Augusto de la Torre
PhD and Master's in Economics from the University of Notre Dame. He is an assistant professor at the School of International and Public Affairs at Columbia University and directs the Center for Economic Research at the University of the Americas (UDLA) in Quito, Ecuador. He worked at the World Bank, where he held positions such as chief economist for Latin America and the Caribbean. He was president of the Central Bank of Ecuador and worked as an economist at the International Monetary Fund (IMF).
Interview
Q/ The region has made progress in its development, but incompletely, because poverty and inequality levels are still very high, as are per capita income levels. What policies do you consider essential to foster economic growth and social inclusion in the region?
Perhaps it would be appropriate, first, to respond with the argument that policies that promote growth do not necessarily promote social equity. There was a time when economists thought that, under a series of conditions, growth would spread to the lower strata of the population and would generate social inclusion and equity, but I think we have learned over time that we need policies specifically dedicated to inclusion and equity, and policies dedicated to growth. The one is not a substitute for the other.
If you want to start with growth, Latin America has been lagging behind for 60 years. I think history shows us that, after World War II, Latin America missed the opportunity to connect more effectively with the great engines of growth that consolidated after World War II, namely Western Europe, the US and Japan. The countries of Southeast Asia connected with Japan, the countries of Southern Europe with Germany and Western Europe, and, unfortunately, the Latin American region did not achieve a virtuous integration with the great country of the U.S. What one sees in the data is that from the 1950s onwards, Latin American growth has barely kept pace with world growth and in long periods has lagged behind. So we have a very serious growth problem, the roots of which have been studied extensively, but which require growth agendas with many reforms that have not yet been implemented.
On the social inclusion side, we had a formidable phenomenon that materialized in the 2000s (from 2003 to 2013, in particular), where there was considerable social progress in the Latin American region. After that period, which coincided with the rise of China and the commodities boom, the Latin American social structure was transformed. Let me give you a fairly obvious fact: prior to that period, more or less 40 % of the Latin American population was in poverty, and that figure has been reduced by half; now, about 20 % of the region is in moderate poverty. And the middle class -obviously there is a problem in defining what the middle class is- but according to the World Bank’s criteria it has expanded significantly. So, now, most Latin Americans are not poor, but they are not middle class either; they have remained in that zone of vulnerability that requires a new social policy.
So I believe that, on the growth side, we need a much more vigorous, growth-oriented agenda to solve this decades-old problem and, on the social inclusion side, we need a reemphasis, a reconfiguration of social policy to address this new social structure that emerged after the commodity boom. Let us take into account, for example, that the 40 % of Latin Americans who are not yet middle class, but who are no longer poor and are the majority, do not benefit, for example, from a great social experiment that the region had, which are the conditional transfers, these social assistance programs that were very effective in helping to reduce poverty.
We are at a stage in which we must pay more attention to social security, health, pensions and education. Therefore, a reconfiguration of social policy is necessary, as well as finding paths for growth that we have not been able to do so far. We can also talk a bit about the agendas that I think should be emphasized in different parts of the region.
Q/ Precisely, public policies to promote development normally have a great fiscal impact, and to this we have to add that there are some trends in the world, such as the accelerated aging of the population, climate change and the inclination to decarbonize the economy, which aggravate to a great extent the fiscal challenge faced by nations. How do you think the challenge that this implies for fiscal sustainability can be faced and how do you imagine, if necessary, tax reforms or what instruments would be key in this matter?
I would say that growth agendas do not necessarily require a lot of fiscal resources. It is true that one weakness we have is associated with the lag in regional infrastructure, and this could benefit from higher levels of public investment. But, in general, when one thinks about the growth agenda for the region, perhaps there is no need for such a strong pressure on fiscal resources. However, I believe that when we think about the problems of equity and social inclusion, public policy solutions to find better levels of social equity will require significant public resources. For example, in the region we need, in many countries, important reforms to pension systems to make them more sustainable and more equitable. Possibly, they will also require some fiscal support, particularly those pensions that are typically non-contributory, which are financed with public resources to avoid extreme poverty in old age
The same can be said for public health systems. Both pensions and public health in the region are increasingly affected by the aging of the population that is taking place in the region at an accelerated pace and, therefore, we are going to need considerable redesigns of our public health systems that are going to have to attend to different demographics, with different health problems, and that will possibly require significant fiscal resources
A third area, which may also require substantial fiscal resources, is education. We know that one of the ways to achieve greater equity is to have access to quality education, regardless of socioeconomic status, and this means that significant resources will have to be invested, not only in quantity, but particularly in quality, to improve public education and make it more accessible to everyone.
So, you are right in that part of the social inclusion and equity agendas will require fiscal resources, and the region is then faced with the dilemma that it will need to make efforts in terms of tax collection, possibly eliminating subsidies and unnecessary expenses, in order to be able to devote greater resources to social equity . However, I would say that growth agendas -except for the issue of public investment in infrastructure and education- require an intelligent State, with a lot of coordination, leadership and vision capabilities to put together the structural reforms that will be needed to promote growth. And here we have an agenda that may not require a lot of fiscal resources, but a lot of intelligence from governments, a lot of creativity.
Q/ Let’s take a closer look at some sectors. For example, in recent decades, there has been a change in the trend in terms of trade between industrial and primary products, with a reduction in the prices of industrial products due to technological advances and increases in production efficiency. What implications does this trend have for the region and how do you imagine the path of structural transformation in the development process of Latin America and the Caribbean should be?
You are touching on a topic that is of great importance for the region. In fact, it helps us to differentiate growth agendas in different parts of the region. The terms of trade and the dependence of economic processes and economic activity on commodity prices are very marked, particularly in South America. However, in Central America and Mexico, commodity price variations do not greatly affect the terms of trade; these are two sub-regions with less terms of trade volatility. South America, on the other hand, because it is an area very rich in natural resources, is very sensitive. South America’s terms of trade are very sensitive to commodity prices. In fact, South America’s terms of trade are more sensitive to variations in commodity prices than Africa. So, what this means are visions and different models of growth agendas for South America, Central America and Mexico.
Around the mid to late 1980s, the region’s trade structures bifurcated. Until before the 1980s, it was possible to speak of Latin America as a whole, because it had similar trade structures and, in fact, the whole region was very dependent on commodities. From about the 1990s onwards, what we have is that Mexico became a manufacturing-oriented economy, a hub in the international trade network with NAFTA and other reforms. Mexico became a much more diversified economy, with an external sector strongly oriented to industrial production. Central America, on the other hand, turned to services, not only tourism but also other types of services, including those associated with its geographic position. And South America has been concentrating on commodities, on the production of industrial or agricultural commodities. So, the importance of the terms of trade varies greatly in the region and suggests that South America will have to have a development orientation very strongly marked by an effort to diversify its structure and a good use of the natural resources it has to expand prosperity in other sectors. The great challenge for South America, therefore, is to develop economic activities that are internationally competitive, beyond commodities, and this requires improving the value added in the commodities sector itself, but also diversifying
There is quite a different agenda. For example, Central America is a sub-region that cannot depend on commodities and therefore must rely on its ability to develop higher productivity services. Mexico needs to find its own way, a bit like Asia, based on manufacturing exports. So, the issue you mention of the terms of trade has a very different impact in different parts of the region.
Q/ Professor, what do you think the future of the agricultural sector should look like, given that this is a region that has a large corporate advantage in food production?
You are absolutely right, the region is rich in natural resources. South America is a region with a huge agricultural production capacity, a region with a lot of water and to a certain extent one can think that Latin America can find part of its way to growth by better exploiting its agricultural capacity. We have a part of the world that is growing very fast and that is Asia, not only South Asia, but Southeast Asia, which requires more and more sophisticated food. And Latin America can be a very important global supplier of agricultural products.
I believe that a good part of Latin America’s future is connected to agriculture. However, the agricultural sector is subject to climate problems and requires a good public policy. I think there are very big successes in South America, for example, you have all the Cerrado in Brazil, you have all the soybean production in the Southern Cone which has been quite successful, also salmon and wine and fruits. But I have the impression that a large part of Latin America’s growth effort will be connected to the agricultural sector, which also has a very important link with the tourism sector because our agriculture is part of the great topographic beauty of the region. Therefore, the natural, cultural and geographic assets of Latin America must be combined in some way with this project in order to take greater advantage of its agricultural and agro-industrial capabilities, together with its capacity to attract tourism, given its privileged geographic beauty and its wealth of cultural assets.
Q/ I would also like to zoom in on international trade and the conformation of global value chains, since we are witnessing a series of geopolitical factors such as war conflicts, the U.S. trade war with China and other global trends such as the environmental issue, ICT. How do you assess this situation with respect to the region and what strategic response do you imagine in this global context?
I believe that for Latin America there is no realistic option for growth that does not imply a healthier and more vigorous integration with the rest of the world, not only in the area of international trade, but also in the area of finance and foreign direct investment markets. Thus, Latin America’s international integration has not been as beneficial or as complete for growth compared to the integration of Southeast Asian countries.
When one looks at the data of countries that are not large, that are small and medium-sized economies, it is very clear that the capacity to grow is closely linked to the capacity to export and to the vigor and dynamics of exports. This requires the region to find its niches, to integrate, and it is a region that did not manage to do this, partly because during the 60s and 70s, Latin America embarked on a great experiment of trying to grow based on import substitution and manufacturing production. That experiment did not achieve what the region aspired to and rather left us with certain weaknesses in our ability to integrate internationally. When one looks at Latin America’s integration into large value chains, on average, what one finds is that we are connected at the beginning of the chain, with primary products, or at the end of the chain with certain final products. And the studies that have been done show that the countries that have been most successful in growth typically have multidimensional and varied connections with global value chains, in particular, they are very much inserted in the intermediate segments. This suggests that when they are in the middle of the chain, countries have more options for learning, acquiring and developing new technologies, and improving the quality of what they do because they have to import on the one hand, and export on the other.
I believe that the range of learning and technological change that tends to materialize with insertion in the intermediate zones of global value chains is much more beneficial for growth and employment than insertion only at the beginning or at the end, which is typical of Latin America.
Therefore, the issue of international trade, the development of the tradable sector, not only of exports that find quality niches in the world, but also of efficient import substitutions, is a very important process. I am convinced that, in this sense, structure is important for growth. There are some economists who think that the only important thing is to be productive in whatever one produces, but I tend to think that it is not only to be productive and efficient but also to tend to produce more, to be oriented towards external demand, towards the tradable sector. This structure seems to me to offer a wider range for growth based on learning, development and technological adoption. Therefore, international trade as an avenue for growth is an important issue and, unfortunately, the region has a history of rather imperfect insertion in international markets. This challenge for the region is even greater because the world is becoming less friendly to open trade. One senses that we are beginning to see regional fragmentation and, in advanced countries, including the U.S., very strong tendencies towards protectionism. So the region has to find ways to insert itself into the world in an international policy context that is less friendly to trade liberalization. And that is a great challenge, which also implies that it is in the region’s interest to develop export activities in products that do not displace the labor forces in advanced countries, but are complementary. It seems to me that this is why the growth process in Latin America is leaning heavily in favor of issues such as tourism services, welfare, health care and European or North American retirees who come to live in the region. So that goes through an agenda in which the region has to become more attractive, not only for capital, but for people, for citizens of the world who want to visit interesting places in the region. This is a great challenge because, first of all, the region has not been very successful in this aspect compared to other countries in the world, but also because it has problems that make it difficult to be an attractive place, among them, security problems.
The region has to overcome this, because it seems to me that a great part of the economic development will be in its capacity not only to attract capital, direct foreign investment, but also people such as retirees, tourists, etc.
Q/ You give me the basis for the next question, because automation, artificial intelligence and all this that we have been talking about also produce profound changes in the labor markets and productive structures of the countries. What do you think are the strategic sectors that deserve special attention, not only from the private sector but also from the public sector, and how to mitigate the negative impacts of the intersectoral reallocation of employment?
I don’t think anyone can accurately predict how the labor market will be affected locally, regionally and internationally as a result of this process of rapid technological change, digitization and, now, with the very important expansion of tools connected to artificial intelligence. We economists know that certain technological changes displace some jobs and sometimes destroy them. When the steam engine or industrial technologies were invented in the 19th century, obviously certain jobs died or were displaced, but many others were created. So technological change has this disruptive effect because it does indeed displace or destroy certain activities that employ a lot of people, but it generates other needs. What I think is going to be vital for Latin America is its ability to adapt to the impacts of this great technological change, for example, artificial intelligence and digitalization in the labor market. Accepting that there will be some types of activities and jobs that may be replaced by technology, but the same technology that replaces some jobs will generate spaces and needs for human labor elsewhere. I imagine, for example, that artificial intelligence, with all its goodness and its dark sides, could give greater importance to the ability of human beings to use their judgment, their good judgment – this is not easy to replace – or simply human closeness, attention, care, especially for people who have health problems or who are aging. I imagine that these changes in the labor market will generate much more demand for jobs associated with human contact, interpersonal relationships, good judgment. And the region needs to be attentive to these spaces that are going to open up, while at the same time mitigating the transition pains in certain types of jobs that technological change, artificial intelligence and digitalization are going to produce. I don’t think we have a simple formula. It seems to me that the adaptability of public policy will be important because there are very unpredictable elements in this process.
Q/ Well, and to close this look at the sectors, the region is lagging behind in terms of infrastructure, including that which is key for trade and telecommunications. What institutional factors do you think limit the expansion of infrastructure and the proper maintenance of the existing one, and how do you imagine this gap can be closed?
First, we must recognize that there is a space that has to be judged by the public sector. I believe that when it is well thought out, public investment is complementary to private investment. And not only is it complementary to private investment, but also: good public investment initiatives in areas where it is difficult for private investment to enter due to institutional complexity or risks, etc., are going to have to be led by an intelligent public sector. The region even needs to re-prioritize public investment better, given the scarcity of fiscal resources, and ensure that it is a catalyst and complementary to private investment. The region has engaged in public investments that have been white elephants or have led to dead ends. A lot of public investment has gone into public companies that have ended up being very inefficient, full of corruption and with problems of different kinds. So, the region is interested in how to reconfigure public investment, but the infrastructure deficit we have, including the one you mentioned in communications, transportation, etc., is going to require a lot of private investment and many investment structures in which not only the private sector will have to participate, but also multilateral entities at different points. These are complicated structures, and this requires well-constructed contracts and public-private alliances. Public-private partnerships are a double-edged sword. If the contracts are not well designed, they end up being a very heavy fiscal burden in the future because they are activated, because the costs start to be exceeded, the renegotiations of the contracts are often repeated and the guarantees that the state has given to be able to set up these alliances many times are activated and end up becoming a great fiscal burden. So, these public-private alliances are very important, but they have to be made with great care, making sure that the contracts are sufficiently well designed so that the private sector does not, in fact, shift the risks and costs to the public sector, but rather assumes the costs and risks and it is a fruitful relationship. But I believe that the role of multilateral entities, private investment, these public-private partnerships in well-designed contracts, are an important part of the solution to this great deficit that the region has in the area of infrastructure.
Q/ Precisely, at the end of your answer you perfectly introduced the following topic, which is that of multilateralism. What role do these multilateral organizations play in the region’s development? And leaving aside everything that has to do exclusively with financing and looking at the alternatives in terms of services, knowledge or coordination between countries, how should these organizations be adapted to better fulfill their purpose?
As the world becomes more interconnected and the complexity of global and regional issues grows, the role of multilateral entities becomes more important. But these multilateral entities need to reinvent themselves along the way to adapt to new country conditions.
In particular, when we look at Latin America, a region in which most of the population is no longer poor, but neither is it middle class, a region that is already middle income, the role of the multilaterals has to go beyond financing and has to be seen, in my opinion, as a rapprochement between the multilaterals and the countries, more based on a portfolio approach. The services that the multilaterals need to bring to the countries are not only loans of one kind or another, but also these services of knowledge, of advice, of being an impartial observer that can facilitate the debate and contribute inputs to the debate, and these capacities that the multilaterals have to coordinate and bring together different actors and help to have mutually beneficial relationships. So I think it is a kind of portfolio of services that the multilaterals have to make more balanced.
Financial services may need to be more adapted to middle-income countries. These countries appreciate many services that help them manage their risks. Thus, contingent loans, insurance loans and guarantees may become more important financial services
But this issue of technical assistance, knowledge services, contribution to development, good public policy, facilitation of debates on reforms, and these capacities that the multilaterals have to coordinate with the countries to jointly resolve regional issues.
For example, infrastructure, which has a very important cross-border aspect and the countries of the region do not coordinate properly in this regard, seems to me to be increasingly important. I think it is essential that multilateral entities adapt to the new conditions in the region. They continue to be an important source of financing, but they have to go much further and include financial services within a set of services that complement each other and play with each other. And this seems to me to require a much more fruitful dialogue in the countries, which fortunately does have a lot of potential between the countries and the multilaterals, because the multilaterals have managed to get closer to the countries, even through a great decentralization of regional and local offices that the CAF, the IDB and the World Bank have in the countries, to improve this dialogue from which I believe a much more multidimensional relationship emerges.
Q/ And in this sense, what do you think is CAF’s differentiating role in the region?
CAF has some advantages that the other multilaterals do not have, and it seems to me that many of them are associated with governance. In CAF there are only the member countries, mainly from the region. There are some guest countries, but the governance is not dominated by the richest shareholders in the world, as is the case with the World Bank and even the IMF and the IDB. CAF, then, has a certain self-determination of the countries themselves which has worked quite well and which has given it the capacity to better understand the concerns, let us say, of the ministers, and to place the interests of the countries of the region more at the center of attention, as opposed to the interests of the advanced countries. And that has given CAF a certain agility, a certain capacity to move more decisively in projects, not only of investment, but also of coordination and knowledge. So, I believe that CAF has to use this unique characteristic, a governance closer to the countries to add value that perhaps the IDB or the World Bank cannot, because they have a very different governance.
Q/ Professor Augusto, last question. In these terms, sustainable development involves objectives related to economic growth, social inclusion and the protection of nature. These are objectives that have many areas of attention, but also many possible synergies. In your opinion, what are the most promising policy spaces for leveraging these sustainable development synergies in the region?
I really liked the tripod you mentioned, that is, economic and social development cannot be reduced to a single dimension. One dimension is growth, another is environmental sustainability , another is social equity and perhaps we could add a fourth vertex, which is macro-financial stability. As you rightly say, finding a virtuous circle between those four vertices is quite difficult. In fact, when one looks at the history of the Latin American region, what one finds is that there have been periods in which the region has focused mostly on one of those vertices: for example, in the 1990s, macroeconomic stability was dominant because we had to overcome inflation problems. Then, when the region was coming out of the dictatorships and also in part of the 2000s, the region focused a lot on social equity, and when the region focuses on only one of the vertices, it tends to forget about the others or to make decisions that, although they may favor one dimension, are detrimental to another, so it is easier for tensions to materialize and even enter into vicious circles. It is more difficult to have a virtuous circle.
But I believe that the wisdom of good public policy is to look for complementarities between the different vertices. For example, a very strong argument can be made that a good fiscal policy, which is countercyclical and viable, will help growth, partly because a good fiscal policy and good public debt management will reduce the sovereign risk premium, which, in turn, will encourage private investment and productive projects. One can make the argument that a good growth policy will generate future dividends with which the country can, in the fiscal area, live with a higher level of debt, because it will have the capacity to pay that debt thanks to growth. One can offer the argument that in terms of social equity, for example, in the reduction of inequalities in Latin America, if the social fractures that exist are healed, it will make the region much more attractive for tourism. So, there is a connection, therefore, between social equity agendas and growth agendas.
The point is that although there may be vicious circles between the different dimensions that are important for economic and social development -macroeconomic stability, growth, social equity, environmental sustainability- and although there may be tensions and they must be managed and a good balance must be found, there are also complementarities. And I believe that good public policy needs to exploit these complementarities so that progress in favor of one dimension, for example, growth, is compatible with and helps progress in another dimension of economic and social development, such as, for example, environmental sustainability or social equity.