Volume 44, Number 175,
October-December 2013
The Implications of the Global Financial
and Economic Crisis in Latin America
Susana Nudelsman
Weaknesses of the Region

The region also exhibits major weaknesses. The first is related to the fact that the region is dependent on raw materials. The super-cycles of raw materials are not a novel phenomenon in the history of the region, and in fact, South America in particular has benefited from the boom of these products. Even so, the issue of dependency poses serious questions.

It is unclear if raw materials constitute a threat or an opportunity, although many high-income countries were developed through the exploitation of their natural resources. Still, the theory of the curse of natural resources cannot be ignored. There are a variety of questions surrounding the abundance of natural resources. Proper management of the quantity of primary goods available requires turning natural capital into other forms of wealth, which also requires effective handling of macroeconomic policy and improving the competitiveness of economies dependent on natural resources. Reality has shown that a large proportion of income from natural resources is merely consumed, rather than invested. There is a special challenge in applying fiscal policy capable of managing short-term cycles and maintaining real wealth in the longer term as well. Three aspects are deserving of attention: the diversification of fiscal revenue, support for diversification of the tradable sector and equitable distribution in a synchronic and diachronic manner (De la Torre, 2011).

A second weakness is related to the risks that vast capital inflows could bring to the region, which could include both macro and microeconomic aspects and even toxic interactions between the two. A particularly significant risk is that of overheating, which refers to an excess of demand for local goods and financial assets that could lead to strong currency appreciation, inflation in consumer prices, and most importantly, an increase in the price of non-tradable goods and local assets with restricted supply. This overheating could conceal serious macroeconomic risks. Although a constant increase in the inflow of capital may also be favorable for the region, a significant and sudden increase in this inflow could lead to a series of potential adjustments. Capital inflow levels could stay the same, fall or even suddenly be withdrawn, generating great uncertainty for the economies of the region (idb, 2011).

Regulating capital flows may be the proper macroeconomic tool to implement by addressing the origin of cycles of expansion and contraction: unstable capital flows. These regulations would provide a margin for maneuver and act during periods of boom by applying prudent monetary policy with lower pressure. The effectiveness of this tool lies in its capacity to ameliorate or eliminate the quasi-fiscal costs of the sterilized accumulation of currency. Likewise, on the other extreme of the cycle, where there are dominant external restrictions, they may provide a margin for applying expansive monetary and fiscal policy (Ffrench Davis, 2008).

Finally, dependency on European banks is no less important, as the subsidiaries of these foreign banks in Latin America play a key role in financial intermediation. If the situation in Europe does not become too severe, the process of deleveraging European banks may occur rapidly. However, if the situation worsens, they could transmit their vulnerability to Latin America, either through direct or indirect channels. The former would include cross-border loans and the presence of their banks in the region. Although the majority of foreign banks are locally anchored, deleveraging could have negative repercussions on the region by restricting capital and loans. Indirect channels are also important, as the international banking structure is extremely intricate and exposure may not be derived only from direct loan relations, but rather also from connections with banks that lend to countries or institutions in crisis (idb, 2012).

Figure 6. Shares of Capital Inflow (% of Total Inflow to Emerging Economies)

Source: imf, World Economic Outlook and International Financial Statistics,
“Latin America Excludes the Bahamas,” in El Mundo de los senderos que se bifurcan
América Latina y el Caribe ante los riesgos ecnómicos globales, idb, 2011.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 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,
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