Jerusalem, 9 April 1995

INTER-AMERICAN DEVELOPMENT BANK

(COMMUNICATED BY GPO ECONOMICS DESK)

From 2-6 April 1995, the Bank of Israel hosted over 2,500 foreign guests, including 45 Ministers, Central Bank Governors, and Heads of State, at the Inter-American Development Bank and the Inter-American Investment Corporations’ annual meeting in Jerusalem. Topics discussed in addition to official IADB and IIC official business, included recent developments in agribusiness, international capital flows, private sector financing of infrastructure projects, economics of Middle East Peace, emerging markets, economic crises in Mexico, Brazil, and Argentina, economic developments in Israel, and the integration of Latin America into the global economy.

Israel, as a non-regional member, provides 0.16% of the IADB’s budget, which enables Israeli firms to participate in IADB projects and tenders. According to the Bank of Israel, 15 Israeli concerns have been awarded projects worth $62 million during the past six years. In 1995, the Inter- American Development Bank is expected to fund approximately 3,500 projects worth a total of $3 billion.

In a keynote address, Prime Minister Yitzhak Rabin told delegates that with he collapse of Soviet-style communism and other upheavals in the international system, one of the weapons which could replace military confrontation is the economic weapon and therefore that, "the fate of the post-Cold War era will be decided by bankers, economists, and businessmen." The Prime Minister called on the international economic community to assist the Middle East peace process, warning that, "if not, we will not achieve peace." Rabin said these leaders should seek to use economic tools as leverage for economic and social progress, applying the example of the Inter-American Development Bank. Rabin told the delegates that due to the unique opportunities presented to Israel, his Government had come to look differently at the Middle East and had come to the decision, "to give peace a chance and take calculated risks for peace." "Patience is needed to overcome the conflict…and this is only the beginning of trying to fill the statements with content," Rabin stressed.

Central Bank Governor Jacob Frenkel in his first speech as Chairman of the Board of Governors of he IADB (the host country’s Central Bank Governor is chosen to lead the IADB Board of Governors), told the audience that this conference was the largest economic conference ever held in Israel; the fact that it was held in Jerusalem symbolizes the importance of the changes occurring in the Middle East. Frenkel reviewed Israel’s economy, noting that open trade was a key to growth, as was the influx of more than 500,000 new immigrants. He noted that the slowdown in the world’s economy that lasted from 1990-93 is over, and that there are now grounds for optimism, in particular, about Israel’s export industries. Though inflation is still a battle, said Frenkel, a multi-year approach to macro-economic factors such as inflation, trade liberalization, and capital market reforms has set Israel’s economy in the proper growth pattern.

The major topic of discussion during the conference was the recent, and ongoing financial and economic crises in Latin America which were initially caused by the devaluation of the Mexican Peso and the resulting "Tequila Effect" in which most of the other Latin American countries were also sent into financial crises. The following comments were made during a seminar on International Capital Flows: Prospects and Policy Issues.

* Lawrence Summers, Under Secretary for International Affairs, Department of the Treasury, United States, told the conference that countries needed to be more conservative in their fiscal and monetary policies on capital flows and called for stronger regulatory measures. Summers said that analysts should view capital inflows as temporary, and capital outflows as permanent features of a country’s macro-economic situation, rather than the opposite, as is generally the case. Summers noted that short term debt, now the norm in Latin America, should be replaced as much as possible by long term debt, in order to help the Latin American economies recover from the current crisis.

* Enrique Inglesias, President of the IADB, speculated whether the conditions which created the Mexican situation massive outflow of foreign capital in a short period coupled with a large amount of internal short term credit loans could occur in other emerging markets.

* Michael Bruno, Chief Economist of the World Bank and former Bank of Israel Governor, compared the structure of investments in Latin America and in South East Asia. He pointed out that direct foreign investment in Latin America went primarily into pre-existing sources, generally via privatization, while in South East Asia, direct foreign investments went into new industrial or infrastructure projects. According to Bruno, structural reforms in South East Asia have increased investment faster than investment in Latin America.

* Guillermo Perry Rubio, Minister of Finance and Public Credit, Colombia, called on the Latin American countries to encourage more personal saving. He said that as a result of the crises, capital flows to the region will be reduced, causing a slowdown in macro-economic developments.

* Domingo Cavallo, Minister of Finance, Economy, and Public Works, Argentina, said that the Argentine experience showed that Latin American Governments need to generate confidence and create better regulations, and increase transparency. He called for the elimination of indexation towards which Argentina has taken steps, which structurally, has benefitted the economy.