‘Central banks and treasuries in Latin America have become professionalized in recent decades’

William Maloney, the World Bank’s chief economist for the region, talks about the impact of inflation, the threat of climate change and the growing influence of China in the area

William Maloney
William Maloney, World Bank chief economisy for Latin America and the Caribbean, in a hotel in the center of Madrid.Samuel Sánchez
Lluís Pellicer

The World Bank’s chief economist for Latin America and the Caribbean, William Maloney, has an optimistic message for the region. Latin American economies were hit by the pandemic and inflation, but the region wasn’t worse affected than any other areas. Maloney believes that central banks and Treasury heads in the region have become more professional, although he is calling on leftist governments to be cautious about triggering market uncertainty.

Question. Economists take it for granted that the Federal Reserve's actions will push the United States into recession. Do you think that this is going to drag Latin America down?

Answer. No one knows what will happen. The United States is attempting a soft landing to end inflation without creating a recession. In any case, it is true that the performance of the G-7 economies is an important factor that affects the economies of Latin America, along with that of China, and the evolution of interest rates and the price of raw materials. That explains a lot of what we’re seeing right now, which is not very positive. We expect growth of 1.4% for this year, while for the next two years, we forecast 2.4%. We are seeing that, since 2010, the region has advanced an average of 2.2%, while the world has grown by 3.1%. This implies that very important structural issues in the region must be addressed.

Q. What are these issues?

A. To begin with, education. It is even more important after the pandemic, when, in general, children lost a year and a half of schooling. And that translates into a 10% drop in revenue over a person’s life. There is also lack of infrastructure: an average of 3.5% of GDP is spent in the region, when Asia or Africa allocate 7%. There is also a problem of competitiveness, both when it comes to attracting companies and to entering foreign markets. And obviously, uncertainty complicates things.

Q. It’s striking that losing a year and a half of school leads to a 10% drop in income. Can this time be recovered?

A. It requires intensive tutoring systems. So far we have not seen these programs on a large scale in the region, so it seems to me that it is lost.

Q. Given the resources allocated to address the pandemic and inflation, do the governments of the region have the capacity to deal with these problems?

A. Most of the countries in the region strengthened the safety net of families during the pandemic. This caused an increase in spending and public debt, which means that there is now very little fiscal margin.

William Maloney, World Bank chief economist for Latin America and the Caribbean region, at a hotel in downtown Madrid.
William Maloney, World Bank chief economist for Latin America and the Caribbean region, at a hotel in downtown Madrid.Samuel Sánchez

Q. How can they get the necessary funds?

A. There are two ways. One, you can look for new resources. At the World Bank, we are doing some studies on what type of tax could raise more resources without hurting the economy. And two, we have produced reports that show that an average of 4.4% of GDP can be saved by making governments more efficient.

Q. Forecasts indicate that inflation will continue to be high in Latin America...

A. Excluding Argentina and Venezuela, Latin American countries have an average inflation rate that is lower than that of Eastern Europe and somewhat higher than Asia. The authorities in the region have done a very good job of managing inflation: they have taken action early. For example, Brazil started raising interest rates a year before the Federal Reserve, and Mexico and Chile did so nine months before. In recent months, the average rate of inflation has fallen and forecasts have not risen. For next year we expect inflation of 5% and in 2024 the goals of the central banks will be met.

Q. In other words, there is no risk of a debt crisis, as we saw after the inflationary crises of the 1980s?

A. That is another piece of good news. Things that are changing. We have gone through two crises in which things were no worse than in the rest of the world. The economy was managed just as in any other part of the planet, which means that there has been a maturation and a professionalization of macro politics. The markets are seeing that central bank reserves are much larger than 30 years ago. The composition of the debt is also very different, there is a higher proportion in local currency. The rise in debt does not come without concern, but there is some confidence in the markets that officials are handling a difficult situation decently.

Q. In other words, there has been institutional progress.

A. Absolutely. There has been a good professionalization of central banks and finance ministries in recent decades.

Q. The Federal Reserve and the European Central Bank have so far continued to raise rates. Have you detected capital flight?

A. Obviously, what happens to interest rates in advanced countries affects capital flows, and central banks must react to it as well. It is happening, but we haven’t seen anything dramatic so far.

Q. Is the rise in interest rates negatively affecting companies?

A. Part of the professionalization that we have seen in Latin America also occurred in the management of banks. Yes, we saw an increase in defaults, but we also saw that the banks had sufficient provisions to deal with it. The United States has seen some banks fail, but ties with Latin American entities are almost non-existent, so we do not expect a contagion effect. Still, we must be cautious and keep an eye on the situation.

Q. Some Latin American presidents lament that their economies are highly dollarized. Can or should they address this?

A. The most dollarized countries, such as Panama and Ecuador, have the lowest inflation rates in the region. And Panama has grown quite well. The problems run deeper.

Q. Is it a good idea to create a common currency like the one proposed by Brazil and Argentina?

A. Everyone is welcome to the party. But it’s not that easy to create a currency that everyone accepts. The dollar and the euro are the most important currencies in terms of denominating contracts, trading and doing financial transactions because they are stable currencies, with a decent track record, with fairly deep financial markets. It’s not easy to achieve that. That takes decades. The influence of the yuan is increasing gradually, but it is still quite small.

Q. Indeed, we have seen Argentina accept purchases in yuan and Brazil suggested in China that there must be alternatives to the dollar. How do you see the growing presence of China in Latin America?

A. This is how free trade works. It’s good as a source of capital. And if it were a source of technology, that’s fine too.

Q. There are countries like El Salvador that have experimented with Bitcoin by making it legal tender. How dangerous is this?

A. We support El Salvador. But in this area, there is a lack of transparency and environmental problems. We do not want to participate or have much say in this matter.

Q. Aside from a common currency, is it a good idea for Latin American economies to be more integrated?

A. Latin America can take advantage of the scale of trade. The problem is the geography of the region and the lack of infrastructure makes this difficult. But there is also technology transfer, which is essential. And that is more complicated when the exchanges take place with countries with similar characteristics. Granted, it may lead to more trade with the region, but the U.S. has 330 million people and is the most dynamic generator of technology. You have to make an effort there.

Q. The agreement between the EU and the Southern Common Market Mercosur is signed but not ratified. Should this process be sped up?

A. Any such treaty with the EU would be good.

Q. There is also reluctance within the EU about the deal...

A. With these treaties, there are always winners and losers. You have to manage it.

Q. The world is already in the midst of another digital revolution thanks to artificial intelligence. Is Latin America losing ground on this front?

A. In terms of the physical network, the coverage is not too bad. There are more cost issues that keep a lot of people from getting into that system. We are just getting started with e-commerce and digital banking.

Q. Studies say that Latin America is one of the areas most affected by climate change. The U.S. and the EU have deployed plans to combat the problem. How can it be financed?

A. As a region, it emits 7% of [global] emissions and has the greenest electricity matrix in the world, with 50% coming from renewables. We have many opportunities. But we have more hurricanes and storms in the Caribbean, more drought in Argentina or Uruguay and new insects that attack coffee crops in Colombia. We expected a stronger recovery, and the drought prevented it. Responding to climate change is a big challenge that will require capital. On the positive side, the region is very committed to reducing emissions. Where can it get the money from? It’s a big question, but it’s a global problem. The figures being thrown up are enormous.

Q. Europe has decided to do it with debt.

A. Exactly, but it’s a complicated situation. We must think about how to mobilize the private sector.

Q. The five largest economies in Latin America have leftist governments that sometimes give fiery speeches against foreign companies. Does that affect their economies or the business climate?

A. These leaders have critiqued the previous model, implying that they are looking for new ways to organize their economies. There can be good things in those experiments, and not so good things. But obviously, with more uncertainty, it becomes more difficult to invest.

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