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Through Dynamic Growth Latin America and the Caribbean Absorbed the Crisis' Social Impact

October 6, 2010

WASHINGTON, 6 October 2010 – Latin America and the Caribbean (LAC) cushioned the social impact of the 2008 global crisis thanks to its ability to inter-connect firmly with emerging markets in Asia which in turn boosted growth to 5-6 percent for 2010 -and at least 4 percent for 2011- while keeping in place the region’s social protection networks. 

According to “Globalized, Resilient, Dynamic: The New Face of Latin America and the Caribbean” a report authored by the World Bank’s Chief Economist for LAC, Augusto de la Torre, the region showed a remarkable capacity to withstand the crisis’ impact which –the report argues- did not last very long in comparison with other regions, including developed countries, “due to the region’s sound macroeconomic, fiscal and financial policies.”

Between 2002 and 2008, LAC managed to lift 60 million Latin Americans out of poverty, even as preliminary estimates showed the crisis adding 10 million people to the ranks of its poor. But according to new World Bank data, in 2009 the number of people living in moderate poverty ($4 per day) grew by 2.1 million with respect to 2008, totaling 168.3 million, while the number of Latin Americans living in extreme poverty ($2.5 per day) grew by 2.5 million, and now it reaches 85.9 million.

In 2010 LAC was able to reverse the temporary increase in poverty levels. New estimates indicate that 7 million people will leave poverty behind and 6 million more will be pulled out of extreme poverty allowing the region to return to pre-crisis levels as a result of governments’ capacity and speed to react and apply measures to mitigate the crisis’ social impact.

The labor market was also resilient. A year ago, forecasts indicated that 3.5 million people would lose their jobs, but recently released data for 2009 shows that the number of the region’s unemployed increased only by 2 million. The rise of unemployment in LAC was less than in other regions such as Europe and Central Asia (ECA), and was slightly above the number posted by the “Asian tigers”. 

LAC’s resilience to the crisis – including its capacity to withstand the initial external shock, to achieve a speedy and solid recovery, and to apply countercyclical policies in good and bad times – is a reflection of the progress countries have made in the last few decades towards strengthening the macro-financial system’s immunity, noted de la Torre in his presentation as part of the World Bank’s annual meetings.

He explained that the region’s newfound resilience draws on the quick recovery experienced by countries fully integrated into financial markets  -such as Argentina, Brazil, Chile, Colombia, Mexico and Peru (LAC-6), plus Uruguay-- despite being exposed to the crisis’ financial shock. “This is a silent revolution where Latin America has been able to create a financial management style that does not amplify the shock but, instead, mitigates it,” said de la Torre.

LAC’s growing links with emerging economies in Asia and China (especially South American countries, Costa Rica and Panama) have also contributed to making the region stronger, de la Torre noted. Such economies, mainly China’s, have become the region’s growth engine both as a direct result of growing demand for agriculture and mineral products, but also indirectly, as consequence of China’s growing leverage on international commodity markets for products that abound in LAC.

De la Torre explained that in the new millennium LAC has been moving toward a safer form of international financial integration where the region has become a net creditor to the rest of the world with regards to debt contracts, while significantly increasing its position as a net debtor of equity contracts, especially through foreign capital inflows which, at 12 percent, already exceed 2007’s historical record.

The Bank’s chief economist said that the recession phase in LAC’s economic cycle lasted between nine and eleven months but was, on average, shorter than in high-income economies. The region emerged in good shape from the crisis and in 2010 its Gross Domestic Product (GDP) will exceed 2008’s levels. Meanwhile, GDP in other regions such as ECA will be 1.7 percent smaller than before the crisis.

LAC’s resiliency during the recovery phase, has allowed some countries to restart growth at rates comparable to those of the Asian Tigers. Argentina, Brazil and Peru could grow around 7.5 percent this year; Uruguay and Paraguay, 6.1 percent (above the regional average); while Chile, Colombia, Dominican Republic, Mexico and Panama will experience robust growth at 4-5 percent.

In contrast with its recent past, the global crisis found LAC with the necessary fiscal space and credibility to implement countercyclical monetary and fiscal policies, allowing countries to partially mitigate the global shock. Some economies were capable not only of reducing nominal interest rates (especially those with inflation targets such as Brazil, Chile, Colombia, Mexico and Peru), but also of increasing public spending in real terms, which was mainly destined for social and infrastructure programs.

According to the report, factors that used to amplify external shocks – weak currencies, unsustainable fiscal processes, fragile banking systems, etc. – were reversed and on this occasion helped to mitigate the crisis’ impact. For the first time in decades, several countries in the region were able to implement strong countercyclical policies, particularly monetary policies. LAC countries avoided financial turmoil at home and are now leaving this crisis behind with favorable fiscal and debt situations.

Even though the immune systems of regional countries were able to navigate this crisis, it could not be guaranteed that they would respond in the same way in a new crisis Nevertheless, de la Torre warned.  Because of that –he said- the resilience of macroeconomic and financial frameworks cannot be established conclusively. 

LAC is not isolated from the global economy. Some of the risks confronting it are associated to the future of rich countries, which face a scenario of timid growth punctuated by uncertainty. The report points out that global macroeconomic policy coordination is important to minimize risks to the region and emerging countries.

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