Change that's Needed for Latin America

The signal has been sent: The U.S. hard line is over. The Obama administration's decision to allow Cuban-Americans unlimited travel and remittances to Cuba just four days before the Summit of the Americas is no sea change but a symbolic act that will warm up the crowd and, with all hope, enable leaders meeting in Trinidad and Tobago to focus on the even more urgent issue at hand -- the financial crisis cum global economic crisis and its effects on the poor.

Exports from the region have dropped 25 percent since October and foreign investment will plummet more than 50 percent this year. Economic growth is expected to be flat or even slip into negative territory -- all this just as poverty reduction initiatives were starting to show promise.

Washington's concern is clear. In a recent interview, Thomas Shannon, the assistant secretary of state for Western Hemisphere affairs, said in treating the crisis world leaders cannot "allow it to turn into a political or social crisis."

In the past, Washington might have preached a message of austerity. During previous economic downturns, Washington based institutions, particularly the International Monetary Fund, pushed governments to tighten their belts, increasing the suffering of the poor. Not surprisingly this led to social unrest, toppled governments and ushered in new populist leaders who promised to stop listening to Washington and adopt fairer economic measures.

Until now it has been those populist leaders, Hugo Chavez in Venezuela, Evo Morales in Bolivia and Rafael Correa in Ecuador, who have had "a near-monopoly on the rhetoric, though not the reality, of 'Fair Growth,"' as Nancy Birdsall, president of Center for Global Development, recently wrote. The current crisis, however, presents an opportunity for Washington to demonstrate new priorities and to promote a more just recovery.

For now, that seems to be the intention of the new U.S. administration, according to Jeffrey Davidow, White House advisor on the Summit of the Americas. Obama believes that "the poorest of the poor ... should not be the ones that have to pay a disproportionate amount of the cost of the crisis," Davidow said in a teleconference prior to the gathering. "Development should come from the bottom up."

That is a marked change from the previous trickle-down economics and the recent abiding faith in market forces and the stigma of debt. But what kind of policies will ensure such bottom-up development? And more to the point, what should the leaders of the Americas commit to at the Summit to make sure the poor are not left further behind?

According to Pamela Cox, World Bank vice president for Latin America and the Caribbean, the answer is twofold. In the short-term, governments should expand their safety nets especially through conditional cash transfers that provide subsidies to poor families in exchange for sending children to school and regular health check-ups. In the medium term, governments should increase investment in education and infrastructure. The trick is, of course, where to get the money.

The World Bank, according to Cox, just approved $1.5 billion for Mexico's safety net program and is working with Colombia and Argentina to do the same. But that is merely three countries out of 32 in Latin America and the Caribbean, and $1.5 billion is already more than 10 percent of the $14 billion the Bank has for additional lending for the entire region this year.

What's more, conditional cash transfers, while a successful Latin American innovation, are only a palliative and not a substitute for development. As governments assume a larger role in the recovery, investment in education and infrastructure should be complemented by productive investment that seeks to "discipline private capital" and make sure local companies are able to compete as the world economy recovers, said Kevin Gallagher, a political economist at Boston University.

Gallagher and other economists also argue that Latin America will need to invest more aggressively to boost bottom up development. Current stimulus packages in the region average 1 percent to 2 percent of gross domestic product, a cautious approach to deficit spending caused by past punishments inflicted by multilateral lending institutions and markets.

"In advance of the Summit, we have begun to move in a new direction," Obama wrote in a column published throughout the Americas, citing his change in Cuba policy. At the Summit, Obama will have an unparalleled opportunity to send a stronger and unmistakable message that times have indeed changed and that, under the current circumstances, the responsible thing to do is to support far more substantial stimulus spending.