Why Did Latin America Do Better in This Crisis? The Benefits of Being Prepared

By Nicolás Eyzaguirre

(Version en español)

Although this time the external shocks were very strong in this year of global crisis, the Latin American and Caribbean (LAC) region has performed notably better than in the past, and also better than many other emerging market countries.

This improvement can be attributed to the fact that the region faced the crisis equipped with economic policy frameworks that were more solid and credible than in the past, and with smaller financial, external, and fiscal vulnerabilities. This allowed a number of countries of the region to implement countercyclical monetary and fiscal policies.

Figure 1 shows a measure of the benefits that this better preparation has brought. It compares the fall in average growth of GDP actually observed in Brazil, Chile, Colombia, Mexico, and Peru (solid line) with our best estimate of the decline that would have occurred if their policy frameworks and vulnerabilities had not been changed (dashed line). The estimates here suggest that these countries were able to “save” about 4 percentage points of GDP during the crisis, thanks to their better preparations for confronting external shocks.

Eyzaguirre1021Ch1

Figure 2 shows that various countries of the region had the room or “space” to apply countercyclical fiscal and monetary policies during this crisis. The figure depicts changes in interest rates (vertical axis) and in fiscal deficits (horizontal axis) for each country of the LAC region, where the colors group countries according to certain general characteristics and the diameter of the circles represent the relative size of each economy.

The countries with more credibility in the management of their monetary and fiscal policies were able to lower their interest rates and simultaneously to increase their public expenditure and fiscal deficits (these are the green circles, corresponding to Brazil, Chile, Colombia, Mexico, and Peru). Key to this outcome was that these countries had saved part of their revenue gains during the “bonanza” years of rising prices of their commodity exports.

Eyzaguirre102109Ch2

In our next note we will look at the differing impacts of commodity price developments on countries of the  region. More details on these topics can be found in the October 2009 edition of Regional Economic Outlook: Latin America and the Caribbean, available this Friday, October 23.

 

One Response

  1. [...] at the IMF are looking at why Latin America fared better in this crisis than during previous episodes of financial duress. Their [...]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 805 other followers

%d bloggers like this: