Friday, May 29, 2009

Latin America and the current global economic crisis

Latin America economies and its policy makers , are like the rest of the world trying to figuring out the way to minimize the losses arising from the current global financial crisis .Some countries are in a better institutional shape than others. According to a recent “Stress time competitiveness index “, the top of the list about this test, includes Denmanrk (which scores the maximum 100), Singapur (96,4) and Qatar(87,93) . Latin America economies scored heterogeneously on a three segment scale :The first segment includes :Chile,(67,79) Brazil (55,05), and PerĂº ( 44,39) .The second segment includes :Colombia (35,41)and Mexico(30,75), and the last segment includes Venezuela (0,0)and Argentina(0,04). Besides the competitiveness index 2009 results for Latin America economies , are concentrated in two groups : the one within places 21 and 40 :Brazil (40), Chile(25) and Peru(37) which has just signed a Free trade agreement with China, and the ones within places 41 to 57 which includes Mexico(46); Colombia(51) , Argentina(55) and Venezuela(57).-
There is an obvious relationships between the two measures. The Latin America economies best suited for coping with the effects of the crisis, are the one better qualified in terms of its competitiveness index. It follows that competitiveness as a goal for economic policy, pay off when it comes to confront severe fluctuations in global economies, like the current one underway ,because it means not only better tools and capabilities to overcome its effect, but a lower impact on welfare level than otherwise as well.
The welfare level, decrease during economic crisis because unemployment rise therefore income fall, and at the same time , firms have both human and financial capital losses which decrease investment . As a result, resources must be reallocated to a different and more efficient uses ,which imply a transaction cost because it take time to identify those new uses. The more flexible markets are ,the lower this adjustment (transaction cost ) and the faster the economy gets back its recovery path. Similarly, robust institutions and proper economic policy ,support a better prospect for economic recovery.
However in the current situation financial the weakness of banking system , make the whole process more complex. It is not only to get back on track the real sector , but also the financial sector as well , to make possible the economic recovery.
Thus ,those countries in a better shape, have better chances to adapt themselves quickly to this new environment , reducing the expected welfare losses and moving faster to he starting line for recovery.-
The traditional approach of both expansive fiscal and monetary policy, has been followed by all of this economies. However ,the impact will differ among them because of different scope , different structural conditions(mentioned above),and different amounts involved. Latin America economies even in a better shape than in the past (the eighties ) to solve this crisis ,will hardly avoid an economic contraction for this year. Some estimation (LAEC) expects a GDP contraction of more than .-0,3%, while others international institutions expect -1,5% or so for this year, given the further deterioration of mexican economy.Thus, no matter the implementation of policy prescription and good competitiveness , it is unlikely for Latin America economies to get positive economic growth this year.