Former President of Spain Discusses Managing Regional Competitiveness in Latin America

Jose Maria Aznar, former president of Spain, delivered the keynote address during the Outlook for Regional Competitiveness in Latin America and the Caribbean Conference on Tuesday, Sept. 29, 2009. The event also featured a panel discussion by Arturo Sarukhan, Mexican ambassador to the United States; Peter Hakim, president of the Inter-American Dialogue; and Everett Santos, former CEO of the Latin America Infrastructure Fund.

The event was sponsored by Georgetown University’s McDonough School of Business, Georgetown University’s Latin American Board, Georgetown University’s Center for Latin American Studies, the Integration and Trade Sector, Vice Presidency for Sectors and Knowledge, Inter-American Development Bank, and The Inter-American Dialogue.

How to manage regional competitiveness during economic uncertainties? What is the outlook for Latin America and the Caribbean?

Dear George Daly, Dear Ricardo Ernst, Distinguished guests,

It is wonderful to be back here at Georgetown with you all, at this joint event organized by the Latin American Board, the McDonough School of Business, the Integration and Trade Sector, the Vice Presidency for Sectors and Knowledge, the Inter-American Development Bank, the Inter-American Dialogue, and the Center for Latin American Studies. I have been kindly invited to talk about Latin America and how to manage regional competitiveness in these times of economic uncertainties.

Before I go into any detail about the economic crisis and its impact on Latin America, I find important to state, once again, as I have done many times already, a basic idea that must be present on everybody’s mind when talking about the region. This idea is that Latin America is part of the Western World.

The Western World, or simply the West, is not a geographical area; it is primarily a common project embodied in a set of values and principles; values and principles that have universal legitimacy: values such as freedom, democracy, and the dignity of each person; the Rule of Law, limits on power, equal opportunities, equality before the law for all regardless of race, sex, or religion; pluralism and freedom of speech.

Some Latin American countries are suffering one of the most apparent attacks to these principles by the enemies of the free society. The result of this confrontation is obviously not neutral for the liberty and economic prosperity of their citizens.

Those who live in free and rich societies, those that sometimes are tempted to take liberty and prosperity for granted. We all have the responsibility to give support to those freedom fighters who are struggling for the western values to prevail in Latin America.

Those who resist day by day the attacks of authoritarian regimes in Latin America should not feel alone. They share with us the ideas that the most powerful engine of progress is a free and open economy; that respect for the rights of each individual is elementary; and that prosperity thrives from the hands of free men in free societies.

This is the West. Those are the shared values that define our identity. And this is what makes Latin America a vital part of this concept. Adherence to these principles is at the core of liberty and long term prosperity. Adherence to these principles is by essence the most powerful confidence building measure we can imagine to overcome current difficulties.

Ladies and gentlemen, to talk about economic uncertainties in these days necessarily implies to talk about the financial and economic crisis that emerged in 2007 and intensified in October 2008. I do not wish to discuss the details of the crisis, as other are in a better position to do so. But I do believe it is necessary to clarify what, in my opinion, has failed, because in order to raise effective responses to the crisis it is imperative to correctly diagnose what has gone wrong.

Today it is widely shared that the economic crisis had its origins in several key factors. First, the excesses committed by the most prominent central banks around the world, starting with the Federal Reserve of the United States and continuing with the European Central Bank and the Asian central banks. They all made the terrible mistake of flooding the world economy with cheap money for a too long period. So cheap that negative real interest rates prevailed for a long time. This gave incentive to unprecedented increase in indebtedness.

Secondly, the serious mistakes made by many governments with regard to proper regulation of financial markets.

Third, the errors committed by many governments in their responsibility of monitoring the health of the banking system and the stock markets.

Fourth, the immense mistakes committed by many governments in their approaches to public policies. The United States seriously erred in its housing policy, promoting the extension of credit to hundreds of thousands of people who were not able to repay their loans. In Europe, most governments made a mistake betting on excessive government spending and not undertaking economic reforms to increase their growth potential.

Fifth, the miscalculations committed by most executives in the banking firms around the world, who with remarkable negligence implemented poor risk management controls, allowing an enormous volume of credit without sufficient guaranties.

Sixth, the serious lack of transparency, professionalism, and ethics in the financial markets which has in some cases led to multimillion-dollar swindles and scandals.

Broadly speaking, these six factors are the causes of the global crisis; of its emergence and worldwide spread. But, obviously, these causes do not apply equally to every part of the world. In order to understand Latin America’s current situation, we must stress some peculiarities.

This crisis is a crisis of indebtedness. But it is somewhat different from other crises that the world, and specially Latin America, has suffered in the past. Traditional debt crises normally related to unsustainable levels of public debt derived from irresponsible fiscal behavior. This is to say, they were public debt crises. But this crisis emerges as a consequence of unsustainable private, and not public, indebtedness.

Fuelled by the powerful incentive of a loose monetary policy that led to negative interest rates, households and corporations in many developed countries lived for a long time beyond their means. They accumulated increased amounts of debts, until the process became unsustainable and finally exploded. Fortunately, in Latin American countries these trends did not occur as fiercely as in the U.S. and other developed economies.

This limitation prevented many of the private excesses to happen due to two main reasons: first, the fact that past experiences of financial crisis in the region presupposed an intensified market discipline on these economies; and secondly, the underdevelopment of local credit markets that traditionally concentrated on financing the public sector alone.

Thanks to these motives most Latin American countries were insulated to a great extent from the first wave of the crisis, which did hit hard on most developed countries’ banking sectors. Difficulties for Latin American nations appeared through a second wave of the crisis derived from declining global trade. This is affecting global demand for the commodities many Latin American countries export.

Though this currently poses a problem, global trade will eventually recover. Therefore, I believe the impact of this second wave on Latin America will not be long lasting, and, on the long term, should not affect the regional competitiveness.

But, of course, this shock does have a negative impact right now. The main pervasive effects are suffered by those who had just abandoned poverty thanks to sustained growth and now have their accomplishments at risk. Enhancing the flexibility of the economy, fighting financial and commercial protectionism, and promoting free trade is vital for mitigating and cushioning those negative effects, and Latin American nations should do so very clearly.

As I have said, in my opinion this second wave of the crisis is not the real threat that hangs around Latin America’s recovery and future prosperity. The real source of uncertainty in the region is a potential negative third wave of the crisis. This third wave could emerge from inadequate policy responses to the current situation. That is to say that the main risk is a potential policy-lead negative shock.

Some developed world countries think they can afford irresponsible fiscal expansions to fight the crisis. This can pose serious problems for them. But for Latin American countries, following this path would certainly be disastrous. Irresponsible fiscal behavior always, and in any country, will have a negative impact in the medium term. In the case of Latin American countries the penalties will be lethal even in the short term.

If Latin American countries try to mimic the kind of fiscal policies some other nations are tampering with, the inevitable outcome will be a traditional fiscal crisis; a crisis of the sort that has already hit Latin American countries so strongly in the past. The same dreadful and long lasting consequences on the credibility of the region for global investors would emerge if this is to happen. The long term effects of this crisis on Latin America’s regional competitiveness will therefore directly depend on policy decisions, and not on external trends or events.

Before I go any further, let me remember that Latin America is a very diverse region. It is obvious that there are many cultural and social similarities, but we must not fall for the simplistic idea of treating the whole region as one and only reality, because it is not so. In fact we may say that policy variation across the region is perhaps greater than in any other comparable region of the world.

Ladies and gentlemen, the current economic uncertainties put Latin American nations at an important crossroads to which policy making has to respond. It is often said that difficulties often carry within hidden opportunities. Certainly, I believe this economic crisis can mean a huge opportunity for Latin American countries that choose the right direction. That is the direction that leads to intensifying their adherence to the western values of freedom and openness.

In a context of global uncertainty, sound policy making will be rewarded an extra confidence premium. And many Latin American countries enjoy a good starting position to fully take advantage of this opportunity. Their economies are suffering only from second round effects and they started with relatively sound macroeconomic balances.

Now it is time to show global investors that Latin American countries can be a stabilizing factor for the global economy. But, as previously said, Latin America will not do this as a whole, but rather individual Latin American nations on their own are the ones that must show their potential.

This crisis can represent the perfect chance for many nations to stand out. The ones that undertake the necessary reforms; the ones that follow a path of fiscal discipline; the ones that are able to differentiate themselves will have a marvelous opportunity for progress and prosperity.

In times of need, people pay much more attention to the rare, extraordinary, valuable, or original. Nations and markets do the same. In times of global prosperity, it was difficult to be noticed for doing it well, for being prosperous yourself. After all, more or less every nation was doing the same.

But now, when hard times are by, it is much easier for markets to realize where the good conditions, good policies, and good opportunities are taking place. There is a universal thirst for new occasions, for acknowledging where the best possibilities of success are. This is a time of change.

Latin American nations can now, with relative ease, if they have the vision and needed political will, be noticed, stand out and prove to the world that they are fully committed to stability and are plenty of potential and opportunities. This is a time when, more than ever, the adequate policy decisions will pay off and will be rewarded with greater confidence. On the contrary, mistakes will have deeper consequences. Latin American countries that reject protectionism, open their economies, exploit their advantages and are able to position themselves as trustworthy economic partners will flourish enormously.

In this age of proximity, where every corner of the globe seems to be just a few miles apart; in this world of decreasing transportation costs and instant information; and at this moment of economic uncertainty, Latin American nations that follow the correct path have an incredible window for definitely insert themselves in the global economy in a strong position.

Nations that are capable of doing this will build trust. Trust is a key element for attracting investment. Investment leads to economic growth. Economic growth means less poverty and higher living standards, which is, after all, the measure of economic success.

Ladies and gentlemen, on this issue of building trust and being able to stand out, let me put what for me is a good and close example; my own country, Spain. I remember well when I was first elected to serve as President in 1996. Back then, Spain was regarded as a second class country; a nation that was not so stable, not so trustworthy.

At that time, Spain did not meet any of the requirements set by the European Union to become a member of the future European single currency, the euro. Not a single one. My Administration put into action the kind of responsible policies the situation required based on the principles I have mentioned today. Following that path led us, in less than 18 months since we took office, to meet every single requirement, and finally Spain became a full founding member of the euro. The long term consequences of this commitment to sound policy making are now apparent to all.

The international community and investors started then to reconsider their judgment on what they had thought was an unreliable country. After this achievement, we did not fall into complacence. We followed the same line of action, continued to apply our restrictive spending policies, and kept on with our fiscal and budgetary prudence.

As you know, the European Stability and Growth Pact dictates that European member states must respect an annual budget deficit of no higher than 3 percent of GDP. This pact was designed to control euro area member-states’ fiscal policies, to prevent free riding within the monetary union.

Many thought the pact was specifically aimed at controlling the least trustworthy European countries, which were considered by some other countries in need of close monitoring. Perhaps you remember that some years later, in the aftermath of the “dot com” crises, some of those powerful European nations failed to comply with the provisions of the Stability and Growth Pact.

But not Spain. Spain did what was agreed, made the necessary economic efforts, and fulfilled its obligation to control public finance. And we committed to do so specially in times of global stress. And the commitment paid off.
A country that only a few years before was regarded as untrustworthy was now fully recognized as a reliable and stable nation. We were a model of prosperity and stability after becoming a founding member of the euro and satisfying in full all its rules, while some other European countries were not able or willing to do so. We were able to create 5 million new jobs, reduce the unemployment rate from 23 percent to 10.5 percent, and increase foreign investment in Spain by 370 percent.

Spain achieved all this through hard work and continued discipline especially in times of difficulty. We proved to the entire world that Spain meant well-doing and opportunity. We were different. We inspired confidence. We stood out in difficult times. We did exactly what Latin American nations ought to do now, embracing this window of opportunity that has been presented to them.

Ladies and gentlemen, at this point I find it necessary to take a step back and talk about the basic pillars upon which trust is aroused, investment attracted and wealth created, and to which policy making in Latin America should commit to take advantage of the opportunities ahead.

These basic pillars are: first, a decisive bid for liberal democracy; secondly, implementation of open-market policies; and finally, a complete hook to globalization. Let me dig deeper in these ideas.

First, Latin America needs to embrace a decisive bid for liberal democracy. I alleged at the beginning of my talk that Latin America is an essential part of the West. We understand the West as a set of values and principles, and those values and principles are what liberal democracy represents.

However, there are those in Latin America who intend to negate this evident truth. Some are trying to relegate the entire region to the past, rather than allow it to stroll along the path of modernity.

We cannot deny that, in recent years, freedom has been put at jeopardy in some Latin American nations. Populism or the so-called "socialism of the twenty-first century" seek to alienate Latin America from its Western vocation. And let me be very clear on this issue; populism runs in the opposite direction to progress and prosperity. Populism condemns nations to poverty and lack of freedom.

“Socialism of the twenty-first century” is nothing new; it is the same old ideology that failed miserably last century; that enslaved nations, and trapped millions of human beings in poverty. It is only a new name for an old catastrophe. The old leftist ideology that was defeated, that collapsed under its own failures and lies, intended to be reinstated now by some.

Some, aware of the failure that this ideology represents, are trying to reinstate it under the mask of a fake democracy. Behind this new name of populism, the rights and liberties of many citizens are being trampled under the excuse that everything done by a leader emerged from the polls has democratic legitimacy.

But Democracy is not based solely on the popular election of leaders. Democracy stands on the strength of various institutions dedicated to the purpose of preserving citizens’ freedoms. There is no real Democracy without separation of powers, freedom of expression or respect for the law on behalf of power. There is no Democracy if there is no freedom of press or independent judges.

Today, the rulers of those authoritarian regimes are struggling to amass more power, control judges, corner those who disagree, and are determined to hold on to power the years that they please. They intend to submit society, not let it thrive.

By contrast, nations that opt for democracy, open economies and individual rights are the ones growing faster, the safest and freest. They are those that attract more investment, create more jobs and more wealth. Because the true path of prosperity, success and future, comes in the hands of real democracy, openness, economic freedom, individual liberties, and the Rule of Law. In short, prosperity to all comes in the hands of liberal democracy.

Liberal democracy allows freedom; freedom spawns stability; stability generates trust. And, as I said before, trust ends up in less poverty and economic growth. The first and indispensible requisite for Latin American countries to flourish, to embrace the opportunities the current economic outlooks pose, and to grow is to leave aside the nefarious path of populism and bid decisively for liberal democracy.

Ladies and gentlemen, the second pillar I mentioned is the implementation of free market policies. As I said before, right now it is more important than ever to apply the correct measures. Politics and policies have a big role to play in the current situation, and especially economic policies.

Free and open markets encourage entrepreneurship, which I believe is the engine of free and booming societies. Free markets promote investment, which are key to growth. And investment also means innovation, which is a vital impulse for development. Free markets foster creativity, which beget more buoyant, healthier and more open societies. Free markets are based on liberty. And, whenever, in the course of human history, freedom has reigned, societies have flourished tremendously. Economic freedom supposes limited State intervention; it calls for lower taxes; it heartens free trade.

This is the path Latin American nations should pursue, and not fall into the temptation of following the trail some developed nations seem to be walking down nowadays.

It seems that today many believe that the State is the answer for everything. Some politicians seem to think that every problem can suddenly be solved by throwing on them taxpayers’ money. Some are forgetting that public finances need to be sustainable and under control. Some are forgetting that private enterprise, lower taxes and openness are needed for recovery. Some are forgetting that what is needed is better and more focused regulation, not more. Some are simply planting the seed for a new crisis.

Latin America should not follow this trend. This is the time for Latin American nations to succeed, and success is a long desired goal that will never be achieved if open and free markets do not flourish in this region.

The third pillar is a final hook to globalization. The era of globalization has been the most prosperous in history. Economies have developed immensely all around the globe. Poverty has been reduced considerably. It is time for Latin America to fully enjoy these same benefits.

Free trade and free movement of capital must be promoted in the context of open economies. And let me stress that this free trade must be with the whole world, and not only with the rest of the region. As the word itself states, it must be a global free trade. This is the way to fully enjoy the benefits of bigger markets and specialization.

And once again, the nations that opt for this openness will be the ones that achieve success. Once again, the responsibility for opening markets and promoting trade falls in the hands of policy makers. Every free trade agreement reached by any Latin American nation with, for example, the United States, should not only be respected but praised. And many more free trade agreements should be promoted, with Europe, the U.S., and the whole world.

Any attempt to impede or delay free trade agreements with Latin American countries is not only a drawback for the prosperity of all the economies involved but a disastrous strategic decision for the cause of western values in the region.

It is our duty to support those who are fighting for our shared western values in Latin America. The U.S. can do a lot in this field. To start with, a final approval of the U.S.-Colombia Free Trade Agreement will be of great importance when there is so much and so important at risk in Latin America.

Ladies and gentlemen, these are my views on the prospects for Latin America. I fully believe that nothing stands in the way of that region’s prosperity. I do not believe in historic curses or anything like that. Nothing impedes Latin America from full economic development but the ability to put into action the correct and appropriate measures and policies.

I have described the global economic crisis and its impact in Latin America. We have come to the conclusion that it has opened a huge opportunity for this region. Now all that is left is the necessary political will, the vision and courage to fulfill this dream. If Latin American decision makers embrace this chance to promote free market, innovation, fiscal discipline, to stand out, to build international trust, to construct fully democratic and free countries, to promote free trade and open markets, these nations will witness the miracle of full economic development.

As Winston Churchill said: “A pessimist sees the difficulty in every opportunity: The optimist sees the opportunity in every difficulty.”

I am optimist on Latin America because I have witnessed its potential. Let us all be optimists and work together for the birth a brighter and more prosperous Latin America.

Thank you very much.