have proven
insufficient to lead to sustainable and equitable growth.
This challenge must be met: to carry out reforms and
growth policies, but with due respect to recent
achievements in stability terms. It is imperative to
undestand how macro and microeconomic factors interact,
how macroeconomic consistency restrictions condition each
other, and also to comprehend imbalances generated along
the reforming process and the consequential changes in the
productive groundwork.
11. The worldwide concept of developing policies must be
changed, because Latin American problems cannot be
separated from those of the rest of the globe. In this
context, the revision of the function of international
organisms carries great importance. In the contribution of
the effort to renew governments and societies,
international institutions show obvious deficiencies
regarding problems under their care.
12. It is indispensable to arrive at long-term consensus
formulas assigning responsibilities to all concerned,
because no single country can have everything. This means
recognizing the complementarity of all economies.
13. Internal shocks arising from changes in economic
policies of the most important countries or in the world
economy directly affect Latin American economies. This
means that governments must face deeply assailable
situations in order to create and apply suitable policies
to neutralize adverse effects. Governments cannot, but
take appropriate measures doing their best to avoid
isolation.
14. During the 1980s and 90s a world-wide change came
about which inevitably had an influence on Latin America.
The transformation process in the region cannot come
overnight. Consequently, Latin America is experiencing the
benefits and also the cost of the said structural
change.
15. In many countries, the privatization process has not
brought about a deep transformation, because this is a
complex task that is supposed to conciliate real -- some
times opposing -- objectives. Nevertheless, the basic
questions to be considered are social equity and
efficiency.
16. There is no conflict between growth and equity,
provided economic policy bolsters complementary areas
between one and the other; namely, maintaining
macroconomic balance within tolerable margins, investment
in human resources, policies seeking increased and
sustained productive employment, rapid and massive
technological know-how.
17. It is necessary to put into practice wide and
carefully planned financial deregulation measures that
will allow the adaptation of national economies to the
dynamics of financial globalization. This raises the need
to reinforce financial systems in order to have solvent
and efficient financial organizations. In this manner,
financial deregulation complements organized financial
development. The answer to the question "does capital
control make sense?" is far from simple, because the
globalization of finances and of the movements of capital
affects Latin American countries regardless of controls.
At any rate, the answer is affirmative, especially where
short-term speculative capitals are concerned.
18. It is to be desired that Latin American central banks
study ways to reduce the region's financial vulnerability,
and that they create mechanisms to furnish operational
content.
International Insertion and Competitiviness
19. Transformations in the world economy affect Latin
America because of the economic interdependence we now
live in, which presses governments to obtain,
simultaneously, the permanent arrival of capital,
macroeconomic stability, competitive exchange rates and
the strengthening of the saving-and-investment process.
Although it is true that vulnerability is in proportion to
the risk that sovereign governments take, it is also true
that little can be done with the decisions that other
countries take to protect themselves, or in view of the
dynamics of the world economy.
20. The Asian crisis puts before Latin America external
imbalances and their destabilizing danger. It is a clear
warning that fiscal austerity is a need that is here to
stay, and that it is the way to neutralize, at least in
part, the effect of internal shocks. For the present year,
the impact of the Asian crisis through the fall of natural
resources and energy prices, and consequently on its
internal sector, will increase the vulnerability in Latin
America with regard to the volatile international capital
markets. The external financing requirements in Latin
America for 1998 are expected to be in the neighborhood of
l00 billion dollars, or 25 percent more than in 1997. It
will not be easy to obtain them.
21. Financial speculation affects the real economy and is
linked to phenomena regarding the solidity or
deterioration of national economies. Even solid economies
and fine administration can be affected by a financial
turbulence. It is not possible to remain completely
isolated from the effect of such a turbulence, although a
high level of internal savings and international reserves,
fiscal austerity, avoidance of outdated exchange rates
and, in particular, rigorous regulation and supervision
are proven key elements to reduce vulnerability when
financial turbulence crops up.
22. Even though Latin America is now better prepared to
defend itself against external factors, such as the
current Asian crisis, or, in the 1980s, the debt crisis,
this is not enough. However, lessons learned from the the
Mexican crisis in 1994 diminished the impact of the new
crisis in 1997-98.
23. Regional integration is important and should be
strengthened in order to define joint positions. If Latin
America is united, we can obtain more. This way, Latin
America would be able to handle with increased efficiency
its international insertion, a goal already reached by
some countries. Among the various integration initiatives
now undergoing a consolidation process in Latin America,
five are particularly important because of the great
weight of the economies involved: the free trade agreement
(NAFTA) signed by the United States, Mexico and Canada,
Mercosur, the Andean Pact, Common Central American Market
(Mercado Común Centroamericano or MCCA) and the Caribbean
Community (Comunidad del Caribe, CARICOM). Participation
in trade blocs has repercussions on the development of
productive sectors. In view of the hazardous fragmentation
of economic spaces considered desirable, attention has
been given to the need to structure subsystems or economic
spaces. The structural format frequently proposed for the
region could be called mutual convergence, in view of the
way subregional economic spaces are formed.
24. Inside Latin America, it is necessary to go deeper
into intercountry relations. What is going to happen to
countries which have not as yet integrated?
25. Latin American competitiveness has decreased, which
makes the region vulnerable, especially in the case of
"one-product countries." This must be corrected through
the diversification of exports, product by product and
market by market. Competitiveness based on low wages, or
in ecological deterioration, which only yields one-time
benefits, should be rejected as pseudocompetitiveness or
spurious competitiveness.
Productive Transformations and Technical
Progress
26. Productive transformations are nowadays concentrated
on the promotion of competitivenes in the context of open
economies, but they have weak points as far as the
treatment of sectoral aspects and fostering small or
medium-sized industry are concerned. This makes it
necessary to formulate productive encouragement policies
linked to internationalization and to export
orientation.
27. Foreign investment complements national efforts, and
its associated technological content should not be
underestimated. It increases the capacity of industrial
and technological know-how, as the basis for indigenous
innovation and dynamic increase of international
competitiveness. On the other hand, national savings are
decisive for the generation of investments required by the
productive transformation process.
28. Latin American manufacturing industries have undergone
various transformations in the last few inars. Performance
in the export field has been favorable, but growth in
production and of investments has been slow, considering
the weak recovery of internal demand and the increase of
external competition. Consequently, it is indispensable to
continue promoting exports, adding new products and
exploring new markets. It is likewise important to
increase competitiveness in the internal market, which
still is the main demand factor for the industry of the
region.
29. The farming sector (cattle and crop raising) has
fallen behind considerably, and this situation demands
productive reconversion, regarding modification of crops
and areas under cultivation, and the incorporation of
profitable technology.
Human Resources, Poverty, Inequality
30. The creation of physical infrastructure, as basis for
development, is essential; but basic education is likewise
essential to improve the quality of human capital that
buttreses development. No country can be competitive or
equitable if it does not assign proper teaching and
training to its human resources. Education has become a
fundamental element of the modernization process, because
in view of the changes the production system has gone
through and all the corresponding challenges, Latin
America will have to live up to its capacity for
adaptation, greatly improving the education system.
31. Latin America gives top priority to matters regarding
macroeconomics and neglect social policy priorities. This
makes more acute the imbalance between income and wealth,
which may lead to disorders affecting previous
achievements. Social imbalances cannot go on
indefinitely.
32. Latin America must create demandable social rights as
a redistributive and social cohesion measure.
33. Inequality and poverty levels have not decreased.
Social compensation policies have, so far, been limitedly
effective. Social outlays have been curtailed by measures
meant to achieve budgetary discipline, and the application
of social policies has not been sufficiently renewed.
34. The demographic problem is still very serious. There
are countries -- especially in South America -- which have
substantially reduced population growth. Other countries
-- such as Mexico and Central American nations -- have not
reached that goal. The former has established with good
results moderation programs and, on the other hand, their
demographic growth has been traditionally slow. In
general, the problem arises from the fact that even when
there is real progress, population-growth rates are high
when compared to employment possibilities and social
service coverage.
35. Fairness cannot be reduced to fighting against
poverty. The main goal is to avoid inequality in order to
arrive at "all embracing societies."
Looking Ahead
36. In practice, financial interests, macroeconomics and
short-term benefits take precedence over environmental
problems. But the truth is that the environment, the space
we inhabit now and will inhabit in the future, is
supremely important both globally and regionally. Most
regional economic analyses say almost nothing about the
environment and natural resources; they barely touch on
environmental quality with regard to population centers
and the fluctuations in the availability of natural
resources (especially renewable resources) despite their
crucial importance for regional development options.
Moderate incorporation to technical progress, intensified
world trade, and deterioration of the price of regional
products in international markets have increased the
pressure on natural resources. Adding demographic growth
and increased internal demand to the foregoing facts, one
arrives at the conclusion that development strategies, in
practice, hardly take into consideration the environment
and natural resources.
37. Crises in South America affect countries in North
America. That is the reason why long-term trends must be
examined from a global viewpoint. Starting from this
point, what is required to avoid regional imbalance should
jointly be defined.
38. Sustainable development, by meeting of present needs
but without endangering the capacity of future generations
to satisfy their own needs, must be considered. Building
on this ground, changes in development policy must be
brought about.
39. Real economy requires careful consideration:
macroeconomic analyses are not enough when planning is
concerned. Sectoral analyses of national economies are
indispensable, covering the steel, mining, petrochemical
and automobile industries, among others, as well as
subcontractors ("maquila"). Similarly, it must be
remembered that small- and medium-sized industries absorb
most of the available labor force. These analyses are
essential for structuring productivity policies in the
context of open economies. The same applies to closer
cooperation between the public and the private sectors
when consensual decisions are concerned; to the
strengthening of social security and health systems; to
savings and pensions having a redistributive function; to
the interrelation between national and multinational
enterprises as a consequence of interrelations at a
worldwide production level.
40. Foreign debt is no longer considered a problem, due to
policy changes and progress already made. But several
sequels of the crisis have not as yet been overcome,
because interest payments are still an obstacle that
precludes applying resources to real economic growth,
particularly in the case of relatively smaller
economies.
41. At present, privileged attention is given to
short-term problems, to the detriment of long-term ones.
Consequently, consensual strategic planning, answering
basic questions asked by public opinion, falls in the sine
qua non category.