In role reversal, Latin America may aid IMF

December 3, 2011

In years past, the International Monetary Fund would bail out Latin American nations on the brink of economic disaster, including Brazil, which was often hammered by international crises and its own fiscal mismanagement.

But this past week, the new director of the Washington-based multilateral lender, Christine Lagarde, visited Brazil, fast-growing Peru and economically solid Mexico to praise the region’s macroeconomic management and take steps to ensure that Latin America is not infected by Europe’s debt crisis. Brazilian and Mexican financial officials also told reporters their countries are leaning toward contributing to the IMF’s war chest, as Lagarde, who is French, determines how the lender will assist Europe.

“Those bilateral loans will be important,” Lagarde said in an interview here Friday in Brazil’s industrial heart. “They are a very efficient way to increase resources, if that was needed. And to have a strong signal from various emerging markets that should it be the case — if it’s necessary — they will stand ready to do so.”

Though the IMF has $390 billion available for loans, Lagarde has indicated that it may not be enough should the situation markedly worsen in Europe. The possibility of more contributions to its funds, then, is “reassuring,” she said.

“It gives confidence both within but also more importantly outside the IMF that the institution will be equipped to deal with the issue,” she said.

Economists and observers say Lagarde’s visit represents a sharp role reversal for Latin America and the IMF, which historically preached austerity in the face of hard economic times.

Over the past decade, Brazil and its neighbors have controlled inflation, implemented fiscally responsible policies and restored confidence. Chinese demand for commodities, along with increasingly robust domestic demand, has fueled the fastest sustained growth in Latin America in decades. Rainy-day funds in some countries and a well-managed banking sector helped shield the region from the subprime collapse in the United States and now from the European crisis.

“It seems like the tables have been turned,” said Michael Shifter, president of the Inter-American Dialogue policy analysis group in Washington. “Latin American finance ministers used to shudder when IMF officials came to the region. And they were scolded, they were berated by IMF officials, who told them the way to do things. . . . Now they’re the model of fiscal discipline and responsibility.”

Though not dependent on any one region or country, the IMF is looking to the biggest economies here — Brazil’s is the world’s seventh-largest, and Mexico is in the top dozen — to join forces with China, India, Russia and other muscular emerging economies. Lagarde stressed that it is not just about loans but about creating a buffer against European spillover while remaining a robust market for Europe’s exports.

“It’s often the case that when one part of the world is not doing so well, the other ones are going to drive the bus and take the global economy forward,” Lagarde said.

The 55-year-old former French finance minister, who became the IMF chief in July, said that she does not expect the emerging markets to have the firepower to rescue the developed countries that are in trouble. “But it’s terribly important for Latin America to continue on this very sustainable, solid, well-balanced path that they have embarked on 10 to 20 years ago,” she said.

To many countries in this region, the 1980s and much of the ’90s were considered lost years, as economies stagnated and inflation skyrocketed.

Now, those countries have a debt-to-GDP ratio hovering around 50 percent, less than half what it is in many European countries, said Claudio Loser, an Argentine economist who worked at the IMF for 30 years. As recently as last year, some countries grew at rate of 6 to 9 percent. Even this year, economic output for Latin America is expected to hit 4.5 percent, three times higher than in developed countries.

Loser said the region can contribute to the worldwide economy simply by adequately addressing troubles such as an uptick in inflation or a slide toward recession. “By being stable, they can continue demanding the products that they buy from Europe,” Loser said. “So a good situation in Latin America helps Europe.”

In the interview, Lagarde noted the region’s adherence to market fundamentals but said she had also been “amazed by the determination” of some governments to implement policies that reduced poverty. Indeed, her visit came as newly released U.N. statistics showed poverty in Latin America at its lowest level in 20 years, having fallen from 48 percent of the population in 1990 to 31 percent last year.

Lagarde also stressed that she was here to learn from countries that had been whipsawed by economic storms and to see “what suggestions, what advice, they can give.”

Latin American leaders, Lagarde said, “recognize in some of the European reactions their own reactions” to crises in the past, namely, a denial phase in the face of increasingly bad news. She said that finance officials here had emphasized to her the need “to act fast and to act decisively.”

Much of the public interest generated by her visit, though, centered on how much Brazil and other emerging countries might provide the IMF. That remained unclear even as Lagarde left Brazil late Friday, but the government here seemed to savor that there had even been talk about the issue.

“This time, the IMF did not come to bring money but to ask for money,” Finance Minister Guido Mantega told reporters Thursday. “I would prefer to be a creditor than a debtor.”

In a switch from the past, when the IMF made loans to the region contingent on certain conditions, officials in Brazil and other developing countries have been talking about the structural reforms needed in Europe as they consider funneling money there.

Carlos Marcio Cozendey, secretary for international affairs in the Brazilian Finance Ministry, spoke in a phone interview of the importance of lessening risk. Still, he said, Brazilian leaders felt obliged to help.

“Brazil has a stable economic situation and, on the external side, we have the reserves,” Cozendey said, referring to foreign reserves topping $350 billion. “It would be part of our responsibility to help in these efforts.”

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