Working Paper

Rodrigo Delgado Aguilera and Vanessa Rossi
  • Latin America and the Caribbean are currently seeing severe collateral damage to their economies owing to the impact of the global downturn. Although this comes after the longest period of sustained growth since the 1970s, one which has left previously crisis-prone countries with stronger economic credentials than before, forecasts by the major international institutions (IMF, World Bank, ECLAC) are likely underestimating the scale of the local crisis in 2009.
  • The region has primarily suffered as a result of the slump in demand in the industrialized economies, and the subsequent weakening in trade and commodity prices. This has been compounded by the losses in capital and income flows and the tightening of international credit. Regional currencies also witnessed severe devaluations last year although many have recovered some of the lost ground.
  • The impact of the crisis will be particularly severe for the most vulnerable sectors of the population, many of which might be pushed deeper into poverty or unemployment, reversing the gains made during the growth period.
  • However, the macroeconomic lessons gained as a result of previous crises have secured unprecedented fiscal discipline and monetary credibility, leading to the accumulation of foreign reserves and a reduction in the debt burden. This, in turn, has been reflected in upgrading by credit rating agencies and lower country risk premia, which have increased only slightly over the last year, comparing favourably with previous bouts of instability.
  • These factors should help the region to cope with global turbulence and local recession, making it likely to emerge ready for a robust recovery once growth picks up in the industrialized economies. Nevertheless, while medium term prospects appear bright, fundamental concerns remain regarding the region's long-run economic performance, specifically the need for more balanced growth and the alleviation of poverty and social inequalities.