Latin America needs to invest in social safety nets and infrastructure and avoid protectionism to offset the crisis.
The Inter-American Development Bank is scheduled to hold its annual assembly in Medellin, Colombia on March 27–31, 2009. The crisis will be a key topic at the event, which coincides with the 50th anniversary of the bank's creation. In a Q&A released by the bank, IDB President Luis Alberto Moreno warns against protectionism and urges governments to maintain or boost investments in social safety nets and job-creating infrastructure projects. And the bank, which lent a record $11.2 billion last year, may lend as much as $18 billion this year, he reveals.
How will the crisis affect the region?
The crisis is reducing the availability of credit to emerging market countries and reducing demand for commodities, which are the main source of exports from Latin America and the Caribbean. Our banking system, despite its resilience stemming from a sound regulatory framework, has also been exposed to the crisis because of the presence of international banks, which have been cutting lending to the region. As a result, economic growth in the region will be affected, meaning fewer jobs and more people are under threat of falling back into poverty.
How much could poverty increase in the region?
That is not a simple question. The answer will depend on the size of the output contraction and how long that contraction will last. If the crisis lasts just one year and economic growth in the region were 1.1 percent, which is the latest scenario forecast by the International Monetary Fund, as many as 2.8 million people could fall back into poverty in Latin America and the Caribbean in 2009.
But it looks as though the economic situation could get worse.
We probably have not yet seen the bottom of the crisis, but it is also in our hands to prevent the worse from happening. Let’s look at previous crises that hit Latin America to have a better idea of how bad it could get. According to a study by our research department, the region was hit by six different world financial crises since the 1980s that caused per capita income to contract 1.4 percent annually for two years on average. If we use this as a base scenario, the impact on poverty is dramatic. As many as 12.7 million people in the region could fall below the poverty line over the next two years—a 7 percent increase. The number of extreme poor would rise by 7 million.
What kind of policy advice can you give to countries in the region?
It is imperative that countries use the money wisely to ensure that their recent advances in the fight against poverty are not destroyed. Latin America and the Caribbean over the last five years have done a tremendous job in improving the resilience of their economies and the quality of life of millions of people. About 48 million people in the region have been lifted above the poverty line since 2003. We need to ensure those gains are not lost. It is important, for example, to invest in social safety nets, particularly conditional cash transfer programs, which ensure that children stay in schools and get proper health care. We recently approved a $400 million loan for Mexico’s Oportunidades program. Countries should also invest more in infrastructure because these projects not only stimulate the economy but ensure future growth. We also need to avoid protectionism, which could aggravate the situation and destroy business relationships. It is important to have in mind that there is no proven alternative to trade and integration as a path to prosperity and poverty eradication.
What is the role of the multilateral system during this crisis?
This crisis has proved that financial institutions need to be flexible and adaptive to a continuously changing environment. Just one year ago, multilaterals were exploring new areas as countries progressively gained access to international credit. It is important to realize that developing countries will have a very limited capacity to perform counter-cyclical policies, as we are seeing in developed countries. Now, countries need again our help and we have to be agile in fulfilling their increasing demands.
What is the Bank doing to help the region fight the crisis?
The IDB has been partnering with countries to mitigate current risks and prevent the negative outcomes of the crisis from taking place. The IDB created a $6 billion emergency liquidity fund in October to provide financing for banks in the region so they can continue to provide loans to companies. Costa Rica, El Salvador and Jamaica have used the fund. We are reinforcing our policy dialogue with the countries in order to maximize the best possible allocation of our resources and have the greatest impact. We are committed to increase our financing to the region.
The Bank’s investments have suffered because of the crisis. How could this affect your lending?
Our lending or operations have not been materially affected. The global financial crisis has reduced the market prices of several types of securities and the IDB was not immune. Our liquid investment portfolio sustained losses last year, mostly unrealized. However, the IDB maintains its strong financial position. More than 99 percent of asset and mortgage-backed securities in our portfolio, for example, continue to pay interest and principal and more than 80 percent hold the highest investment grade rating.
How much do you plan to lend to the region this year?
We are making a tremendous effort to increase our financing this year. We may approve a record of as much as $18 billion in financing in 2009, which could be made up of $12 billion from our ordinary capital and as much as $6 billion from our emergency liquidity fund. We are also holding discussions with our members on how to increase our financing capabilities in order to meet growing demand from our member countries. We have created a special commission to look into this matter and this group will present their findings during our annual meeting. The region needs a stronger and bigger IDB to help address its long-term development goals.
What are our expectations for 2009?
This year is a very important landmark for the IDB. We are commemorating our 50th anniversary and China will for the first time take part of our annual meeting in March in Medellín, as the Bank’s newest member. But more than talk about history, we have to look into the future. These are difficult times and the region will need increased support from us and other development agencies. We must be able to effectively offer our countries products and services to fight the current crisis while maintaining our focus on the long-term development agenda for the region. This is why Latin America needs a stronger bank today, not only to respond in this time of financial turmoil and economic slowdown, but also to achieve the developmental challenges that cannot be postponed any longer.
This Q&A originally appeared on the Inter-American Development Bank's web site. Republished with permission.