Many of you are well aware of the popular phrase, "When America sneezes, the rest of the world catches a cold." This was especially true for Latin America, when any small sniffle used to send ripple effects throughout the region.
However, why is it that this time around,
not a single bank or financial institution [has gone] bust in the region while the United States and Europe [have] faced [the] collapse of companies and banks with turnover of more than that of the GDP of many of the Latin American countries.This is truly a very interesting puzzle. Was the decoupling theory partially right, in that certain regions, rather than the entire world, is no longer completely at the whim of the American business cycle?
None of the Latin American countries have gone to the IMF for rescue, even as some East Europen countries have done so. While Iceland, situated far from the epicenter (USA) of the financial earthquake collapsed and had to seek rescue from Russia, none of the Latin American countries, which are in the proximity of the earthquake zone have suffered serious damage. There has been no panic summit meetings or rescue packages or nationalization of banks in Latin America.
From the UN Economic Commission for Latin America comes the finding that:
Compared to previous shocks in the United States economy and the world at large, Latin America and the Caribbean(LAC) is much less vulnerable than in the past, with a current account surplus, sounder public finances, a lower level and better profiles of public and external debt, and larger international financial reserves. Considering the severity of the global shocks, LAC economies are, on average, weathering the crisis significantly better than in the past.Has Latin America simply insulated itself from external shocks by amassing large amounts of reserves, lowering their debt levels, and implementing sound fiscal and monetary policies? Has the financial crises simply not reached Latin America yet? Has Latin America finally emerged from the Lost Decades (1970-2000)? Over the next few weeks, these are some of the questions I will explore, in a special series on Latin America and the Financial Crisis.