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Latin America faces important development challenges. Although many countries have implemented solid macroeconomic and financial policies, large segments of the population have not reaped the benefits from higher economic growth. Based on the analysis of CGD’s substantial in-house expertise in the region, the initiative goal is to advance recommendations to policymakers in Latin America as well as those in developed countries and multilateral organizations to support the region’s efforts to climb the development ladder and reach shared prosperity.
While Latin America shares many features with the rest of the developing world, three features characterize most countries in the region: Latin America is the most financially open (that is, it has the fewest restrictions to the cross-border movement of capital), the most democratic, and the most socially unequal of the world’s developing regions.
These features combine to produce an important development challenge. While Latin America’s generally sound macroeconomic and financial policies supported high growth rates since the mid-2000s and an impressive resilience to the 2008 global financial crisis, many people have not significantly benefited from this growth. Inadequate social services and, in some countries, high poverty rates remain a problem. Institutional deficiencies, lagging productivity, and escalating transnational violence—often influenced by US policies—feed popular discontent that could threaten sustained growth.
Led by senior fellow Liliana-Rojas Suarez, the Latin America Initiative seeks to analyze the Latin American experience and offer lessons to both advanced and developing countries, as well as to international standards-setting bodies:
What can developed countries learn on financial crisis prevention and management from the vast experience of Latin America?
How can Latin America’s experience be useful to multilateral organizations in designing their recommendations for financial stability?
What can other developing countries seeking economic growth in the context of greater financial integration learn from Latin America’s strengths and weaknesses?
How can the experience of today’s high-income countries inform Latin America’s efforts to escape the so-called middle income trap (a trap that Brazil, the largest Latin American economy, has remained in for over two decades)?
How can the United States better monitor development assistance to Latin America, and Haiti in particular, as it continues with relief and recovery efforts?
What can the United States do to address key political and economic security challenges facing Mexico and other Latin American nations?
CGD’s substantial in-house expertise on Latin America and the large stock of research it has undertaken on the region places the Center in a strong position to address some of these questions. CGD has published two books on Latin America and a large number of working papers, reports, and policy notes dealing with key issues in the region. CGD also hosts most meetings of the Latin America Shadow Financial Regulatory Committee (CLAAF), which is comprised mostly of former central bank governors and ministers of finance from the region.
Latinoamérica enfrenta importantes desafíos para su desarrollo. Aunque muchos países han implementado sólidas políticas macroeconómicas y financieras, grandes segmentos de la población no han aprovechado los beneficios de un mayor crecimiento económico. Basada en la sustancial experticia de CGD en la región, el propósito de la Iniciativa es presentar recomendaciones para guiar a los diseñadores de políticas públicas en Latinoamérica, así como a los países desarrollados y organizaciones multilaterales para que apoyen los esfuerzos de la región hacia la industrialización y la prosperidad común.
Aunque Latinoamérica comparte muchos elementos en común con el resto de los países en desarrollo, y a pesar de las diferencias entre cada país, existen tres elementos que caracterizan a la mayoría de los países de la región: Latinoamérica es la región financieramente más abierta (es decir, la que impone menos restricciones a la movilización internacional de capitales), la más democrática y la más desigual entre todas las regiones en desarrollo del mundo.
Estas características se combinan entre sí para generar un importante desafío al desarrollo regional. Las sólidas políticas macroeconómicas y financieras aplicadas en la mayoría de la región contribuyeron a generar altas tasas de crecimiento desde mediados de la década del 2000, y a resistir la crisis financiera global de 2008 de manera extraordinaria. Sin embargo, queda una parte de la población que no se ha beneficiado significativamente de este crecimiento: servicios sociales inadecuados y, en algunos países, altas tasas de pobreza, han persistido en el tiempo. Así mismo las deficiencias a nivel institucional, creciente violencia y rezagos en materia de productividad, problemas en muchos casos influenciados por políticas de los Estados Unidos, alimentan el descontento popular y representan una amenaza para el crecimiento sostenido de la región.
Liderada por la investigadora principal Liliana Rojas-Suarez, la Iniciativa para América Latina busca analizar la experiencia latinoamericana y ofrecer lecciones, tanto para los países desarrollados y subdesarrollados, como para los organismos reguladores:
¿Qué pueden aprender los países desarrollados de la vasta experiencia de Latinoamérica en materia de prevención y gestión de crisis financieras?
¿De qué manera puede ser utilizada la experiencia de Latinoamérica por los organismos multilaterales para diseñar recomendaciones para la estabilidad financiera?
¿Qué pueden aprender, de las fortalezas y debilidades de Latinoamérica, los demás países en desarrollo que buscan crecer en un contexto de mayor integración financiera?
¿Cómo puede utilizarse la experiencia de los países de alto ingreso para apoyar los esfuerzos de Latinoamérica por salir de la llamada trampa del ingreso medio (en la cual Brasil, la economía más grande de la región, ha estado atrapada por más de dos décadas)?
¿Cómo pueden los Estados Unidos hacer mejor seguimiento a la asistencia para el desarrollo enviada a Latinoamérica, en especial a Haití, mientras se mantienen los esfuerzos de recuperación?
¿Qué pueden hacer los Estados Unidos para enfrentar los desafíos políticos y económicos más importantes que enfrentan México y otras naciones latinoamericanas?
Gracias a su amplia experiencia e investigación en temas regionales, CGD está favorablemente posicionado para abordar algunas de estas interrogantes. CGD ha publicado dos libros sobre Latinoamérica, así como una gran cantidad de documentos de trabajo, reportes y notas de políticas públicas que discuten los temas regionales clave. CGD también organiza y es anfitrión de la mayoría de las reuniones del Comité Latino Americano de Asuntos Financieros (CLAAF), compuesto principalmente por ex-gobernadores de bancos centrales y ex-ministros de finanzas de toda la región.
Economic recovery in Latin America and the Caribbean (LAC) is gaining momentum, but more work is needed to ensure growth is both sustainable and inclusive. Looking ahead, activity is expected to gather further momentum—reflecting stronger demand at home and a supportive external environment. But there are still challenges ahead. Risks to the region’s outlook reflect internal factors as well as heightened external risks—notably, a shift towards more protectionist policies and a sudden tightening of global financial conditions. Additionally, longer-term growth prospects for Latin America and the Caribbean remain subdued.
Most countries in Latin America are currently reporting fiscal deficits and many have increased their external debt ratios. This has refocused attention on whether the region’s resilience to external shocks has deteriorated, and it has raised questions about Latin America’s ability to reignite growth and support development efforts.
Since the early 2000s, Latin America has become increasingly integrated with the global economy, liberalizing trade and opening its capital account. These initiatives were prompted by the assumption that advanced economies would not impose barriers to the cross-border movement of goods and services. But today, a rising wave of protectionism not seen since the Great Depression challenges this assumption.
With this new reality as the backdrop, the Latin American Committee on Macroeconomic and Financial Issues (CLAAF) will be meeting in Washington, DC to discuss how to tackle these emerging global economic challenges. Members of this committee include former finance ministers, former central bank governors, and other high-level economic officials and academics from across Latin America.
Often overshadowed by the regional powerhouses that border it, Paraguay’s recent sovereign bond issuance of $530 million was five times oversubscribed, revealing that the landlocked country of 7.5 million people warrants more attention. With presidential and legislative elections approaching next month, the incoming government will surely hope to continue building upon the country’s recent economic growth, averaging 4.8 percent over the last decade. This growth has helped the country make massive poverty reductions in one of the lowest income per capita countries in Latin America—in 2016, Paraguay’s poverty rate was 26 percent, down from 57.7 percent in 2002.
This success has been largely thanks to sound macroeconomic management that has helped the country weather both political and economic uncertainty in two of Paraguay’s major trade partners, Brazil and Argentina. However, as protectionist forces gain strength in the United States, interest rate hikes by the Fed are certain, and renewed market volatility raises concerns, structural shortcomings threaten to diminish the country’s capacity to withstand external shocks. The persistent vulnerability to such shocks demands attention be paid to how structural variables undermine Paraguay’s resilience and reduce the effectiveness of its macroeconomic strengths.
Indicator of economic resilience to external shocks
The importance of structural variables is revealed in my latest CGD working paper, which constructs an indicator of economic resilience consisting of two dimensions: (i) the economy’s capacity to withstand the impact of the shock, and (ii) the authorities’ capacity to rapidly implement policies to counteract the effects of the shock on economic and financial stability. Each dimension consists of both macro and structural variables. While macro variables can fluctuate rapidly in the short run, structural variables take more time to change. Inadequate performance of the latter can limit the effectiveness of the former, downgrading resilience against shocks.
The figures below illustrate the dimensions of resilience with macro variables in black and structural variables marked in red.
Figure 1. First dimension of resilience: the capacity to withstand the impact of the shock
In the event of an external shock, non-domestic sources of finance can become scarce and costly. Thus, the first dimension of Paraguay’s resilience depends on the strength of its external position and the availability of domestic sources of finance. The former is a testament to the country’s prudent macroeconomic management. In 2017, Paraguay boasted a current account surplus (as a percentage of GDP) and a total debt ratio of only 25 percent of GDP. Strong performances in these macro variables supported demand for Paraguay’s recent bond issuance, reflecting their importance as a safeguard against external shocks.
At the same time, Paraguay’s structural variables moderate such strengths and undermine its capacity to withstand shocks. First, trade shocks represent an important risk to Paraguay where soy and derivatives, cereal and beef account for about 75 percent of exports. In the event of a sharp decline in prices for these products, the lack of export diversity can expose Paraguay’s external position to current account balance deterioration and a weaker fiscal stance. Second, the national savings rate and indicator of financial depth are woefully low. Paraguay’s savings ratio is less than 20 percent. This helps explain Paraguay’s low level of financial depth that is hampered by a stubbornly low pension funds ratio. Together, these deficiencies signal a lack of domestic sources of finance needed to counteract a sudden scarcity and/or higher costs of external sources of finance.
Figure 2. Second dimension of resilience: the capacity of authorities to rapidly implement policies to counter the effects of the external shock
With respect to the second dimension of economic resilience, the story is quite similar. Efforts to improve the country’s macroeconomic stance since 2003 have paid off and will continue to do so if a new adverse external shock hits the economy. During the global financial crisis, the authorities had the fiscal and monetary space to implement countercyclical policies, minimizing the overall effect of the shock. An analysis of Paraguay’s macro variables presented in my paper reveals that their relative strength has persisted, and in some cases, such as the behavior of inflation under an inflation targeting scheme, has even improved.
Again, the strength of these macro variables needs to be qualified by Paraguay’s structural deficiencies! Tax collection in the country is one of the lowest in Latin America. Despite a low fiscal deficit and debt, weak tax revenues can potentially undermine Paraguay’s ability to fund existing investment projects in the event of a shock that reduces or reverses external sources of funding. Additionally, Paraguay’s rate of financial dollarization, measured as financial institutions’ holding of assets and liabilities denominated in foreign currency, is nearly at 50 percent. The latter is contained because a significant part of borrowings in dollars corresponds to the agribusiness industry, whose revenues are denominated in dollars and, therefore, have a natural hedge. Notwithstanding, a high degree of dollarization remains a risk to financial sector stability and a constraint on the efficacy of the central bank to respond countercyclically to an adverse external shock.
Ranking Paraguay: the significance of structural variables in Paraguay’s performance relative to other emerging markets
To evaluate Paraguay’s economic resilience and highlight the importance of structural variables, I put together two valuable exercises. First, similar to the exercise in my 2015 paper and using a similar methodology, I consider the macro variables discussed in this blog post to create a macroeconomic resilience indicator that is defined as the simple average of the seven variables in consideration. The two graphs below compare how this ranking has changed in the last decade, presenting the indicator’s values in 2007, pre-global financial crisis, and 2017. Countries are organized according to the value of the indicator. The larger the value, the greater the country’s macroeconomic resilience relative to the countries in the sample.
Figure 3. How the macroeconomic resilience indicator value affects country ranking, 2007 and 2017
Paraguay only moves from second to fourth place in the ranking between 2007 and 2017, confirming the macroeconomic strengths discussed in this blog post. Yet, a second exercise that accounts for all variables considered in this blog post (macro and structural) paints a different picture.
Here we employ an indicator of economic resilience to external shocks that accounts for all the variables considered in this blog post (macro and structural).[i]
Figure 4. How the economic resilience to external shocks indicator value affects ranking, 2007 and 2017 (all variables, macro and structural)
In this exercise, the effect of structural variables is clear. Paraguay’s position is not only lower than in the first exercise, but its position deteriorates considerably from position 11 to 19 out of the 22-country sample.[ii]
In Paraguay, the winners of next month’s elections will face the challenge of building upon Paraguay’s pragmatic macroeconomic management by bolstering its economic resilience through structural reforms. Considering that a more uncertain external environment looks increasingly likely, it truly is an opportunity that Paraguay can’t afford to waste.
[i] Four sub-indicators are considered represented in the two dimensions of resilience (external position, availability of external financing, fiscal position and monetary position). Each sub-category is formed by the corresponding variables discussed previously. These sub-categories are obtained by calculating the simple average of the standardized values of the variables that they’re comprised of. Finally, the indicator of economic resilience to external shocks is the simple average of the four sub-indicators.
[ii] This exercise considers tax revenue—an index without this variable is presented in the working paper where Paraguay falls from position 9 to 12 in the ranking.
A graphical depiction of the discussion, created during the conference. (Click to enlarge.)
Early this month, CGD co-hosted a conference with the Inter-American Development Bank (IDB), highlighting progress, challenges, and lessons learned from the first phase of the Salud Mesoamerica Initiative (SMI), a seven-year-old results-based funding (RBF) partnership between donors and national governments in health. Uniquely, the event brought together country governments, external funders, intermediaries, and evaluators—from different stages of the program—to discuss motivations, results, issues, and lessons learned. [Disclosure: I (Amanda) participated in the design and initial funding arrangements for SMI as lead of the IDB team, but left for CGD just after the initiative was launched in 2010.]
RBF can be hotly debated. A recent BMJ Global Health paper argued that RBF is a potentially destructive donor fad. In contrast, a 2011 paper described RBF as a lever for health systems change. Evaluations emerging from RBF programs financed by the Health Results Innovation Trust Fund at the World Bank are mixed in terms of results (8/33 programs have reported so far). The details of design, the context in which the intervention operates, and the quality of implementation all seem to matter for effectiveness (see here).
But underlying the debates, there is a core problem that RBF is attempting to fix, and that any budget or payment mechanism in a health system must address—what economists call the principal-agent problem: weak accountability relationships, divergent goals, and asymmetric information between funders (a health care payer or commissioner, or a national government) and those charged with healthcare provision (a provider group, or a subnational government, for example). RBF solves some of these issues by creating a contract between the parties in support of a shared goal, attaching money to progress on a few results that are straightforward to measure independently, and disseminating results to everyone involved and the public at large. Funders can be central governments or external donors, and recipients can be subnational governments or provider groups.
SMI took on a version of RBF that established a contract between external funders and central governments’ ministries of finance, with the aim of improving service readiness, coverage, and outcomes in the poorest municipalities in Central America, where responsibility and budgets for health were owned. What have we learned?
In SMI-eligible communities, RBF worked better than F alone
Based on a natural experiment in El Salvador, Pedro Bernal and his colleagues found that clinics in SMI communities offered nearly double the number of services than control community clinics that received an equivalent amount of money through a traditional budget. According to Bernal, similar patterns appear in Belize, Honduras, and Nicaragua.
In SMI communities, service readiness and coverage increased a lot
Using case and control communities and a large sample of facilities and households, the University of Washington’s Institute for Health Metrics and Evaluation (IHME) reports 36-month follow-up results, finding that SMI increased both service readiness according to countries’ own protocols as well as coverage of key women’s and maternal health interventions. According to Ali Mokdad of IHME, regions targeted by SMI have seen more babies delivered by skilled attendants, more women accessing antenatal appointments, and more families consuming healthy diets as compared with baseline household and health facility data from 2011. Although more work is still needed to achieve results on other indicators, these initial results suggest that the RBF-plus model has significantly improved performance.
How it worked
In SMI, country ministries of finance and health and IDB project teams, supported by the SMI’s small secretariat, negotiate a set of policy goals at the national level (new protocols or norms, for example) and a set of health coverage and service readiness goals to be achieved in the poorest fifth of municipalities in the country, building off a baseline survey. Country governments contribute 50 percent of the funds required to meet goals, and the Bill and Melinda Gates Foundation and the Carlos Slim Foundation—via the IDB—put up the other half of the required resources.
If countries meet goals, SMI provides governments with a financial return equivalent to 50 percent of their original contribution. Ministries of finance may or may not decide to “trickle down” financial incentives to communities, but most have passed on funding to municipal governments or health authorities to meet goals. All funding is on-budget, meaning that government oversees and manages expenditure uses, as well as audits and accountability using their own structures. IHME carries out the independent data collection, analysis, and verification that certifies whether countries have met goals, and this external measurement—in combination with the RBF—was a catalyst for change.
Healthy competition played a role…
SMI was undertaken by an existing regional group of country governments in Central America (COMISCA). Participants reported “healthy competition” amongst countries and municipalities within a country because of the measurement of results and the pass/fail certification in every measurement period. There were multiple opportunities to get it right, so even if a country “failed” at the first measurement, there was another chance to get it right, and most did. Some governments preferred the idea of payment for progress in lieu of all or nothing, but most liked that the scheme raised the stakes for doing well in the poorest, historically neglected communities in their countries.
…but it wasn’t only the money and measurement
SMI describes itself as “RBF plus” because the initiative also offers intensive consulting and analysis alongside the formal agreement and measurement. Policy and protocol updates, supply chain support, and information systems and app development was part of the secret sauce, as was a qualitative and ongoing evaluation and learning process on top of the quantitative measures.
Would it work elsewhere?
When I started working on SMI, GDP per capita in Honduras was about the same as it is in Ghana today. I see many parallels between the highly decentralized health systems in Central America and health systems in Ethiopia and Nigeria, including in the huge differentials in public spending by states. While human resource capacities and distribution are certainly different at baseline, I see no important reasons not to test a SMI-type approach in cooperation with the governments and regional bodies in other parts of the world. SMI is different from the idea of paying providers directly, but still retains the positive incentives for population coverage of key health interventions. And it is a less-cumbersome and more constructive way for an external funder or philanthropist to engage with public health systems.
Learn more, access presentations, see graphical facilitator illustrations, and watch a recording of the conference here. Your views are welcome.
This report examines the impact of the REDD+ agreement between Guyana and Norway on indigenous communities in the country. It aims to understand the concerns, hopes, and fears of indigenous communities at the start of the agreement, and the effects, if any, that communities have faced from REDD+.