core sector communique

Latin America and Caribbean Recover from Effects of Global Crisis, but Policy Challenges Remain, IMF Report Says

  

The global crisis had a substantial impact on the Latin American and the Caribbean (LAC) region, but the worst is over for most countries, and many economies have begun to recover, according to the International Monetary Fund (IMF) in its latest new Regional Economic Outlook – Western Hemisphere report, presented today in La Paz, Bolivia.

The report, entitled Crisis Averted – What’s Next?, looks at how LAC is recovering from the global recession, which drove up the cost of external financing for the region, and reduced exports, remittances and tourism receipts. Output for the region as a whole, after contracting by about 2½ percent this year, is expected to recover with growth of about 3 percent in 2010.

Bolivia weathered the crisis remarkably well and has the distinction of being the country with the highest growth rate in 2009, of at least 3%. “Bolivia was prudent in saving part of the windfall during the expansion period,” said Gilbert Terrier, Senior Advisor in the IMF’s Western Hemisphere Department. “That has allowed the country to apply a counter-cyclical fiscal policy in 2009, including more public investment to support internal demand and the social protection network.”

While the LAC region as a whole has done considerably better this year than in past global crises and recessions—and better than many economies in other regions—there are marked differences among countries. The near-term outlook for commodity-exporting countries, like Bolivia, is more favorable given the ongoing recovery of commodity prices.

Looking forward, LAC countries will face two key challenges. First, policies will need to adjust to a new global reality of lower growth over the medium term, as a return to pre-crisis growth rates is unlikely. In this context, policies will need to better prioritize public expenditures, provide conditions for domestic growth, and reduce poverty.

Second, the region will need to advance the reform agenda to improve further its resilience and preparation for future shocks. This should include enhanced fiscal policy frameworks, and financial regulation and supervision practices that incorporate the lessons learned from the recent financial crises in other regions. The benefits of implementing sounder policies in the recent past (which have allowed space for counter-cyclical policies) were confirmed by the region’s relatively good performance amid this year’s global turmoil.

“Bolivia has applied a correct macroeconomic policy. It’s accumulation of savings and reserves have allowed it to implement counter-cyclical policies. Towards the future, it will be important to protect this capacity to react to adverse external shocks, including with maintaining a sustainable fiscal policy. Additionally, the fight against poverty will require that a focused social policy be maintained and improvements in infrastructure,” Mr. Terrier said.

The Regional Economic Outlook explores the consequences and policy implications of the recent global crisis for the LAC region. Chapter 1 sets the global stage, emphasizing how developments in the United States and advanced economies will affect recovery in the region. Chapter 2 reviews the current state of regional economies and their outlook for 2009–10 and through the medium term, setting out key policy issues and recommendations. Chapter 3 then steps back to evaluate how well the region performed recently, from an international perspective, and compared with its performance in past episodes of global turmoil: together, these experiences point to an agenda for the region to further develop its policy frameworks and resilience to external shocks. Finally, Chapter 4 focuses on fiscal policy responses of LAC countries to the recent crisis, linking these to their precrisis conditions and policies and identifying priorities for developing fiscal policy frameworks in the years ahead.