Volume 44, Number 175,
October-December 2013
The Implications of the Global Financial
and Economic Crisis in Latin America
Susana Nudelsman
Good Luck or Good Policies?

Following a series of disruptive crises, Latin American nations experienced unusual prosperity from 2003-2007. These countries also saw the most significant economic growth since the post-war boom that ended around the mid-1960s. This growth was a result of a combination of four factors: high prices for raw materials, thriving international commerce, extraordinary financial conditions and high levels of remittances. The history of Latin America reveals that these factors had not co-existed in the region before (Ocampo, 2009).

The response of Latin American countries to the recent global crisis has given rise to various interpretations. The region, or more precisely, GrupLAC 7 (Latin American and Caribbean Group), which includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela and together constitute 91% of the regional gdp, went into the crisis with stronger conditions than in previous crises. Low levels of inflation, surpluses in external and fiscal accounts, healthy banking systems, significant international reserves and more flexible currency systems were all factors that strengthened the region. This situation allowed the economies to respond to the global crisis with anti-cyclical policies, which is different from how these economies responded to previous episodes. However, the most distinctive feature of the recent crisis lies in the strength derived from international assistance. On this occasion, the assistance provided was widespread, timely, unconditional and meant to be preventive, which is a novel approach, given that in the past, assistance had been limited, slow, conditional and not preventive. Although the institutionalization of a lender of last resort on the global scale has yet to fully solidify, actions taken by the international community all point in this direction (idb, 2010).

Ocampo (2011) takes a more critical approach to the GrupLAC 7, ascertaining that with a few exceptions, the greater margin for applying anti-cyclical monetary and credit policies in the midst of the crisis cannot be explained by improved policies implemented in the years of prosperity. Rather, this margin came from the accumulation of reserves and a reduction in external debt levels, which are the greatest legacy of the prosperous years. Obviously, the exceptional external boom is no stranger to these facts. On average, external and fiscal accounts tended to be pro-cyclical in the years of prosperity. Current accounts adjusted for the terms of exchange show a strong deterioration in those years. This pattern was verified in the majority of GrupLAC 7 countries, which implies that they spent revenue derived from favorable terms of exchange. A strong adjustment later on the order of around 2% took place in 2009. Likewise, favorable fiscal balances reflect exceptional revenue derived from high prices of raw material, where Chile and Peru were the only nations in the GrupLAC 7 to apply real anti-cyclical policy in the years of prosperity. In 2009, public spending as a percentage of gdp in the GrupLAC 7 continued to grow, reflecting an increase in spending but also a fall in the gross domestic product.

Katz (2009) wrote that even though "all that glitters is not gold," the macroeconomic policies of the majority of countries in the region tended to be more prudent. Although fiscal revenue and the resulting surplus of the external sector were favored due to exceptional external conditions resulting from high prices of raw materials that were exported, it is also true that a significant portion of economic performance was in response to a greater government commitment to seeking stronger macroeconomic policy. The fundamental tools in the performance of the countries of this region throughout the global collapse included more flexible exchange rates, lower fiscal deficits, greater financial regulation, a lower weight of external debt and greater international financial reserves. The improved macroeconomic policies implemented in the pre-crisis period allowed policymakers a greater degree of freedom to undertake anti-cyclical actions when the global crisis brought on adverse and unprecedented conditions for the economies of the region.

In summary, unlike what happened in past crises, the economies in the Latin American region dealt with external difficulties without widespread financial turmoil. At the beginning of 2009, gdps in these economies did fall. However, by the second half of the year, there was significant recovery, which consolidated and continued in 2010 and 2011. On the basis of more reasonable policies, the performance of these economies would indicate that policymakers and economic agents have learned from their experiences in past crises. Still, all of the nations must avoid falling into complacency and continue to persist in implementing prudent macroeconomic policies.

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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