IMF Managing Director Dominique Strauss-Kahn.

Washington -- Latin American countries need to improve their overall business climates and encourage new industries if they expect to continue to thrive in the global, knowledge-based economy.

So says Dominique Strauss-Kahn, managing director of the International Monetary Fund. He joined political and business leaders from throughout the Western Hemisphere in Washington May 6-7 for the 38th annual meeting of the Council of the Americas to discuss promotion of open markets, democracy and rule of law.

Despite recent growth, there are external threats to Latin America's economic well-being from two sources, according to Strauss-Kahn. One is the mortgage crisis in the United States, which affects the overall U.S. economy, and the other is China's unbalanced economic growth, which is weighted toward exports while the domestic market remains stunted.

Direct foreign investment coming into Latin American countries is one-third lower than that of East Asia, according to Strauss-Kahn. He and other experts believe that if Latin American countries were to improve their business climates, manufacturing and service businesses would thrive and more foreign companies would want to locate facilities in Latin America. Diversified economies are resilient, the theory goes.

To attract foreign investors to Latin American companies’ stocks and foreign businesses to the region, some Latin American governments are educating workers, building physical and technological infrastructure and even reforming judicial systems to make them business-friendly.

Latin America participates in world trade to a much greater degree than it did a decade ago. Today, high prices are boosting the fortunes of countries exporting soy, tin, copper, iron ore and other commodities. But if prices do not continue to rise, such commodity dependence could harm Latin American economies.

Strauss-Kahn proposed that Latin America increase its focus on value-added products; for instance, he said, countries should develop their oil and gas sectors, which are experiencing low productivity growth compared to that of other developing regions.

Strauss-Kahn said that, despite strong overall growth in Latin America and the Caribbean during the past decade, poverty levels have not changed much in many countries. The region’s dependence on exports of minerals and agricultural products is one reason. Commodity-based economies are less effective in reducing poverty than economies based on manufacturing, he said. He added that Latin America's share of manufactured products in the global economy is declining -- a significant concern.

“Countries like Chile, Peru, Brazil, some in Central America, and Mexico get it,” Eric Farnsworth, of the Council of the Americas, told America.gov after the conference. “They are trying to do the right thing. Others in the region are going in the opposite direction, which is unattractive to investors.”

Farnsworth said that many discussions at the two-day meeting focused on how the region "fits into a world that is growing smaller."

PERU HOPES TO ‘DO THE RIGHT THING’

Peruvian Finance Minister Luis Carranza Ugarte speaks about Peru's high growth and poverty-reduction strategy.

Peru's finance minister, Luis Carranza Ugarte, spoke of the challenge Peru faces in maintaining its high growth rate -- 9 percent in 2007 -- while pressing ahead with economic reforms intended to redistribute wealth, reduce poverty and improve the overall business climate.

"Wages that stay low during high growth exacerbate social inequality," Carranza said. He explained that Peru is pressing ahead to enact a flat tax. It is requiring mining industries to invest directly in infrastructure that would benefit the lives of miners. It is deregulating the labor market. And it is raising education standards.

In Peru's first evaluation of teachers and students, he said, both groups were found to be deficient. Among the educational reforms the Peruvian government proposes is a subsidy for teachers to purchase their own computers.

Peru, an avid proponent of free trade, is preparing to host the annual meeting of the Asia-Pacific Economic Cooperation forum in Lima in November.

"Openness is important for growth in any small economy,” Carranza said. “Peru wants free trade agreements with any country. The free trade agreement with the United States is a key piece in Peru's strategy. Peru wants free trade in the entire Pacific area."

HIGH FOOD PRICES CAUSING HARDSHIP

The finance minister said high food prices are causing hardship for Peru's poor. To deal with the crisis, the government is creating a temporary feeding program for its neediest citizens while working to increase the food supply by introducing better seeds and technology. He mentioned a special program to encourage potato cultivation.

The food crisis is gripping several other countries in the hemisphere, and Strauss-Kahn advised governments not to seek quick fixes, such as tampering with the tax structure. He said the easiest solution to deal with civil discontent stemming from food shortages would be to cut import and sales taxes, but that would create a problem later because of the eventual need to re-impose them. A wiser course of action would be to provide temporary food subsidies, Strauss-Kahn said.

Transcripts of speeches from the meeting are on the Council of the Americas Website.