WASHINGTON DC, United States — Latin America and the Caribbean (LAC) cushioned the social impact of the global crisis of 2008 relatively well largely due to its ability to inter-connect with emerging markets in Asia, more notably China and India.

According to a World Bank report released earlier this week entitled, Globalized, Resilient, Dynamic: The New Face of Latin America and the Caribbean, authored by the World Bank’s Chief Economist for LAC, Augusto de la Torre, the region’s connection to Asia has led to growth of between five to six per cent for this year and with a minimum of four per cent at the very least expected for 2011.

The World Bank economist pays particular attention to the region’s capacity to withstand the impact of the crisis with its social protection networks holding up remarkably well. He attributes this ” to the region’s sound macroeconomic, fiscal and financial policies”.

Falling poverty rates

Poverty has been suppressed with the World Bank’s initial estimates that more people would join the ranks of the poor, proving unfounded. Poverty and unemployment responses to the 2009 economic downturn were much milder than initially anticipated.

Between 2002 and 2008, the region managed to lift some 60 million people out of poverty while 10 million people were expected to enter moderate poverty for that year (estimates based on historical coefficients). In fact, only 2.1 million people joined the ranks of the poor (actual data). Moderate poverty is determined by those living on US$4 a day while those in extreme poverty live on US$2.5 a day. There are now 163 million people in the region living in moderate poverty and 86 million in extreme poverty according to the World Bank report.

This year the LAC region was able to reverse the temporary increase in poverty levels. New estimates indicate that seven million people will leave poverty behind and six million more will be pulled out of extreme poverty allowing the region to return to pre-crisis levels as a result of the capacity and speed with which governments reacted and applied measures to mitigate the social impact of the crisis.

Resilient labour market

Fall in unemployment numbers also brought good news. Last year 3.5 million people were predicted to join the unemployed. Instead only about two million did in fact add to the unemployed numbers of the region. De la Torre pointed out that the rise of unemployment in LAC was less than in other regions such as Europe and Central Asia, and was slightly above the numbers registered by the “Asian tigers”.

So how did the region manage to fare so well?

According to de la Torre, LAC’s resilience to the crisis — meaning its capacity to withstand the initial external shock, to achieve a speedy and solid recovery, and to apply countercyclical policies in good and bad times — reflects the continuous progress regional countries have made in the last decades toward strengthening the macro-financial system’s immunity.

Caribbean still in shock

But this ability to absorb the impact is not uniform across every country of the region. The Caribbean has paid a terrible price and continues to suffer from the impact. This is due in part to its heavy reliance on tourism and its inability to find and trade with new partners together with its high debt to GDP ratios. It is undoubtedly the case that the Latin American countries more particularly, Brazil, Chile, Colombia, Peru, Mexico and Argentina have benefited from sound fiscal management and net export inflows.

“The region’s resiliency is due in part to the fact that countries more fully integrated into the global financial markets — Argentina, Brazil, Colombia, Mexico, Peru (LAC-6) and Uruguay — were able to negotiate the crisis despite having been more exposed to the financial shock. This is a silent revolution whereby Latin America created a type of financial management that does not amplify the shock, rather, it mitigates it,” said de la Torre.

He went on to surmise that the resilience being exhibited is also due to the growing links between LAC and emerging nations in Asia and China. This is more so with many South American countries as well as both Costa Rica and Panama.

de la Torre explained: “Many of these economies have become an engine for growth in the region, not only because of the direct links created by the growing demand for agricultural and mineral commodities, but also indirectly, due to the impact China has on international commodity markets for products that abound in LAC.”

Going Forward

The World Bank report concluded: “Going forward, however, there is no room for complacency. Although LAC’s improved immune systems passed the test this time, the continued resilience of countries in the region is not a foregone conclusion. At present, monetary policy in most of LAC is overburdened — it is expected to deal with the multi-faceted complexity associated with surging capital inflows and commodity price buoyancy single-handedly, without help from fiscal policy and without suitable macro-prudential tools.

“The region therefore needs to start addressing the issue of resiliency in good times in earnest, significantly rebalancing the policy mix. The stimulus implemented during the crisis should be withdrawn and fiscal and financial buffers should be rebuilt. A more pro-active stance should be taken in LAC by increasing public savings, particularly in commodity exporting countries.

“Moreover, it has become even more urgent for LAC countries to develop a suitable menu of macro-prudential instruments that can complement monetary policy, helping ensure that the current surge in capital inflows does not mutate into domestic financial excesses.”