Also, the series of corporate failures in 2001-02 revealed weaknesses in corporate governance practices, including accounting and audit rules, which are currently being addressed by the US authorities. Latin America Over the last two years, growth in most Latin American countries has been weak. This year, however, there are signs of a modest upturn, with confidence slowly returning. This has been due, in part, to the direction of the structural reform agendas of many countries in the region. To strengthen the foundations for growth, policy-makers must remain committed to implementing structural reforms. Countries that have made the greatest strides in reform are already reaping the benefits. Both Mexico and Chile, which are at the most advanced stage of reform in the region, have proven remarkably resilient to turmoil in regional economies and have weathered the period of weak global growth well, considering their exposure to sluggish mature economies. Other countries in the region have embarked on reform agendas and should be encouraged by the international community to see them through as swiftly as conditions allow. East Asia As for the crisis-hit countries in Asia, economic performance has been positively correlated with progress in reforms. Stronger average growth potential in countries such as Korea and Malaysia reflects partly the authorities' determination in pushing through corporate reforms, reforming the financial sector and strengthening insolvency laws. In China, the authorities have repeatedly emphasised that banking reform, if coupled with the restructuring and privatisation of state-owned enterprises, is key to strong growth and financial stability in the medium term.
Given that the target of imminent euro adoption is gone, and the large euro zone nations do not provide real leadership on fiscal soundness, there is less incentive for some of the new member states to stick to the consolidation of their public finances from today’s deficits above 5 per cent of GDP. The consolidation plans are already too dependent on a continued upturn. Whether in the old or new member states, there is an additional problem, as we are entering a period of intensifying structural changes. Old industrial patterns in Europe are being changed when confronted with both the boost to productivity from IT, as partly realised since the late 1990s in the US, and globalisation and enlargement, all of which supports this process. These trends will eventually help productivity and growth in Europe to start to catch up with the US again. But in the short term the structural changes will lead to higher frictional unemployment as old industries are more rapidly replaced by new ones. In addition, the recent downturn never led to a dramatic increase in unemployment or decrease in employment in the euro area; hence, the upturn is probably also less likely to lead to rapid job creation. Both factors create new incentives for fiscal policy to focus more on short-term job creation schemes and less on long-term fiscal soundness. So from this perspective, too, the hope that the recovery alone will “fix” the European deficit problem might be too optimistic.