IMFSurvey Magazine: Countries & Regions
Improved Policies Seen Helping Latin America in Crisis
IMF Survey online
November 24, 2008
- Financial crisis is "stress test" of Latin America's improved policies
- Capital flows, remittances, among the contagion channels
- Significant differences among countries in policy elbowroom
Although Latin America will not be immune to the financial crisis, many countries in the region are likely to ride out the storm better than previously because they now have stronger economic policies in place, according to Nicolas Eyzaguirre, the new Director of the IMF's Western Hemisphere Department.
Speaking in the Dominican Republic, the former Finance Minister of Chile took a broad look at the causes of the world financial crisis and the global economic slowdown. He said the crisis was already having an impact on Latin America and the Caribbean in a number of ways. These included reduced capital inflows, lower prices for the region's commodity exports, and lower levels of worker remittances, particularly to Central America.
He said the crisis posed a serious challenge for Latin America. "We are seeing now a real-life "stress test" of the progress that countries of the region have made in terms of building resilience," said Eyzaguirre in his first speech since his appointment as the Director of the IMF's Western Hemisphere Department. He officially took up his post on November 24.
At the November 22 seminar, "The Emerging Global Financial Order: A Regional Perspective," he gave two examples of the better policies now being pursued by Latin American countries compared with during previous crises:
• Many Latin American countries have brought down inflation in a credible manner, and adopted more flexible exchange rates while at the same time reducing their balance sheet exposure to currency depreciation.
• Public debt ratios have also come down in many countries—although in some cases not as far as might have been possible at a time when soaring commodity export prices boosted government revenue
The seminar was convened by Dominican Republic President Leonel Fernandez. Financier and philanthropist George Soros and Nobel Prize-winning economist Joseph Stiglitz also participated in the panel.
Eyzaguirre emphasized that different countries in the region would be affected by the global crisis in a variety of ways. But, in its latest forecast, the IMF still expects positive growth in Latin America next year. Indeed, it was notable that many nations in Latin America were doing better than some emerging market countries in other parts of the world.
Within Latin America and the Caribbean, countries differ in the room they have available for policy maneuver. "I believe that the current crisis will remind us of the value of avoiding procyclical fiscal expenditure patterns," Eyzaguirre said. He reminded the audience of the importance of protecting the poor in the current environment. "I would stress also the importance of social safety nets. A number of countries in the region have made progress in this area in recent years—now is the time to strengthen protection of the most vulnerable."
With respect to advanced countries, where the financial crisis originated, Eyzaguirre pointed out that the initial "piecemeal approach" had been abandoned in favor of a comprehensive one, most importantly using the public sector balance sheet to recapitalize financial institutions. He also noted that policy coordination across countries, that had sometimes been inadequate, had improved recently.
In addition, he said that there was broad agreement that new monetary and fiscal policy initiatives are needed. With respect to the latter, analysis by the IMF suggests that global fiscal stimulus of about 2 percent of GDP is justified. Such a stimulus is considered imperative in order to sustain global demand and output.
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