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Globalization presents a challenge and an opportunity that could be seized by adopting good policies and institutions. Latin America should take advantage of this opportunity to accelerate their development and narrow their gaps with developed countries. Latin American economies have benefited from globalization, but there are areas where potential gains remain unexploited. Here lies the challenge, and the timing could not be better. Reaping the benefits and mitigating the costs of larger trade and financial integration involves reinforcing open markets, improving and completing structural reforms started after the debt crisis, and strengthening political and economic institutions. Regulation and supervision of financial systems must conform to international standards, to ensure appropriate management of financial institutions. Monetary policy has also been affected by globalization. Transmission mechanisms have been altered by weaker links between domestic demand and output, and large trade and financial integration. Macroeconomic discipline has become imperative. Strong credibility of domestic macroeconomic policies contributes to offset the weaker transmission of domestic interest rates to output and inflation. Deviations from international best practice are penalized with economic and political consequences. However, to close the income gap with developed economies, Latin America needs to go beyond the basic requirements ¿ of stability, openness, market competition, and modern institutions ¿ and get involved head-on in technological innovation, better education, and improved training of the labor force. Attaining political consensus and involving the civil society into policy making must be part of the reform process, to achieve political legitimacy and minimize the likelihood of costly policy reversals.
