Alicia Bárcena, Executive Secretary of ECLAC:
The Time for Latin America

Photo: Lorenzo Moscia/ECLAC

(Column published in El País, Spain, 25 July 2010)

One of the main characteristics of the global economic crisis and that has been key in the way it was manifest in Latin America and the Caribbean, is that the epicenter of the crisis was in the developed world as well as in the financial system. The banking system in Latin America did not collapse, mortgage loans continued their normal course, toxic assets did not become part of the day-to-day vocabulary and insurance companies were not short of breath.

Governments didn’t rush out, gripped by the panic, to save private banks and fiscal deficits have remained at levels reflecting great responsibility. Unlike previous crises, this time countries in the region were not part of the problem, but part of the solution, and have shown strong signs of fiscal responsibility, financial sobriety and concern for people.

The crisis impacted the region particularly during 2009, largely in four very important ways: a) a steep drop in trade, with volumes falling 13.5%; b) a drastic decrease in foreign direct investment (42%) after reaching record levels in 2008; c) a significant fall in the volume of remittances, around 10%; and d) declining prices of basic commodities (25%).

The economy was hurt by all of this and shrunk 1.9% in 2009. Unemployment and the informal economy spread and poverty, which had dropped 11 points between 2002 and 2008, went up one percentage point last year.

But not all countries in the region suffered the effects of the crisis in the same way, and therefore, the avenues and pace of recovery have also differed.

The economies of South America rely on the export of basic commodities (oil, soya, copper, minerals), which recovered quickly after a period of low international prices. Economic activity in China and other Asian countries has spurred demand and the international prices of these products have risen in general.

In contrast, an important pillar of most Central American and the Mexican economies are their exports to the United States. Along with the Caribbean, they receive significant amounts of remittances from their migrants. For these countries, the negative effects have been greater and the pace of recovery is also expected to be slower.

In Europe, however, the measures adopted to contain the risk of losses, recover market confidence through guarantees and clean up portfolios with the government purchase of compromised assets converted private risk to an even greater risk of public debt. For this reason, the public finances of several European nations has deteriorated.

In other countries the expected deficit has prompted its own dynamics, so that even before the eclosion of the crisis, the projections of fiscal results pointed to a worsening of the problem. Furthermore, the doubts about the sustainability of the macroeconomic scenario deepened in those cases in which the fiscal deficit was coupled with a deficit in its foreign accounts. During the first quarter of 2010, international financial markets cast doubts on the capacity of some European countries to pay their public debt, reigniting the sensation of uncertainty with regard to the prompt recovery of the world economy.

The Economic Survey of Latin America and the Caribbean published by ECLAC this past July shows a vigorous recovery of the economies in the region so far this year.

Regionally, gross capital formation, private consumption and the export of goods and services are the most dynamic components of spending. Strong domestic demand, in terms of consumption and investment, spurred by the resumption of projects that were suspended during the crisis, as well as the recovery of agricultural production in several South American countries, have driven the regional economy to a 5.2% growth rate in 2010.

The Economic Survey also shows that trade gradually recovered as of mid-2009, with positive monthly rates, a trend that has been reinforced in 2010. In addition, the prices of basic commodities have risen, leading to an estimated 7.1% average increase in the terms of trade for the region this year.

Tourism in Central America and the Caribbean is estimated to grow 7.5% and 3.8%, respectively, and remittances are expected to pick up strongly. Despite the turbulence caused by the European crisis, the region continues to experience favourable conditions of external financing and improvements in its risk indicators.