The road to recovery is shorter for Latin America than for other nations.
BY PAMELA COX
A year ago, things looked pretty gloomy in Latin America. World demand had taken a nose-dive, and exports from Latin America and the Caribbean had dropped more than a third in just six months.
More concretely, commodity prices had collapsed. A barrel of oil had gone from $147 per barrel in July 2008 to $42 in February 2009. Prices of soybeans, wheat and copper also dropped dramatically. For a region, where 90 percent of the population resides in net commodity exporter nations, the plunging prices were destined to take a toll.
In human terms, we calculate that the recession added about 10 million to the ranks of the poor and 2.5 million to the ranks of the unemployed in Latin America.
To make matters worse, remittances, while still resilient, have shown some decline. These flows had been known to be countercyclical and to grow in times of economic hardship, but this crisis was different. Because the epicenter was in rich countries, it affected industries with large concentrations of immigrant workers, thus reducing employment and remittance flows. Mexico, for example, suffered a 16 percent drop in remittances, from $25 billion to $21 billion between 2008 and 2009, though the depreciation of the peso softened the impact of this reduction in dollar remittances.
Overall, economic growth collapsed by more than 6 percent between 2007 and 2009. Some countries such as Argentina, Costa Rica and Mexico suffered a contraction in real gross domestic product of more than 10 percentage points.
In broad terms that is what the worst global recession in 80 years meant to the region. Now, let us consider what the worst global recession in 80 years did not mean.
Countries in the region felt nearly every international economic crisis in the recent past. The Asian and Russian crises of the 1990s, for instance, led to turbulence in domestic economies in Argentina, Brazil, Chile, Colombia, and Peru.
This time around, the global crisis spelled financial disaster elsewhere but not in the region. In Eastern Europe, for instance, the downturn triggered turbulence in banking systems and devaluation of local currencies. In Latin America there were no bank collapses and no debt defaults.
Having learned from past experiences, the region was in a much stronger macroeconomic and financial situation when the crisis hit – and it remains relatively strong as it comes out of the crisis. In 2010 public debt levels among the top seven countries in LAC are expected to be on average one third of debt levels in OECD countries. Also the region’s international reserves last month were more than three times what they were half a decade ago.
Thanks to sounder financial regulation and supervision, as well as improved monetary and fiscal policies, the region weathered the downturn much better than in the past and much better than other regions including Japan, Europe or the United States. Yes, the region did not come out unscathed from this crisis, but it is fundamentally less vulnerable today than it has been in modern economic history.
As such, we at the World Bank are convinced that the road to recovery is shorter for Latin America than for other nations.