The decade ahead: a chance for the 'Latin Jaguars'

Dr Pamela Cox, Guest Writer

A year ago, in the aftermath of the worst recession in 80 years, I was optimistic about Latin America's significant economic transformation.

For the first time ever, an international financial crisis had not thrown the region into a tailspin. Many countries not only survived the crisis but were recovering stronger and faster than many other regions. You could even say they were roaring out of recession.

At the time I did warn that World Bank projections indicated that the crisis could push eight million Latin Americans back into poverty, threatening important social gains such as the first reduction of inequality in 30 years.

The good news is that we were wrong. In 2009, the ranks of the poor increased by far less - 2.1 million. Moreover, the ranks of the unemployed grew by 2 million, less than our predictions of 3.5 to 5 million. Now we predict that these deficits will be absorbed by next year.

Growth rates for the largest countries in the region reveal an even more significant surprise. Mexico, Colombia, Peru, Argentina, Chile, Brazil and Uruguay will grow more than five percentage points this year, well above forecasted levels.

Many thought, based on past performance, that nations more open to trade and international finance would suffer a more severe collapse. But that, too, wasn't the case. These countries demonstrated a new resilience and proved that the risks of globalisation depend on how safely a nation integrates into international markets.

Indeed, by next year, the region's economic activity will have wiped out any traces of the crisis. After experiencing a mere three-month recession, Brazil will lead the pack with its incredible recovery capability.

How did this happen? How did the region break with the patterns of past?

The short answer is that the region underwent a "silent revolution" in the years prior to the crisis. It was part of a steady progress initiated two decades ago.

It was a revolution of sound macroeconomic and financial policies, coupled with an emphasis in social impact. The monetary, fiscal and banking policies adopted in recent years did nothing less than change the variables that used to amplify shocks into variables that diminished them. Currencies were strong enough to absorb greater stress. Governments had fiscal room to pursue countercyclical spending to help those who needed it most. And banking systems had enough liquidity and capital reserves to keep functioning.

The region had also transformed itself from a net debtor to a net creditor. This means inflows to the region are no longer a function of more debt but, just as with the Asian tigers, the product of more direct investment.

Finally, the region's diversifi-cation of its export markets helped soften the blow from a crisis that originated in what used to be its top, if not only, customer, the United States. Thanks to significant new links to Asia, particularly China, most countries in the region bounced back when commodity prices rebounded at the beginning of 2009.

They were also helped by foreign investors who quickly recovered their appetite for investment and who began looking to emerging markets, including several in Latin America. This has led to a surge in capital inflows that will likely contribute to robust growth in the next few years.

This new situation is much better than it could have been, without a doubt, but it still has its challenges.

In particular, Latin America now must avoid the financial excesses that caused developed nations to trigger the recent recession. Ironically, countries traditionally on the periphery of the global economy behave now as one would expect the centre would; while rich countries, and especially some European economies, are facing the challenges of economic stagnation and even debt default that were the trademark of the periphery.

Fortunately, most Latin American central bankers can be trusted to act credibly and professionally. Their task, to control inflation without affecting competitiveness in the midst of currency appreciation, is challenging but one that could be eased if their governments adopt more balanced fiscal policies that contribute to a sustainable growth pattern.

Latin American economies have come a long way in an advance reminiscent of the Asian tigers. We have just begun to hear them roar, but they will need to do it long into the post-crisis before we can safely declare them the Latin American jaguars.

Pamela Cox is the World Bank's vice-president for Latin America and the Caribbean.

ghoad@worldbank.org