Latin America will not be immune to the global financial crisis. Although much of the region has benefited from a period of sound macroeconomic policies and high commodity prices, it now faces steep challenges ahead.
As world leaders made clear at the recent G-20 summit in Washington, the financial turmoil demands coordinated policy actions. In mid-September, the president of the Asian Development Bank, Haruhiko Kuroda, suggested that a new "Asian Financial Stability Dialogue" could help promote such coordination. Officials in the Asia-Pacific region are considering Kuroda's proposal. They would be wise to adopt it.
Latin America needs a similar forum. No single country can address the financial crisis alone. In order to bolster regional cooperation in stabilizing financial markets and weathering the global economic downturn, Latin American officials should establish their own financial dialogue under the aegis of the Inter-American Development Bank (IDB). Not only would this help the region during the current crisis; it would also provide a permanent, institutionalized venue in which to identify and tackle future problems. The IDB is focused on the region and is highly respected internationally. Its sponsorship of a "Latin American Financial Stability Dialogue" would give the new project instant credibility.
The need for such a consultative forum should be obvious. In its most recent World Economic Outlook report, released in early October, the International Monetary Fund (IMF) noted that "Latin America has been increasingly affected by turbulent conditions in mature financial markets, with equity prices falling sharply, spreads widening markedly, access to dollar funding tightening appreciably, and exchange rates coming under pressure, especially in commodity-exporting countries facing lower export prices."
Some Latin American countries are better positioned than others to adapt. As Morgan Stanley economist Luis Arcentales recently observed, "Chile seems to be in a league of its own" when it comes to "macro stability and the ability to engage in counter-cyclical policies." The IMF points out that Chile is one of five Latin American countries with "inflation-targeting central banks." The others are Brazil, Colombia, Mexico, and Peru. In these five countries, rising inflation has "generally been more contained than elsewhere in the region, and there are signs of stabilizing or even declining inflation expectations for some countries," according to the IMF.
Over the past few years, most Latin American countries have strengthened their democratic institutions and improved their macroeconomic policies. But other countries have moved in the opposite direction. The latter group includes Venezuela and Argentina, two countries whose recent economic growth has been almost entirely a function of high commodity prices. Now that commodity prices have fallen dramatically, the utter failure of their populist economic strategies will become more evident. Unfortunately, the type of leftist populism championed by Venezuelan President Hugo Chávez and supported by Argentine President Cristina Kirchner is also espoused by the current presidents of Bolivia, Ecuador, and Nicaragua.
In short, Latin America is a heterogeneous mix of governments and economies. The economic fortunes of many Central American and Caribbean countries are closely tied to the United States, while many South American countries are more dependent on commodity prices and trade with China. The financial crisis and global economic downturn will thus affect different countries in different ways—but all of Latin America will be affected.
Even Brazil. As The Economist magazine reports: "Just a few months ago, Brazil's economy was growing at its fastest pace since the mid-1990s, driven by record commodity prices and record credit growth. The country's president, Luiz Inácio Lula da Silva, declared confidently that 'Bush's crisis' in the United States would not affect Brazil. It all looks very different now. Credit is becoming scarcer and banks more suspicious of each other."
Brazil's troubles affirm that no country in Latin America will be impervious to the global turmoil. The region would benefit greatly from having a new consultative forum in which policymakers could discuss the appropriate fiscal and monetary remedies. An IDB-backed "Latin American Financial Stability Dialogue" would increase daily communication among financial authorities in the region and enhance their collaboration. By creating a new financial dialogue, Latin American officials would help their countries deal with the current turbulence and also prepare them for future upheavals in the global economy.