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Jeffrey Davidow Assistant Secretary for Inter-American Affairs Address before the Council of the Americas Washington, DC, April 28, 1997

As Delivered Text

U.S. Foreign Policy Toward Latin America and the Caribbean in the Clinton Administration's Second Term

I'd like to take this opportunity, my first chance to speak to you as Assistant Secretary, to lay out some of my broad concerns and hopes for the economic future of Latin America and the Caribbean, and the context within which we make day-to-day decisions.

Before doing that, however, let me take a step backward and remember this meeting last year. I had just come up from Venezuela -- in fact I was commuting at that time as Acting Assistant Secretary, and did attend the Council of the Americas meeting, the theme of which, as you will recall, was "Regaining the Momentum." I must say that I found the mood of the meeting generally fairly dismal. Not the people, or at least not all of the people. But there was a general feeling that the momentum, the great euphoria of the Miami Summit had slipped away. And quite frankly I cannot challenge that thought. Nor can I say that in the intervening year was much done, particularly during an election year in this country in terms of changing the perception.

But I would sustain to you, and I hope this becomes clear as others speakers make their presence here today and tomorrow -- the pendulum has shifted. We have as you have just seen, in a new Secretary of State Madeleine Albright, a person who comes to this building, comes to her job, with more direct knowledge and activity in Latin American and Caribbean Affairs prior to assuming the office than any other Secretary of State. The fact that the President has given a formal designation to Mack McLarty as Counselor to the President and Special Envoy for the Americas is a very major development for those of you who follow the intricacies of Washington bureaucracy. And having a person of Mack's stature and interest in the White House itself is a very important development.

It is not accidental that the first two state visits of (President) Clinton's second term were (Prime Minister) Chretien of Canada and (President) Frei of Chile. And it is not accidental that during the Frei visit the President went on record firmly committing to seek Fast Track negotiating authority. And it is not an accident that the President is committed to making three trips to the hemisphere within the next eleven months. All of this is important. It is particularly important in the ways of Washington. I really do believe that the train is now leaving the station. I do believe we have regained the momentum. I really do believe we all have got to get on board.

I do want to talk a bit about our perception of Latin American economic issues. I don't have to repeat to anyone in this room the obvious fact that to preserve our own freedom in the United States and our own values; to keep the U.S. economically strong and prosperous; to protect our citizens from such transnational threats as terrorism, drug trafficking and environmental degradation, we must be fully engaged in promoting democracy and prosperity in this hemisphere, and must maintain a close cooperative relationship with the region.

The commitment in Latin America to democracy and market economics gives us an unusually solid foundation on which to build our policies. The turn toward market decision-making, the restructuring of economic institutions, the return of growth, the control of inflation, the strong flow of foreign capital, and the forging of a common economic agenda for the whole hemisphere -- these are achievements undreamed of a decade ago.

But I would like to focus today not on past success but what I see as coming in the future.

The Challenge of High and Shared Growth

I mentioned growth as one of the accomplishments of the past five years. During the 1990's, Latin America's per capita growth averaged about 1% per year, an impressive turn-around from the 1980's, when per capita GDP declined about 1% per year.

But some have asked, is this enough? After all, Latin America's growth averaged about two points higher during the 1960's and 1970's, and the East Asian countries have a record of long-term growth about four points higher. Can Latin America achieve substantially higher growth? And can it achieve especially high growth which is broadly shared throughout society, so as to have a real impact on unemployment, poverty and public confidence in democratic and market institutions?

One answer is to say: "Change the model; market reforms can give us growth but not equitable growth." Another answer is: "Wait; be patient; this will all trickle down, it takes time." And finally, there is an answer that says: "Don't change; don't wait; do more. More macro-economic reform; more structural reform; more investment in human capital."

There are groups within the region that espouse each of these views. To those who want to return to populist and statist economic models, history offers some powerful rebuttals. The experience of a number of countries -- especially in East Asia -- shows that market-based economies can grow very rapidly while increasing equity. A change of model would cause more pain than gain. According to the Inter-American Development Bank (IDB), in the absence of the reforms of the 1990's, per capita income would be about 19% lower than it is now.

To those who counsel patience, I agree that we cannot expect overnight success. However, personally and politically, I am drawn to the third answer which favors strengthening reforms.

As we look around the hemisphere, we see very substantial liberalization in trade and in finance. Nevertheless, more needs to be done; more can be done.

For example, tariffs in Latin America today average about 13%; that's a whole lot better than the 45% average a decade ago, but 13% is still a lot and can still be a substantial barrier to trade.

In areas outside of trade and finance, the scope for additional reform is even greater. Here are a few examples: There have been many tax reforms in the region, but tax collection needs to become more effective for the reforms to have real impact. Although Latin America has led the world in privatization, the process has been concentrated in a few countries. There is also huge scope for institutional reform, for example in improving access by the poor to high-quality secondary education. The region's labor force has an average of 2 years less schooling than East Asia. Finally, labor regulations in many countries impose extremely high costs for hiring and dismissing workers, as well as extremely high payroll taxes, and more importantly, they are NOT effective in protecting workers against the risks of unemployment, illness and old age as originally intended.

The Pay-Off From Intensifying Reform

A broadening and deepening of reforms in Latin America could pay real dividends. IDB economists have estimated that if the region remains at its current level of reform, growth will continue at roughly current rates. But if all the countries of the region intensify their macro-economic and structural reforms, this could raise growth by an additional two percentage points. And if, in addition, they were to pursue vigorous institutional and educational reforms, then growth over the next decade would likely approach that achieved by the fast-growing East Asian economies.

Such a growth path could double per capita income in about a generation, and the emphasis on investments in education would have a major impact on poverty and income inequality, as well as increase public confidence in democracy and the market model.

The U.S. Policy Response

How does U.S. policy respond to these challenges?

First, let me say that we look at the problems of growth and economic reform in a broad context; we see our objectives as integrated and mutually-reinforcing parts of a comprehensive strategy. Just as high and broadly-shared growth will reinforce democracy, so will democracy and the long-term stability it promotes help create the conditions for more investment and growth.

Secondly, I need to emphasize the strength of the region's commitments to the reform agenda -- commitments which are strong enough to withstand such stresses as the attempted coup in Paraguay exactly a year ago and the 1995 crisis in Mexico. The public response, the institutional response to these crises inspires confidence in the wisdom and courage of the region's leaders. Thus, the U.S. posture is that of recognition and support, as exists among friends, allies and equals.

This is most clearly demonstrated in the Summit process, which as you know began in Miami in December 1994, continued through the Sustainable Development Summit in Santa Cruz, Bolivia, and will move on to the Santiago Summit in early 1998.

In preparing for the Santiago Summit and throughout the next four years, we are intensifying and refining the agenda of the first Clinton Administration. We are working to strengthen democracy, the rule of law and respect for human rights. By helping to consolidate Guatemala's peace settlement, to strengthen Haiti's still fragile democratic institutions, to help find a lasting settlement between Ecuador and Peru, we are building the long-term stability which, as I noted before, is indispensable for sustainable and high growth. And, of course, we remain committed to the peaceful evolution of Cuba toward a system which respects basic individual and political rights.

Another key item on our agenda is addressing transnational problems. Those are problems which cannot be effectively handled within the narrow boundaries of one country or another. Cooperative action is necessary, and cooperative strategies are imperative to make a real impact against the illegal drug trade, trans-border crime, migrant smuggling, terrorism and environmental degradation.

And finally, one of the top items on the President's agenda for the next four years is to move decisively toward concluding a Free Trade Area of the Americas by the year 2005. As you know, Trade Ministers will be meeting next month in Belo Horizonte to consider moving from the preparatory to the negotiating stage. This must be done. We must be ready, it seems to me, by the Santiago Summit, to launch these negotiations. The Administration has been consulting with interested parties on enhancing the benefits also of the Caribbean Basin Initiative as a step in preparing the region for the FTAA, and we intend to submit a bill to Congress soon. You will hear much more about our objectives and strategies for the FTAA later this morning from Counselor McLarty and Ambassador Barshefsky. For my part, let me re-affirm that we are working closely with Congress to make sure that we have the tools, notably Fast-Track authority, to meet our commitments and to protect our trade interests in Latin America.

In closing, I'd like to emphasize that I remain optimistic about fulfilling the ambitious goals which the hemisphere has established for itself. I strongly disagree with the notion -- which unfortunately is still out there, we run into it every day -- that growth, market-based policies and free trade are incompatible with democracy, responsive government, improving income distribution and poverty alleviation. We now know that these two sets of goals can be accomplished at the same time and indeed they are mutually reinforcing. The evidence of the past five years in the hemisphere demonstrates that decreased inflation, trade liberalization, and greater incentives for investment and productivity have succeeded in halting the drift toward greater poverty and inequality which occurred in the previous decade. Effective and responsive government helps build the trust which is indispensable to implementing far-reaching market reforms. Investment in human capital promotes both growth and social justice. And economic reforms stimulate the growth which demonstrates the validity of democratic institutions.

With your help and support, I look forward to a bright future for the Americas.

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