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liberalization has helped to improve competitive
environments, though the region is still far too
dependent on natural resources (more a “curse”
than a “blessing”) for export earnings. While small
and concentrated, the region’s banking sector is
hardly exposed to the toxic assets associated with
the U.S. subprime crisis and has not invested
heavily in risky investments or complex derivatives.
Finally, most governments in the region
have taken steps to reduce the dollar component
of public sector debt, to fund more of the public
debt in local currency, and to issue debt at longer
maturities than had been the case in the past.
One need not argue, and I do not, that the
region has done all of its reform homework or that
its reform gains are solid and irreversible. Reforms
are of relatively recent vintage everywhere, and
backsliding has occurred in countries ranging from
Venezuela to Argentina, often accompanied by
anti-U.S. rhetoric. While Brazil has largely resisted
such pressures and is a star performer in terms of
growth, it has been resting on its oars in terms of
implementing deeper fiscal reforms as well as in
investing in energy, education, and health—the
long-term determinants of economic growth.
What More Can Be Done?
Four policy initiatives need to be considered
in Latin America for the region to reinforce the
levees against the rising waters.
First, fiscal policy plans for 2009 need to be
reexamined with the goal of adapting expenditures
downward (or reducing their planned growth) in
line with a likely deterioration in tax bases. Latin
American budgets, as experience has taught
us, can swiftly switch back into deficits as tax
revenues wither in a crisis and expenditures programmed
during times of prosperity prove politically
impossible to reduce following the onset
of a crisis. Public investment spending probably
should be spared from cuts, but not so most other
categories of government spending.
Second, monetary policy must be vigilant with
respect to the established inflation targets, which
are already under pressure due to rising food prices
and depreciating exchange rates. At a time when
private sector investment is already under pressure
due to faltering global confidence and weakening
currencies, the last thing Latin America needs is
further pressure on domestic interest rates due to
inflation uncertainty. While Latin America seeks to
protect private investment spending to the extent
possible, regulatory and supervisory structures need
to be strengthened to cool off the rapid growth of
Top: Brazilian stock traders negotiate in the future market
at the Future Stock in São Paulo. Right: A worker fi lls the
back of a pickup with bunches of bananas at a market in
Tegucigalpa.
consumer credit, which characterizes many markets
in Latin America.
Third, while Latin America does have the luxury
of large international reserve levels, these are
perishable assets, and they are also costly for the
region to maintain as they require a counterpart
issuance of domestic public debt. The countries
of the region should examine the possibility of lining
up contingent lines of credit with multilateral
lenders, including the IMF and the World Bank,
as a form of insurance policy if the global credit
freeze is prolonged. This will not be a politically
popular move in any country, but the quicker
Latin America acts, the calmer markets are likely
to be when the crisis worsens.
Fourth, in addition to trimming public spending
while protecting public sector investment, it
will be important to ease the impact of slowing
growth and employment on the most vulnerable
populations in Latin America, especially
the unemployed, the less well educated, and
the so-called “working poor.” Latin American
countries have made a great deal of progress over
the last decade in devising conditional income
transfer programs (e.g., Bolsa Familia in Brazil,
Oportunidades in Mexico) to direct spending at
these at-risk groups. Efforts to maintain this flow
of spending, and to improve its targeting, are
critical in tough times to prevent these vulnerable
groups from swelling the ranks of the extremely
poor in Latin America.
No aspects of this four-point emergency
agenda will be easy. Fiscal cuts needed to
protect investment and the poor will provoke
fierce political resistance. Temptations will
abound to swell public sector indebtedness, to
preserve middle- and upper-class entitlements,
to impose price controls, to ease interest rates
artificially, and to prevent the exchange rate from
depreciating. These temptations will exist, but
if indulged by policymakers, they can erode the
institutional basis so painfully put in place over
the last fifteen years and which is the best hope
for a recovery of economic growth when the global
credit crunch finally relents.
Thomas J. Trebat is executive director of the
Institute of Latin American Studies at Columbia
University.
SIPA NEWS 5