Interview with Claudio Loser: Facing Asian Crisis, Latin America and Caribbean Demonstrate Resiliency, Potential for Growth

• Pages: 65-68

Page 65

IMF Survey: During the past several months, the Asian crisis seems to have driven consideration of the economic condition of the Latin American countries off the front pages. How similar are the conditions that face the Asian countries now to those that faced Mexico in early 1995, and how are they dissimilar? LOSER: There are many similarities. For instance, in 1994, in Mexico and, to some extent, Argentina, you had a rapidly rising level of demand, an expansion of credit, widening current account deficits, and-to varying extents- tensions in the banking system. The situation in Asia was similar, except that in Asia there was an investment boom rather than a consumption boom, as was the case in Latin America. Page 66

What are the differences? First, the contagion effect has been much greater in Asia. The crisis in Latin America ended up being confined mainly to Mexico and Argentina-with limited impact on other economies.

Second, when the crisis hit in Latin America, structural reforms had already been in place for some time. Although Latin America's performance had been very weak in the 1980s, for about ten years the authorities had been working hard at changing the structure of the state and reducing its size, privatizing, modifying the structure of incentives, and eliminating elements of discretionality. When the crisis hit in late 1994, the authorities were better prepared and more willing to move quickly.

Third, although the banking systems were weak in both Asia and Latin America, the impact was probably smaller in Latin America.

I would also note that the quality of the technical staff in Latin American countries-in the ministries and central banks-has improved and deepened markedly.

IMF Survey: How completely have Mexico and Argentina and the other countries that were affected by the 1994 financial crisis recovered? Are there any lessons to be learned from the Mexican crisis that could be applied to the Asian crisis?

LOSER: Overall, Latin America has recovered: 1997 was a banner year, with GDP growth of 5.2 percent-the highest in recent years for the region-and inflation at 12 percent, the lowest in 20 years and in dramatic contrast to the triple and quadruple levels in earlier years. These figures mainly reflect developments in

Mexico, with 7 percent growth, and Argentina, with 8 percent, as well as the actions taken after 1995- strengthening of the banking system in Mexico and maintenance of a strong currency board in Argentina that respected the rules of the game.

These actions gave assurances to market participants that the authorities were serious about the measures they had introduced and that the reforms were here to stay. After 1994-95, economic activity recovered, exports picked up, and capital flows increased rapidly. In fact, during 1987-97, private flows to the region-not just to Mexico and Argentina-increased tenfold, mainly in the form of foreign direct investment. Another important feature of the recovery was that all the countries in Latin America had strong fiscal positions.

IMF Survey: Are the countries in the region now well insulated from the contagion effects of the Asian crisis? LOSER: It is difficult to say that countries can be completely insulated from outside shocks, any more than they can be completely insulated from...