Latin Finance - May 2008 - 96

enrique garcia Shifting the Paradigm by Julio Urdaneta o find out where the region is going, it sometimes pays to look back. LatAm has navigated through several changes of paradigm in the last 20 years, according to Enrique García, longstanding leader of Corporacion Andina de Fomento (CAF). First and foremost, it graduated from a model based on import substitutions and the state as central engine of the economy. “At the end of the 80s, LatAm countries initiated a process of reforms for a market oriented model,” García tells LatinFinance. In this process, tariffs were reduced, exchange rate systems were modified and some structural reforms were enacted to help the private sector open up to investment. There was also a process of privatization in almost all countries. “This brought important repercussions for regional integration, with the advent of the concept of open regionalism, with the birth of Mercosur,” García says. This coincided with the Washington consensus, the basis for the multilaterals to operate in the region. In the first part of the 90s, foreign investment jumped with privatization, including telecoms, mining, oil, and banking. “At the end of the 90s however, after the Tequila Crisis and the Asian crisis, there was a significant retraction in the global economy. And that had a serious impact in LatAm,” says García, a former Bolivian government official who has run CAF since 1991. The disastrous consequences of these crises prompted a new phase, in which leaders questioned the established model. “This new process is more political, more democratic,” García says. “These new political options win elections and seek to yet again modify paradigms, some in a more practical way, others with moderation.” T LatAm has undergone constant evolution in the last 20 years, says CAF president Enrique García. But income inequality is still a glaring problem. have improved, but we can also say that the distribution of wealth [in LatAm] is the worst in the world.” García says the region has lost relevance internationally, as LatAm has seen its participation in international trade reduced compared to regions around the world that have had faster growth, such as Asia or Central Europe. “LatAm needs to enter a period of careful consideration,” García says. The region must take advantage of this sudden commodity bonanza to establish structural changes that could make the region less vulnerable, he adds. This should allow transition from economies with comparative advantage, as they depend on commodities and low wages, to economies where there is more value added, greater technology, bigger chains of production and more insertion in the global economy. “And of course, with more positive impact on closing the gap that separates rich from the poor. That is the big challenge,” García states. However, the sub prime crisis looms large over LatAm, García says. “If this situation prolongs it can have a direct effect not only in the economies of the US and LatAm, but also indirect effects in economies like China, which can see it’s GDP growth drop 2 or 3 points, thus having a serious impact on commodity prices.” LF Careful consideration needed: García Striking a Balance, Falling Behind Even though the political direction has obviously changed and there has been some reversion of privatizations and other policies, countries in the region seem to have found equilibrium, where socially-conscious measures coexist with market-oriented policies, García says. He highlights Brazil under Lula, or Uruguay under Tabaré Vázquez. “Most countries have found an adequate middle ground,” García says. “What we can see in the region is that extremes are not welcomed – neither statism nor a blind openness, where markets are expected to solve all the problems.” LatAm now enjoys an extraordinary situation as commodity prices soar. But there are deficiencies. “Poverty levels UPDATE For more on CAF see www.latinfinance.com > 96 LATINFINANCE May 2008

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Latin Finance - May 2008

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