WASHINGTON DC, October 8, 2010 - Latin America’s new face following the global financial crisis is tough and almost impervious to shocks but also soft and kind to the most vulnerable.
A World Bank report argues that the region’s economic demeanor is resilient, globalized, and dynamic as it zips towards 5-6 percent growth for 2010 and shows that its investments in social protection managed to shield the most vulnerable from the worst effects of the downturn.
Presented as part of the World Bank Annual Meetings, Latin America’s semiannual economic report also reveals that the region’s recovery is ahead of the rich nation’s and compares well with the Asian Tigers’ expected growth of over 7 percent. All in all, the crisis in Latin America & Caribbean (LAC) was short lived, as compared to other parts of the globe, thanks in part to solid macroeconomic and fiscal frameworks set in place well before the crisis struck.
Individually, Brazil, Peru and Argentina lead the pack with 7.5 percent projected growth while Uruguay and Paraguay are expected to largely surpass the regional average. Chile, Colombia, Dominican Republic, Mexico and Panama, in the meantime, will likely post a robust 4-5 percent growth, according to ‘Resilient, globalized, dynamic: The new face of Latin America’.
Small Increases in Unemployment, Poverty
This better than expected economic performance has also had some encouraging outcomes in the social arena. Unemployment and poverty numbers were much lower than in previous crises. While at the cusp of the crisis about 10 million people were expected to be added to the region’s poor, data based on new growth projections suggest that only 2.1 million have joined the rank of the so-called moderate poor (living with less than $4 per day) while 2.5 million have become part of the extreme poor (living with less than $2.5 per day).
As for the labor market, a year ago 3.5 million people were predicted to join the unemployed in 2009, but currently those figures have been adjusted to about 2 million newly unemployed in 2009. And these are real numbers, not projections.
Despite the sobering nature of these numbers, there’s reason for moderate optimism as they’re likely to shrink as the region’s prosperity gathers momentum, noted de la Torre.
“If the region keep’s its current growth–poverty reduction ratio, mirroring its pre-crisis rate, we could project that about 7 million people will be lifted out of moderate poverty this year,” de la Torre said.
Same logic applies to unemployment. Informality, a labor response to recessions in Latin America, did not grow as in previous crises, whereas formality continued its widening trend during the recent global economic crisis, noted the Louise Cord, head of the Bank's poverty reduction unit.
"Although unemployment did rise, real wages remained relatively strong, and the quality of employ ment did not appear to deteriorate significantly,” said Cord in a separate report titled ‘Did Latin America Learn to Shield its Poor from Economic Shocks?’
Solid Macroeconomic Policies
So what’s behind this crisis-proof façade of the region’s?
Circumstances and good policy combined to propel Latin America towards a fast recovery and even faster growth, experts note.
Latin America’s good work on the macroeconomic and financial fronts got a push from external forces such as a quick rebound of commodity prices and an increased appetite for risk by foreign investors, which has translated into massive capital inflows across the region.
But the strength of region’s immune system against shocks really rest on three pillars that have been built over time and can be credited to good leadership:
1) Improved macroeconomic and financial policy frameworks that have become shock absorbers or cushions rather than conduits to amplify crises. These improvements include strong currencies –which in the past were shock transmitters - and countercyclical fiscal policies that have allowed for potent fiscal stimulus during the crisis. Banking systems have also been strengthened and currently there are enough buffers in place –such as liquidity and capital provisions- to endure a shock without infecting the rest of the economy.
“That’s a very importance factor that explains LAC’s resilience and why it’s recovering very nicely in this phase,” said de la Torre.
2) Integrating better into global financial markets has allowed the region to become a net creditor to the world rather than a debtor -a move that provided a cash cushion against downturns. In the past, Latin America used to hold an excess of debt contracts that exposed it to rollover risks, interest rates hikes, and sentiment changes, that could wreak havoc in its finances. These days the region is a large debtor on the equity side, including Foreign Direct Investments (FDI), and a creditor on the debt side, which forms a more robust debt mix. FDI surpassed the $60 billion mark in 2010 almost reaching 2007 levels.
3) Diversification of its trade structures has placed Latin America in a unique position to profit from China’s voracious appetite for the region’s commodities while desensitizing it from economic activities in rich areas such as Europe, the United States and Japan. Much of the region’s growth can be credited to the ‘China Connection’, which saw the country’s share of commodity exports grow tenfold since 1990 (from 0.8 percent in 1990 to 10 percent of total commodity exports in 2008).
The region’s recovery, however, is not written in stone. It is unfolding in a still volatile global environment where growth in the rich world -still important for Latin America- is fraught with uncertainty.
Managing Risks a Priority
So saving for a rainy day becomes extremely important, said de la Torre, while adding that a more pro-active stance should be taken in the region by increasing public savings, particularly in commodity exporting countries.
Also at the top of the region’s to do list is addressing currency appreciation pressures, due in part to the massive capital flows coming into the region. “At present, monetary policy in most of LAC is overburdened—it is expected to deal with the multifaceted complexity associated with surging capital inflows and commodity price buoyancy single-handedly, without help from fiscal policy and without suitable macro-prudential tools,” de la Torre said.
Additionally, macro prudential policies -a new agenda mostly being discussed in the rich economies- may come in handy to help the region deal with the potential risks of this newfound bonanza.
These policies -including measures such as capital inflow controls and limits on credit expansion- will need to be put in place to address the very real risks of financial excesses in the region’s economies, warned de la Torre. For example –he said- large capital inflows may be funneled through financial systems in “imprudent ways” leading to excessive asset price increases in real estate, stocks and other assets, and excessively fast growth rates in credit.
“This can plant the seed of a crisis down the line, so we need to get serious about bringing into the region’s economic debate macro prudential policies,” de la Torre argued.
‘Resilient, globalized, dynamic: The new face of Latin America’ concludes that going forward there is no room for complacency. It notes that although the region’s improved immune systems passed the test this time, the continued resilience of countries in the region is not a foregone conclusion.
