Volume 44, Number 175,
October-December 2013
The Implications of the Global Financial
and Economic Crisis in Latin America
Susana Nudelsman
THE STRENGTHS AND WEAKNESSES OF LATIN AMERICA
The Current Global Economic Context

Following the global crisis, Latin America experienced significant recovery. In this case, the combination of internal factors, such as more prudent and reasonable macro-financial choices than in the past, together with external factors, such as a strong spike in the prices of raw materials for exportation and significant capital revenue, were of importance. The recovery varied among the economies of the region, but similar to developing economies, recovery exceeded that of advanced economies.

The current global economic context is one of uncertainty and complexity. On the one hand, it is clear that the major players of the developed world have shown unfavorable financial and economic indicators. These signs are severe in the Eurozone, not very strong in the United States, and hard to predict in China. Taken as a whole, these indicators could point to deceleration of emerging markets as a result of the commercial and financial linkages they share with the United States and the Eurozone (Roubini, 2012).

For Latin America, global risks have been reduced, at least in the short term. Economic policy in the United States and in the Eurozone has halted the threat of low global growth. Reacceleration of growth in China should raise raw material prices and exports from the region. Vast capital revenue and good conditions for external financing are favorable to the growth of internal demand. In the medium-term, these same factors could experience an unfortunate setback. The agenda for economic policymakers in the region must lie in strengthening economic fundamentals to broaden the fiscal-monetary space. Currency flexibility to mitigate external effects must continue while prudential financial supervision and regulation to limit system risk will also be a crucial policy instrument. The challenge of increasing productivity in the region is of no less importance either (imf, 2013).

Strengths of the Region

Beyond the external context, it is important to analyze the strengths and weaknesses of Latin America. One of its strength is the greater currency flexibility now present in many economies in the region. A variety of relatively new aspects in the regional scenario have allowed for greater flexibility of currency regimes to function efficiently. The partial de-dollarization of financial relations, a reduction in the fragility of domestic financial systems and greater opening of various economies in the region have all made it possible for greater currency flexibility to mitigate the effects of the external crisis. The depreciation of national currencies helped to balance external accounts while encouraging activities in the tradable sector and counteracting a trend towards falling internal production. Although vulnerability with respect to currency transactions fell in general, in some countries, the portfolios of local agents still showed a trend towards denationalization given sudden depreciations in the exchange rates. In these nations, the counterpart to expansion of economic activity was a decrease in liquidity and internal credit, brought on by a reduction in deposits in the domestic financial system (Katz, 2009).

In many cases, the fear of floating, or of significant currency fluctuations – which refers to the trend to intervene in the currency regimes of floating regimes to avoid sudden depreciation – was surpassed by the fear of appreciating, or the trend to intervene and depreciate or offset appreciation (Levy Yeyati and Sturzenegger, 2007). This type of intervention from economic authorities acknowledges two key factors. One, the boom in raw materials during the decade of the 2000s does not seem to have come to an end. Two, following the global crisis, capital inflows to emerging economies grew significantly.

A second strength has to do with improved financial regulation in various economies of the region. The recent global crisis gave rise to important lessons. Until recently, the role of monetary regimes consisted of ensuring price stability. Following the crisis, consensus grew with respect to the need for central banks to reinforce their objectives of financial stability by implementing regulatory instruments with a broader scope than they traditionally used. The application of a macroprudential approach to supervision and regulation of the financial system is crucial. This will allow better risk evaluation with broad coverage for all agents and their linkages with internal and external economic conditions as potential factors for systemic crisis. This new approach both differs from and complements the more traditional microprudential perspective of regulation. While the former focuses on limiting instabilities with systemic effects, the latter only seeks to limit episodes of tension in individual banks without the capacity to evaluate their effect on other entities or on the economy as a whole (Central Bank of the Republic of Argentina, 2009).


Figure 4. Evolution of Nominal Exchange Rates (USD index January 2004 = 100)


Source: Sebastián Katz Bloomberg, Ensayos Económicos, num. 53-54,
Central Bank of the Republic of Argentina.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 193, April-June 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Moritz Cruz. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: June 27th, 2018.
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