Transcript LUSTIG-Presentation

The Financial Crisis and
its Impact on Latin
America
LASA Workshop on the Crisis and its
Impact on Latin America
October 6, 2010
Nora Lustig
Samuel Z. Stone Professor of Latin American
Economics
Tulane University
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1.
What was the economic performance of the
region before the financial crisis?
2.
Where does Latin America stand today and
where is it headed?
3.
How will the crisis affect living standards?
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1. Economic Growth in LA Before the
Crisis was Robust: 5.3 % a yr. 2002-07
(Source: CEPAL)
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Economic Growth in LA Before the
Crisis was Robust
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2. What were the expectations
and what happened?
 Two
Phases of Financial Crisis
(Izquierdo and Talvi, 2008)

First Phase: mid-2007 until mid-2008

Second Phase: mid-2008 until ….
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Phase 1 (cont.)


Conventional wisdom in early 2008:
 Latin America is in a much better position to
withstand the external shock: prudent fiscal
policy, sound banking system, low indebtedness
and large amounts of international reserves.
Problem:
 Growth was highly linked to the boom in
commodity prices and part of this boom was the
result of the policies pursued to tackle with the
financial crisis. In particular, with lower interest
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rates in the US.
Phase 2: From mid-2008 Onwards

Realization that:
 Financial system in advanced countries facing solvency
issues
 Advanced countries in deeper recession than anticipated
 Emerging economies would face growth slow down. No
decoupling
 Post-Lehman collapse led to global credit market freeze

As a result:
 Massive redemptions
 Flight to quality
 Demand for dollar/US Treasuries sky-rocket
 => commodity price, foreign currencies, foreign
stock markets simultaneously fell
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 =>dollar appreciated
Phase 2: From mid-2008 onwards:
Biggest fears:
 Deep
and protracted global
recession
 Deflation
 For LAC: Adverse external shocks
for commodity exporters but also for
economies relying on exports to US,
remittances, tourism and external
capital flows
(Sources: IMF; Izquierdo and Talvi, Nov. 2008)
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Boom and Bust of Commodity Prices
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Latin America and the Caribbean:
Transmission Channels


Financial:
 Exchange rate volatility, private sector debt and risky
financial investments (Brazil, México)
 Lower access to international credit markets
 Capital outflows
Real economy:
 Lower exports, remittances and tourism
 Lower commodity prices: bad news for Mexico and
South America; good news for CA and Caribbean, but
insufficient to compensate for other negative factors
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3. Where does Latin America stand
today and where is it headed?

Growth for 2009 was negative but not as bad as some
anticipated.

Countries most affected not necessarily those
people were expecting


Argentina and Venezuela have been holding their ground
while…
…Mexico has been hit hard because of its close ties with
US economy through exports and capital flows.
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Real Impact of the Global Crisis:
Economic Activity
(Real GDP, annual variation)
Central America
LAC-7
(CAC-7)
Russian
Crisis
8%
Beginning of
the Boom
7%
Lehman’s
Bankruptcy
7%
Russian
Crisis
Beginning of
the
Boom
6%
6%
4.8%
5%
5%
4.4%
4%
4%
3%
3%
2%
2%
1%
0%
1%
-1%
0%
* Estimate. Source: JPMorgan and WEO
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia,
Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
CAC-7 is the simple average of Costa Rica, El Salvador, Guatemala, Honduras, Dominican Republic, Nicaragua and
2008
2009*
2007
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
-1%
1991
2009*
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-3%
2006
Lehman’s
Bankruptcy
-0.6%
-1.9%
2005
-2%
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LAC Currencies: Appreciation Followed by Sharp
Depreciation
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US-Mexico correlation of business
cycle in manufacturing sector
120%
15%
100%
Correlation
80%
10%
Mexico
60%
US
5%
40%
20%
0%
0%
-5%
Jun-08
Jun-07
Jun-06
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
Jun-98
Jun-97
Jun-96
Jun-95
-60%
Jun-94
-40%
Jun-93
-20%
-10%
-80%
-15%
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 For
the first time in decades, Latin
American economies got hurt mainly
due to adverse external shocks and not
because of poor domestic
macroeconomic policies.
 Adverse external shocks are also an
impediment to implement countercyclical fiscal policies.
 =>
Adjustment costs can be significant
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4. The Impact of the Crisis on Living
Standards







Unemployment
Real Wages
Remittances
Government monetary and in-kind
transfers
Poverty (tbc)
Inequality (tbc)
Other social indicators (tbc)
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Are Countries Ready to Mitigate the
Impact on the Poor?

Which countries introduced countercyclical safety nets and what kind?

Did they cover the universe of the affected
population?

Were transfers sufficiently large to
compensate for the income losses?
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Conditional Cash Transfers in LAC
(Source: Inter-American Development Bank, 2008)
Without program
Bahamas Haiti
Barbados Nicaragua
Belize
Suriname
Guyana
Pilot
Guatemala
Small scale
(<25% poor)
Costa Rica
El Salvador
Dominican Rep.
Medium & large
scale (>25%
poor)
Honduras
México
Uruguay
Paraguay
Bolivia
Trinidad y Tobago
Venezuela
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2
Jamaica
Panama
Argentina
Perú
Brasil
Colombia
Chile
Ecuador
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THANK YOU
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