Latin America post-crisis, a chance not to be wasted

By Pamela Cox

Pamela Cox is the World Bank’s regional vice president for Latin America and the Caribbean. For the first time in six years Latin America and the Caribbean will see its economy shrink this year. That is also why 2009 could still be best membered as the year when regional leaders decided they could not afford to let a crisis go to waste.

A few weeks from now Latin America will be entering a busy political season with seven presidential contests in 13 months. It is easy to predict that the worst economic recession in 80 years will play a role in voters’ choices. More difficult to know is what kind of leaders will emerge.

Pamela Cox
Pamela Cox

But whether they are labelled old left, new left, liberal, neo-liberal or conservative, these new leaders, as their predecessors, will likely embrace pragmatic solutions that wed sound economic and fiscal policies with human and social concerns. This pragmatism is alive and well in the region, helping reduce tremendous inequality between rich and poor – and it will prove particularly important to recover from the global recession.

Hundreds of international executives and government leaders will converge in Miami for the 13th annual Miami Herald Americas Conference on Sept. 29 and 30 to discuss political and economic challenges ahead during the post-crisis. Central to their deliberations should be a simple idea: human concerns should go hand in hand with economic ones. Or as World Bank President Robert Zoellick has insisted since the beginning of the crisis: the global financial disaster does not have to become a human and social disaster.

From 2003 to 2008, 60 million people were lifted out of poverty in Latin America and the Caribbean. Few periods – perhaps none – have seen so much progress in so little time. Yet today, the World Bank projections so far indicate that the crisis will push 8 million Latin Americans back into poverty, that is, back to living on less than $4 a day.

In comparison to other regions, the road to recovery may be shorter for Latin America. Thanks to improved financial regulation and supervision, the region has weathered the downturn without massive currency devaluations, bank collapses, debt defaults, inflationary spikes or capital flights.  The same cannot be said of Eastern Europe, for instance, where the downturn triggered a banking crisis, devaluation of local currency and rising inflation.

As comforting as that might be, average growth in Latin America and the Caribbean has shifted down from more than 4 percent in 2008 to minus 2 to 2.5 percent in 2009. We expect growth to recover in 2010 to around 3 percent. 

These averages mask important differences in growth among countries. Mexico’s downturn, in particular, is a major driver behind this year’s forecast. Still there do seem to be some emerging challenges to all. These include permanent loss of human capital, middle class unemployment, lack of funds for stimulus packages and scarcity of foreign financing. 

Despite all these, the crisis offers an opportunity for the region to unleash its enormous potential.

Consider trade. Many countries in the region, large and small, are seeing their currencies appreciate uncomfortably. This puts a premium on trade competitiveness—even if only to preserve a slice of a smaller global trade market. Many of the long delayed reforms that make integration worthy, from infrastructure and logistics to tertiary education and property rights, will now become even more urgent. 

This crisis should also prompt new thinking about universal subsidies. Latin America spends between five and 10 percent of GDP on such subsidies annually, with one-third captured by the wealthiest 20 percent of the population. While the region has a fairly advanced system of social assistance – 13 countries make direct cash transfers to the poor — such funds could triple if countries stop subsidizing everyone.

Worldwide the role of the state has grown in response to the crisis, in ways unthinkable years ago. The more optimistic economists at the World Bank believe this historic recession also provides an opportunity for citizens to demand more from governments. With fewer resources available to the state but more expected of it —from regulating finance to facilitating job creation—the time seems right for taxpayers, particularly those who earn the most, to accept a slightly higher tax burden.

Still for taxpayers to be willing to pay more, governments will need to improve transparency and be held accountable. This is a matter not only of greater public access to government information, but also a matter of governments setting goals and benchmarks so that public spending can be evaluated on results. Citizens have the right to know what their money is being used for.

This year may be remembered as the year that abruptly derailed Latin American growth; or it may be remembered as the year when recession inspired smarter and more widespread development.  Which way it goes depends greatly on how policymakers respond, and whether they see opportunity behind the crisis and proactively take on issues that were holding Latin Americans back well before subprime became a household term.

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