Western Hemisphere Region

Shifting Winds, New Policy Challenges

October 2011

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Despite the recent deterioration in the global economic environment, projections for the region involve only a modest worsening of the outlook. The October 2011 Regional Economic Outlook: Western Hemisphere cautions, however, that there are severe downside risks. A sharp slowdown in Asia, for example in response to a recession in advanced economies, could impact commodity prices, with negative effects on Latin American commodity exporters. With global monetary policy likely to remain accommodative, capital flows could exacerbate overheating and amplify vulnerabilities in emerging markets. Countries with strong real linkages to the United States face a somewhat weaker outlook and should give priority to reducing public debt. Although much of the Caribbean is recovering from a prolonged recession, the outlook remains constrained by high public debt and weak tourism flows. This issue finds that policies can play an important role in mitigating the economic impact of terms-of-trade shocks, and underscores the need to rebuild policy buffers.

Video: IMF says Latin America Navigating Shifting Winds

Executive Summary
1.   Global, U.S., and Canadian Outlook and Challenges
  1.1.  Global Outlook: Slowing Growth with Dominant Downside Risks
    Policy Options: Rebalancing Demand
  1.2. United States: A Tough Balancing Act
    U.S. Policy Options
  1.3. Canada: A Slowing Recovery
    Canada Policy Options
  1.4. Implications for Latin America and the Caribbean
2.   Outlook and Policy Issues for Latin America and the Caribbean
  2.1. Overview
  2.2. Policy Challenges
    South America: Financial Integrated Commodity Exporters—Guarding against Overheating
    South America: Less Financially Integrated Commodity Exporters—Avoiding Procyclicality
    Mexico and Central America: More Headwinds to Growth
    The Caribbean: Repairing Sovereign and Financial Balance Sheets
  2.3. How Tight Are Labor Markets in Inflation-Targeting Countries?
    Estimating the Nonaccelerating Inflation Rate of Unemployment
    Policy Implications
  2.4. Effectiveness of Macroprudential Policies
    Cross-Country Analysis
    Sectoral Evidence
    Policy Implications
  2.5. Fiscal Consolidation Challenges in Tourism-Intensive Economies
3.   Commodity Price Cycles: The Perils of Mismanaging the Boom
  3.1. Introduction
  3.2. A Historical Perspective on Commodity Prices
  3.3. How Commodity Dependent is Latin America?
  3.4. What Explains Economic Performance in the Face of Terms-of-Trade Busts?
    Cross-Sectional Approach
    A Panel Approach
  3.5. Key Takeaways and Policy Implications
Annex 3.1. Additional Figures
Annex 3.2. Cross-Sectional Approach: List of Explanatory and Control Variables
Western Hemisphere: Selected Economic and Social Indicators, 2005–11
Western Hemisphere: Main Economic Indicators, October 2011
Latin America and the Caribbean: Main Fiscal Indicators, October 2011
New Publications from the Western Hemisphere Department, January 2010–August 2011
  1.1. U.S. Housing and Labor Markets: Headwinds to Recovery
  1.2. U.S. Financial Exposure to Europe
  1.3. Budget Institutions for U.S. Fiscal Consolidation
  2.1. Latin America: Banking Sector Spillovers from the European Crisis
  2.2. Latin America: Fiscal Adjustment with Social Cohesion
  2.3. Rule-Based Fiscal Frameworks for Latin America
  2.4. Challenges for Financial Regulation and Supervision in Latin America
  2.5. Recent Sovereign Debt Restructurings in Latin America and the Caribbean
  3.1. U.S. Monetary Policy and Commodity Prices
  3.2. Latin America’s Commodity Dependence and Export Diversification: Selected Cases
  3.3. Export- or Import-Induced Terms-of-Trade Shocks: Are They Different?
  3.4. The Cost of Mismanaging Abundance