Testimony of
Nancy Birdsall
President,
Center for Global Development
Before
Committee on Foreign Affairs
U.S. House of Representatives
Subcommittee on the
Western Hemisphere
Wednesday, March
28, 2007
Attacking Poverty and Inequality in Latin
America: The U.S.
Can Help
Mr. Chairman, Members of the
Committee: Thank you for the privilege of appearing before this Subcommittee on
the Western Hemisphere of the House Foreign
Affairs Committee.
For almost 20 years, most countries in Latin America have been implementing market reforms –
opening their economies, privatizing their former state enterprises, and
addressing their debt and fiscal problems. These so-called Washington Consensus
reforms were supported and encouraged by the U.S. and the U.S.-backed IMF, World
Bank and Inter-American Development Bank.
They have beaten back inflation, increased capital inflows and
investment, and contributed to modest growth.
But relative to expectations they have failed on two counts. First they have not delivered the kind of
hefty growth that is reducing poverty so dramatically in China and India. Though the rate of poverty
(defined as number of people living at or below $2 a day) has fallen slightly
(to 40 percent), the number of poor people has been stuck for almost a decade
at a shocking 200 million. Second, they
have benefited the already rich and well-educated far more than the poor and
middle-income majority. It is true that income inequality is increasing not
only in Latin America but in China,
India and Russia (and of course here in the U.S. as
well). But in Latin
America, income inequality was already extraordinarily high and
visibly unjust (with for example the richest 10 percent of households capturing
50-60 percent of income) to start with.
The result has been deepening resentment —with
market reforms, with the political process, and not surprisingly in some
countries with the “capitalism” and globalization of which the United States
is the dominant symbol. More than 60
percent of those surveyed in most countries are unhappy with the way their
democracies are working (a 2006 survey), and more than 90 percent (in 2001)
viewed the distribution of income in their country as “unfair” or “very
unfair”. In this context, the election
or re-election and the growing popularity of candidates representing the “left”
broadly defined is not surprising. Some, including Lula in Brazil, Bachelet in Chile
and ___ in Uruguay,
represent the maturing of the democratically constituted political party system
in the region. But that is not true of
others. Chavez in Venezuela
is an increasingly despotic populist who is destroying the legislative and
judicial institutions that once provided a check on abuse of power. The direction Morales in Bolivia and Correa in Ecuador will take is not clear –
Morales is certainly vulnerable to Chavez’s oil-funded largesse and
anti-American rhetoric. Like them, Umala who ran for President in Peru, and Lopez Obrador who very nearly won in Mexico were
attractive to voters, despite their anti-American and anti-democratic rhetoric,
who are fed up with the gap in income, influence, power and privilege between
elite haves and majority have-nots.
For the first time
in the last two or more decades, and in marked contrast to the situation in the
1990s, there is now a risk that several countries will become more statist and
protectionist in their approach to economic policy. Worse with the spread of populist
demagoguery there is the risk that the region’s democracies will founder. And Chavez’s
willingness to use his oil spoils to buy new strategic allies in (and outside
the region) is a larger problem for the U.S. Though it would be wrong to exaggerate his
appeal in the region, he is clever and oil makes him rich, at least for now.
His anti-American campaign raises the risk that unless the U.S. responds, some of its key allies in the
region will see their domestic political position deteriorate, and the U.S. could lose
their support on geostrategic issues and in the global battles against terror,
drug trafficking, money laundering and other illicit activities. U.S. investors and exporters could
also lose out, if more leaders try to satisfy voters with renationalization of
industries and trade protection. The basic problem is that his ”model” of a
more socialist system with more emphasis on the needs of the poor, for all its
fundamental flaws, falls on grounds made fertile by voters’ growing awareness
that their existing social and economic systems are fundamentally unfair.
What can and should the United
States do about this situation?
Support “fair
growth”
The reform agenda
associated with Washington – the IMF, the World Bank, the Inter-American
Development Bank, and the U.S. Government -- has not been wrong, but rather
incomplete. Its focus on stability and
competitive efficiency rather than jobs and economic opportunities left out the
poor and the near-poor middle-income majority – the 80 percent or more of
people living at or below $10 a day. To address their needs, the U.S. should encourage its friends and allies in
the region to focus on what I and my
co-authors of a forthcoming book on economic policies in Latin
America call “fair growth”.
Fair growth policies are pro-growth and
pro-fairness – built on a “growth” foundation of sound fiscal and monetary
policy and open markets, but also a “fairness” foundation of financial, social,
tax and regulatory reforms that eliminate insider privileges and corruption and
give Latin America’s non-elite “silent
majority” economic opportunities they have never really had. This is not just about charity for the poor –
the theme President Bush sounded on his recent trip. It is also about challenging current economic
policies and practices that add up to a lack of opportunities for working class
and middle-income people. It is in large
part about creating good jobs and providing good education so more people can
create and take good jobs. As many of you know, in much of Latin
America, small businesses cannot easily borrow (to expand which
would create more jobs) because the laws and courts prevent legitimate
creditors from seizing collateral. The
children of urban workers, especially if they are members of ethnic and racial
minority groups, cannot get a good education because public spending is low due
to tax systems that are depressingly complex and encourage evasion. Secondary
school graduates cannot get a good job because onerous labor laws drive
businesses to prefer investing in equipment rather than new hiring. And
middle-income households cannot get a mortgage because banks make more money
lending to governments (so President Bush’s announcement of support for housing
finance was good).
Our fair growth agenda includes elements
associated in the U.S. with the political right and the political left: such
policies as hewing to fiscal discipline (to drive down interest rates and
encourage job creation and small business investment); charging public
university students from affluent households higher tuition; eliminating tax
loopholes and attacking the tax evasion that keeps average effective tax rates
of the wealthiest families as low as 10 percent; facing up to racial and ethnic
discrimination; replacing labor laws that make layoffs so costly that hiring is
avoided altogether with an adequate system of social insurance that is portable
from one job to another; guaranteeing rights of association and collective
bargaining while eliminating regulatory minutiae that burden businesses. In effect it consists of a legal, regulatory
and tax and expenditure environment that looks like what we have built in the
U.S. – flawed of course in many of its details and in its implementation, but
fundamentally meant to be fair in its democratic foundations – because it
represents the collective will of the people.
Explicit support by the U.S. for growth that is
“fair” is also about signaling to the people of Latin America that we are not
just interested in our own prosperity, but in theirs – and in a kind of
prosperity in their societies that extends well beyond their business, trade
and financial elites with which the U.S. government is still seen as primarily
allied.
Some specifics
The U.S. has money – but not nearly
enough to leave trade and immigration policy and soft power aside. Still I start with money for aid programs
because aid may be the politically easiest tool to deploy.
Aid:
Target U.S.
foreign aid on new opportunities for the majority. The fair
growth agenda has to be driven primarily by the businesses, civil societies and
democratically elected governments of Latin America. But the U.S. can help with programs of aid
that visibly create and increase opportunities for the poor and middle-income
majority. The legislation being
sponsored by Senator Menendez makes sense – to support a special facility at the
Inter-American Development Bank (IDB) focused on improving economic
opportunties and at USAID on support of health and education services. The IDB has launched a program called
Opportunities for the Majority; U.S.
support of a special facility there would give it a substantial boost. Resources needed to help governments beef up
tax administration; design and introduce loan and scholarship programs to
accompany tuition increases at universities; include systematic evaluation of
targeted cash transfer programs that encourage families to immunize their
children and keep them in school (Oportunidades in Mexico; Bolsa Familia in
Brazil); catalyze creation of credit bureaus, and so on, are not huge. But small amounts outside the political
competition for tight budgets do enable governments to take initiatives that
are otherwise hard to initiate.
The amount of any new aid is probably less
important than the vehicle new money can provide for aggressive support of
justice and fairness. Even a doubling of
current aid to the region (of about $1.5 billion) would pale in comparison to
the many billions Chavez is spending --
to buy Argentine bonds, provide cheap oil to Bolivia, build infrastructure in
Central America -- and for that matter the $100 billion or more the governments
in the region spend themselves on health and education programs alone. (The
original members of the European Union spent more than $20 billion a year on
transfers to Spain from 1986 to recently, and are planning to spend similar
amounts in Poland in the next five years.)
On the other hand, Latin Americans look to the United States as a land
of opportunity and mobility, where a strong middle class demands accountable
and honest, competent government (even if they are unhappy with our intervention
in Iraq and narrow emphasis in their region on the drug war). Aid explicitly designed to create new
economic opportunities and upward mobility for more of the region’s people
would be visible and smart.
Aid:
Plan Colombia:
How about 60 acres and a plow? The balance between military aid and fighting
drugs in this large U.S.
aid program needs to change. President
Uribe deserves continued U.S.
support; he has not tried to hide embarrassing facts about his appointees but
has stayed focused on transparency and institution-building. However U.S. aid ought to be aimed at
demonstrating to Colombian citizens an interest in building a more just as well
as a more productive rural economy. That is best done by increasing support for
social services, rural development, and alternative employment. Congress should
urge that U.S.
resources be used to implement a serious program of land reform that provides
public support for resettlement of displaced populations.
Trade:
Go ahead with the imperfect FTAs. The Democratic majority should find its
way to ratifying the free trade agreements negotiated with Colombia and Peru. The Congress should provide
financial support (e.g. $100 million) to monitor abuse and strengthen
enforcement of countries’ own labor standards, since the main problem in those
countries is not unwilling governments but lack of enforcement capacity. These agreements, by locking in what has been
preferred access to U.S.
markets, are likely to create more jobs, especially for unskilled and semi-skilled
workers – the have-nots. It is also the case that rejection of these negotiated
agreements would not be seen in Latin America as a sign of support for labor or
other rights in the region, but as a sign of a resurgence of protectionist
sentiment in U.S.
politics, and lack of support for the moderate, democratic governments that are
fundamentally our allies.
Trade:
Reinstate discussion of an FTAA. The U.S.
should work with Brazil to
reinstate discussion of a Free Trade Area of the Americas
– which has been set aside awaiting agreement between the U.S. and Europe
on agriculture.
Soft power:
Ethanol, energy, the Farm Bill,
etc. A Farm Bill consistent with the
U.S. taking leadership on
opening rich country agricultural markets would be seen in Latin
America as friendly to fair growth. A reduction of elimination of the import tax
on ethanol would be a good way to jumpstart discussions with Brazil on the
FTAA. Any legislation that encouraged conservation of oil would bring down its
global price and do more to combat Chavez’ influence than any other conceivable
step, as well as supporting democrats in Ecuador
(and Iran).
Soft power:
an immigration bill. Failure to complete balanced legislation
including an arrangement for temporary worker immigration and legalization will
strain relations with Mexico,
will possibly undermine the still-fragile standing of President Calderon there,
and will be resented throughout Latin America as a sign of growing U.S.
insularity and peevishness. There are practical proposals for ensuring that
temporary migrants have positive incentives to return home and that the
governments of Mexico
and other sending countries have incentives to take responsibility for their
return.
Soft power:
Remittances. Congress should ask the U.S. Treasury to work
with U.S. banks to reduce further the cost of remittance transfers and to
develop savings, lending and other banking products targeted to
remittance-receiving households, particularly in rural areas (especially in
Mexico, where U.S. banks have a large share of the market).
The IMF, the
World Bank and the Inter-American Development Bank in Latin
America’s middle-income countries. In the last
several years there has been considerable discussion about the role of these
institutions, where the U.S.
has historically had critical leadership and constructive influence, in the
middle-income economies of Latin America. With interest spreads low, commodity prices
high, and a generally benign external environment, emerging markets and middle-income
countries have been building their reserves and borrowing relatively little
from the IMF and the multilateral banks. On the other hand, many of these
countries are in a double bind – of both high social and high financial debt. They have huge divides in income and
well-being – a large social gap – but to retain the confidence of creditors
(domestic and foreign) given the burden of servicing that debt, they sustain
those high reserves and run large primary fiscal surpluses. Both involve substantial opportunity costs in terms
of financial returns and social gains.
They are more interested in attracting private capital, deepening their
local capital markets, and reducing the overall risks of both sovereign and
private borrowing than in direct borrowing (for example for health and
education programs and water and sanitation).
The U.S. Congress should ask the Treasury to examine closely the
unrealized potential for the official international institutions to better
serve the emerging needs of Latin America’s emerging and middle-income markets,
for example in the form of greatly reduced time and transactions costs in
countries meeting minimal standards of good government; greater emphasis on
guarantees and insurance and other risk-management products; expanded
demand-driven technical assistance; and increased emphasis on technical
assistance in such areas as social insurance, pension reform, reform of
agricultural and other subsidy systems, municipal finance, and debt management
– all with the intention of expanding the potential for the countries
themselves to spend more and spend more effectively on social programs.
Mr. Chairman, this concludes my
statement. I welcome any questions that you and other Members of the
Subcommittee may have for me. Thank you.