Magazine article Americas (English Edition)

Latin America and the Global Crisis: A Firm Foundation Yields Dividends

Magazine article Americas (English Edition)

Latin America and the Global Crisis: A Firm Foundation Yields Dividends

Article excerpt

THE CURRENT CRISIS IS very serious and it is affecting the entire globe. The world economy is expected to have its worst performance since the Great Depression and it is likely that no region will be immune to its effects. For Latin America, the crisis will manifest itself in the form of negative shocks to the region's external balance of payments; restrictive financial conditions; less demand for the region's exports; a decline in the prices of raw materials; and a downturn in remittance income, tourism, and foreign direct investment. These shocks are of a magnitude not seen since the 1930s and they are affecting all of the countries of Latin America to a greater or lesser extent.

Today, however, Latin America is in a much better position to face a crisis than it has been in the past. This is because of the significant progress that many countries have made during the last decade. In many cases, financial and macroeconomic policies have been, and are, much more sound, and they have resulted in substantial improvements in the composition of balances in both the private and public sectors. For example, public finances are in a much stronger position than they were before, and inflation has fallen significantly in most countries. In a stark contrast with the past, more flexible exchange rates made possible by successful inflation control and the oversight of bank and corporate currency mismatches have provided a significant buffer to the external shocks. While many currencies have been sharply devalued, destabilizing effects have not been produced. Furthermore, the regional banking system has hardly been touched by the effects of subprime lending; the financial systems--which are much better regulated and overseen-have held up well under recent tensions; and there have been no systemic problems in the region's banks. As a result, Latin American countries, unlike other countries in the world, are not facing fiscal or financial crises in their own economies, though in the past they may well have.

Many Latin American governments have adopted proactive measures for attenuating the effects of the crisis (also called countercyclical policies). Monetary authorities have provided resources to the credit system and liquidity in the currency markets, and several central banks have significantly reduced their interest rates, helping to mitigate the effect that decreasing demand is having on their economies. At the same time, many countries are using the fiscal space that they have created in the past to maintain or increase levels of public spending, for example on infrastructure and in the social sectors. These efforts will help economies to be better prepared to take on growth once international conditions improve. Social costs will be more moderate. This, once again, is a fundamental change from the past, when macroeconomic policies had to be more restrictive in the face of external shocks in order to prevent crises in the Latin American economies. The financial crisis of the early 1980s, for example, had prolonged effects on macroeconomic policies and depressed growth in the region for many years.

In spite of the efforts being made today, our forecast is that economic activity in Latin America will fall by 1.5 percent in 2009. This is approximately the same as the forecast for the average performance of the world economy. Though it may not appear so, this forecast actually represents a relatively good performance for the region. In the past, a crisis of this magnitude would have caused a much greater downturn. For 2010, our central projection for the region is one of 1. …

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