Enrique Iglesias

It’s been 40 years since the Inter-American Development Bank was created by a group of economists who believed, like the bank’s current president, Enrique V. Iglesias, that a U.S.-Latin American partnership would help realize the region’s full economic potential. The bank sponsors programs that promote social development, encourage economic integration and assist small businesses. Its record of success in these areas is indisputable.

Yet, with Latin America struggling to survive global financial turmoil, the Inter-American Bank is often--and unfairly--lumped with the much-criticized International Monetary Fund.

Furthermore, about 10 years after Latin America’s largest countries, including Argentina and Mexico, opened their economies to international capitalism, a majority of citizens have yet to experience the benefits of the market economy. One result is that a consensus is growing in the region that questions the wisdom of the economic model embraced by these countries and would replace it with a “third way”--a hybrid that would smooth the rougher edges of market capitalism.

The Inter-American Development Bank stands right in the middle of this conflict and Iglesias is the man on the hot seat. The son of an immigrant Spanish family, Iglesias, 68, grew up in Uruguay. While studying for his doctorate in economics at Harvard University, he developed a close friendship with John Kenneth Galbraith. At the time, the renowned economist was helping President John F. Kennedy put together the Alliance for Progress, the first true U.S. initiative to assist Latin America through a program linking economic aid to internal reforms. That friendship influenced Iglesias’ leadership of the Inter-American Bank.

In 1986, Iglesias chaired the conference that launched the so-called Uruguay round of trade negotiations, which led to the creation of the World Trade Organization. Two years later, he was elected president of the Inter-American Development Bank. He was reelected for a third term last year, after he raised the bank’s lending capacity from $1.6 billion in 1988 to a record $10 billion.

Iglesias’ professional career spans 45 years. He has been a college professor, a diplomat and president of Uruguay’s central bank. During a recent telephone interview, Iglesias, a bachelor, named three things that make him extremely happy: talking with friends around the world; listening to opera; and sleeping, for which his travel schedule allows little time.

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Question: Many Latin American economists and leaders are calling for a “third way.” Is there a growing feeling in Latin America that the experience with the market economy is failing? How should we measure success?

Answer: We should look at the whole picture to measure, simultaneously, economic and social efficiency within the context of a democratic system. There may be times in which we try to maximize economic efficiency at the expense of social efficiency, and, sometimes, that leads to confrontation. We also have other periods in which we try to maximize social efficiency while neglecting the economic side, and we end in populism, high inflation and backwardness. The big test is to have a good combination of policies that can, at the same time, assure sustainable growth with social justice and a reduction of poverty.

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Q: In countries like Mexico and Argentina, have economic reforms implemented over the past 15 years reduced the gap between rich and poor?

A: The reforms that were put in place were very important to restore stability in those countries. They also set the foundations for modernization. Maybe there were things that could have been done better. Yet, in essence, those reforms were pushed by the big economic mismanagement that we had in practically every country in the region.

These are prerequisites to implement solid social policies that will close the gap . . . Those countries have to complete the reforms, but at the same time they need to refocus their social policies and make them their main concern in the years to come. We had to do those reforms, but we haven’t finished the job. The big task of reducing poverty and inequality is still a pending issue in the region as a whole.

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Q: Are marginalization and widespread poverty in Latin America byproducts of economic exploitation and unjust economic systems, as some people maintain, or are they rooted in other causes, for instance, a weak education system?

A: Poverty has deep historical roots in the region. It starts with the ways wealth, particularly land, was distributed in Latin America. We also had mismanagement of the economy and the ensuing inflation that imposes a tremendous burden on poor people. We have governments having to work with meager resources, and we have an inefficient handling of the available money. Also some adjustment policies, in the early stages of the reform of the economy, led to some concentration of income. . . .

But when I look at the major element at the root of poverty and inequality, it is, in my mind, the education gap. It is really too sad to admit that, in this area, we have not done enough. Education is still very poor in the region. It reaches a limited number of people and its quality needs a lot of improvement. The concentration on the major instruments of social policies should go basically to education and training, which are the basic elements of social mobility and social justice in any part of the world.

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Q: President Bill Clinton has failed to convince Congress to grant him the fast-track authority he says he needs to negotiate international free-trade agreements. Is protectionism in the U.S. growing?

A: My sense is that the present phenomenon of globalization is going to make protectionism grow everywhere, not only in the U.S.

Globalization is also a threat to the integration schemes we have been putting in place in recent years. In the final analysis, it is important to recognize that trade has always been a very difficult issue and that a lot has been done to free it. Even more will have to be done to open the markets. I hope the developed countries, in particular the U.S., will appreciate how important the opening of markets in Latin America has been for the U.S. [and will also appreciate] the Latin American contribution to job creation in this country. The region is now the second or third trading partner of the U.S., and I hope the long-term vision of the benefits of free trade finally will be understood here. But I also understand that, in times of crisis or turmoil, protectionism will be a temptation.

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Q: From left to right, the International Monetary Fund is under attack for the way it dealt with financial crises in Asia, Russia and now in Brazil. Is the criticism fair?

A: The IMF has always been controversial, particularly in Latin America, but people should recognize that the Bretton Woods institutions, after all, have played a major role in avoiding big financial crises since the ‘30s. So this goes to the credit of the IMF. It should also be said that, in recent years, the IMF has been expanding its areas of action to introduce very important issues, like the social dimension of governance. This is an important improvement in terms of broadening the scope in which the IMF is working.

While I don’t deny the controversial areas in which they are working, I believe they are doing the best to get countries out of their messes, and it is always important to do a comparison with the past.

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Q: What are the possible outcomes of the Brazilian crisis? Is President Fernando Henrique Cardoso doing the right thing?

A: Yes. He is confronting a situation that, at the beginning of the crisis, came from outside. They had weaknesses in their economy, and he recognized that even prior to the election last year. He has tried to correct Brazil’s fiscal policies, and he is applying a score of monetary policies in trying to make the IMF package work. The markets are taking their time to show their belief in the program, but there are increasing signals it is going to take place, because there is a strong determination to find the new level for the currency.

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Q: Isn’t the globalization of production creating a larger gap between economically viable and nonviable countries?

A: Globalization has two phases, one brings opportunities, the other brings risks. . . . We have a globalized financial market, which allows access to the savings of the whole world and that, after all, is something good for everybody. But that also implies a big risk. Those countries that do not prepare themselves to navigate in those waters will suffer and can be excluded or delayed in the race for development.

What counts under globalization, and what we must understand and learn, is to read the signals of the international markets in order to create internal defenses. The first defense is a good macro-economic policy, particularly a good fiscal policy. Those countries that have a good internal economy, a well-managed economy, are always better prepared to face the risks of globalization.

Second, we have another instrument, which is extremely important in Latin America, called integration. So, yes, there are risks of exclusion and marginalization.

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Q: What will it take to devise a mechanism that could help investors discriminate between reformed and unreformed nations?

A: I think investors know very well what they are doing, and the market is very telling in that sense. If you look at it statistically, yes, there is financial turmoil in Latin America, particularly in Brazil, that is affecting the current short-end flow of resources. But not in the long term. This type of investment continues to be very active everywhere. The markets are betting on what they think is safe but they are very much aware of the future importance of Latin America. There has been, to a certain extent, a revaluation of Latin America in the global perspective. Even during the present turmoil, it is very interesting to notice that contagion was limited to Brazil and did not spread to other parts of Latin America. Under different circumstances, confronting the present volatility, the situation in Latin America would have been much worse than what it is today. This is due, to a certain extent, to the merits of the policies that were followed last year and the reforms undertaken some years ago.

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Q: At a time when fiscal discipline and less public spending are hallmarks of government, how should governments deal with unemployemt?

A: Governments should take the necessary steps to stimulate investments by the private sector. Employment will grow when those conditions are created. But, at the same time, considering that there may be periods in which unemployment grows, the government should foresee the need to create safety nets to face the issue. Apart from that, in a region that has so many small businesses, it is extremely important for the government to promote micro-businesses for job and income creation. In this sense, there is still much to do in Latin America.

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Q: Should we measure the success of an economic model strictly in terms of its ability to increase a country’s productivity?

A: No. I never fall into the temptation to reduce any approach to economic development, considering only an economic angle. Development should include social justice, equality of opportunity and living within the values a society adheres to--particularly, the spiritual realization of the people. That is why we at the bank are paying growing attention to “cultural development,” because that is the way to put in the development equation those elements of culture that allow us to strengthen our identity and our cultural values. . . . There should be a good balance between work, values, democracy, respect for human rights and times of dolce far niente, or leisure time.