 So good afternoon everybody, my name is Carl Meacham and I am the Director of the America's Program here at CSIS and I'm glad you could join us for this event that I'm thrilled to be co-hosting with the IMF to launch their latest Regional Economic Outlook for the Western Hemisphere. This event came about following a series of discussions that we had with the team at the IMF and it's been a true pleasure to work with them. In particular, I want to thank Alejandra Werner, today's speaker, and the Director of the IMF's Western Hemisphere Department, who's going to speak about the report's findings. And I also want to thank today's discussants, Nicole Golden, who's the Director of the Youth Prosperity and Security Initiative here at CSIS, and Barbara Kochwar, who's the Research Fellow at the Peterson Institute for International Economics. So I'm very happy to have both of you here to talk about this. They're exceptional professionals and I'm happy that they accepted my invitation. So what is the Regional Economic Outlook report? Since 2002, the IMF has produced this series broken down on a regional basis. The report discusses recent economic developments and prospects all around the world, addressing the key factors that have impacted and will influence economic performance. The report serves to highlight the pivotal challenges policymakers face in their various context through using country-specific data and analysis. The report acts as an inclusive window into the inner economic workings of every region in the world. And this year's Regional Economic Outlook for the Western Hemisphere does just that. I'll leave it to Alejandro to discuss the report's findings in depth, but just to give you all an overview, according to the report, economic growth across Latin America and the Caribbean is expected to remain somewhat subdued, coming in around 2.5 percent this year. Financial market volatility will continue to present substantial risk for the region as will sharp declines in commodity prices. Those are basically the broad brushes. Now, when we deal with these issues, we're dealing with the bigger sort or the policy implications of these issues, and that's why we've assembled a sort of diverse group of folks to talk about this. I don't want to go into any other details, but I would just make an observation that much of the report's conclusions drive home how deeply connected Latin America is to the global market. It is the U.S. recession that has been so determinant of economic growth in much of the region in recent years, and it is the stronger recovery of the United States and other developed economies that will bolster export growth in the region, and as a result, continue to fuel the region's recovery. Similarly, among the biggest risks to the region's economies is an economic slowdown in the world's largest markets, especially the United States and China. Such sizeable consumer markets inevitably play a large role in determining commodity prices, and as you all know, the region depends on commodity exports. So on that note, I'm going to turn it over to Alejandro to discuss the report in more depth. Following his remarks, Nicole and Barbara will give their reactions to the report, and we will have a discussion. We're going to have a Q&A as well, and I would remind you that today's event is on the record, that we're webcasting the event in real time to our online audience. So hello, folks who are watching. During the Q&A, I would ask that you identify yourselves, and if you want to say something that you think is really important, please do, but try to keep it brief. We're more interested in your questions. So without further ado, Alejandro. Thank you very much. Thanks for the invitation, and let me be relatively brief to leave space for comments and questions. As you said, the report touches on the main issues that we think are going to be influencing the economies in Latin America for the next 12 to 24 months. We looked upon the impact of normalization of U.S. monetary policy throughout the region. We look at the impact of the slowdown and declining commodity prices on growth, especially in South America, and we look at the challenges that might be arising in the financial sector and in fiscal policy throughout Latin America. But I think this combination of factors basically is painting a picture in which Latin America is entering a slower growth phase than the one we have seen in the last 10 years. That subdued growth was estimated at 2.5 percent when we put the report out. This is the lowest rate of growth for Latin America in the last 10 years. If you take away 2009, when the impact of the world financial crisis really hit Latin America, but taking away 2009, this is the slowest rate of growth in the last 10 years. We do think an important part of that is explained by the fact that commodities are slowing down, but also a lot of South American economies had already reached their potential GDP. I mean, the economies in Latin America started growing really fast in 2003, four or five with the commodity cycle, but starting from a position of significantly negative output gap and a lot of unused resources. So they actually were in a very good position to take advantage of the huge pool by China and India, et cetera, through commodity prices to have an extremely good run of growth all the way up, let's say, until 2010, 2011. And then we have seen economy after economy started slowing down. I mean, Brazil did it first, starting in 2011. We have seen Chile slowing down significantly at the end of last year and the beginning of this year. Mexico has been in a low growth stage for a long period of time. And now we are also seeing, I mean, those economies that closed down significantly in the last 10 years, but were being benefited by a huge income windfall from commodities like Venezuela and Argentina, et cetera, started to feel the external financing constraint significantly and therefore slowing down maybe to show negative growth in both cases this year. In our forecasts, we have, I mean, Venezuela growing at a negative rate in 2014 and Argentina growing still at a very slightly low positive rate. When our new forecast comes out, we will have to update it and the first quarter in both economies have not been terribly good and therefore there might be some downward bias to the region as a whole because the first quarter, I mean, the first quarter was pretty bad for the U.S. and it was bad for the world economy as a whole. So let me, instead of touching on the more conceptual issues that some of our chapters touch upon in the report, let me try to give you a broad view on how do we see things countries by countries. And let me start with the two largest economies in Latin America, Brazil and Mexico. In Brazil, our, let's say, broad diagnosis is basically that the Brazilian economy in 2010 reached potential and actually went beyond potential. The counter-signical efforts to stimulate the economy generated important overheating symptoms so inflation started to go up, the current account deficit started to widen and now the Brazilian economy is trapped in a situation of low growth. There are inflationary pressures and a wide and current account deficit and I mean it is in a situation in which after the huge increasing growth associated with the commodity boom, the reforms of the first Lula administration and the deepening of its financial system, it has reached a new level of GDP but growing from this new level has become much harder, especially in an economy that invests too little. If you look at the investment ratio in Brazil, it's around 18% of GDP, one of the lowest in Latin America. Productivity growth is relatively low and when you look at the unemployment rate, it's at the historical minimum. So to grow at a faster rate, Brazil would have to increase its investment, increase its productivity growth, shift its economy more towards the external sector and a little bit less towards the domestic market. So that requires an important change in the policy mix and it also will require an important focus on structural issues. The government has been focused on infrastructure that it's an important structural bottleneck but we do think that the structural agenda would need to be much broader to move to significantly reduce red tape, simplify the tax system, et cetera. So for Brazil to grow more, it goes beyond just a macro policy adjustment. I think it will imply significant structural reforms in Brazil. So going forward, basically our forecasts are for other two years of low growth, macroeconomic adjustment and hopefully under the scenario of important reforms, a pick-up in growth, a significant pick-up in growth starting in a couple of years. If we go to Mexico, Mexico is a very different story than what I just told. I mean, Mexico has been the country that has grown the least from the big economies in Latin America in the last 10 to 12 years. Basically because Mexico suffered, I mean, the inverse shock that South America suffered. I mean, South America benefited from the full entrance of China into the global economy while Mexico had a negative effect because Mexico competed with Chinese goods in the US market. So that generated very low growth in Mexico for a long period of time. And now things were starting to reverse in Mexico. I mean, the relative unit labor cost between Mexico and China, the big advantage that China had 12 years ago had been completely closed. A lot of firms are coming back to other sources of production. The disadvantage that electricity costs and natural gas costs implied in Mexico in the early 2000 has turned on its head with the huge developments in the natural gas sphere in the US. So now Mexico is being a beneficiary of the shale gas boom in the US by importing cheap natural gas. And I think throughout this period, Mexico has worked to significantly improve its logistical platform as being part of a supply chain to the US. So that, I mean, the unit labor cost, cheap energy, an important logistical advantage, and a relatively competitive exchange rate has put Mexico in a place to have a significant recovery in its economy. If on top of this, you factor in eventually the effects of the structural reforms on the energy and telecom side, I mean, Mexico could be doing well in the next few years. Having said that, in the last six quarters, Mexico has been growing at a very, very low rate. Part of that was due to the changing government and a significant deceleration in government expenditure, problems in the construction and infrastructure sector, etc. And part of that might be explained, especially in the last few quarters, by the uncertainty associated with a broad package of structural reforms. I mean, you still need a lot of secondary legislation to go through. Also, a lot of these reforms that are good from a medium term perspective by imposing more competition on the economy have an effect on the short one because by challenging monopolies, those monopolies slow down the rate of investment. And the new entrants are not here yet. So this process takes time, and it might generate, as we have seen, some deepening growth to eventually start going at a higher rate. But in that sense, I mean, we are assuming a 3% rate of growth for 2014, maybe that will have some downward bias looking forward to our next revision, but we expect Mexico to accelerate this rate of growth in the next few years. Then when you look at the Pacific Rim, I mean, we do see Chile, Colombia, and Peru have done extremely well. It's a commodity story and a macro stability and predictability of policies story. Those economies will be slowing down with the commodity cycle. We do think that, I mean, we have already seen symptoms that Colombia is following, sorry, Peru is following Chile in its recent slowdown. And Colombia is recovering from some slowdown in 2013 and also benefiting from still high energy prices for their exports. But eventually, we do see a generalized slowdown there. And then, I mean, when we touch upon these economies like Venezuela and Argentina, economies that have a close themselves significantly vis-a-vis the rest of the world, for a long period of time they were benefiting by very high windfalls coming from commodity prices. When you look at Venezuela, I mean, we did a study a while ago, and we basically calculated the windfall gain in ten years from the increase in the price of oil, and that accounted to almost 300% of GDP. So Venezuela in ten years got three times its annual GDP as an additional export income. So obviously, that explains why you can do relatively well, even in an environment in which you have huge micro-economic distractions and huge institutional weaknesses. Now, as the price of oil has stabilized and production has continued to fall, I mean, obviously the external constraint is starting to bite. We're seeing significantly high inflation, the highest inflation in the world. And obviously, in 2014, a negative rate of growth, huge scarcity, et cetera. The case of Argentina, the Argentinian government did, I think, took important steps at the beginning of the year to adjust to the external constraint by depreciating the currency, by tightening monetary policy, by reducing some subsidies, and by starting a re-engagement process with the international community. I think we, the aim of eventually retapping international capital markets sometime down the road, trying to escape the external financing constraint, and trying to generate some macro-stabilization and an environment to start developing their new energy sources. And that painted a picture that had an important adjustment in the short run. With the Swedener, that in the long run, there's important investment opportunities in the energy sector in Argentina to be developed. And with this rejoining of the international community, there will be some incentives for foreign capital to go into that sector, together with local capital. Obviously, yesterday's Supreme Court decision in the US would have to be analyzed with more detail to understand the options for Argentina going forward. But I think that was the scenario that we had before. Tough adjustment in the next 12 months, and hopefully with a continuation of policy changes, a recovery going forward. Central America, we have concerns, I mean, slow growth, fiscal weaknesses, a very heavy electoral process in the last 12 months. So we have a lot of new administrations that are facing significant fiscal challenges in an environment in which maybe placing bonds in international markets will be tougher and tougher. And therefore, that help that they had to maintain a weaker fiscal stance might no longer be there. So we will see these new governments implementing important adjustments to put their public finances in a sustainability path. But we will be seeing, I mean, slight help from the US remittances, tourism and exports, but also significant countercurrents coming from the domestic economy, especially in those cases in which important fiscal weaknesses are present. And obviously, the Caribbean in the same situation of very high debt, financial sector weaknesses, and very low growth. So I mean, there we have been working with some countries with IMF programs, with the TA in other cases. But obviously, it's a situation that has a significant, a multiplicity of vulnerabilities that will show up in the next 24 months on a country by country basis, especially in those cases in which we have financial sector fragilities. Or in those cases in which we have very high debt in an environment in which tapping the markets will be harder and harder. So that's a little bit a broad view at the region under the umbrella that we think for the next few years we will be facing a tougher economic environment overall. And I think this tougher economic environment will be a real-time stress test for good policies. Overall, we have many countries in the region that had implemented relatively good policies, but it's easier to implement good policies in a good environment. And now we're going to see the true face of many of these governments under more stressful times. So it will be a time for more volatility, not only being imported from the US, China, and the rest of the world, but also some locally generated uncertainty. Before I get to Nicole on that issue, I mean, is there a fear that protectionism could start creeping in in reaction to this slow growth in certain countries? I mean, is it or do you see it as them sort of being on the straight and narrow? No, I don't have that fear because in terms of protectionism, I think a significant part of Latin America actually took advantage of the good years to protect. So now that they face tougher times, I think maybe their reaction would be to stay where they are or to open up a bit. So we saw that in Argentina. I mean, very small steps this year to open up or to reduce some of the restrictions that they had on foreign currency transactions. So I mean, when you look at some economies that have closed up so much, maybe we will see some of them moving a little bit closer to the center in their policy package. I think the same might be true for the case of Brazil. And it's hard to see protectionist pressures appearing in economies like Chile, Venezuela, Chile, Peru, Colombia, Mexico. So in that sense, we don't see that. I think we might see the temptation to countercyclical macro policies that were useful during the crisis because the shock was clearly exogenous. And now that the shock will no longer be solely exogenous, if you try to implement countercyclical policies, investors might think that you're trying to counteract a permanent change in your trend with transitory policies. And that would lead to loss of confidence, maybe inflationary pressures, volatility in FX markets. And I think that's a little bit more worried on weakening of the macro framework than structural changes on trade policy. Nicole, any reactions? Sure, great. Well, thank you. Thanks again for having me. As the leader of the Youth Initiative, I like having the chance to put on my broader development hat as well. And I think the report has some really interesting implications from a development perspective, a little more political economy, if you will. And it's interesting because while obviously the divergent dynamics that the report speaks to, I think there were three probably somewhat trends across the region and implications from a development side that I saw and going forward if the overall recommendation boosts productivity and competitiveness. So taking that onto development side, three things I think about inequality and where inequality will affect and be affected by economic growth. The enabling of our in-governance, which you spoke to a little bit, and then inclusion and by that, putting my youth hat back on, and also women. So just a couple of thoughts on each of those. On the inequality piece, the Latin America region, as we know, has some of the highest rates of income inequality in the world, although it's an issue that is front and center right now in the US, in the global agenda, the global economic agenda. When we think about the post-2015 millennium development goals and equality certainly rises in that discussion as well. Just by way of example, I know Columbia's sort of genie coefficient at 56, Brazil's at 55, Chile 52, Peru at 48. So all in that sort of middle range. And while you rightly speak of the infrastructure varies, when we know health education and work, access to health education and work outcomes will vary, again, that inequality and with it, some of the social implications of that inequality are things to consider, especially when we think about competitiveness and what that means in terms of the go forward and how inclusive the growth is. One thing we've seen is that, unfortunately, in particularly in middle income and emerging economies, it's middle class and underserved populations that are often most affected by economic slowdowns. And we'll speak to that a little bit more. In fact, just yesterday, actually, Oxford, University of Oxford, released its latest multi-dimensional poverty index. And as they found in the past, this year, in this year's version, 70% of the world's poor are actually living in middle income economies. And so something we need to think about is, yes, we want to promote economic growth. But what are the social and other political and economic implications when you have growth without equality or growth and inequality? We'll come back to that in a bit. On the competitiveness side, I mean, we spoke about the, I'll leave it to my colleagues to speak more on the structural issues and some of the infrastructure pieces that you mentioned. But I think one of the other things we need to think about, again, in a development context is the role of governance and transparency. That's something that, again, in the global context comes up widely and where there are still some gaps in terms of, if you look, for example, at the corruption, the perception index or transparencies ranks Brazil at 72 of 177 and El Salvador at 83rd. If you think about the enabling environment, which you spoke to, but from a private sector business enabling environment perspective, if you think about the doing business indicators, for example, and where countries stand there, again, Brazil at 116 of 189, El Salvador at 118 of 189. So clearly some room for growth and sort of boosting that product, that private sector investment. And with that back to the third piece, which relates to, I would say, both enabling environment as well as competitiveness and boosting productivity is inclusion. And again, I'll defer to my colleagues to talk about some of the structural side of the fiscal and monetary constraints. But with the boosting productivity, this is where, again, on a regional trend and really on a global trend, whether it's the impact of the recession in the U.S. or the global recession, the region is, unfortunately, subject to some of the same fates in terms of global youth unemployment and the challenges associated with that. The population-wide, obviously, the Latin America region is sort of in the middle of its demographic transition, if you will, so maybe not as hard hit by, you know, by, as say, Middle Eastern North Africa. But still, I mean, regional rates vary, but measured youth unemployment is still sitting at the high teens to low 20s across the region. And the drag of that sort of unproductive labor force, if you will, that untapped labor force, not only on the individuals, but, again, on the governments, whether it's a higher burden of assistance, foregone tax revenues, and therefore sort of affecting the domestic resource mobilization, something, I think, to think about going forward and what the impact. And similarly, the women's labor force participation rates tend to be lower in the region compared to elsewhere. Just an example, though there was an increase of the labor force participation from 50 percent in 2000 to 52 percent in 2010, so well below the male labor force participation rate of 80 percent. So, again, we know that the opportunity to just engage more in the workplace. And what's behind the youth unemployment and unemployment in general, lots of issues, again, that we can sort of talk through in detail later. But part of that relates back to the investment in education outcomes that the report recommends, again, across the region, not only to increase opportunity and maybe level the address of the issues on the inequality side, but also to bring forward the human capital and therefore, hopefully, score up some of the labor force side. And we can get into each of those in a little bit more. Great. Well, thank you very much and very interesting comments. Thanks, Carl, for inviting me. This is great. I mean, the Western Hemisphere regional outlook is something that probably most people in the audience look forward to eagerly and read with great interest, and this one certainly didn't disappoint. Although it probably caused most of us to feel a little bit more sobering since the message is quite serious. I want to congratulate Alejandro and the team. I think that there are some very useful pieces in the report, particularly for those of us trying to puzzle through the prospect for the hemisphere, the decomposition of the impact of commodity price slowdown on the region, and of US tapering is very interesting. Probably you'll get the most hits, though, particularly after yesterday on Box 2.2 on the potential spillovers from Argentina and Venezuela and the rest of the hemisphere. So if you haven't looked at that before you go and manage your portfolio, you might want to take a look at that, too. The main messages of the report seem to be, obviously, that we've had a decade of prosperity and of good results, for the most part, with some exceptions, but in the hemisphere and that that has now come to an end. We've seen the storm coming for a while. We've seen the clouds gathering, and these message of subdued growth, I think, a wake-up call that was made a while ago and is certainly a message to policymakers that the good times are over in the way that they have been. And so you cannot rely anymore on external demand for your economic development model. And this will reveal, even greater, the second message, which is, I think, how bifurcated the hemisphere is. And Anacondra mentions the countries that have closed themselves versus countries that have more openly engaged in the international system. I have six minutes, so I'll refer to them as the 21st century socialist versus the 21st century capitalist, recognizing that there is variability and there are subtleties to that, but six minutes. I think this bifurcation stands to get much worse in the face of tougher economic conditions and countries that do not have a plan B to deal with this will have a day of reckoning. So the past decade has been good, but as the report points out, the near future brings several risks. The region has experienced sustained macroeconomic growth. Much of it buoyed by external economic conditions. Much of it also buoyed by good policies, and so that's the light rays in this report. Inflation has been low with the exception of a couple of countries who are in the ranks of the highest inflation countries in the world. External debt has been a regular low except for the Caribbean and Central America. Reserves have been built up and policymakers have been able to focus on some of the social inclusion issues and some of the inequality issues that Nicole has talked about. And here is where I think a lot of intention needs to be paid. Macroeconomic stability plus concerted pro-poor policies against the background of good external economic conditions have helped policymakers lift millions and millions of people out of poverty. The middle class in Latin America has increased by 50% and so now you have a large tranche of people that has the potential for greater economic participation, for greater welfare and the potential to make their children better off. The middle class now by most measures encompasses about a third of the population. You can argue with that and we could do that in the comments, but the message is that things have been much better for a great tranche of the population. What will happen now that the favorable external economic conditions are waning? The current challenge is to maintain these gains and to build on these gains in a situation where there are fewer degrees of policy freedom. Unfortunately, the work is still incomplete. Although the policies that were implemented have brought people into a better setting economically and in terms of access to education and some services, pro-poor programs have gotten kids into school but have not necessarily increased the quality of education. People have gained in terms of quantity of education but are not necessarily in a position where their skills match the needs of the workforce and so this hasn't yet provided a competitiveness boost or a sustainable welfare boost and so that needs to be addressed. There's also major pressure on politicians as we've seen most markedly in Brazil and in countries like Chile to respond to the rising frustrations of people who've seen their lot improve but are worried that their lot will not continue to improve or that their lot will decrease. They've also, with additional education and additional political awareness, become more aware of some of the problems that are inherent in their country that might prevent them from taking more advantage of those opportunities. It can be expensive for politicians to respond to these demands, however, and as the report points out, during this period of prosperity, expenditure as a share of GDP has risen against the background of high commodity prices and so fiscal government budgets are seeing more and more pressure as we enter into a period of lower economic growth. So there are a number of challenges in order to sustain this model that governments have built up and maintain the welfare of people who've come into the middle class, they need to address a number of issues. These include continuing to bolster social capital. Nicola referred to youth unemployment. The NEMEs is a big issue in Latin America, young people who are neither employed nor in education. Infrastructure much has been done but there continues to be an infrastructure gap, particularly with the threshold countries in East Asia. Estimates in place the negative consequences of infrastructure as eating about a quarter of GDP growth per year and this is a quarter of growth that most countries would very much like to have back. So insufficient infrastructure both has domestic GDP and access implications and also keeps some of the countries out of global value chains. Household debt has been increasing so as part of the boom, consumers have had more access to financing in situations where you've seen consumer debt increase by a factor of four. One becomes worried that this might become an issue for individuals in terms of paying this back. Competitiveness and government efficiency called it a wonderful job of covering that and continuing inequality. If you look at the trade policy scenario, I think this is where you have the starkest divide among countries. You have the Pacific Alliance countries that are opening more and more that have free trade agreements with just about everyone and who are in some way participating in the mega-regionals and in the plurilateral that are rewriting the rules of the international trading system and the rest of Latin America is left out. I wonder what the implications are for the region and for the world of this bifurcation. We've also noted a shift in dependence from the EU and the US to China and East Asia and I'm not sure that all countries have a plan B in effect for the slowdown and growth of those economies. So that's also something that's worrisome and is addressed in the report. Now two unknowns that were not in this report but that I think would be very interesting in future reports, what are the implications of some of the geo-strategic moves that we've seen which I'm sure will have an impact on prices and on some of the relationships in the hemisphere and climate change. Climate change, the area that has the probably the most immediate effect of climate change is the Caribbean which is facing dire economic straits but also dire climate prospects but obviously will have impacts on the economic projections and the welfare projections of citizens in all regions. So I think the real challenge in the hemisphere in the short to medium term is how to not allow this past decade of prosperity to be known in the history books as the decade of lost opportunity. Thank you very much. Thank you, thank you all of you for your opening for your reactions and for your opening. Let me just start off with Alejandro a little bit. Do you think Latin America is better equipped to deal with the challenges that it's facing right now? Yeah let me, I mean I think I close on a very sour note and I do think that question gives me the opportunity to correct myself. I mean in terms of growth I think the challenges are there in terms of the initial conditions to face this environment especially financially Latin America is much better equipped than in the past. I mean it was mentioned after me that I mean we have the highest level of international reserve that we have seen historically. We have in many countries very low inflation and flexible exchange rates that have a, I mean help these countries a lot in a just, I mean today you work at the central bank in Latin America in Chile, I mean something happens in Europe and when the government of the central bank wakes up already the currency has depreciated by 5%. He cannot do anything. So it's a done deal. 15 years ago, 20 years ago he would have spent one third of his reserves for five months trying to fight this situation when he realized that it's impossible. He's much, I mean his balance sheet would be much weaker and he have been doubling the bet and therefore the effects of the devaluation would have been much higher. I mean just remember the case of the Tesla bonus in Mexico. I mean when Mexico basically converted its local currency debt into foreign currency debt maybe in 12 to 18 months. So after 18 months they have completely polarized economy. They were not able to avoid the devaluation when the devaluation takes place then the effect on the fiscal situation was twice as bad. When you look at the financial sector, I mean banks in Latin America are quite robust. Capitalization ratios are quite good. They have their own source of funding. They don't have a lot of wholesale funding, et cetera. I think they're pretty robust, both from a liquidity and the capitalization ratio though there's some problems with household balance sheets overall I mean you see a private sector that it's not as leveraged as it has been in the past. So I think they're well prepared to handle this situation. I think in those cases, where do potential problems can arise? It's the combination between a low growth environment and a bad policy reaction. So they're starting from a good position but if you actually try to fight the slowdown for a protracted period of time you might end up building up the vulnerabilities that eventually will generate problems but that's not the situation now. That's my, let me just stop up. I think there's a key issue with inclusion, inequality, et cetera. And I think a country that as it has been the case in the last two decades is taking the lead in doing this or in starting this discussion is Chile. Today in Chile we're seeing that although Chile has done extremely well in managing its macro economy in the last two decades, I mean again when you look at the education outcomes I mean they're pretty poor. And now I think they're engaging in a broad reform effort to basically with the Chilean fiscal rectitude basically raising taxes to fund a very important effort on education. So I think this discussion of how to escape the middle income trap. How to move forward in terms of growth but maintaining and improving the gains that have been achieving in social indicators. I think the Chilean discussion now will be an example that the region will be looking very closely. And of course with the Chilean situation since they're gonna increase tax and the growth is lower it's sort of controversial to be funding the education sector. Well you know there's a conversation going on but let me ask you a question about that. So there's inequality and there are groups that are affected disproportionately. I was hoping that you could tell me a little bit are there ways to mitigate the effects that we're seeing in the sloth of growth on these groups? So a couple things just to pick up on the education point because I think that is probably one of the most foundational investments that can be made to level the playing field if you will and mitigate some of the disproportional effects of the economic slow down again over time. And your point about you know Chile it's interesting if you look at the most recent PISA scores which came out they were done for 2012 just released and PISA currently measures 65 countries OECD plus and across all of the it's in maths, science and reading literacy again among 15 year olds and Chile of the Latin America Caribbean countries is the only one that scores above that sort of doesn't land and say the bottom dozen of those measured in all of the three. And so to your point about you know that the investments have paid off we're seeing that and to Barbara's point as well but clearly even though a number of the countries are making the investment there has not been enough attention to the quality or whether that's the teacher training, the curriculum, lots of things we can talk about as far as why the outcomes may not be equivalent to the investment in education. But Peru it comes in it falls in last place of those scored across all three of the buckets. So investing in education, focusing on quality of education, what kids are learning across the life cycle of education again looking to secondary and higher education beyond primary now that the region has you know good performance at the primary level and as well as engaging the private sector I think that's where one of the other tools not only in the education front but in health services and reaching poor vulnerable you know the more marginalized communities focusing on where you can engage on leverage private sector resources to support public resources is I think an area of opportunity and similarly technology. Education is probably one of the lasting divides if you will that's bringing inequality but technology is increasingly obviously a tool and a platform for opportunity and access but at the same time those without access to technology are that digital divide is bringing with it in some cases further inequality. So enhancing access to you know whether it's mobile technology you know internet recent studies of sort of digital native show the region sort of average if you will and the last point I'll make on terms of how to sort of mitigate some of the impacts and inequality is better understanding where the inequality lies and this is something that's coming up again in the broader global context is better data and measurement and understanding and where the gaps are and where the inequality lies both within regions so whether it's rural or urban and across social groups and different population groups. So I think close retention to again better data collection and monitoring of how people are doing assets and different aspects of the inequality and income will then again better enabled response that is mitigating it. So Barbara the economic slowdown has sort of prompted economies to sort of look at themselves and see where they're getting their incomes etc. And a lot of the income that countries are getting is from commodities right. So my question I guess would be are there ways of sort of diversifying their economies are there any barriers to finding ways to do that though. Well I think you know obviously there are ways other than selling primary commodities to growing the economy. You've had this huge increase in price and this huge demand for primary economy so it would have been irrational for countries not to exploit that. Some countries have undertaken policies to safeguard the revenues that Chilean fund is obviously the most prominent example. Other countries have tried to, Chile again has tried to go into higher value added processing of some of the primary commodities particularly in the agriculture and tried to develop industries there. The Pacific Alliance which I know you're a great proponent of the Pacific Alliance is aiming to bolster regional value chains with a view to exporting more to Asia. And the idea here I think is to exploit some of these natural resources to help countries get into higher processing, higher value added activities while exploiting their comparative advantage. The other area is services and here is where we don't talk that much about services partly because of insufficient data which makes it more frustrating to write about this but as data is coming out and people are doing more work on this it's becoming a more prominent issue. There's a large initiative at the multilateral or at the plurilateral level now the trade in international services agreement where a number of hemispheric countries are participating but not all and services is a growing component of all economies in the hemisphere and so it would be incumbent countries to look at the services sector also to see where they can exploit some of their comparative advantages there. I actually related to that I have a question for Alejandro if I may and that you had talked about Mexico and not reaping the benefits of the commodity boom and actually losing some growth you said that during this period Mexican growth was slow how much of the slow growth is attributable to China and do you think that Mexico might actually benefit from not having been part of that bonanza and having to sort of hunker down and maybe increase its competitiveness in order to compete with China or is the new competitiveness just the result of Chinese labor costs coming down? Okay, no, no, no, it's super fair. I think... We didn't script this part. I think it's very hard to claim that not having been part of the commodity boom is going to be good for Mexico overall because I think to some extent in many countries in the region this commodity windfall has not been that poorly managed to claim that it has been a curse I mean, I think that it could have been managed better but it wasn't mismanaged so in that sense I think Mexico, well in a sense from the non-diversification view it has been blessed by being next to the largest market in the world and it has been exploiting that comparative advantage through NAFTA being a manufacturing export exporting platform to the U.S. The other countries in South America have been commodity powerhouses some of them in copper, agricultural, et cetera and each of them has exploded the way they can. I am convinced that the Chinese shock I mean if you look at some studies have shaped off a significant amount of growth from 2002 to 2012, let's say in Mexico but I do think that now as you were saying a significant part of this has been two or three things one is the label caused this advantage of Mexico has disappeared secondly I think many firms found it much harder to do business in China than what they thought and they are rethinking let's say other places to locate their manufacturing platforms I also think that the combination now of cheap natural gas and high low prices makes Mexico a great place to produce for the U.S. market because transport costs remain relatively high and energy costs in North America are low so that it's the best combination of energy pricing that it's possible for Mexico and there are the challenges to be able to bring natural gas from the U.S. to Mexico so I think the advantages of Mexico are there and I do think that sometimes we are too fast to single out Mexico like the country that now is reacting to this bad environment pretty quickly but basically it's because for the last 10 years Mexico has suffered that now the Mexican society has come together and actually pushed for a lot of these reforms that have been discussed for the last decade so hopefully it doesn't take that much in other countries and we see a reform agenda to react to this environment being put in place much faster in the rest of Latin America. Let me open it up to questions from the audience here. Can I just make a quick follow-up while they get their thoughts in mind? Because Alejandro you mentioned agriculture and I just wanted to kind of add in when thinking about some of the investments or reforms that can be made to address populations and we want on the agriculture side I think one of the things we also are taking a closer look at is land tenure. It's something that's coming up increasingly around a sort of rural youth and engaging young people and in agropreneurship if you will and thinking about value-added agriculture but particularly in some of the economies where agriculture is still and agribusiness is a rising piece of that. I think where land tenure and access to land for more traditionally marginalized groups is something else to kind of think about. Excellent. So we're gonna take some questions from the audience. We're gonna have the questions posed and then we're gonna let you guys answer them. So why don't we start here in the middle? Clay Lowry, Rock Creek Global Advisors. So Alejandro, I think this question is for you but it might be for Barbara because actually she calls me to ask it. External vulnerabilities are external shocks for Latin America, how do you see them? I know the report probably presents, you didn't talk about it too much, the taper tantrum and US monetary policy and how is that affecting Latin America? I mean, how are you guys looking at that? Secondly was from Barbara's question which was geopolitical shocks and for all I know what's happening in Russia, Ukraine or potentially even now what's happening in Iraq has absolutely nothing to do with Latin America but I would think that one, it could change flows somewhat and secondly it could certainly change energy markets. I have another question related to that but you know what, I'll let other people ask. Go with Hector over here. Hi, thank you. It was touch upon but I was wondering if you could elaborate a little more on the issue of the middle class or the new middle classes. To what extent, if any, this slow down which is significant I think will affect particularly the new middle classes which are the most vulnerable in terms of you know well going back to where they were, they are the ones with the highest expectation and they're the most vocal ones, all right? I mean, those in Rio outside, Maracana or middle class, Brazilians complaining. I worry about this scenario in terms of political instability in the region going through the electoral cycle, Brazil but not only and so on and so forth so if there is anything in the data about that, thank you. So let's start off with those two. Okay, so on US monetary policy and in the report we have a chapter, we analyze the effect let's say of expected normalization of monetary policy so to the extent that the tightening of monetary policy comes together with the expected closing of the output gap in the next three years, then we evaluate how let's say the real sector channel and the financial channel interact in these countries and obviously, I mean the result is pretty obvious, I mean those economies like Mexico and Central America will benefit because the real sector channel will be stronger than the financial linkages and the increase in the cost of financing and South America will have a negative effect, small but a negative effect. On top of that comes the most important question, is if normalization takes place in an environment of high volatility, then the financial channel will be stronger and how costly could that be? We saw let's say a short sample of that in the tapered tantrum, we claim that that was a huge shock to monetary policy in the US because when you measure it through the increase in the 10 year bond or 10 year treasuries, it has been the largest shock to monetary policy let's say in three years. It actually sent the signal that the end of the loosening cycle was coming closer, it was the first pitch that actually did that and it caught a lot of markets on a very one-sided position because it came after a lot of quantitative easing from many central banks. We had just been through the Japan quantitative easing so there was a lot of positioning to actually continue benefiting from appreciating currencies in Latin America declining interest rate, et cetera, and then that signal came. I think we think we are now in a much better environment but if a similar shocks appear in the next two to three years, they can be disrupted, they will take away part of the benefit that we are seeing from the real sector channel and however we do think that when you look at how capital inflows were used in Latin America this time around, we compare it with how capital inflows were used in the period going from 1991 to 94. In that episode, first only one third of capital inflows were FDI, now around 50% is FDI and then when we see, so that tells you that the strength of a reversal should be lower and then when you look at how that those resources were used, last time around maybe two thirds of the capital inflows were used to financing a widening current account deficit. This time around only one third was used to finance a widening capital current account deficit and the other two thirds were used either by central banks to buy foreign assets or by the domestic private sector to buy foreign assets. So that means that in an environment in which foreign investors want to dump Mexican or Brazilian commercial paper or sovereign paper, the state and several corporations have the assets to buy back their debt if they want. So they're not as unhedged as they were before and their leverage is not as high. Obviously there will be a lot of volatility in local markets but we don't think that this volatility will translate into bankruptcies in the financial sector or in the corporate sector that would have a systemic implication. We will see problems. I mean, there's always things that our surveillance misses and those were the problems we end up having problems but overall our surveillance points that there's a huge chunk of the financial sector and the corporate sector that it's relatively healthy. And on the second point, I think it will imply a huge effort by governments to try to maintain the gains that have been done in social indicators, especially in these segments of the population that move from poverty to let's say lower middle class but are extremely vulnerable at the levels that we see them today. Because I mean, at the end of the day, the adjustment, let's say the macroeconomic adjustment will imply that governments will have less resources. Real wages will have to adjust or will not be able to grow at the same pace that they were growing. Third, availability of credit will be curtailed by some of these segments of the population. So it will imply a significant, a very important political challenge to move from growing at 4% to growing at two and a half for Latin America as a whole. And it would be naive to say that we can escape this without important social pressures. We have lived through a period in which income growth and wealth creation has been very helpful to smooth the political process. And obviously, technically you can devise a lot of mechanisms to maintain an important part of these gains because you also see and we highlight in the report, I mean, the increase in government expenditures in the region has been very large. For me it is, I mean, when you look at a household, when you look at a firm, when you look at a country, if you have increased your expenditures year after year in a very important amount, by definition there exist important sources of savings maintaining the quality of the services that you're providing because a lot of problems have been solved just by putting more resources into them without putting the focus that we should put on efficiency. But that's something that is hard for governments to deliver and I think if governments will need to focus significantly in the governance of public expenditures and significantly monitoring, measuring and improving the delivery of public services. And that will take time. You cannot change the way governments work. So I think it will be a challenge some governments are reacting. I mean, I mentioned the case of Chile. Even though Chile is the country in Latin America with the highest pieces scores, it still scores in the lowest 20% of the sample. And therefore Chile is saying, well, we have to do this and we have to do that in a fiscally responsible way. So hopefully that will be the generalized response. But as we know from the past, hard to think that the whole sample of countries and all the governments will be able to maneuver through the political pressures that we'll be facing in the short term to take the decisions that are good for the long term. I mean, in that respect, it's very commendable that the Chilean government is looking at a slowness of their economy and they're launching this huge process because they know it's good for the next 10 years not for the next 18 months. I think we have time for one more question and I guess we have three more questions. What I'm gonna do is this, I'm just gonna have you ask the questions and you're gonna decide if you can answer them because we have to close out. But there was one of the questions was a tweeted question and then I'm gonna get to the rest. Let's begin. Right, one of our Twitter followers, orangehilius asks, having structural economic problems existed in Brazil for a long time, why are they impacting growth now in particular? Okay, that's one. Let's keep on going with the questions. Gustavo. Alejandro, Gustavo Navarra, senior advisor here at CSIS. You mentioned Argentina, the Supreme Court decision is fairly fresh, but it was one of a few anticipated outcomes. It's wondering if you could, if you're in a position to speak about that. We're all aware of the difficult relationship between Argentina and the IMF for several years. Is there any concern that Argentina will default and then so what effect might that have on other countries in the region, particularly Caribbean, that feel that they are overly extended when it comes to external debt? Eric Langer, Georgetown University. It's very interesting the way you divide up the country's closed economies and more open economies, but I think there's another way to think about that. And that is those economies are most exposed to commodities and those that are not. And in addition to that, the smaller ones, which probably can't do very much about it, and then the larger ones, which actually have a domestic economy large enough to if you will, pirouette towards more infrastructure growth and things like that. And if you perhaps can see a different kind of division within Latin America between the small, very exposed economies and those that are exposed, but have the ability to change towards more internal economic growth rather than being so dependent upon commodities growth. And the last question up here. Gentleman, yep. Yes, hi, Adrian Gillam from the American Chemical Society. Recently, President Nieto recently pledged more GDP funding towards science, technology, research and development and certain sectors of the economy that deal with developing smart capital. I was wondering if you could probably project or comment on whether you see other Latin American countries taking similar steps to deter what could be seen as a brain drain trend for young Latin Americans leaving their home or their respective countries for better opportunities in the United States or elsewhere. There's one more. One more. Thank you. Miriam Cornblith from the National Endowment for Democracy. One question. Do you see opportunities in this new cycle? And the other question is, what about Venezuela, Venezuela's influence in the region going through this economic crisis? What kind of impact will it have, especially in Central America, Caribbean? Thank you. Okay, so there are many questions. So many good questions. I wish we could answer them all. Well, I think a few of them are answered in the report. I mean, I would turn or draw your attention to the box 2.2 in Argentina and Venezuela's impact on the region. So just as a shortcut. Okay, I mean, on Venezuela, maybe as it has been said, the impact goes through a lot, through the oil sales and financial support that Venezuela has given to a lot of countries in Central America and the Caribbean. That's an important fragility for these countries. In terms of why are we bringing up structural issues in Brazil now, when they have been there for a long time? Yeah, I think we definitely concur with that view. Brazil had a very good, let's say five years, five to seven years associated with important reforms, stabilization, financial deepening, the impressive development of their oil industry and the impressive development of their agricultural sector in relation to the commodity shop. But that kind of step effect is over and now they're back to facing with their structural problems. So they did things very well. They had an important positive shock from the outside. That is done and now it's back to the reality of working on fundamentals and structural issues. I mean, at this stage, we are starting the situation in Argentina trying to understand and waiting to see how they will react and how the investor community will react before we actually structure an opinion. I think the issue between small and large commodity exporting economies, it's an important one. I mean, I think larger economies with a larger financial sector, et cetera, have more levers to generate growth from their domestic economy. I think now the problem is some of those economies in Latin America didn't use the good times to save and to deleverage as much as you needed to be able in this period to relever and use this space. So you're coming to this point in the cycle after a period of significant windfall of income, but also increasing leverage. And I think there's a trend break in Latin America that it's interesting. When you look at the current account balance for a short brief period of history in Latin America from 2003 to 2008, Latin America exhibited a current account surplus. So these countries were saving part of the windfall. After 2008, we went back to deficit even though commodity prices went back up. So that's a little bit the problem to think that even large economies can actually forcefully implement some counter-cyclical policies to face this new environment. Mr. Juan? Yeah, I mean, just a last comment on the question around pivoting into new markets. Barbara talked a little bit about services earlier and relates to the question about migration. I don't know the number specifically on youth migration from Latin America, roughly about a third of international migrants globally are youth. So I would expect the trends from Latin America to be the same. And I think it's exciting to think about what services, higher value added agriculture, tourism, hospitality, huge opportunity to engage in that space. But really what it comes down to is what are, again, will the labor force needs be and how you get there. And it's foundational investments in, again, primary, secondary education, science, technology, math. But again, where can you engage the private sector to really understand what are the skills going to be needed and how can those partnerships happen to make sure that people are ready. There's some interesting things happening in different sectors with different corporate leaders to really understand what the needs and the opportunities are and make sure that the labor force is gonna be ready, willing, and able, willing also a key piece of that in terms of expectations management on all sides. So then we can talk about that. Yeah, and just really quickly, I think the question on R&D investment is really very interesting. Latin America is one of the regions with the lowest number of patent filings and with the lowest investment in research and development. And there are studies that show that boosting that gets good gains. And so if you look at sectors that have done well, even in countries that may not have grown as much, those tend to be successful. So a number of countries have put more resources into investing in research and development, science and technology, Costa Rica and Panama are two that come to mind. And so I think that this is a laudable effort by President Peña Nieto, and hopefully others will follow suit. Although, of course, it's much more difficult as the degrees of freedom for policymakers are narrowing. But it's difficult. It's a time to make hard choices, winnow out those policies that will yield gains for the most and greater growth gains and less policies at one time. Great. So with that, I want to thank you. I want to thank you, Nicole, Barbara, Alejandro. You've been great. I think this has been a very comprehensive panel, which I think when you talk about economic issues and finds you can get a little dry. So I think it was important to sort of give things context. These figures are great in your publication, the Regional Economic Outlook for the Western Hemisphere. We really appreciate that you came, that the IMF was willing to work with us on this issue. We hope we can continue doing those things. I want to thank all of you for coming and for the folks that watched. So thank you very much. Thanks.