Latin America’s Progress
What the global financial crisis has demonstrated.


There are two Latin Americas. The first is a region of widespread poverty, crime, and corruption, where drug gangs wreak havoc and left-wing populists rail against Uncle Sam. This is the Latin America that generates sensational and provocative headlines — the Latin America of Joaquín “El Chapo” Guzmán, the most-wanted drug baron in Mexico (who checks in at #701 on the latest Forbes list of the world’s richest people), and Hugo Chávez, the thuggish Venezuelan president who has formed an alliance with Iran and aided Colombian narcoterrorists. It is a Latin America that seems overrun with violence and paralyzed by its own history.

But there is another Latin America: a region where national governments have significantly improved their fiscal and monetary policies. Where they have slashed their public debt, boosted their stock of foreign reserves, and tamed inflation. Where both small and large nations have aggressively pursued trade liberalization. And where, with the crucial support of market-friendly social democrats, a broad macroeconomic consensus is emerging.

In its latest “Regional Economic Outlook” for the Western Hemisphere, the International Monetary Fund (IMF) affirms that many Latin American countries “have made strides in strengthening fiscal positions and public debt structures, solidifying financial systems and their regulation, anchoring inflation expectations, and building more credible policy frameworks.” To be sure, not all the countries in Latin America have made progress — some have regressed — and the entire region is now coping with severe external shocks stemming from the global financial crisis. But Latin America as a whole is far better equipped to withstand such shocks today than it was in years past. The difference is “night and day,” says Alberto Ramos, senior economist for Latin America at Goldman Sachs.

The IMF points to five countries — Brazil, Chile, Colombia, Mexico, and Peru — which together represent two-thirds of the GDP of Latin America and the Caribbean (LAC). These countries have all become less sensitive to outside shocks, whether those shocks affect global demand, external financial conditions, or commodity prices. This reduced sensitivity is largely a function of policy improvements.

At a recent Brookings Institution event, former Chilean finance minister Nicolás Eyzaguirre, now head of the IMF’s Western Hemisphere Department, said that Latin America’s progress was an “earned outcome” and not simply the result of good luck. Since the global financial meltdown began, he noted, not a single Latin American country has suffered a domestic banking crisis. The region has achieved a newfound exchange-rate stability, which, as economist Liliana Rojas-Suarez pointed out, has enabled Latin officials to keep interest rates low and conduct countercyclical monetary policy, rather than (as they often did during previous recessions) hike interest rates to defend overvalued exchange rates. Rojas-Suarez, a senior fellow at the Center for Global Development, agreed that Latin America’s demonstrated resilience “is related to policy choices made before the crisis.” As the IMF observes, the region’s financial systems “are much better prepared and more resilient than in the past because earlier weaknesses, such as exposure to currency depreciation or reliance on external financing, have been greatly reduced, and important capital buffers have been built.”

None of this is meant to diminish the challenges Latin America is facing. The IMF reckons that economic output in the LAC region will decline by 1.5 percent in 2009, after expanding by 4.2 percent in 2008 and by 5.7 percent in both 2007 and 2006. The downturn will be especially harsh in poor countries that rely heavily on remittances (Central America) and tourism (the Caribbean). Mexico is among the wealthiest Latin countries, but its economy is deeply entwined with the U.S. economy, and has therefore plunged into a particularly nasty recession. The Mexican economy depends considerably on remittances and tourism, but also on oil prices, U.S. demand, U.S. manufacturing activity, and direct investment from U.S. corporations. The IMF projects that it will shrink by 3.7 percent this year.


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