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FEATURE STORY

Latin America: World Bank Experts Confident in Region's Resilience to Global Turmoil

August 9, 2011

STORY HIGHLIGHTS
  • Latin America is in good position to weather the current global turmoil
  • A new global recession could impact parts of the region
  • The region's poor are shielded by strong social protection nets

WASHINGTON D.C., August 9, 2011 – Latin American economies have developed strong immune systems against global contagion but a worsening of the current market turmoil could put those defenses to the test said World Bank Chief Economist for Latin America and the Caribbean, Augusto de la Torre.

“Over the last 20 years the region has experienced a silent economic revolution that has provided a shield against external shocks, as we have witnessed in the previous crisis and those reforms are still in place ,” de la Torre noted.

But he warned that a worsening of the current turbulence -"a global turmoil of immense magnitude”, he said- could impact Latin America’s ability to grow. “Not even the best immune system in the world could withstand these kinds of attacks,” he noted.

Such 'worsening' would materialize if rich economies –Europe, United States, the developed countries– dip into recession once again, de la Torre said. Under this scenario a US slowdown would have a larger impact on its close trade partners, including Mexico, the Caribbean and Central America. Economies linked to China –essentially those in South America– would sustain a lesser impact, provided the Asian giant continues its current high growth trend.

This week global markets experienced a confidence rollercoaster that wiped out more than US$3.8 trillion in investors’ holdings, forcing them to flee to safe havens such as Swiss francs, Japanese yen and gold. Latin American stock markets also zigzagged in this uncertainty, with their main indexes dropping an average of 7 to 8 percent, and then gaining around 5 percent in strong rallies.

Global markets calmed somewhat after the US Federal Reserve’s decision to maintain a very low interest rate --near zero percent- for the next two years. Experts attribute the global market turmoil to a loss of investor confidence following the US credit rating downgrade and Europe’s financial woes.

De la Torre is confident that, should a crisis develop, Latin America’s outlook will remain positive mirroring its resilience to the previous recession, when the region had a positive performance thanks to high commodity prices and its increasing trade with China. “Latin America could absorb the financial shocks from the global turmoil through greater exchange rate flexibility, maintaining reasonable growth rates,” he said. The World Bank’s most recent estimates suggest an annualized growth rate of around 4 percent for most regional economies, with the exception of the Caribbean.

Protecting the Poor and Vulnerable

Mindful of potential ravaging effects of economic downturns on the poor, de la Torre noted that in the last decade 60 million Latin Americans were lifted out of poverty thanks to strong social protection networks set up by most countries in the region. “We believe that if the situation worsens the most vulnerable will be shielded, in part thanks to the existence of these structures,” he said.

In the short term, the global economic outlook remains uncertain, the expert said. Calm would only return once investors feel again confident that rich countries –the US, Europe– have the capacity to implement public policies to confront their economic growth problems.