Sunday, November 23, 2008

Latin America and the Financial Crisis

. Sunday, November 23, 2008

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.

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.
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?

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. 


Anonymous said...
This comment has been removed by a blog administrator.
Kindred Winecoff said...

Alex -

the above comment is spam. you probably want to delete it.

off-the-cuff non-snarky questions: i wonder if the previous Latin American debt crises, and ensuing reforms, made that continent better off in this crisis. also, i wonder if the rise of the export sectors in some L.A. countries (e.g. Brazil) has led to current account surpluses that have helped provide stability to the currencies. finally, perhaps the fact that the banking/financial sectors are smaller in L.A. relative to U.S./Europe is driving the stability there.

perhaps some topics you might want to look into. i'd be interested to hear the result.

Latin America and the Financial Crisis
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