As a general rule, events that did not happen are not considered newsworthy or particularly relevant. Yet, the clue that helped Sherlock Holmes solve one of his cases was precisely a non-event: the fact that the dog had not barked. Likewise, the economic performance of Latin America since the outset of the sub-prime mortgage collapse in 2007 could be described as the financial crisis that did not happen.
At painful cost to their nations, regional policymakers learned the following lessons from previous crises: inflation is destructive; high levels of US dollar-denominated debt are dangerous; deep and well-regulated domestic capital markets serve important development objectives; excessive protectionism undermines economic competitiveness; macroeconomic stability requires fiscal and monetary discipline, as well as transparency and technical competence; heavy-handed state intervention in the economy is counterproductive; volatile and uncertain external conditions place a premium in the availability of adequate amounts of international reserves. These lessons led to the adoption of a comprehensive reform agenda that is largely responsible for the aversion of a new debt crisis in the region. Some of these very same lessons are now being learned by government leaders in several of the most vulnerable European countries and will hopefully lead to similar episodes of reform.
Several acknowledgments must be made be tore attempting to provide an explanation for the improvements that have taken place. The first is about the great difficulty in making valid generalizations about a region as large and as diverse as Latin America. A detailed evaluation of individual countries lies beyond the scope of this essay. When relevant, obvious exceptions to the overall trends will be pointed out. Second, the relatively favorable regional response to the challenge of severe international turbulence should be kept within the proper context. Latin America weathered the storm well, in comparison to some of the countries of Eastern Europe, the peripheral members of the European Union, and to its own previous performance during the international recession of the early 1980s. Nevertheless, the sharp contraction in world trade and in capital flows has brought about a reduction of regional output and economic dynamism.
Third, by necessity, the positive trends in Latin America's economic performance that can be identified will be described in rather broad terms. And fourth, any hint of triumphalism must be discarded from the following analysis. The favorable results notwithstanding, the regional agenda includes significant unfinished reforms that are essential to achieve economic and social modernization. A tone of modesty is appropriate because there is much to be modest about.
Crisis and Response
The United States experienced several recessions after World War II. The recession that started in July 1981 and extended until November 1982 was associated with a financial crisis of a magnitude similar to the recession that started in the United States by the end of 2007 and that seems to have ended by July 2009. Both recessions acquired international dimensions of an order of magnitude much bigger than the shorter recessions of the US economy in 1990-1991 and 2001. The two great US recessions pushed unemployment above 10 percent and generated around a three-percent decline in GDP from peak to trough.
The US recession of the early 1980s had a negative impact on Latin America. Starting with the 1982 Mexican debt crisis, the major Latin American countries, with the exception of Colombia, felt compelled to reschedule their foreign debt payments and experienced severe financial crises. A painful decade of stagnation, inflation, and, in some cases, hyperinflation followed. Recovery was eventually achieved in the 1990s.
Contrary to what anti-globalizers expected, the greater degree of trade and financial openness that took place since the 1980s did not make the Latin American economies more vulnerable to the sharp reductions in world trade and financial flows that took place in 2009. …