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From Global Collapse

to Recovery

Economic
Adjustment
and Growth
Prospects
in Latin America
and the Caribbean

THE WORLD BANK
Office of the Chief Economist
Latin America and the Caribbean
1818 H St. NW THE WORLD BANK
Washington, DC 20433
www.worldbank.org/lac

From Global Collapse
to Recovery

Economic Adjustment and Growth
Prospects in Latin America
and the Caribbean

Office of the Chief Economist
Latin America and the Caribbean
THE WORLD BANK

Foreword This semiannual report—a product of the Office of the Chief Econo-
mist for the Latin America and the Caribbean Region of the World
Bank—analyzes where the Latin America and the Caribbean (LAC)
region stands following the global crisis, its growth prospects and
main challenges. The first part of the report focuses on macroeco-
nomic and financial aspects, emphasizing the outlook going forward.
The second part examines some aspects of the adjustment in la-
bor markets during this crisis in comparison to previous ones. The
preparation of this report was led by Augusto de la Torre, Regional
Chief Economist, in close collaboration with César Calderón, Tatiana
Didier, Julian Messina, and Sergio Schmukler. Paula Pedro, María
Virginia Poggio, and Carlos Felipe Prada provided outstanding re-
search assistance. We would like to thank Tito Cordella, Francisco H.
G. Ferreira, Samuel Freije-Rodríguez, Gladys López-Azevedo, William
Maloney and Lars Christian Moller for their invaluable comments.
We also extend our gratitude to M. Ayhan Kose (IMF) for providing
us with the results of his research on the decomposition of business
cycles into their global, regional, and idiosyncratic components.

From Global Collapse to Recovery 3

.

. the recovery started ear- lier. particularly in the monetary front. Due to greatly improved macro and financial policy frameworks in LAC. for the first time in decades.e. LAC’s “balance sheet” was not impaired by the crisis. no doubt. but its economic downturn in 2009 was less dramatic than that other of regions and it led to a milder than expected increase in unemployment when compared to past downturns. LAC comes out of the crisis with a bruised “income statement”. Moreover. weak currencies. in the strength of the recovery. LAC is second among emerging regions. Malaysia. For this group of emerging markets (EMs). Beyond the cyclical rebound. and weak banking systems) this time helped cushion the shock. Several LAC countries were able to conduct countercyclical policy. Global Economy South Korea. Philippines. The effectiveness of countercyclical policies in LAC was complemented and enhanced by multilateral institutions’ sizeable. Countercyclical policies have supported domestic demand in the larger LAC countries and external demand from fast-growing EMs. a higher trend growth will not be as easy to sustain for LAC because future economic dynamics for the rest of the world are clouded by uncertainty and complexity. and timely provision of liquidity and budget-support financing. has boosted exports and terms of trade for LAC’s net commodity exporters—which are mainly located in South America and account for over 90 percent of the region’s population and GDP. China. The current pattern of global recovery has favored LAC so far. after Asia. however.Part I Executive Summary LAC Recovering The global crisis is now in the rear view mirror and world growth is being restored. there are doubts about the sustainability of China’s invest- From Global Collapse to Recovery 5 . especially China. And while growth in LAC (especially in South America) can continue on the strength of its ties to emerging Asia. flexible. and the rebound has been much steeper. factors that used to magnify external shocks (i. Prospects for LAC in the short-term thus look good—regional economic activity is forecast to expand by a solid 4 percent in 2010. In sharp contrast with past episodes of global tur- in a Multi-Polar moil. the contraction in economic activity was much smaller than that of rich countries. weak fiscal processes. It is unclear if rich countries will be able to overcome the growth-impairing effects of high govern- ment indebtedness without a significant increase in inflation fur- ther down the line. and Thailand). India. this time the recovery is led by the periphery—specifically by the larger and more dynamic emerging markets (Brazil.

when several LAC countries other Bank. commodity-related revenue windfalls. banking and/or to adopt and adapt new technologies. others. economies in Eastern and Southern Europe. that the downside risks of commodity abundance are being avoided would materialize if commodity export- While central banks in rich countries will have to keep ing countries mange to save (via cyclically adjusted interest rates low to support their sagging economies. While the nancial intermediation in the rich countries was avert- process of convergence towards rich-country stan. out of the crisis with a bruised “income statement” But the jury is out on whether the region will be able to but. when the glob- prudential policies to dampen credit creation as well al credit crunch originated in the US shut down all as on policies to curb undue currency appreciation economic engines of world growth. debt crises tended to wreak havoc at home following 6 From Global Collapse to Recovery . LAC’s cially considering the large gaps that LAC would need “balance sheet” was not impaired. During that time. (international reserve accumulation.” A clear sign stage. economic performance and policy reactions LAC has been making significant strides in the equity varied across countries. physical infrastructure. however. unlike rich countries and some of the emerging seize the opportunity to boost long-run growth. so as to avoid falling victim nation. intensifying After the fall. ed and confidence began to stabilize. within a long-term horizon. controls on capi. nized. The resulting widening of the interest rate differen- tial will further boost capital flows to LAC. led by the U. of 2008 and the early months of 2009. the balance sheets of than Chile recorded visible productivity growth. LAC came vor of a long overdue growth-oriented reform agenda. but only if the asso- model in China would be easier to achieve with the ciated windfall earnings are managed judiciously help of international macroeconomic policy coordi.Office of Regional Chief Economist ment-reliant/export-based growth model.S. LAC Poised to Recover. the improved macro-financial resiliency of the region gives greater assurance that future gains from growth While the downturn in growth was globally synchro- will not be wiped out by financial crises. which seems unlikely to materialize at this to the so-called “natural resource curse. fiscal tightening). raising the risk of fis- such hopes are rekindling. LAC stands tall policy tensions vis-à-vis the risks of an overshooting in the appreciation of LAC currencies (with potentially As discussed in our previous semi-annual report of permanent adverse effects on export competitiveness) September 2009. on the strength dards of living has eluded LAC for more than a cen. with some coping better than agenda and this could help mobilize consensus in fa.” the 2008–09 financial fragility down the line). dominated country-specific strengths and rates of economic growth took a nose dive across countries in The region’s major longer-run challenge going forward a highly synchronized manner. With public sectors in rich countries were weakened by a LAC coming out of this crisis relatively well positioned. major increase in indebtedness. A full meltdown of fi- will be to craft a bold productivity agenda. and the ability perience. hopes that this trend may be changing emerged and stimulus policies. Federal Reserve before the crisis. pectations as signs of economic overheating surface. A smooth LAC’s natural resource wealth can broaden the scope shift towards more of a consumption-based growth for seizing the growth opportunity. the systemic and global propagation of the downturn tal inflows. espe. In addition. This remarkable to close in such key areas as saving. of a broad menu of unprecedented risk-absorption tury. In the process. human capital fact stands in sharp contrast with LAC’s own past ex- accumulation. The policy debate in crisis reached its darkest phase in the fourth quarter LAC going forward will thus tend to focus on macro. Like most countries in the world. especially considering that cal crises down the line (see below). “Update on the Global Crisis: The and excessive credit expansion (which may threaten Worst is Over. primary fiscal surpluses) a substantial fraction of the EMs will have hike them earlier to control inflation ex. where domestic currency.

while milder than perienced a marked slowdown in growth it did not suf. dependence on rich country markets. and weaker banking systems. while LAC ex. and that number would have In particular.4 pp. SSA refers to Sub- Saharan Africa countries. Indonesia. as analyzed in ence in GDP growth rates between 2009 and 2007) of greater detail in Appendix I.5 percent LAC trademark in social policy. ECA refers to Eastern Eu- rope and Central Asia countries.China. the recession in LAC. LAC’s “growth collapse” (the differ.A). To be sure. In other words.9 pp and 7. LAC’s recession in 2009 (a GDP contrac. ranks during 2002–2008. Moreover.3 percent) was deeper than that of the East breaking with history—LAC governments were able to Asian Tigers (0. and in many cases actually step up. social income countries (3. The World Bank a major external shock. was a regional outlier. While 60 million Latin for investment and placed them in a good position to Americans are estimated to have left the poverty resume growth. and this has raised the relative erty reduction gains that the region achieved in the attractiveness of many LAC countries as destinations five years prior to the crisis.A. Data comes from Consensus Forecast as of December 2009 for countries that have not published 2009 growth figures yet. improvements in LAC’s macro-financial Figure 1  Real Growth and Growth Forecasts Across Regions A. expected. including the very effective con- (5. was just under that of the industrial countries characterized by greater trade openness.9 pp) (Figure 1. (12. IMF International Financial Statistics (IFS) and Consensus Forecasts. Singapore. ditional cash transfers schemes that have become a over. higher share of tively) and much smaller than that of Eastern Europe manufacturing exports. and Thailand. MENA makes reference to Middle East and North African countries. LAC refers to countries in Latin America and the Caribbean. Malaysia. 2009 B. From a cross-country perspective.Republic of. Excluding Mexico.7 percent) (Figure 1.3 percentage points (pp). Source: Bloomberg. East Asian Tigers are Hong Kong. been greater had it not been for the fact that—again tion of 2. led to a partial reversal of the robust pov- fer systemic damage. Taiwan.  Growth Collapse Real GDP Growth in 2009 Around the World GDP Growth Collapses Around the World Annual Real GDP Growth Rate Differences Between Growth in 2007 and 2009 10% 0% 8% –2% 6% –4% 4% 2% –6% 0% –8% –2% –10% –4% –6% –12% –8% –14% ECA OECD LAC East SSA MENA South China ECA East OECD LAC China SSA MENA South Asian Asia Asian Asia Tigers Tigers Note: Growth collapse is defined as the difference between the GDP growth rate in 2009 vis-à-vis growth in 2007. Korea. although large in absolute around the world tended to be larger in economies terms. some 9–10 million people joined the poor in 2009. PART I  LAC Recovering in a Multi-Polar Global Economy 7 . growth collapses 6. respec.4 percent) and Eastern Europe assistance programs. OECD refers to OECD-member countries. In addition.  Growth Across Regions. higher trade and East Asian Tigers (6.1 percent) but milder than that of high.B). maintain. more. LAC’s GDP hardly contracted in 2009. whose output contraction of about 6.China.

some Caribbean countries). equity assets. Bolivia. the rest of the mentioned 2010) that quantitatively assesses the impact of mul- factors help explain why. Panama and Peru compared to. the flexible. the prompt response by multilaterals but also. oping countries with access to multilateral resources Costa Rica. sounder and better regulated banking sys- A Safer Integration in LAC Net Creditor tems. say. say. The latter reflects a 0% process that begun in this millennium.1 Indeed. as a large share of World Bank lending in 2009 took the form of fast-disbursing budget-support finance. They enabled LAC to bet. –40% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Importantly. to a lesser extent. a significant reduction of currency mismatches 10% in debtor balance sheets. the growth col. pacity resulting from this combination also helps ex- table feature in LAC’s macroeconomic policymaking. assets and reserves minus debt liabilities. –25% come an increasing net claimant on LAC on the equity –30% Net Equity Position vis-a-vis side (that is. tilateral finance during the crisis finds that: (i) devel- lapse was more pronounced in Argentina. especially on the monetary front shock.Office of Regional Chief Economist policy frameworks paid off. the side where systemic vulnerabilities –35% Rest of the World are much less likely to emerge) (Figure 2). plain why labor markets in LAC behaved differently a region where in the past external shocks were in. sizeable. on the fiscal side. The shock absorption ca- Countercyclical capacity is a new and certainly no. icy frameworks to cushion the effects of the external tercyclical policies. the side where systemic vulnerabili- –20% ties can easily arise) while the rest of the world has be. In turn. macro-financial fundamentals which enabled LAC to better withstand the crisis. outperformed those without it. While constituted a more prominent feature in the manage- banking system weaknesses did not play a role in ment of this crisis compared to previous ones. and credible and professional central banks). and a safer integration into 5% Net Debt Position vis-a-vis Rest of the World international financial markets. with the salient exception Figure 2  LAC: A Safer Integration of Chile). whereby LAC –5% –10% became a net creditor to the rest of the world on the Net Debtor –15% debt side (that is. The sample ranges from 1990 to 2007. and (ii) it was the com- zil and Chile. Source: Lane IDB. a recent IDB study (Izquierdo and Talvi. and CAF) complemented and boosted the ability and Milesi-Ferretti (2007). In this most LAC countries (with the possible exception of connection. Bra. and timely provision Source: The net debt position (vis-à-vis ROW) is the sum of debt of liquidity and budget support financing by multilater. of LAC’s more robust macro-financial and social pol- ter cushion the external shock and undertake coun. with unemployment rising less than stead amplified by weak macroeconomic fundamen. Mexico. 1  The World Bank’s commitments to disburse to the LAC region rose from an average of nearly US$ 5 billion per year during FY2003–FY2008 to around US$ 14 billion in FY2009. Part II of this report provides virtuous combination of: more robust monetary policy a detailed comparative analysis of the dynamics of la- frameworks (including greater exchange rate flexibility bor markets in this and previous downturns. bination of multilateral financial support and improved paratively very small in. is a fruit of steady downturn) and the share of informal employment (sur- institution building over the past 25 years involving a prisingly) not increasing. 8 From Global Collapse to Recovery . more viable fiscal processes (although these tend to remain pro-cyclical in most of LAC. in past crises (controlling for the size of the economic tals. the net equity po- sition (vis-à-vis ROW) is the sum of net FDI assets and net portfolio al financial institutions (including the IMF. this time around. and why the growth collapse was com. for instance. furthermore. World Bank. The average size of IBRD loan to countries in the region increased from US$ 116 million in FY2003–FY2008 to US$ 271 million in FY2009. This capacity.

mid-2007 levels and thus attenuating fears of a trade- atically across countries.200 Oil WTI in Current US$ 1. Index 2000=100 EAP 165 170 230 160 165 EAP Exports 180 LAC 155 160 Exports 180 LAC 150 155 UK Imports 130 ECA 145 150 UK Imports 130 ECA 140 145 80 Japan 135 140 Japan 130 135 80 125 130 30 S&P 120 125 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 30 S&P Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 120 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 C.000 350 Private Flows Wheat 150 1. Copper and Soybean: Prices Commodity Index Jan-01-05=100 01-Jan-05=100 1.  World Trade Volumes Stock Prices Around the World World Trade Volumes Indexes: Stock Jan-06=100 Prices Around the World Seasonally Adjusted. Source: Bloomberg. 90 and and 400 FDI 200 150 70 200 Oil WTI. by low interest rates. a sharp compression of spreads over U. Global liquidity remains abundant and cyclical recovery has so far taken a sharper V-shape a vigorous search for yield seems underway. already reaching the so-called “green shoots. not least because eco. World Trade Index 2000=100 Volumes 170 230 Indexes: Jan-06=100 Seasonally Adjusted. to pre-crisis paths while increasingly being directed There has been a strong and steady comeback in as. CopperOil andWTI in Current Soybean: US$ Index Jan-01-05=100 150 01-Jan-05=100 1. or 2009.  Commodity Prices Net Private Capital Flows to Emerging Economies Commodity Prices Net Private CapitalUS$ FlowsBillion to Emerging Economies Wheat. Note that the 2009 and 2010 figures on capital flows are forecasts from the Institute of International Finance. and capital flows are returning nomic activity is rebounding from a very low base.  Capital Flows D. CPB (Netherlands Bureau for Economic Policy Analysis).S. and Institute of International Finance. 50 30 –200 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f 2010f Note: EAP represents East Asia and the Pacific region. PART I  LAC Recovering in a Multi-Polar Global Economy 9 . towards emerging markets (Figure 3).200 US$ Billion Wheat.” started to sprout system. Figure 3  Recovery in Financial Markets: A. 0 50 30 –200 Portfolio Equity Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 Oil (rhs) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f 2010f Investment Wheat.  Stock Prices B. Current 600 250 Soybean 110 Copper Soybean. For the world as a whole. spurred than was expected a year ago. the less recovery. has rebounded significantly. 90 Current 600 250 200 400 Soybean Oil WTI. and a robust pick-up in commod- periphery ity prices. world trade volume.000 130 800 350 300 US$US$ Private Flows Wheat 130 800 300 Copper 110 Soybean. Copper FDI 150 70 200 Debt Investment 100 50 0 Copper Debt Investment Portfolio Equity Investment 100 Oil (rhs) 50 Wheat. Moreover. after falling more than 20 percent between April 2008 and May A year has passed since the first signs of a recovery. The World Bank The global recovery: contrasting set prices. paths for the center and the Treasury securities.

almost whereas growth in Eastern Europe is the lowest among 20 percent in Spain. Malaysia.7 percent in 2011.4 percent per year in 2010–11 the U.. South Ko. reached bottom in May China is expected to post the highest growth rates. earlier and the rebound since then has been much steeper.S. By contrast. Chile and Panama leading the pack (see below). strengths of individual economies play a greater role as 10 From Global Collapse to Recovery . When emerging regions are for 2010 and 2.4 percent from the peak. rich countries is still below the minimum of previ. The ous downturns and unemployment rates remain at GDP growth forecast for countries in the Middle East stubbornly high levels (slightly below 10 percent in and North Africa is 4. Con- February 2009. available data suggest that capacity utilization and employment are at around The considerable variation in the recovery across pre-crisis levels for the dynamic EMs as well as for countries is not surprising given that the idiosyncratic many countries in LAC. thus remain.e. Brazil.5 percent in 2010 May 2009-December 2009 period). at 2009. Europe and excluding Turkey. more than 8 percent in Germany.2 percent in their troughs. Philippines.25 percent for 2011. Consistent with the heterogeneity of the recovery de- Thus. For this group of emerging markets (dynamic Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 EMs).Office of Regional Chief Economist While global economic growth is being restored over- Figure 4  World Industrial Production all. growing at a solid 4 of this writing. emerging Asia and LAC have dominated visaged to grow slightly above that average—flattening the recovery. posting posted cumulative gains of at 3. 16.9 percent in 2010 and 9. The most recent forecasts (i. By contrast. (5.S. India. and Central European Japan) but the through was reached three months countries. In particular and in sharp contrast with past episodes of global economic 100 Developed Countries and financial turmoil.5 percent in the Asia’s GDP is forecast to grow by 5. 90 ing markets (namely. Emerging Economies rea. By contrast. respectively. World Industrial Production Growth engines are being reignited at different paces Index Apr-08 = 100 105 and intensities across nations. GDP growth forecasts range widely by 13. Republic of Korea.5 percent) (Figure 5).9 percent from its peak. Peru. is en- compared.1 percent in industrial production since Western Europe somewhat below—at 1.1 percent in 2011. there is great heterogeneity in the strength of the post-crisis recovery across regions and within regions. Ireland). a much industrial production for the rich countries fell by stronger rebound is forecast for the dynamic EMs.. Moreover. industrial production for the dynamic EMs fell scribed above. East (a cumulative increase of only 3. which jointly 85 account for nearly 55 percent of emerging markets 80 GDP). and has been increasing sharply sensus forecasts as well as IMF and World Bank pro- since then.7 and 9.. reaching pre-crisis levels by the time of jections) put growth in the rich countries at 2. the recovery this time around 95 has been led not by the center but by the periphery —specifically by the larger and more dynamic emerg. and Thailand. and still rising in France and emerging market regions (3. The U. capacity utilization in the percent per year during 2010–2011. not only was the fall from peak to through in average industrial production smaller than that of the Note: The group of developed countries refers to OECD countries advanced economies (mainly the U. Mexico.1 percent per annum during 2010–2011—and 18. Source: CPB (Netherlands Bureau for Economic Policy Analysis). and has been rising sluggishly since then 9.S.1 percent this writing (Figure 4). with Brazil. average 2010 and 1.1 percent in 2011) and LAC’s economic activity is ing substantially below pre-crisis levels by the time expected not to lag much behind. China. touched bottom in across regions.

contract in 2010 (Figure 6). in the near future. The World Bank index was back to its pre-crisis peak levels already by Figure 5  Regional Growth Forecasts for end-March 2010. Sweden. The Brazilian stock price are not yet mounting to significant levels (Peru and PART I  LAC Recovering in a Multi-Polar Global Economy 11 . UK. Panama and Mexico are also the effect of the global systemic shock fades. and (iv) commodity abun- dance. including a comparison of for Argentina. Coun- 4 tries in LAC that are experiencing stronger rebounds 2 tend to be characterized by: (i) vigorous expansion in domestic demand. A purely arithmetic bounce-back effect also seems at play. For many countries in the region. pression of (sovereign and corporate) spreads. Domini- the collapse-rebound patterns around the current and can Republic. Lagging be- previous crises). Lastly. markets on average. where industrial produc- Note: Western Europe comprises Euro Zone countries. and Peru. as countries that recorded greater growth col. and Uruguay. there is significant het- 10 erogeneity in projected growth rates within the region. In effect. This recovery was preceded by a strong expect the initiation of a monetary policy tightening V-shaped rebound in stock prices and a sharp com. countries that were able to hind but rebounding nevertheless are most countries conduct counter-cyclical policies are experiencing a in Central America and the Caribbean. and Switzerland. Norway. output is expected to remain below potential reaching a trough in October 2008. Paraguay. Denmark. A few countries in LAC may begin to face the risk of lapses also tend to register faster recoveries. Analogous behavior is observed in 2010 and 2011 stock markets in Chile.2 percent). with inflationary pressures ex- pected to increase over the next months. economic overheating. Moreover. Brazil is the most visible case in point—economic activity is begin- The recovery in LAC: things are ning to expand at a pace above the pre-crisis trend looking good overall growth and inflation forecasts are already above the center of the targeted inflation. Costa Rica. Growth that this is indeed the case (Appendix I. and Venezuela are expected to grow very little or even encing a rebound in their net exports after the crisis. Chile. the fiscal As noted. 8 South America is envisaged to have a stronger recov- ery (4.B provides rates in the 3–4 percent range for 2010 are expected a more detailed analysis. despite being one of the most financially and quasi-fiscal stimulus measures taken in Brazil. Source: Consensus Fore. Jamaica faster recovery and so are countries that are experi. trough and its 2010 GDP growth forecast is at 5. Hence. Real GDP Growth Forecasts for 2010–2011 Annual Real GDP Growth Rate While LAC’s is forecast to grow by 4 percent in 2010 12 2010 2011 on a weighted average basis. tion has increased by almost 20 percent from the casts (December 2009 and March 2010). Peru. stock prices in (Mexico and Colombia) and/or inflationary pressures LAC recovered vigorously. Colombia. LAC is coming out of which are estimated to have totaled around 4 percent this crisis without systemic damage and is experienc. and Bloomberg. After however. A more expected to record relatively faster GDP growth within systematic analysis of cross-country data suggests the region—between 4 and 5 percent in 2010. (iii) economic complementarity to Europe Europe Asian Tigers Asia (especially China). (ii) extensive use of counter- 0 Western Japan Eastern US LAC MENA East China cyclical policies.7 percent over 2010–11) than Central America 6 (4 percent) and the Caribbean (3. of GDP. globalized regions in the world. will likely not be undone in the near future ing a relatively strong recovery in economic activity due mostly to the electoral cycle. The leader is Brazil. Colombia.5 percent. Bolivia. Mexico.

0% 5. Latin central banks are thus expected to the Caribbean.0012 HND –0.0008 GUA SLV CRI CRI DOM –0. Lucia Paraguay Peru Uruguay Belize Panama Argentina Mexico LAC Brazil Venezuela Haiti Nicaragua Bolivia Guatemala Honduras Ecuador Dominica Chile Guyana Jamaica Colombia Source: Latin American Consensus Forecasts as of March 2010.0004 BRA 0.0% –3. Be it as it Figure 7  Output Gap and Inflation A.0005 0. Honduras Ecuador Guyana Colombia Costa Rica Dom.0% 5. Bahamas St.0% 6.0% 4.0% 1. Source: LCRCE Staff calculations based on Consensus Forecasts as of March 2010.0% –3. IMF’s Regional Economic Outlook. St.0% –2.0005 CHL ECU –0.0% 2.0015 –0. where the scope for independent mon- start a gradual normalization of interest rates. Vc. Rep. Kts. & Nv.0014 –4 –2 0 2 4 6 –2 0 2 4 6 Inflation Pressure in percentage points Inflation Pressure in percentage points Note: Inflation pressures are calculated as the difference between the 2010 inflation rate forecast and an estimated target of 4% (assumed to be the target for most countries in the region).0004 COL COL PAN ARG –0. Costa Rica Barbados Venezuela Ant. & Grs.0006 URY URY 0. supply conditions in the agricultural sector.0% 4.0% 1. & Barb.0% 3.0006 SLV GUA DOM –0. domestic timing and extent of interest rates increases will likely price increases will tend to reflect developments in vary significantly across countries depending on the import prices (including foods and fuels) as well as output gap and inflationary expectations (Figure 8).0% St. & Grs.Office of Regional Chief Economist Figure 6  Growth Forecasts for 2010 and 2011 among LAC Countries A.0002 PRY 0 PER BRA ARG CHL BOL Output Gap Output Gap 0 BOL PRY –0. Rep. open economies in Central America and (Figure 7). with the latter being calculated using the Hodrick-Prescott filter.0% –1. Paraguay Suriname Bolivia Argentina Uruguay LAC Mexico Panama Chile Peru Brazil Dom. & Tob.  2011 Growth Forecasts Real GDP Growth Forecasts for 2010 Real GDP Growth Forecasts for 2011 LAC countries LAC countries 6. Dominica St.0% 2.001 ECU NIC NIC –0.0% 0.0% –1. The output gap calculated as the difference between the (log of) actual and potential GDP.  2010 B. Chile). 12 From Global Collapse to Recovery .  2010 Growth Forecasts B. but the etary policy is very narrow or non-existent.  2011 2010 Output and Inflation Gaps 2011 Output and Inflation Gaps 0.0% –2. Vc.0002 PER MEX PAN –0. Jamaica St. Lucia Nicaragua Belize Guatemala Haiti Tri.0% 0.0% 3. After engineering a massive cut in policy rates For the small. IMF’s World Economic Outlook.001 MEX HND –0.001 0.

0% such shocks may be higher than those coming from –1.0% One important point to keep in mind in this regard is 9.0% Colombia that. extent. par- may.S. As a result. although there is no one-to-one mapping. ticularly China and the South East Asian countries maining low in rich countries. Global growth prospects: it is likely that those regional factors are mainly driven obscured by clouds by regional shocks.0% rest of this section.0% other emerging countries may become increasingly 3.0% 11. is plagued by great complex- Figure 8  Monetary Policy Rates in LAC ity and uncertainty. shocks coming from 5. LAC’s growth has tended to –5% track closely global growth. to a lesser Source: Bloomberg. Full decoupling between –10% LAC’s growth and world growth is thus a chimera. Shares in LAC ternal environment. The World Bank very short-run. Brazil 13. LAC’s trade was on average mostly linked to the U. ingly accounted for by “regional” factors (that is. fac- tors affecting individual regions rather than the whole world) and. In the past. Hence. the share of output variation for LAC-7 countries accounted for by regional Whereas the prospects for growth in LAC countries in the near future are promising. PART I  LAC Recovering in a Multi-Polar Global Economy 13 . The region now relies much more on external demand from other emerging markets. Kose. the sources and nature of external shocks 7. im- plying that the growth prospects for LAC can only be –15% ARG BRA CHL COL ECU MEX PER PRY URY VEN assessed in the context of the growth prospects for the world. due to the mentioned Variation in Export Market Shares for LAC Countries substantial improvements in macro-financial policy 2008 vs. But the sad 5% fact remains that LAC has not managed to sustainably grow above the world average during the last hun. the region is not isolated from the world economy and a significant Figure 9  Variation in Export Market fraction of the downside risks to growth lies in the ex.0% international financial markets and rich country de- Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 mand for LAC exports. Otrok and Prasad (2008) find that to surge. Europe. Growth in the rest of the world beyond the Source: IMF’s Direction of Trade Statistics (DOTS). as interest rates increase in most of LAC while re. Some of the regional differences countries and relevant factors affecting growth prospects out- Monetary Policy Rates side LAC are briefly and selectively discussed in the Inflation-Targeting Latin American Countries and the US 15. creating complex challenges for LAC central business cycles among LAC-7 countries are increas- bankers.0% Chile Peru will also diversify. In particular. in percentage points frameworks LAC is much less vulnerable to shocks 20% Euro Zone US China than it used to be. and. To be sure. as discussed in more detail below. capital inflows are likely (Figure 9). 1990.0% US more relevant for LAC in the future. The volatility of 1. however. 0% dred years! In general. as the region diversifies its linkages to the rest of Mexico the world. domestic macro-financial 15% crisis are arguably less likely than in the past to erase 10% LAC’s gains from growth going forward.

But this. on the other hand. Otrok. related yet.0% 35.0% 7. and across all variables.0% 5.0% 1985–2008 1985–2008 40. domestic private demand. For instance. and a revival of net exports.0% 20.8 percent on lus injections.0% 25. The extraordinarily high level of government American and the Caribbean countries) (Figure 10). emerging markets and other developing countries.0% 12. Source: Kose. Mexico Brazil Chile Peru Colombia Argentina RB RB Note: Global factors encompass all fluctuations that are common among industrial countries.0% 15. mainly Central term.0% –3. are likely to remain at near-zero for a while in is uncertainty about the sources of future growth as order to continue providing an expansionary impulse the process of inventory restocking ends and the ef.S. While the U. cal burden to monetary policy. may foster a half of this year in the absence of additional stimu. explaining more than 17 to the public sector. massive help stabilized the financial system. weak and shows no clear signs of a solid recovery zil.0% 2. So. interest rates in stimulus policies. There the U. and Prasad (2008).2 indebtedness significantly limits the scope for fiscal expansionary policies and this shifts the countercycli- Consider now the growth prospects for the rich coun. Otrok and Prasad (2008) use dynamic factor models to decompose the fluctuations in output. emerging markets and other developing coun- tries. Fed is tries.Office of Regional Chief Economist factors increased from 1.3 percent to 7. Global (rather than “regional”) factors (i.0% Colombia Venezuela. Brazil Mexico Peru Chile Argentina Venezuela.S. and idiosyncratic factors. Moreover. regional factors.0% 22. The global factor includes all fluctuations that are common to industrial countries.0% 17.  Regional Factors Percentage of Output Fluctuations Percentage of Output Fluctuations Explained by Global Factors Explained by Regional Factors 50. The recovery in the United States has so far been already unwinding some credit support facilities that driven mostly by a restocking of inventories. consumption and investment. the management of the crisis implied to fluctuations affecting the entire world) are nonethe. which is still relatively ing almost 16 percent in Peru and 10 percent in Bra.. and across all variables. consumption and investment for a sample of 106 countries over the period 1960–2008 into global factors. 2  Kose.e.  Global Factors B. and this is likely to pose down- percent of output variations in Brazil and around 9 side risks to a sustainable growth path in the medium percent for non-LAC7 countries (e. Regional factors. reach.g. emerging markets). 14 From Global Collapse to Recovery . the regional factors for LAC-7 countries involve fluctuations affecting only theirs and other emerging markets’ output.0% 1960–1984 1960–1984 45.0% 10.0% 0. in the absence of vigorous fects of the stimulus fizzle away—towards the second and well-designed regulatory reform. to the economy. country factors. are those that capture fluctuations that are common only to a particular group of countries. that balance-sheet problems shifted from the private less still important for LAC. prospects will largely depend on average between 1960–1984 and 1985–2008.0% 30. buildup of financial excesses similar to those that led Figure 10  The Increased Importance of Regional Factors and Decreased Global Ones A. Regional factors capture fluctuations that are common only within a particular group of countries (say.

household consumption in China seems high debt levels and/or weak fiscal stances such as to be growing at the same pace as real GDP (even if Greece. But it has still not seen a recovery in domestic undertake the extent of fiscal adjustment. Italy.S. including of course ary forces are likely to be stronger and more persistent. in ployment remains high. To for growth in Western Europe are more daunting. During the cri- up significantly in the near future. its main engine of growth. markets which are politically difficult to alter. investment-based growth pull on the rest of the world. there are strong doubts that Japan has experienced a slow export-based recovery the U. suggesting lems with Greece’s debt have already led to increased that the high domestic saving rate has remained es- fears of a double-dip recovery path in the EU. and consumption in particular. the net commodity exporting countries of South Amer- This is particularly troublesome for EU countries with ica. Turning now to emerging markets. However. will be able to grow at the very high rates. But the challenges sis.e. Portugal. rebound in commodity prices and helped with the re- fer fiscal resources among Euro members. While China is expected to con- contractionary effects of fiscal austerity measures may tinue to grow strongly in the short-run. This. the European Union (EJU) does not credit. as its stimulus spread. The resulting investment boom in China (invest- have the flexibility to tailor monetary policy to the differ. along with net exports. collapsed. Moreover. debt might have to be inflated away down the road. raises the inflation specter—i. real wages seem to be rising a bit faster). China is playing an pressed levels and investment is not expected to pick important role in the world’s recovery. However. as the sentially unchanged.S. required to (consumption and investment) demand and unem- restore public sector debt to robust viability. and interest rates in rise about the durability and sustainability of China’s the EU will also remain at very low levels for a while. covery in other emerging markets. or so far. exports. The forces of Western European growth re.. and Spain. Ireland. with deflationary pressures ensuring that interest In Western Europe things look even worse and overall rates will stay at near zero levels. the specter that bound might slow down as inventory restocking ends. although there is a wide the monetary policy front is putting an excess burden variation in macro-financial circumstances among its on fiscal policies. In the absence of GDP) led to a sharp rise in imports. This would entail a shift towards a domestically-oriented growth model. Real appreciation can be achieved through either domestic price inflation or a change in the current exchange rate policy. In the event of mounting inflationary pressures. if external demand indeed remains weak. PART I  LAC Recovering in a Multi-Polar Global Economy 15 . the U. Un. recession. sustain economic activity. This is more likely to happen through a slow and gradual change in the nominal exchange rate in the event of high inflation. Domestic demand is also at de. dwindles (a few measures have already been taken es faced on the fiscal side. Perhaps which were spurred by a gigantic increase in domestic more importantly.4 3  A resolution to Greece’s debt sustainability problems seems to be underway with both the IMF and Euro zone members involved in a rescue package. 4  China is capable of designing the appropriate mix of policies to stimulate domestic demand. the export-led re- turn. Another way to stimulate domestic (private) consumption is the real appreciation of the Chinese Yuan. The country remains caught in a long-lasting liquidity trap.—inventory restocking and stimulus packages. ment is estimated to have risen to nearly 60 percent of ent needs of different EU countries. Moreover. The prob. which contributed to the and given the severe restrictions on the ability to trans. the government launched a employment is extremely high and unyielding. thus giving a boost to domestic consumption. Chinese authorities may allow the exchange rate to gradually adjust. the country does not have countries.3 Given the sluggish recovery and the challeng. not least massive and unprecedented stimulus focused on in- because of the well-known rigidities in European labor frastructure investments at the local government level. much space on this front due to its large (gross) debt covery have been the same temporary ones at work in position of almost 200 percent of GDP. an exit from the monetary towards a normalization of conditions) uncertainties stimulus is unlikely to occur soon. particularly of in- differentiated exchange rate adjustment mechanisms dustrial metals and minerals. The lack of room on growth prospects are grim. but this will have to be accompanied with painful fiscal austerity measures. The World Bank to the crisis.

This is equally uncertain considering that their Required Fiscal Adjustment Between 2010 and 2020 To Reach Debt Levels of 60% current growth model remains frankly reliant on ex. as EMs production chain. in % of GDP ports. 40 33 33 The difficulty involved in meeting this challenge is clear when one considers the large size of primary fis.S. world consumption demand needs to be recomposed to put world export growth 10 on a high and sustainable path over the medium. 0 US Euro Japan UK OECD LAC-7 cal surpluses that the U. Together with China and India. While the domestic market has played an im. increase interest rates to control inflation expectations ed distribution of manufacturing production stages in the midst of a possible economic overheating while within Asia. since January 2009 and will likely continue to be so in the near future. including in particular the integrat. 2010. however.S. At the same time. Ideally. But it is utterly unclear whether and –5 Colombia Brazil Chile Mexico Peru Argentina Hungary Bulgaria Ukraine Turkey Philippines Indonesia Russia Romania South Africa Germany Italy France Portugal Spain UK US Japan Ireland Greece how this might happen in the absence of effective in- ternational macroeconomic policy coordination involv- ing not just the rich countries but also the dynamic Source: IMF Fiscal Affairs Deparment..Office of Regional Chief Economist The significant growth recovery in other Asian coun. The second question is whether Asian EMs will be able to Figure 12  Required Fiscal Adjustments sustain in the medium-term their current growth pat- tern. 20 Developed Countries portant role in the recovery for some of the dynamic 15 EMs (including Brazil). and this is induc. Figure 11  Gross nominal liabilities for inflationary pressures are surfacing. February. 167 160 In sum. the prospects for global growth are clouded 120 by great uncertainty and complexity regarding at least 98 100 89 89 two main questions. how. have been the main drivers of global growth sagging economies.” Washington. sustainable levels without inflation (Figure 12). Germany and Japan (and less from the U. That type of coordination unfortunately appears cal Consolidation in the Post-Crisis World. more consumption demand will have 5 Latin America to come from the surplus EMs. East Asian rich countries keep interest rates low to stimulate their countries. with actu- al GDP growth rapidly approaching potential growth. Europe and Japan would have to generate in order to bring down their debts to Source: EIU and Consensus Forecasts (various issues). is. “Strategies for Fis- EMs.) and this is difficult to envis. par- ticularly China. The first question is whether rich 80 71 74 63 countries will be able to overcome the growth-impairing 47 effects of their damaged balance sheets (Figure 11). unfeasible in the near future. developed countries and LAC-7 ing Asian EMs to normalize monetary conditions and even initiate the cycle of monetary policy tightening Gross Nominal Liabilities % of GDP that would cool down growth. 16 From Global Collapse to Recovery . Other Emerging Economies term. DC: IMF. capital flows to EMs are likely to pick up further tries has been driven by their position in the global as the interest rate differentials rise—that. Malaysia already raised 200 the policy interest rate and others are expected to fol. 0 age in the absence of stronger currencies in Asia. 200 2007 2010 low soon. In the meantime. ever.

against the wind” in exchange rate markets might PART I  LAC Recovering in a Multi-Polar Global Economy 17 . DECPG. the rebound in com. Not surprisingly. the feasible fiscal. however. Honduras terest rates low and this has. Brazil. LAC currencies and/or the accumulation of interna- tional reserves in several LAC countries (e. in turn. This section briefly discusses some and Haver Analytics. LAC policy makers will thus rate appreciations likely face increasingly difficult policy tensions vis-à- vis the risks of overshooting in currency appreciations As noted. Chile. The option to step is already flowing to LAC in considerable amounts. alternative options to “lean monetary policy mix will likely shift the burden to. especially from the equity side. and given a generally limited scope for fiscal policy adjustment. helped dampen –40% –20% 0% 20% 40% 60% 80% 100% 120%140% the pressures for LAC currencies to strengthen rela- Note: The cumulative variation in the terms of trade index is calcu- tive to other currencies. change rate flexibility. The World Bank Challenges ahead for LAC Figure 13  Terms of Trade So far for LAC. Guatemala Costa Rica modity prices and relatively fast pace of recovery in Nicaragua 2008q4–2009q4 LAC has not awaken major inflationary pressures. moreover. given the prospects and to the peak in 2008q2. The blue bars represent the cumulative percentage change during the recent commodity price boom up LAC going forward.. The pressures of sterilization. The red bars capture the cumulative per- policy complications outside LAC as discussed in the centage change in terms of trade from its trough in 2008q4 to the most recently available quarter (2009q4). has boosted exports and terms Colombia Peru of trade for LAC’s net commodity exporters—which Argentina are mainly located in South America and account for Mexico Uruguay over 90 percent of the region’s population and GDP Brazil Panama (Figure 13). Consequently. The ongoing strengthening of commodity export boom can easily materialize. Mexico. (which could inflict adverse and permanent effects on trivial levels given the near zero rates in developed export competitiveness) and capital inflows-induced countries) will widen further. of the challenges ahead for LAC. via the issuance of relatively expensive for LAC currencies to appreciate will be further en. face of the tensions (Figure 14). Colombia. Source: WDI. & Tob. of the monetary impact hanced in the case of commodity exporters—where a of such intervention. interest rate differentials (already at non. not up exchange rate intervention—aimed at dampening least because of many LAC countries withstood the appreciation pressures—will naturally be considered global crisis well and came out of it as relatively more despite its costs—for it calls for a significant degree attractive destinations for investment.g. countries in the LAC region will con. Countercyclical policies Bolivia Ecuador have supported domestic demand in the larger LAC Chile countries and external demand from fast-growing Paraguay Trin. and Peru) already reflects tinue to face significant challenges in the monetary/ the interventions in the exchange rate market moti- exchange rate front. local-currency debt securities. EMs. Things will not be as easy for lated using quarterly data. Rep. especially China. This Dominica 2001q4–2008q2 Dom. And this will happen in a context financial system down the line). Until now. no easy way out of these tensions. therefore. likely leading to greater excessive credit expansion (which could weaken the capital flows to LAC. Living with capital inflows and exchange wards monetary policy. has hitherto allowed LAC central bankers to keep in. previous section. There is of course where foreign capital. the pattern of global recovery discussed Cumulative Change in Terms of Trade above has brought benefits. Having moved to more robust vated by the need to find a reasonable balance in the monetary policy frameworks that rely on greater ex.

The weights are given by the inverse of the annual standard deviation of the changes in the nominal exchange rate and the standard deviation of the changes in reserves.  Colombia 5 D. The actual mix of averting the excessive credit expansion that could result policies will. Source: LCRCE Staff calculations based on IMF’s IFS. become an important item in the monetary policy de. dential (capital or provisioning) norms. depend on whether flows and from the surge in capital inflows. LAC authorities might focus on a way to offset a global distortion. such controls tend to be easy to were allowed to strengthen. LAC countries might also circumvent and thus become less and less ineffective interpret their intervention in exchange rate markets as over time. Alternatively.  Chile 8 6 8 3 2 3 4 6 1 2 2 4 0 1 0 2 –1 0 Reserve Accumulation Reserve Accumulation –2 0 Appreciation Pressures –2 Appreciation Pressures –1 Exchange Market Pressure Exchange Market Pressure Reserve Accumulation Reserve Accumulation –4 –2 Appreciation Pressures –3 –2 Appreciation Pressures Jan-03Jan-03 May-03May-03 Sep-03Sep-03 Jan-04Jan-04 May-04May-04 Sep-04Sep-04 Jan-05Jan-05 May-05May-05 Sep-05Sep-05 Jan-06Jan-06 May-06May-06 Sep-06Sep-06 Jan-07Jan-07 May-07May-07 Jan-08Jan-08 May-08May-08 Sep-08Sep-08 Jan-09Jan-09 May-09May-09 Sep-09Sep-09 Jan-10Jan-10 Jan-03Jan-03 May-03May-03 Sep-03Sep-03 Jan-04Jan-04 May-04May-04 Sep-04Sep-04 Jan-05Jan-05 May-05May-05 Sep-05Sep-05 Jan-06Jan-06 May-06May-06 Sep-06Sep-06 Jan-07Jan-07 May-07May-07 Jan-08Jan-08 May-08May-08 Sep-08Sep-08 Jan-09Jan-09 May-09May-09 Sep-09Sep-09 Jan-10Jan-10 Sep-07Sep-07 Sep-07Sep-07 Exchange Market Pressure Exchange Market Pressure –4 –3 8 C. as for instance. macro- associated appreciation pressures are perceived to be prudential policy tools could be considered. and (b) the level of international reserves.  Peru 4 6 8 5 3 4 4 6 2 3 2 4 1 2 0 0 2 1 Reserve Accumulation –1 Reserve Accumulation 0 –2 0 Appreciation Pressures Appreciation Pressures –2 Exchange Market Pressure Reserve Accumulation –1 Exchange Market Pressure Reserve Accumulation –4 –2 Appreciation Pressures –3 Appreciation Pressures –2 Jan-03Jan-03 May-03May-03 Sep-03Sep-03 Jan-04Jan-04 May-04May-04 Sep-04Sep-04 Jan-05Jan-05 May-05May-05 Sep-05Sep-05 Jan-06Jan-06 May-06May-06 Sep-06Sep-06 Jan-07Jan-07 May-07May-07 Jan-08Jan-08 May-08May-08 Sep-08Sep-08 Jan-09Jan-09 May-09May-09 Sep-09Sep-09 Jan-10Jan-10 Jan-03Jan-03 May-03May-03 Sep-03Sep-03 Jan-04Jan-04 May-04May-04 Sep-04Sep-04 Jan-05Jan-05 May-05May-05 Sep-05Sep-05 Jan-06Jan-06 May-06May-06 Sep-06Sep-06 Jan-07Jan-07 May-07May-07 Jan-08Jan-08 May-08May-08 Sep-08Sep-08 Jan-09Jan-09 May-09May-09 Sep-09Sep-09 Jan-10Jan-10 Sep-07Sep-07 Sep-07Sep-07 Exchange Market Pressure Exchange Market Pressure –4 –3 Note: The Exchange Market Pressure Index is the weighted average of year-on-year percentage changes in: (a) the nominal exchange rate of the local currency vis-à-vis the US dollar (such that an increase represents an appreciation of the LAC currency).Office of Regional Chief Economist Figure 14  Exchange Market Pressures A. although 18 From Global Collapse to Recovery . Furthermore. unremunerated reserve requirements on pointed out in a recent IMF Staff Position Note (Ostry financial intermediaries and/or counter-cyclical pru- et al. Lastly. 2010). An increase in the Exchange Market Pressure index signals appreciation pressures and/or accumulation of reserves. tions. is likely also to be part of the menu of op. however. including. In this case.  Brazil B. Controls on capital inflows. permanent or temporary. although these controls might bring distortions to bate in LAC going forward. To the extent that currency financial systems that would be hard to reverse in the appreciation in LAC would be lower if China’s currency future.

a major thinning of red tape. Singapore. in turn require a leap in the quality of the investment climate. Thailand. has been taking place at a rapid rate since the 1970s Indonesia. with no simple solution in sight. there. But the jury is still out on whether the and violence. abundant liquidi. Seizing the oppor. in place. LAC has failed to engineer sustained high growth. relative to. Some hope that this trend may be chang. individual countries. as tended to be the case in the past. the large gaps resiliency of the region gives greater assurance that that LAC has in education. 70. to be sustained through perseverant and major re- ty. LAC has been making significant strides in the vestment levels would have to be supported via higher equity agenda—through noticeable improvement in national savings (and the willingness to keep savings poverty-reducing social policies—and this could help in the country) as well as prudent access to foreign mobilize consensus in favor of a long overdue reform savings. 2009). growth would have ternal conditions (low interest rates. Taiwan (China). Also. That would agenda aimed at raising productivity growth. numerous or unduly complex.0% Substitution averting the downside risks of commodity 40. physical infrastructure. and high commodity prices) but also of productivity form efforts aimed at eliminating well-know obstacles growth. sensible regulation. vis the United States than otherwise. a major reduction in crime fore. whatever gains from growth that LAC could achieve in and the ability to adopt and adapt new technologies the future will be less likely to be wiped out by finan.0% Interwar Alliance Lost Washington Period for Decade Dissensus 60. ing emerged before the crisis. Once ignited. policies to ignite growth bia) recorded significantly higher growth rates than in that are adequately tailored to the circumstances of rich countries on the strength not just of favorable ex. countries in LAC are likely to have to learn to live Relative GDP Per Capita of Selected Regions relative to the US with more appreciated real exchange rates. as it could allow interest rates to be Latin America and East Asian Tigers vis-à- lower. the improved macro-financial es better reflect relative scarcities. region will be able to seize the opportunity. including through a better contractual and Some of the key conditions for LAC to raise its growth informational environment. In ad. say. during the 2002–2008 period. but not necessarily er growth path can be greatly enhanced in commodity PART I  LAC Recovering in a Multi-Polar Global Economy 19 . but also Brazil and Colom.0% wealth LAC/US 30. and (Figure 15). Republic of Korea. particularly in the form of FDI. The scope for seizing the opportunity to move to a high- tunity will require well-designed. The process of con. 10. in sharp contrast with the East Asian tigers where convergence Note. etc. tematically closed. as LAC fac- es a very tall order in this regard. levels. those hopes appear to be rekindling. as noted. competitive market forces are honed and relative pric- Moreover. the Asian Tigers would have to be sys- cial crises. where several LAC countries other than Chile (chiefly Peru and Panama.0% Asian Tigers/US vergence towards rich-country standards of living has 0. fiscal tightening will also have Figure 15  Trends in GDP per capita of to be considered. The associated need for high in- dition. The World Bank harder to implement. WDI and DECPG.0% the only lasting solution is productivity growth.0% Progress Gold Standard US Washington Assembling a productivity agenda while Period Recovers Imports Consensus 50. for which 80.0% With the possible exception of Chile. much reduced corruption rate sustainably above the world’s average are.0% 20. The group of East Asian tigers includes Hong Kong (China). With LAC coming out of this crisis relatively that undercut efficient resource allocation—such that well positioned. and the real exchange rate to appreciate less. In the end.0% 1900 1906 1912 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 in fact eluded LAC for more than a century. Malaysia. Source: LCRCE Staff calculations based on Mad- dison (2007.

But this can become a reality only if the tions and work effort that could result from the abil- associated windfall earnings are managed judiciously ity of special interests to capture the natural resource within a long-term horizon. so as to avoid falling victim rents to boost wasteful current spending).” This would that these bad side effects are being avoided would require that policies and institutions are in place to be given by a demonstrated ability of governments to dampen the possible welfare-reducing “Dutch Dis.Office of Regional Chief Economist rich countries. fiscal surpluses going forward.e. 20 From Global Collapse to Recovery . A clear sign to the so-called “natural resource curse. save a substantial fraction of the commodity-related ease effects” (via an overvalued currency that unduly revenue windfall—that is. the weakening of institu. by the materialization of hinders non-commodity export diversification) and significant and continuous cyclically-adjusted primary “rent-seeking effects” (i..

thus affecting primarily the relatively land.Part II Executive Summary Labor Markets in In a refreshing break from the past. re- flecting the combination of low inflation and downward rigidity in nominal wages. Hence. In addition.and capital-intensive tradable sectors. such as Chile and Mexico. Unemployment rose relatively rapidly in some countries. In the countries studied. Unemployment did increase (about 3. hitting males harder than females. with the exception of Colombia and Mexico. may have also contributed to mitigating the impact of the external shock.5 million joined the ranks of the unemployed) Common Patterns. In addition. but at a slower pace than in the recessions of the late 1990s. Finally. While the reasons behind the better labor market performance remain to be studied. the share of informal employment Surprises & Puzzles —a commonly used indicator of deterioration of the quality of employment—did not rise. These mild quantity adjustments in the labor market are especially puzzling in light of evidence that real wages in LAC did not decline during the 2009 recession. Another common trend is that the crisis had a differential impact across genders. during which significant increases in unemployment were generally combined with increasing informality and a sharp fall in real wages. several factors may have played a role. The recent shock was transmitted mainly through the trade channel. The overall picture of labor market adjustments during this crisis therefore stands in sharp contrast with past cri- sis episodes. the share of female workers increased relative to males. controlling for the size of the eco- 2009 Downturn: nomic downturn. substantial differences across countries remain. While labor force participa- tion remained relatively stable overall. Behind these general patterns. From Global Collapse to Recovery 21 . the crisis did not reverse the trend towards closing the gap between male and female participa- tion rates. while in Brazil and Peru it returned to pre-crisis levels rather quickly. Per- haps even more surprisingly. or as compared to other regions. the region experienced significantly milder labor market adjustments than in previous crises. specific labor market poli- cies. the domestic policy environment has also changed: Sounder macro-financial policy frameworks and timely finance from multilateral institutions allowed the imple- mentation of counter-cyclical fiscal policies that helped dampen the unemployment response. economic activity in the Latin American and Caribbean (LAC) region was not hit as hard by the LAC during the global financial crisis as in previous recessions. such as temporary employment programs and employment subsidies. men became unemployed proportionally more than women.

the Latin America and the Caribbean (LAC) in Mexico the employment rate fell by 2. according to the latest estimates. gentina and Brazil experienced a decline in employ- unemployment. unemployment strengths of these forces. it is clear that the sion on the supply for labor is in principle ambiguous. In reflect a seasonal pattern. rebounded by 2009Q3. hence reducing the incentives for actively within the same period). Brazil.2 pp. imply. Ar. Chile. Argentina and Brazil they are rapidly approaching 50 percent. sion. the prospects developed world. from 7 percent in 2008 to 8. although these differences are quite heterogeneous across LAC countries. that is. The unemployment rate is affected both by labor supply and labor demand forces. Participation rates for females in the region are lowest in Chile and Mexico (slightly above 40 percent) and highest in Peru (around 60 percent). see Freije-Rodríguez and Murrugarra (2009) 7  Labor force participation varies substantially by gender among LAC countries. What was the actual net effect of these forces after the fourth quarter of 2008 (2008Q4). In Colombia. Thus. Nonetheless. with a relatively low rate in Brazil. the breadwinners of the family might provide an in- ing that the number of the unemployed increased by centive for the females and youth in the family (who 3. During downturns.5 million to a total of 22. In spite of this general pattern. Mexico. insurance schemes tends to strengthen incentives to remain in the job search. As discussed in Appendix I. and.1 pp from region’s economic performance during this crisis was 2008Q1 to 2009Q1. On the one hand. on the degree of labor force participation ing 2009 while it grew by 2. and of the generosity and started to fall in some countries starting in 2009Q2. It might instead simply among some of the members of the household. with the largest increases in countries of finding a job shrink as the unemployment rate in- such as Ireland (10pp since 2008Q1) and Spain (9pp creases. the case of Mexico and Peru. for which aggregate labor market data are available up to the third quarter of 2009. 6  For an early assessment of the impact of the crisis on labor markets in the LAC region. the reduction rate rose by 1. While the consequences of the crisis on labor markets labor demand typically falls while the effect of a reces- around the world are still unfolding. around 66 percent. Whereas report. some of the pains of a recession were unavoidable. Colombia. Mexico and Peru. 2010). hence. in LAC during the crisis? 5  This section draws on data from Argentina.7 The final impact on overall la- the level and the change in unemployment rates varied bor force participation rates depends on the relative widely across countries. of employment. Encouragingly.Office of Regional Chief Economist Adjustments in employment. 22 From Global Collapse to Recovery . Two opposite forces operate on the supply of labor ment rate increased by 2 percentage points (pp) dur.4 pp on average in the during recessions. On the other hand. There is also quite a lot of heterogeneity across countries in the participation of men. the unemployment looking for a job. This was. employment declined by 1. In other LAC countries the la- tered into the worst recession since the Great Depres. or real wages among cent in 2009. In LAC.A of the Part I of this for example. On average. In Eastern Europe. the unemploy. hours worked.6 than in other emerging regions. but coverage of safety nets in the economy. female participation rates are lower than those of males. more than 10 pp below the rates in the countries with the highest rates in our sample. the world economy en. and in Peru over the same period. and Peru. the relative paucity of functional unemployment typically rises in the second half of the year.6 pp better than in most of its own past downturns. including in the informal Employment in most LAC countries started to contract sector. impact is quite large. bor market response actually began earlier. and labor force ment rates of around 1pp but quickly bounced back participation5 in 2009Q3 to pre-recession levels. Chile also experi- enced a sharp decline in employment but it had not In the last quarter of 2008. both to search for a job.5 million by the end of the are traditionally less attached to the labor market) 2009 (ILO. as employment in the region LAC. which might it is still too early to tell if this favorable development alleviate the welfare consequences of unemployment constitutes a change in trend.2 per.

collapses. male participation rates tended to decline its differential effect across the manufacturing and while female participation rates tended to increase. The increase in female unemployment rates.2 and 1. Figure 18 illus- on-year (yoy) in 2009Q3. experienced a net increase of 2. where female unemployment rates rose varied across LAC countries. by 2.7 pp yoy) to reach 9. more sharply in Peru (by 1. by increased relative to males. 2009Q3 (1. Mexico and Peru. countries with higher trade exposure and specialized female participation tended to increase more (see in manufacturing exports experienced larger growth Figure 16). contrast. It de- ployment remained relatively stable in Peru whereas picts the variation in the share of workers employed in Figure 16  Participation Rate by Gender in Selected LAC Countries A.9 pp year. Chile.5 ing the same period). While the actual response of percent (the lowest in the last 5 years).A of Part 1. the pre-existing trend by 2. Again. Male unemployment than females. sectors tend to employ males in a larger proportion males in the LAC-6 (Figure 17). respectively).5 constant in most countries. service sectors. followed by Argentina and trates that the reduction in employment was strongest Mexico (2. able goods.5 pp during 2008Q3– Female unemployment declined mildly in Brazil. During the global down.  Female Population 85% 85% Peru Mexico 75% Argentina 75% Chile Colombia 65% Brazil 65% Peru 55% 55% Argentina Brazil 45% 45% Colombia Mexico Chile 35% 35% Mar-05 Mar-07 Mar-08 Mar-09 Mar-05 Mar-07 Mar-08 Mar-09 Sep-05 Mar-06 Sep-06 Sep-07 Sep-08 Sep-09 Sep-05 Mar-06 Sep-06 Sep-07 Sep-08 Sep-09 Source: International Labor Organization PART II  Labor Markets in LAC During the 2009 Downturn 23 . and 2009Q3. which half the increase in the rate of male unemployment. As shown in Appendix I. Hence.4 pp.6 pp yoy)—which is however only about tion to this pattern was observed in Colombia. This was because.  Male Population B.4 pp. The outlier male and female participation rates to the recession was Mexico. the external shock was transmitted to the region through a fall in the demand for trad- Even with rising female participation relative to males. The largest excep. Chile experienced turn. The World Bank The overall participation rate remained relatively it increased mildly in Brazil and Colombia (around 0. likely to have a larger impact on males. or in the countries where both increased in tandem. in manufacturing sectors during the recession. It is well known that manufacturing traded the unemployment rate of males rose relative to fe. Male unem. but female participation pp). followed by Argentina (a 1 pp increase dur. Hence. employment and unemployment is likely related to ous crisis. similarly to previ. a shock hitting those sectors is rates increased the most in Chile. overall participation rates have barely changed a relatively large increase in female unemployment in in Brazil. has been weaker. toward the narrowing of gender gap in labor force par- ticipation was either maintained or even accentuated The effect of the crisis on the gender composition of during the crisis.

  B. 24 From Global Collapse to Recovery .0% –1.5% 1.0% –2.8 We external sector actually helped dampen the labor mar- observe that the share of employment in services has ket response to the shock.5% –1.  Industry B.5% 2.0% 0.5% 2.5% –0. manufacturing and services in the 2008Q2–2009Q2 major countries. Source: Cho and Newhouse (2010). in con- period compared to the preceding year (2007Q2– trast with previous recessions in the region.5% 0.5% 1. these numbers suggests an increased faster relative to manufacturing during the asymmetric effect of the downturn in global demand recession than during the last year of expansion in all for tradable versus non tradable goods in LAC. Male Population B.0% 1.5% –2. Hence.0% –2.5% 0.0% 0.0% 1.0% –1.5% Argentina Brazil Chile Mexico Argentina Brazil Chile Mexico Note: Differences in the change of the share of manufacturing and services employment share between June 2009 to June 2008 and June 2008 to June 2007.Office of Regional Chief Economist Figure 17  Unemployment Rate by Gender in Selected LAC Countries A. 8  The double difference is intended to isolate the change in shares associated with the recession from the secular structural change towards the service sector that is taking place in every country.5% Female Male –2.  Services in Percentage Points in Percentage Points 2.5% –1. Brazil.0% –0. Female Population 20% 20% 18% 18% Colombia 16% 16% 14% 14% Argentina 12% 12% Brazil Argentina 10% Colombia 10% Peru 8% 8% Chile 6% Peru 6% Chile Brazil Mexico 4% 4% 2% Mexico 2% 0% 0% Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Figure 18  Change in Employment Levels by Activity A. when the 2008Q2) in Argentina. except for Argentina.0% Female Male 2. Chile and Mexico.  A.

Note: For Argentina and Brazil.9 The evolution of formal Not only were unemployment increases relatively mild employment during this global crisis can be gauged in most countries. Formal employment in Argentina is defined as the share of workers having access to both health insurance and a pension benefit through their jobs.A. formal employees are defined as those with “carteira de trabalho assinada.4 pp). employment although the rate of increase in formality did appear to decelerate during the crisis. When the bars are not shown in the graph is because the information for that specific country is not available. Lastly. us- 4 ing quarterly information for the period 1991–2009. employment had progressively lost ground relative Mexico (1.. but increased sharply the dearth of formal hiring observed in previous re. and Peru (3. The deterio.10 3 Figure 20 depicts their evolution in Argentina and Bra- 2 zil. Formal employment –2 stagnated somewhat with respect to the expansion pe- –3 riod. but it did not lose relative weight in favor of infor- Argentina Brazil Colombia Ecuador Mexico Peru mality as it did during previous recessions. but rises in informality—a typical by looking at the share of workers with a labor contract byproduct of economic downturns in Latin America— and that of workers with health insurance. 2008). Formal have reversed this trend. do not suggest a reversal induced expansion in informal of the rising trend in the formal employment share. The World Bank No clear signs of a crisis. 2007) and data availability limitations preclude us from presenting a full picture of the behavior of the informal segment of the labor market (under alternative definitions) during this crisis. we consider a residual employment condition.” a signed labor card that gives access to social insurance or social protection.8 countercyclical nature of informal unemployment and pp) and Colombia (by 1. informal With Contract With Health Insurance 6 employment. idly in the previous downturn (1998Q2–2002Q1). and from 1991Q1 to 2009Q4 in Brazil. Although informal between 2008Q2 and 2009Q2 in Brazil (by 3. available so far. unemployment and self-employment— 5 during the business cycle in Argentina and Brazil. in Percentage Points 7 of the active labor force—formal employment. in Argentina (by 3.6 pp). PART II  Labor Markets in LAC During the 2009 Downturn 25 . especially considering the employment declined considerably in Mexico (by 1. In Argentina. The shaded areas in the figures represent reces- 1 sions—as defined in Appendix II. 10  The quarterly data on the different segments of the labor market spans from 1995Q2 to 2009Q3 in Argentina. which we call “other employees” and comprises owners of firms and unpaid employees. In the case of Brazil. The indicators Zooming in on the dynamics Figure 19  Type of Labor Contracts in of labor markets: the cases of Selected LAC Countries Argentina and Brazil Share of Workers Relative to the Total Number of Employees We now examine the behavior of the different segments Change from 2008 to 2009. cessions (Bosch and Maloney. 9  There is no consensus on the best definition of informality (Perry et al.1 pp) (Figure 19). the unemployment rate increased rap- Source: International Labor Organization. The share were conspicuous only by their absence. LCRCE Staff calculations based on Households Surveys.4 pp). When to formal employment in the years preceding the we use workers with access to health insurance as an global crisis.4 pp). The message from 0 –1 the previous section is reinforced. of formal employment in total employment (using hav- ration in economic activity in LAC labor markets has ing a labor contract as a measure of formality) kept on traditionally led to an increase in informal employ.5 pp) and Peru (by 6. one might have expected the crisis to indicator of formality the message is less clear. or in hidden unemployment. however. rising during the crisis in all countries but Colombia: ment.

while unemployment did rise in the LAC-6 ingly. This steady increase in formal informal employment. Ferreira and Schady (2009) have a relatively benign view of the effects of the global crisis on Latin 11  American labor markets. for Brazil. we investigate whether labor market responses during Figure 20  Active Labor Force by Status A. In an earlier assessment. which rose by 9 pp between employment was not reversed by the crisis. Source: LCRCE calculations based on Households Surveys. mulative gain of the share of formal workers of 8 pp by ers coincided with a massive increase of the share of 2009Q4 (Figure 20. Pesquisa Mensal de Emprego (PME). The initial since the second half of 2004. The formal sector remained the share of informality declined at a slower pace in stubbornly closed to new hires with the result that the second half of the 2000s (falling by only 0.B). This rose. these increas- to lose ground during this period (by 0. cession in Argentina.  Argentina B. At A milder labor market response the start of the current downturn. which led to a net cu- absorption of this large number of unemployed work. In sum. and there were no finding reflects some degree of substitution between clear signs of deterioration in the quality of employ- informality and self-employment during the last re. although 2002Q3 and 2004Q3.4 pp during 2009. starting in the second half of 2003. 26 From Global Collapse to Recovery .11 Next. the share of informal employment continued countries during the recent recession. recovery strengthened. Interest.  Brazil 60% 60% 50% 50% Formal Employee 40% Formal Employee 40% Informal Employee 30% 30% Informal Employee 20% Self-Employed 20% Self-Employed Unemployed Unemployed 10% 10% Employed.A).7 pp the share of formality continued a downward trend in 2009). the formal sector reactivated and started absorbing unemployed and informal workers. Labor force participation of formal employment and the self-employed. Encuesta Permanente de Hogares (EPH) y Encuesta Permanente Continua de Hogares (EPHC). For Argentina. especially among females.9 pp) in favor es were relatively muted. Others Employed. The share of self-employed increased by for more than a year after the recession. as defined in Appendix II. Brazil exhibits an upward trend in formal employment fore declining sharply (see Figure 20. When the nearly 0. by contrast.A. ment. Others 0% 0% Jun-95 Sep-96 Jan-98 Apr-99 Jul-00 Oct-01 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Mar-91 Jun-92 Sep-93 Jan-95 Apr-96 Jul-97 Oct-98 Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Note: Shaded areas are recessions. the to crisis this time around upward trend in formal employment in Argentina leveled off somewhat but did not decrease. at least in terms of growing informality.Office of Regional Chief Economist reaching a peak close to 21 percent in 2002Q3 be.

Q3–1999. recession—given the combination of low inflation and downward rigidity in nominal wages—whereas they The milder unemployment response this time around fell sharply in previous crises (on account of signifi.12 of 8. In contrast. Colombia (2008.Q4). Chile (2008. which ex- ployment this time around was significantly smaller perienced the sharpest GDP contraction in the region than in previous crisis episodes. Let us now consider some of the (than in previous crises) or to a weaker link between details behind this result.4 pp and 2. to a lower elasticity of un- Figure 21. Colombia. employment to output). Source: LCRCE Staff calculations based on National Statistical Institutes data.Q4– 2009.Q4). Current recession periods are: Argentina (2008.Q2–2009.Q3).Q2).B illustrates the fact that the rise in unem. i. and Mexico (2008.Q4–2002. As a result.Q2). the rise in unem. Chile.Q3–2009.Q3–1999.Q3–2009.e. Brazil (1997. Brazil. unem- ployment rose only mildly during the current recession The main conclusion of our analysis is that.  GDP Growth (%) B.Q2). but not in all countries ceeded that observed in the current one. (in the economy as a whole) did not fall during this i.A.Q2).Q2).6pp. could be attributed either to softer GDP contractions cant inflation spikes). respectively.) Current Recession Current Recession Mexico Mexico Previuos recession Previous recession Colombia Colombia Chile Chile Brazil Brazil Argentina Argentina –30 –25 –20 –15 –10 –5 0 0 2 4 6 8 10 Note: Previous recession periods are: Argentina (1998. A more detailed description of the algorithm is provided in Appendix II.Q4–1998. Colombia and Mexico ex- and Chile experienced the largest surges in the rate of perienced larger contractions in economic activity Figure 21  GDP Growth and Change in the Unemployment Rate During Recessions A. and Mexico (1995. between 1994Q4 and 1995Q3. This result is even this time around. and Mexico. 12  The samples used are constrained by the availability of quarterly unemployment data.3 pp in Argentina and Chile. control. of decreases in the level of GDP. less during the current crisis. with increases recessions.Q1–1996. —by 0. First. spectively. the unemployment response was more surprising considering that average real wages less than half that observed during the Tequila crisis.3 pp and 5. Argentina.Q3–2009. the change in economic activity and the change in unemployment (that is. re- ling for the size of the downturn. Colombia (1998. Chile (1998.Q1). Brazil (2008. where growth collapse is defined simply as the difference in the annual GDP growth rate between 2007 and 2009. PART II  Labor Markets in LAC During the 2009 Downturn 27 .  Change in Unemployment (p.A). GDP did contract by ployment during previous recessions substantially ex..Q2)..p. Argentina (Figure 21. The World Bank the current downturn were similar to those in previous unemployment in previous recessions. used in this part of the report do not coincide with those in Part I.e. Note also that even in Mexico. the measures of GDP contraction. We use the Harding and Pagan (2002) adaptation of the Bry-Boschan algorithm (BBQ) to date recessions from quarterly GDP series in Argentina.

while dur. might be at play behind the sharp output elasticity of served in Mexico. pared to the current one (Figure 22).5 crisis compared to certain previous episodes.Q1–1996. Aggregate wage behavior fails to explain the relatively ticity of unemployment to output during the previous muted response of unemployment to output contrac- recession was about one third the one observed in tion among LAC countries during the current global the recent downturn.Q2–2009. it Note: Previous recession periods are: Argentina (1998.Q4–2002. Brazil (1997.Q4–1998. overall participation increased by 2. most countries publish data on compensation per employee in the industrial sector. Chile (2008. During the re- larger in past downturns.0 during the global crisis). these negative effects on employment might rent one. Mexican GDP fell in real terms by nearly 15 Current Recession 2. the semi-elasticity of unemployment to output has halved in Chile. 1 percent 1. Brazil (2008. Elasticity of Unemployment With Respect to GDP Growth 2.5 during the last episode. the semi-elasticity of unemployment to out. Colombia GDP (i. In Colombia differences 1.25 during the Tequila crisis vs. Chile (1998. and we have set the CPI and wage index to 100 for the first quarter of the recession to highlight the behavior of prices during recessions.5 pp pointing towards downward rigidity in nominal wages in Colombia while in the other four countries it barely in a new LAC context of low inflation. 0. A similar reduction is ob. cession. Co- is clear that the rise in the unemployment rate (in per. While in previous recessions average real wages related to the massive increase in labor force partici.Q3–2009. which are shown in the case of Mexico. but the contractions are overall smaller (7 percent during the previous recession vs. Other elements 0. Colombia has one of the are smaller (0.Q3–2009. The forces behind this increase in participa. than in the cur. although the semi-elasticities there unemployment in Colombia. while there is a great deal of heterogeneity in the responses among the 5 LAC countries analyzed. in the whole economy fell rapidly due to high infla- pation observed during the downturn. For instance.Q2). During 2008Q3 tion. The Colombian result might be crisis.5 ing the current episode GDP contracted by almost 10 Previous recession percent. where the semi-elas. In Argentina and Brazil.e. 28 From Global Collapse to Recovery . have exacerbated. In the case of Argentina. 0.Q3). In Figure 2.Q3–1999.Q2). and pre- during the current one).Q2). this time around they exhibited an upward trend. Brazil and Chile instead suf- fered a similar contraction in GDP during the current 0.13 In Argentina. LCRCE Staff calculations based on National Statistical Institutes data. and Mexico (2008. (2008. from 1 in the previous recession to tion in Colombia merit further study.Q4). The sole exception is Colombia. respectively. the vious studies have established their negative impact semi-elasticities of unemployment were 6 and 3 times on employment (Cunningham.Q4). real wages for males (formal and informal workers) 13  Unfortunately.Q3–2009.Q2).0 Argentina Brazil Chile Colombia Mexico Second.Q1). Instead. the to Economic Activity crisis of 1998–2002 was associated with a dramatic collapse of GDP in real terms (28 percent).Office of Regional Chief Economist during their respective previous downturns compared Figure 22  Sensitivity of Unemployment to the recent global crisis. Source: put) was significantly larger in past downturns com.Q2).8 recessions are represented by the shaded areas. changed.Q4–2009. while it shrank by 12 percent during 2008–2009. Q2). 2007). and Mexico (1995. and 2009Q2.0 percent during the Tequila crisis. centage points) for each one percent contraction in Current recession periods are: Argentina (2008.12 most binding minimum wages in the region.5 are marked.. lombia (1998.Q3–1999. we only had access to quarterly data on average wages for Argentina and Brazil.

countercyclical fiscal policies. Appendix available data. The World Bank declined sharply in the previous recession. What explains the different behavior this II. in Argentina the point of comparison is the recessionary period from 1998Q2 to 2002Q2 associated to the financial crisis.B provides a description of policy interventions spe- time around? Among the many conjectures. clined sharply throughout the 1997–1998 recession.B). national financial crisis on labor markets in selected ent. This would CPI. Moreover. region. they were implemented in LAC. they we observe. Whereas the current crisis originated outside the LAC countries.15 Formal employment de- opted for labor hoarding rather than layoffs. The accelera. 1990).D). for example. Overall. after an initial upward spike real wages de. as it came with increasing job protection. In addition. while they showed an upward trend during the current Lastly. and Dra- pared to previous recessions constitutes an apparent goiu. 2009). 15  As before. employment in the active labor force during the reces- rary phenomenon. one might expect a slower job recovery this time by well-know concerns with an underestimation of the around compared to previous recessions. region’s government had planned to invest an addi- tional US$25 billion in 2009. In Brazil we identify two previous recessionary periods. if anything. We conclude this section with a closer look at the evo- nesses. reported real wages returned to their pre-re. to the tive performance of the shares of formal and informal extent that this recession was perceived as a tempo.14 as firms anticipate costs associated with future layoffs In Brazil. it is estimated that the adjustment (Figure 23. especially since effectiveness of these programs on employment. real wage behavior has been apparently differ. We prefer to show the evolution of male wages since it is well known that compositional changes in the labor force across the business cycle are more pronounced for females than for males. although the interpretation of the data is clouded case.F). and while there are signs of wage moderation were an important ingredient of stimulus packages in during the current crisis there was no clear downward some LAC countries. through spending on pub- major downward adjustment in real wages (18 pp in lic works. might have supported tion of inflation in Mexico during 1995–1996 led to a employment. If this is the ent.e. Previous recessions affected most sectors of lution of formal and informal employment and wages in economic activity while the current global shock was Argentina and Brazil. which above. stronger wage rigidities in the might have helped mitigating the unemployment re- recent past rather than in previous recessions with the sponse. Although it is premature to assess the puzzle that deserves further research. we focus our discussion here on the compara- is typically (land or) capital intensive.A and Figure 23. After a moderate decline in the first quarter of the be because firing costs/restrictions can be expected recession. to the extent that turmoil (Figure 23. Compared to Figure 20 presented transmitted mainly through the external sector. firms in sectors where training and/ sionary periods associated to the current crisis vis-à-vis or firing are costly (i. above the original targets (Schwartz. Regarding labor market policies. Andrés.. especially Another conjecture could be that the rising formal em- after the convertibility was abandoned and inflation ployment in the second half of the 2000s might have spiked at the end of 2001. PART II  Labor Markets in LAC During the 2009 Downturn 29 . During the current reces. to reduce also hiring when conditions turn favorable.C and Figure 23. formal sectors) might have previous crises (Figure 24). efforts to prevent labor shedding a year). 1997Q4 to 1998Q2 and 1999Q4 to 2002Q2. cession upward trend (Figure 23. reduced the volatility of LAC labor markets inasmuch sion. previous recessions were either home-brewed or externally generated but magnified by internal weak.E and Figure 23. (Bentolila and Bertola. creased significantly in Argentina and Brazil in previous 14  The corresponding graphs for females present a qualitatively similar pattern. it could be cifically designed to cope with the effects of the inter- argued first that the nature of the recent shock is differ. which would imply a 20 The milder response of unemployment to the decline percent increase in public spending on infrastructure in real economic activity during the global crisis com.

wage data refers to average compensation per employee in the manufacturing sec- tor.  Argentina Previous Crisis Current Crisis Index Jun-98 Previous = 100 Crisis Index Jun-08 Current = 100 Crisis 150 Previous Index Jun-98Crisis = 100 150 Current Index Crisis Jun-08 = 100 150 140 Index Jun-98 = 100 150 140 Index Jun-08 = 100 150 150 140 130 140 130 140 140 130 120 130 120 130 130 120 110 120 110 120 CPI 120 110 100 110 100 110 CPI 110 CPI 100 90 100 90 CPI CPI 100 100 90 80 90 80 CPI Real Mean Wage 90 Real Mean Wage 90 Real Mean Wage 80 70 80 70 Real Mean Wage Real Mean Wage 80 80 70 60 Real Mean Wage 70 60 70 70 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 60 60 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 60 60 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 C.Office of Regional Chief Economist Figure 23  Evolution of Real Wages and CPI (Males) A. For Mexico. Banco de México and INEGI.  Mexico Previous Crisis F. 30 From Global Collapse to Recovery .  Argentina B. Source: LCRCE calculations for Argentina based on Encuesta Permanente de Hogares (EPH) and Encuesta Permanente Continua de Hogares (EPHC) and for Brazil based on Pesquisa Mensal de Emprego (PME). For Mexico.  Mexico Current Crisis Index Dec-94 Previous = 100 Crisis Index Dec-07 Current = 100 Crisis 180 Previous Index Dec-94Crisis = 100 180 Current Index Crisis Dec-07 = 100 180 170 Index Dec-94 = 100 180 170 Index Dec-07 = 100 CPI 180 170 160 180 170 160 CPI 170 160 150 170 160 150 CPI 160 150 140 160 150 140 150 140 130 150 140 130 140 130 120 140 130 120 CPI 130 120 110 130 120 110 CPI 120 110 100 120 110 100 Real Compensation CPIper 110 Real Compensation per 110 100 90 Employee -Industry 100 90 Employee-Industry Real Compensation per 100 Real Compensation per 100 90 80 Employee -Industry 90 80 Employee-Industry Real Compensation per Real Compensation per 90 80 70 Employee -Industry 90 80 70 Employee-Industry Mar-94 Jun-94 Sep-94 Dec-94 Mar-95 Jun-95 Sep-95 Dec-95 Mar-96 Jun-96 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 80 70 80 70 Mar-94 Jun-94 Sep-94 Dec-94 Mar-95 Jun-95 Sep-95 Dec-95 Mar-96 Jun-96 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 70 70 Mar-94 Jun-94 Sep-94 Dec-94 Mar-95 Jun-95 Sep-95 Dec-95 Mar-96 Jun-96 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Note: The graph depicts the evolution of quarterly average male real wages for the whole economy (all sectors) and the CPI index around recession periods for Argentina and Brazil.  Brazil D.  Brazil Previous Crisis Current Crisis Index Sep-97 Previous = 100 Crisis Index Sep-08 Current = 100 Crisis 115 Previous Index Sep-97Crisis = 100 115 Current Index Crisis Sep-08 = 100 115 Index Sep-97 = 100 115 Index Sep-08 = 100 110 115 110 115 110 110 105 110 105 110 105 Real Mean Wage 105 100 105 Real Mean Wage 100 105 100 Real Mean Wage 100 Real Mean Wage 95 100 95 Real Mean Wage CPI 100 95 95 Real Mean CPI Wage 90 95 CPI 90 95 CPI 90 CPI 90 85 CPI 90 85 90 85 85 80 85 80 85 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 80 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 80 80 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 80 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 E.

Counter-cyclical fiscal policies. of informal workers. The World Bank Figure 24  Changes in Active Labor Force by Status During Recessions (Percentage Point Variation Between Peak and Trough) A.5 –3.0 –1. might help explaining the unemployment. PART II  Labor Markets in LAC During the 2009 Downturn 31 .  Brazil 1. In Argentina. important role. During the two recessions.0 0.0 –1. Neither quantities— firms in the formal sector.0 0. crises while it slightly increased in both countries dur.5 Formal Employment Informal Employment Formal Employment Informal Employment Source: LCRCE calculations based on Households Surveys: Pesquisa Mensal de Emprego (PME). as much as in the past. While the differen- gentina and Brazil might also help to shed some light tial impact of the crisis with respect to past episodes on the different behavior of LAC labor markets during deserves further study. In contrast. Counter-cyclical fiscal policies were im- ferent behavior of quantities during the recession. while indicators of labor qual- ity such as the share of formal employment continued Real wages in the formal and informal sector in Ar.0 –3.  Argentina B.A and impact of the shocks on labor markets. In. The greater ability of of relative wages of informal with respect to formal the region to withstand shocks (due to sounder macro- workers in previous crises (especially after exiting the financial policy frameworks) may also have played an convertibility program) may help understand the dif. Final remarks ing the current downturn.B). the sharp decline the nature of the external shocks. A thorough Figure 25. we do not find a differential evaluation of the effectiveness of these policies and wage behavior across crises episodes in Brazil (Figure their role in dampening the labor market response in 25.5 –2. informality ei- ther increased or remained constant in previous crises Our exploratory assessment of the evolution of labor while it has declined in Argentina and Brazil this time market aggregates in selected LAC countries during around.0 Previous Recession (98q2–02q1) 0.5 Previous Recession (97q3–98q1) Current Recession (08q3–09q1) Previous Recession (99q3–00q1) 0. which may have dampened the initial during the current downturn might be related to wage unemployment response. Encuesta Permanente de Hogares (EPH) and Encuesta Permanente Continua de Hogares (EPHC).5 –2.5 –4. plemented to one extent or another in most countries stead. albeit at a slower pace. it may be explained partly by the current recession.0 –1. the region constitutes an important issue that warrants wages of formal employees decline relative to wages additional research.0 1. It is also possible that labor setting: wages of informal workers have grown as fast market policy responses may have helped mitigate the as the wages of formal employees (Figure 25. the lack of dynamism of informal employment studied here.C and Figure 25.0 –0. growing.5 Current Recession (08q3–09q1) –0. In contrast. employment—nor wages suffered differential behavior across the recessions.D). to the extent the recent crisis shows that labor markets were not hit that they targeted public works and contracts with as hard as in previous recessions.5 –1.

for Brazil.Office of Regional Chief Economist Figure 25  Evolution of Real Wages and CPI (males) by Status A. and Encuesta Permanente Continua de Hogares (EPHC). 100 80 Real Wages - CPI Formal Employee Informal Employee Real Wages .  Brazil Previous Crisis D. 32 From Global Collapse to Recovery . Real Wages - 80 60 80 60 Informal Employee Informal Employee Real Wages - 60 40 Informal Employee 60 40 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 40 40 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 C. Encuesta Permanente de Hogares (EPH). For Argentina.  Argentina Previous Crisis Current Crisis Index Jun-98 = 100 Index Jun-08 = 100 160 Previous Crisis 160 Current Crisis Index Jun-98 = 100 Index Jun-08 = 100 160 CPI 160 140 140 CPI Real Wages - 140 120 140 120 Formal Employee Real Wages - 120 100 Real Wages . Real Wages - 100 105 100 105 Formal Employee Informal Employee Informal Employee Real Wages - 95 100 95 100 Formal Employee Real Wages - CPI CPI 90 95 Formal Employee 90 95 Real Wages - CPI CPI 85 90 Formal Employee 85 90 80 85 80 85 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 80 80 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Source: LCRCE Staff calculations based on Households Surveys.  Argentina B. Pesquisa Mensal de Emprego (PME). Real Wages - 105 110 105 110 Informal Employee Informal Employee Real Wages . 120 100 CPI Formal Employee Formal Employee 100 80 Real Wages . Real Wages .  Brazil Current Crisis Index Sep-97 = 100 Index Sep-08 = 100 115 Previous Crisis 115 Current Crisis Index Sep-97 = 100 Index Sep-08 = 100 110 115 110 115 Real Wages .

severely. On the other hand. No country was left unscathed.Appendix I. we estimate the link between the growth collapse in 2008–9 and its potential causes. This appendix investigates the relationship between the growth collapse at the onset of the crisis and pre-crisis characteristics of the domestic economy and its linkages to the rest of the world. although no sig- nificant role for the composition of trade was found. Trade and financial linkages.A and compared in light of recent empirical work. provided that all countries were hit by a global shock (similar in nature across countries). The decline in growth performance was larger in countries with higher trade exposure.A The global financial crisis hit the world economy suddenly. (b) macroeconomic and financial vulnerabilities. The findings are presented in Table I. the growth consequences of the crisis vary considerably across countries. 2009a. and in a synchronized fashion. These studies are un- able to link the growth decline since the beginning of the crisis to either pre-existing conditions in the domestic economies (except for sharp rises in equity prices) or international trade and financial linkages. Our dependent variable is the change in the GDP growth rate in 2009 relative to 2007. Earlier attempts to characterize the crisis focus on measuring the severity of the crisis in its different financial and real manifestations (Rose and Spiegel. recent evidence suggests that the growth collapse was deeper in countries with high shares of manufacturing exports (Berkmen et al. al- Collapse in 2009 though there is still no consensus on the relative importance of dif- ferent factors in the international transmission of this crisis. as classified in the following groups: (a) trade and financial linkages. but this effect ceases to be significant when the sample is restricted to emerging markets (Blanchard et al. the differences in growth performance may reflect the cross-country vari- ance in terms of resilience (external and macroeconomic vulnerabili- ties as well as other factors that might amplify shocks). Lane and Milesi-Ferretti. and (iii) the response engi- neered by policymakers. 2010). (ii) the institutional and macroeconomic framework in place. 2010). How- The Great Growth ever. 2009. Controlling for income per capita. From Global Collapse to Recovery 33 . In other words. We conduct a regression analysis for a sample of 103 coun- tries and find that output during the crisis was hit the hardest in advanced countries (see Table A). and (c) regulatory quality. it has been argued the cross-country differences in growth response at the onset of the crisis may reflect differences in: (i) the exposure to real and financial manifestations of the global shock. b). So far several explanations have been put forth and.

Existing evidence shows ratios) were associated to milder growth declines. high loan-to-deposit ratios) faced safer modes of integration (i. external shocks of this mode of integration (Lane and Milesi-Ferretti.e. Finally. the Macroeconomic and financial vulnerabilities. 2010). al. credit markets ceases to explain the growth collapse However.e.. (2010) Quality of the regulatory framework. Giannone et al. However. Table I shows that economies (i. show that countries with external finance vulnerabili. the quality of regulation in cyclical policies and with lower pre-crisis inflation. suffer a larger growth collapse. 2010). Blanchard et al. higher short-term debt to GDP ratios) have quality and growth performance during the crisis. hit the hardest. Table A shows that However. we fail to find a robust role for the flexible if only emerging markets are analyzed (Blanchard et exchange rate arrangements. though countries with deeper financial markets may be better prepared to cope with crisis episodes. lower debt-to-equity sharper declines in growth.e. deregulated credit markets) were milder in countries with ability to implement counter. authors find that countries that adopted more market- dence suggests that the growth collapse (if any) was friendly policies (i. the structure of foreign assets and liabilities high pre-crisis credit growth and highly-leveraged may have played a significant role..Office of Regional Chief Economist We fail to find a robust link between the overall mea. Countries with financial vulnerabilities also tended to sure of financial openness and the growth collapse.e. (2010) examines the relation between regulation ties (i. Al- also suffered larger growth collapses. 34 From Global Collapse to Recovery . This that this effect was particularly more severe among finding may reflect the insulation properties against EU accession countries (Berkmen et al. Our evi.. 2009).

505)   Inflation Rates 0.008) (0. % of GDP) (0.02**   (Average 2006–7 vs. APPENDIX I.155 0.097 (Foreign Assets and Liabilities.092) Domestic Demand Private Consumption –0.548) Macroeconomic Policies   Fiscal Pro-Cyclicality 4.128) Observations 103 85 83 84 50 99 96 99 R-squared 0.179)   Loan to Deposit Ratios 3.011) (0.101 0.020** 0.028*** 0. 2002–5) (6.851 (% of GDP) (3.022** (Export and Imports. five. The World Bank Table I.029) Share of Manufacturing Exports 0.389) International Reserves 4.026 (% of Total Exports) (0.019 0.188 0.030 0.009) (0.521**   (Ratio. respectively.A  The Great Growth Collapse in 2009 35 .009) (0.173 0. All regressions include controls for GDP per capita (PPP measure).396***   (Level of YoY CPI) (0.106 0. % of GDP) (0.011) (0.019** 0.554 (Assets and Liabilities. **.797***   (Correlation of Govt. % of GDP) (0.009) Financial Openness –0.027) Structure of External Liabilities Equity-related Financial Openness –1.937) Debt-related Financial Openness 0.404) Resilience of Domestic Financial Systems   “Excess” Credit Growth 16.208 Robust standard errors are reported in brackets.018* 0. ***.861** (Assets and Liabilities.040) Composition of Trade Share of Natural Resource Exports –0.178) (0. or ten percent. and * indicate statistical significance at one.013) (0.047 0. % of GDP) (0. Spending and GDP) (1.011 (% of Total Exports) (0. 2007) (1.022 0.078* (% of GDP) (0.A  Characterizing the Growth Collapse Dependent Variable: Growth Collapse between 2007 and 2009     (1) (2) (3) (4) (5) (6) (7) (8) Openness Trade Openness 0.081 0.

.

It should be noticed that the trade effect on the recovery is primarily driven by a rebound in the manufacturing sectors—see regression [3]. advanced economies and emerging mar- kets quickly implemented policies to counteract the recessionary From Global Collapse to Recovery 37 . In short. 2009). the boost from greater trade flows appears to be negligible when controlling for the bounce-back effect. Weak and slow recoveries from these turmoil periods tend to reflect declining asset prices. suggesting that the trade channel might also re- flect a bounce-back effect from the collapsed trade volumes in the last quarter of 2008. The unconditional correlation suggests only a modest economic impact: an increase in total trade of 10 percentage points of GDP would lead to an in- crease in GDP growth of only 0. An exploratory econometric assessment of the forces driving the re- the Global covery is presented in Table I. our estimates suggest that the recovery is not steeper than the is driving it? recession. which is the current case. In comparison to past episodes.9 percentage points (from 3. Mexican real output growth declined by 9. and weak credit growth. As noted in the main text.S. decreased levels of investment.Appendix I. net ex- ports have typically operated as an engine that pulls the economy out of the recession (especially from those caused by financial crises).5 percent in 2009). and our estimates suggest a cumulative growth surge of only 5.3 percent growth in 2007 to a contrac- tion in economic activity of 6. Moreover. imports (Terrones et al. this pull factor loses steam during global downturns. our estimations suggest—regardless of the econo- metric specification used—that the rebound in economic activity will be sluggish. Recovery: We find robust evidence of a bounce-back effect: countries that suf- fered a larger collapse in GDP growth rates between 2007 and 2009 How fast? What are expected to have a stronger recovery (see regression [1]). It should be highlighted that these figures are based on current forecasts and can be altered significantly if the perspectives for global growth (and the US in particular for the Mexican example) change. The current rebound in economic activity is only partly engineered by a recovery in trade flows—see regression [2].5 percent for the years 2010–11. However. The evidence suggests that export growth is slug- gish during global downturns due to a sharp decline in U.2 percent. How- ever.B This appendix characterizes the main features of the current recov- ery from the global downturn of 2008–9 and contrasts this episode Characterizing with previous recoveries from financial crises and global downturns. This result is consistent with recoveries from financial crises as well as those from global downturns (Terrones et al.B. For example. 2009).

respectively.74) Increase in Private Household   -2. Moreover.527*** 0.000 0.018** 0. that stronger recoveries in industrial economies are also characterized by discretionary increases in gov. % of GDP) Composition of Trade     Share of Manufacturing Exports 0.02** (2007 vs.542*** 0.083) Openness     Trade Openness 0. All regressions include controls for GDP per capita (PPP measure).Office of Regional Chief Economist effects of the global financial crisis. five.596   Consumption   (7.684 0.022*   (% of Total Exports) (0.005) (0.008) (0.638 0. % of GDP) (26.39 Formation) (10.001 0.557*** 0. on the strength of the recovery among developing while the floating exchange rate regimes did not seem countries and that floating rates have helped develop- to play a significant role. % of GDP) (0.62) 2007 vs.073) (0.645 0.005) (0.002 0. Our estimations cal position.003 0.005) (0. ***.000 0. Terrones et al.711 0. **.461*   (Correlation of Govt. The main messages from our regression analysis are ernment spending and reductions in nominal and real summarized in the last four columns of Table B. and * indicate statistical significance at one. 2009 (% of GDP) Increase in Investment (Capital    -11.93***   (2007 vs.012) Pull and Push Factors and Macroeconomic Policies Fiscal Pro-Cyclicality -1. of aggregate demand separately on the strength of the Table I.917) Observations 81 75 68 74 70 71 71 71 R-squared 0. Con- interest rates. 38 From Global Collapse to Recovery .005) (0.104 0.814) Increase in Government Consumption 87. (2009) find ing countries rebound from previous recessions. monetary policy appears to have no significant effect tries with the ability to run countercyclical policies.665 0. Spending and GDP) (0.006) Financial Openness (Foreign Assets and Liabilities. 2009.075) (0.B.441*** 0. However. 2009.494*** 0. % of GDP) (5. the authors suggest that the trolling for the bounce-back effect and openness to stimulus engineered by the government becomes less trade.669 Robust standard errors are reported in brackets.000 (Export and Imports.656 0.079) (0.206)   2007 vs. (2009) add that show that the recovery was indeed stronger in coun.006) (0. 2009 (% of GDP) Increase in Net Exports   13.  Characterizing the Growth Recovery Dependent Variable: Expected Recovery in Growth Rates between 2009 and 2011 (1) (2) (3) (4) (5) (6) (7) (8) Bounce Back Effects Growth Collapse between 2007–2009 0. we analyze the effect of different components effective if it compromises the sustainability of the fis.467*** (Percentages) (0.546*** 0. or ten percent.084) (0.083) (0.083) (0. Cerra et al.

we conduct an event study analysis to examine They both have increased on average 1 percent of whether the different components of aggregate de. or domestic debt push. the prospects of characterize the current global downturn vis-à-vis a sluggish growth in trade (and. external debt. by more than 4 percentage points in MICS in past mer group) but has quickly rebounded. tigers after the 1997–8 crisis). Next. In the current cycle. comparison to past recoveries from crises episodes (See Figures I. especially.B  Characterizing the Global Recovery: How fast? What is driving it? 39 . This time. a fast rebound net exports is to simply increase as the crisis unfolded to trend growth is expected during the recovery phase from slightly below trend to significantly above trend (See Figure I.B. countries have emerged from the global 16  The data for GDP and its demand components for 2010 and 2011 are forecasts from the Economist Intelligence Unit. it episodes. Afterwards. trend levels and a mild recovery compared to previ- gate demand. levels. First. APPENDIX I. we only observe a sharp decline from above When looking at the different components of aggre. the ened to some extent by a rebound in net exports that sustainability of growth in the medium term may still have risen to above trend levels after an initial collapse depend largely on the growth prospects of advanced on the onset of the crisis. pulling economies out of the crises. in- ing. crises). Even though episodes. as in previous episodes of severe downturn among high-income countries (HICs) and crisis (say.6).e. in par. however. Although not reported lesser extent net exports. The results suggest that downturn thanks in part to bold actions on the fiscal the recovery from the current global financial crisis front. in imports previous episodes of severe crises (i.16 The decline in GDP growth Second. there is no qualitative difference in the behavior of government consumption between HICs and MICs. we find some distinctive features that ous severe episodes. moved from a below-trend average before the crisis ticular by higher government consumption. rates has been sharper during the current global especially in MICs.B. In other words. the decline in investment was not as sharp. especially in MICs. however. On the other hand. The World Bank recovery in economic activity. this recovery has also been strength- MICs seem to have a growth engine of their own.1–I.3). episodes in from advanced countries) may hinder the likelihood which a country was hit by more than one crisis type: of a stronger and faster recovery based on an external banking. Analogously to MICs. The typical behavior of experienced a sharp decline. GDP growth in middle-income vestment fell on average less than 2 percentage points countries (MICs) has declined at a similar pace to that of GDP for both HICs and MICs whereas it dropped of HICs (although growth rates were higher in the for. Lastly. here. The ratio of government consumption to GDP is driven by a rebound in domestic demand. growth in LAC was unusual and weaker if compared to previous crises above trend in the run-up to the crisis.B.. and to a to above trend at the onset. currency. This pattern is somewhat countries. GDP in 2009 and are expected to remain at this new mand have played a different role this time around in level for the next couple of years. the collapse of investment in the East Asian the expectations of a swift recovery are disappoint.

B.6% 0. –10% Real RealGDP GDP Growth: LACCrises Growth Around Countries –10% D.B.2% 0.6% 0.Office of Regional Chief Economist Figures I.B.6% –0.6% Current Crisis –9% T-3 T-2 T-1 T T+1 T+2 T+3 T-3 T-2 T-1 T T+1 T+2 T+3 –10% Net Exports Around Crises –0. Investment Investment Around Crises % of GDP % of GDP 4% 3% Net Exports Around Crises 2% 1% Investment Around Crises % of GDP % of GDP 4% Current 2% 1% PointsPoints Points PointsPoints Points 3% 2% 0% 3% Current 1% Current Crisis Percentage Percentage 2% 1% 0% –1% Current 2% 0% Current Crisis Percentage Percentage 1% 0% –1% –2% Current Crisis Percentage Percentage 1% –1% 0% –1% –2% –3% Severe Crises Episodes –2% Severe Crises Episodes 0% –1% –2% –3% –4% Severe Crises Episodes T-3 T-2 T-1 T T+1 T+2 T+3 T-3 T-2 T-1 Crises TEpisodes T+1 Severe T+2 T+3 –1% –3% –2% Severe Crises Episodes –4% T-3 T-2 T-1 T T+1 T+2 T+3 T-3 T-2 Severe T-1 Crises TEpisodes T+1 T+2 T+3 –2% –4% T-3 T-2 T-1 T T+1 T+2 T+3 T-3 T-2 T-1 T T+1 T+2 T+3 Note: For the current crisis the T-period is 2008.4% –0. T+2 and T+3 are forecasts from EIU. Real GDP Growth: Middle-Income Real GDP Growth Around Crises Real GDP Growth Around Crises High-Income Countries Middle-Income Countries 4% Real GDP Growth Around Crises 4% Real GDP Growth Around Crises 3% 3% High-Income Countries Middle-Income Countries 2% 4% Real GDP Growth Around Crises 2% 4% Real GDP Growth Around Current Crisis Crises 1% Severe Crises Episodes 1% 3% High-Income Countries 3% Middle-Income Countries 4% 0% 2% 4% 0% 2% PointsPoints Points PointsPoints Points Current Crisis 3% –1% 1% Severe Crises Episodes 3% –1% 1% 2% –2% 0% 2% –2% 0% Current Crisis Percentage Percentage 1% Severe Crises Episodes 1% –3% –1% –3% –1% 0% Current Crisis 0% –4% –2% –4% –2% Severe Crises Episodes Percentage Percentage –1% –5% –3% –1% –5% –3% –2% –6% Current Crisis –2% –6% –4% –4% Percentage Percentage –3% –3% Severe Crises Episodes –7% –5% –7% –5% Current Crisis –4% –8% –6% –4% –8% –6% Severe Crises Episodes –5% –9% –7% –5% –9% –7% –6% –10% –8% –6% –10% –8% –7% –9% T-3 T-2 T-1 T T+1 T+2 T+3 –7% –9% T-3 T-2 T-1 T T+1 T+2 T+3 –8% –10% –8% –10% –9% T-3 T-2 T-1 T T+1 T+2 T+3 –9% T-3 T-2 T-1 T T+1 T+2 T+3 C.  I.8% 0.B.6% 2% Current Crisis PointsPoints Points PointsPoints Points 3% –1% 1% Severe Crises Episodes 2% –2% 0% Current Crisis 0.1.3.4% Percentage Percentage 1% –3% Severe Crises Episodes –1% 0% –4% –2% 0.2% Current Crisis Severe Crises Episodes –5% –9% –7% –6% –10% –8% –0. Source: LCRCE Staff calculations using WDI and EIU data.6% Investment Around Crises T-3 T-2 T-1 % ofTGDP T+1 T+2 T+3 T-3 T-2 T-1 % ofTGDP T+1 T+2 T+3 4% E.  I.8% Real GDP Growth Around Crises Government Consumption Around Crises 3% LAC Countries % of GDP 2% 4% Real GDP GrowthCurrent Around Crises Crisis 0.4% –0.6 A. 40 From Global Collapse to Recovery . The periods T+1.  I.2. Real GDP Growth: High-Income B.6.5.4% 0.0% Percentage Percentage –3% –7% Severe Crises Episodes –5% –4% –8% –6% 0.2% –0.B.4% 0.B. Government Government Consumption Consumption Around Crises T-3 T-2 T-1LAC Countries T T+1 T+2 T+3 T-3 T-2 T-1 % ofTGDP T+1 T+2 T+3 4% 0.  I.4% Current Crisis –9% T-3 –7% T-2 T-1 T T+1 T+2 T+3 T-3 T-2 T-1 T T+1 T+2 T+3 –8% –10% –0.0% 0.2% Severe Crises Episodes Percentage Percentage –1% –5% –3% –2% –6% –4% 0.8% Government Consumption Around Crises 1% 3% LAC Countries Severe Crises Episodes % of GDP 4% 0% 0.2% 0.1–I.2% –0.  I.4.B. Net Exports Net Exports Around Crises 2% F.  I.0% –0.B.

We define economic cycles based on movements in quarterly real GDP in Argentina.60 3.00 7. We report the duration of its recession and its amplitude.00 25.00 42.00 5.A Our goal is to compare the behavior of labor markets during the cur- rent economic recession relative to previous ones. which was developed Dating by Bry and Boschan (1971) and later extended by Harding and Pa- gan (2002) to accommodate quarterly series.A.33 2009q3 Chile 1980q1– 119.00 51. We follow the so-called BBQ algorithm for dating recessions. reported in Table II.57 6.50 2009q2 Mexico 1980q1– 119. The amplitude of a recession (expansion) measures the percentage change in GDP between a peak and trough (between trough and peak).2 below provides some summary statistics on the average severity of each recession in each country in our sample.00 11.25 7.00 11.00 3.00 91. we find 28 re- cessions.00 50.00 28.A.00 7.00 5.40 4.00 5.00 3. Chile.00 77. Brazil.33 2009q3 Colombia 1994q1– 62. The average duration of a recession in the five countries studied is slightly above a year.67 2. vary across countries.00 37.00 10. Country Sample Quarters Episodes Quarters Duration Episodes Quarters Duration Argentina 1990q1– 79.A. Sample sizes.00 42.00 30.00 8. at 5 quarters. The duration of a recession (expansion) counts the number of quarters between a peak and trough (between a trough and peak).00 2009q3 Source: LCRCE Staff Calculations From Global Collapse to Recovery 41 .Appendix II. Colombia and Mexico. Table II. we need Business Cycle to identify the cyclical turning points for each country.1  Dating Recessions in Selected LAC Countries Recessions Expansions   Nº of Nº of Nº of Avg.00 25.00 5. Nº of Nº of Avg.50 2009q3 Brazil 1991q1– 75. Table II.00 3. Overall.1.00 8. Hence. The algorithm defines cycles by identifying troughs and peaks—any quarter lower/higher than the preceding and succeeding two quarters—and using various censoring rules about the minimum duration of the overall cycle as well as the phases of expansion and contraction.

0% –3.7% –0.8% –0.0% –0.8% –0.7% –2.8% 1997q4–1998q3 4 –3.3% 2008q2–2009q1 4 –9.2% –3.0% –1.9% 2001q2–2000q2 4 –3.  Chile D.4% 1998q2–1999q3 6 –5.7% 1994q2–1996q1 8 –8.9% Source: LCRCE Staff Calculations 42 From Global Collapse to Recovery .1% C.4% 2007q4–2009q1 6 –11.2% –1.7% –0.2% 1988q1–1988q3 3 –3.5% 1997q3–1998q1 3 –8.8% 1994q4–1996q1 6 –8.4% –1.9% –2.5% 1998q2–2002q1 16 –28.9% 2008q2–2009q2 5 –4.2  Dating Recessions in Latin America A.5% 1985q4–1986q3 4 –8.2% 2008q2–2008q4 3 –1.8% 2000q4–2001q3 4 –5.9% E.5% –2.9% 2008q3–2009q1 3 –9.6% –2.1% 1987q4–1988q3 4 –6.A.2% –3.7% –0.7% –1.0% –1.5% –2.  Mexico Period Duration Amplitude Quarter Amplitude 1981q4–1984q3 12 –5.4% 1985q2–1986q3 6 –2.1% –1.6% –1.0% 1993q3–1994q1 3 –7.6% –1.3% 1994q4–1995q3 4 –15.5% 2002q2–2002q4 3 –0.5% –0.2% –0.9% 1999q3–2000q1 3 –2.8% –1.  Brazil Quarter Quarter Period Duration Amplitude Amplitude Period Duration Amplitude Amplitude 1992q2–1993q1 4 –6.  Colombia Quarter Quarter Period Duration Amplitude Amplitude Period Duration Amplitude Amplitude 1981q2–1982q4 7 –20.9% 1998q2–1999q2 5 –6.7% 1991q3–1992q1 3 –11.7% –1.Office of Regional Chief Economist Table II.9% –0.  Argentina B.6% 1992q4–1993q3 4 –5.

” a new ac- tive labor market program in June 2008. and the country coverage responds to the countries included in this note. and provide plans to show their future viability. extending non-contributory income support From Global Collapse to Recovery 43 . any firm engaged in a declining activity in the private sector is eligible to receive a monthly fixed-sum of AR$150 (US$ 38) for each of its employees up to a maximum period of six months. ployment insurance. Simi- larly. Brazil Brazil articulated the response of its labor market policies to the in- 17  Some parts of this appendix draw heavily ternational crisis on three fronts: strengthening contributory unem- on Freije-Rodríguez and Murrugarra (2009). contributory unemployment benefits were extended. the “Programa de recuperación productiva” (REPRO) provides income support to firms in distress in exchange of a compromise not to cut employment. up to no more than 12 months. The program was extended as a consequence of the crisis up to December 31st 2009. Participating firms have to show the severity of the economic crisis hitting them. Regarding the protection of jobs. In exceptional circumstances.B This Appendix provides some examples of policies that were either Labor Market introduced in Latin American labor markets or reinforced as a con- Policy Responses sequence of the international crisis.” which combines elements of non-contributory benefits for the unemployed with active labor market policies in the form of assistance in finding a job and training. the benefit can be extended as well as the receiving period. providing training and an opportunity to finish regular school to unemployed young workers (between 18 and 24) with unfinished primary or secondary school. In principle. the government decided to extend eligibility beyond this limit up to De- cember 31st 2009 in case the worker remained unemployed. and iii) employment subsidies. Argentina introduced “Jóvenes con más y mejor trabajo. ii) social protection and policies for unemployment protection. the “Seguro de capacitación y empleo.Appendix II. to the Crisis17 Argentina Argentina responded to the global crisis both reinforcing existing labor market policies and creating new ones. While individuals were in principle eligible for the program for a maximum of 24 months. It also reinforced an existing program. Labor market policies aimed at mitigating the effects of the international crisis can be grouped on three fronts: i) active labor market policies. Its aim is not exhaustive.

The ceiling of eligibility was raised during up to 5 months benefits from the “Seguro de from R$120 (US$ 68) per capita to R$137 (US$ 77) cesantía” while on training. while the second je” (SENA) to provide additional training to 250. come tax reductions for individuals and tax credits for firms that carry out training activities with their workers. is included in a package of reforms of the “Seguro de ment insurance in Brazil is quite limited.000 is related to the innovative program of unemployment young workers. crisis. gram also includes some support to participants in mal sector. an interesting supplementary tors and states. Unemploy. and during the same month.” Within the employ. The first falls within the broad program. a gram may not have cut employment in the previous second law was passed that provides temporary in. in an effort to re- the impact of the international financial crisis on the vitalize this sector and ii) enhancing a major training Chilean labor market.” The maximum period of eligibility measure is the program of “Protección al empleo y became 7 months. As a con. Non-contributory benefits through capacitación laboral. which has effects not only on low wage policies). Within the tion). Eligible individuals are between 14 benefits “Seguro de cesantía. The pro- finished secondary education and working in the for. The benefits are defined per capita. whose monthly (annual) incomes is below the form in kind transfers (e. In February 2009. Firms interested in hiring trainees from the pro- same set of policies. unemployed. but came into effect around May extended the eligibility of the “Seguro desemprego” 2009 and included special provisions to cope with the for two additional months for the “most affected sec.” which allows workers on a vol- the social assistance program “Bolsa familia” were untary basis and as an alternative to a layoff to collect also strengthened.000 (approximately US$ 690).3 million new as 50 percent of the average wage of the worker dur- families became eligible by the end of 2009. and 26 years of age. On the 44 From Global Collapse to Recovery . Among the latter. During the recent crisis. The ing the previous 6 months.g. the benefits obtained through several social security and social assistance transfers.” “Chile solidario” and “Asig. The measure was designed to be in effect workers. the worker keeps his or her labor minimum wage. a new youth employment subsidy tions of severe or extreme poverty in rural and urban law was launched on January 2009. since the minimum wage is used to define between July 1st 2009 and July 1st 2010. Up to 70 percent of the new for those individuals aged between 18 and 24. three months. the minimum contract and all its related benefits (e.” The second set of policy reforms these policies were strengthened or expanded. the government international crisis. This program areas. through the “Servicio nacional de aprendiza- umbrella of employment subsidies. The law provides special tax reductions to Mexico firms employing individuals who are beneficiaries of certain social programs such as “Subsidio familiar.g. with training positions were posted during 2009.” Mexico has in place several active and passive labor “Asignación familiar. covering transporta- Ch$360. market policies. Colombia Chile Colombia articulated its labor market policy response to the crisis on two fronts: i) a series of tax cuts for We identify two set of reforms that tried to mitigate small and medium size enterprises. who live in condi- ment subsidies. During the period the ben- third income support measure was to increase the efits are collected. SENA will provide to these young workers some provides a 30 percent subsidy of the annual income 187 training programs.Office of Regional Chief Economist programs and raising minimum wages. some of nación maternal. health insur- wage was raised from R$415 (US$ 235) to R$465 ance. cesantía” that was launched before the start of the sequence of the international crisis. pension contributions and different insurance (US$ 262). which implies that some 1.

Eligible firms who can prove they turing.100 pesos per worker (US$ 414) during this enroll in the program. operating from February to September of the same Training by the relevant technical education institu- year. As a result. the “Programa de up to September in a maximum amount that equals empleo temporal” (PET) which originally was opera. urban areas. period. and tourism. Peru sos were added to the program. Passive labor market policies til 2010.B  Labor Market Policy Responses to the Crisis 45 . for workers who have lost their job since 2008. In order to make this expansion operative.7 percent relative to pre-tax incomes. Unemployed workers can register are under temporary distress might receive a subsidy themselves in decentralized Labor Ministry offices to of up to 5. with a budget total in 2009 of 2. The World Bank side of active labor market policies. cial security administration (EsSalud) and the public the “Programa para la preservación del empleo” was pension system (ONP). In exchange. “Revalora hit by the slowdown in global demand. payroll tax holiday measures. 1. firms commit to limit the layoffs APPENDIX II. A new program. and health insurance coverage of up to these bonuses. Peru”. The new program is called “Programa de empleo temporal ampliado” (PETA). although these institutions are launched in January 2009 with the objective of main. Bonuses payable twice al million pesos (about US$ 100 million) were added yearly and equivalent to two monthly wages have been to the budget for intermediation services controlled exonerated from social and pension contributions un- by the Labor secretary. The Peruvian Government also launched sectors in manufacturing that have been especially a publically financed retraining program.200 million pesos (approximately US$ 179 In 2009.000 million Mexican pesos tions is offered in the areas of construction. some 500 million pe. was funded with 2. The estimated fiscal cost of this mea- six months after dismissal for the unemployed worker sure of US$212 million is initially covered by the so- and his or her family was granted.250 addition. Also related to active policies. manufac- (US$ 162 million). the Peruvian Congress introduced temporary million). workers’ income will increase by were also enhanced. Individuals’ ability to withdraw 3. expected to seek compensation from the Central Gov- taining employment in firms operating in tradable ernment. while firms funds from retirement accounts while unemployed will not have to pay social security contributions on was extended. The program. a third of the fall in sales during the corresponding tive only in marginal rural areas was extended to cover period.

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