Latin America and the Caribbean: Economic Challenges and Opportunities in a Time of Crisis

Alicia Bárcena, Executive Secretary of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), described the devastating effects of the global financial crisis in Latin America, at the same time pointing out opportunities to re-think the role of the state in development and craft a new fiscal covenant. She addressed these issues at a September 11, 2009, Director's Forum.

The Global Financial Crisis: Cause and Effect
During the boom years of 2003-2008, many countries adopted prudent fiscal policies, reduced the levels of public debt, showed greater exchange rate flexibility, accumulated international reserves, and posted current account surpluses. These positive trends led some to predict that Latin America would be spared the worst effects of the global economic downturn. Those hopes have been dashed, she said, and there has been no decoupling of the crisis.

Foreign Direct Investment has fallen 35-45 percent. Remittances, which account for approximately half the capital that flows into the region, have dropped by 5-10 percent. The greatest shock, however, has been felt in the trade sector. In contrast to the vast expansion of trade between 2003 and 2008 (it grew 138 percent in value and 49 percent in volume), the value of exports has declined by 31 percent and imports have fallen 29 percent. The decline in trade in 2009 has been the worst experienced by the region since the Great Depression, Bárcena said, and with 80 percent of the world's economies in contraction, the recovery will be slow. Looking ahead, she predicted a "new normality" based on lower rates of growth. The four principal channels of recovery—foreign direct investment, remittances and tourism, commodity prices, and external demand—are all negative.

Bárcena noted that an additional four million people had lost jobs in the formal economy as a result of the crisis, with the loss of employment in the informal sector much harder to measure. It took more than 25 years for poverty rates in the region to decline from 40.5 percent in 1980 to 34 percent in 2007, lifting some thirty-seven million out of poverty. These gains are now threatened by the global recession.

Major Gaps
Bárcena recalled that "Latin America is the most the most unequal region of the world," calling on governments in Latin America and the Caribbean not to "put poverty last." It takes twice as long to recover on a social front than it does an economic front, she observed. Growth and development are not synonymous, and the prevailing development models and paradigms are in crisis. Models based on deregulation and on the predominance of the financial sector over the productive are no longer viable, nor are production patterns that jeopardize the environment on a global scale.

Bárcena underscored the region's persistent gaps in income distribution and social protection, education, productivity, and investment. A vicious poverty cycle emerges from these gaps: the poor lack education, leading to unemployment, informality, and low productivity, until at the end of their lifetime they lack social protection as part of an increasingly aging population. Latin American economies "are based on industries that extract natural resources with no innovation and very little competitiveness," Bárcena maintained, calling for policies to improve productivity.

After the Crisis: Dilemmas and Uncertainties
Bárcena outlined a number of dilemmas and uncertainties arising from the crisis, including how the region would respond to old and new forms of protectionism, contribute to a new international financial architecture, and approach issues of regulation. Additionally, without the necessary social protection systems, informality and illegality are becoming more intertwined.

Challenging Transitions
Latin America and the world are in the midst of five transitions, Bárcena stated.

1. The role of the state must be strengthened vis-à-vis the market, because the economic crisis proved that "the market alone is not going to solve all of our problems."

2. Traditional geopolitical alliances are giving way to new alliances based on economic as well as other issues, including climate change, peace, and security. The new alliance of Brazil, China, India, and Russia (the so-called "BRIC's") is one such example.

3. Growth models must transition from social exclusion to a more inclusive development.

4. Research and development are not the same as innovation, she observed. What is needed is "extensive innovation for all."

5. For development to be sustainable, countries must transition from an oil-based economy to a carbon-free or low-carbon economy.

Opportunities for Change
The crisis offers a chance for the state to develop new fiscal and social covenants in which the state enters into a more proactive relationship with the market, protects the most vulnerable sectors, and helps spread technology and innovation in order to ensure inclusive development. The main objective of state action, she said, was to foster equality. A new fiscal covenant is needed that would include tax reform guaranteeing both efficiency and progressiveness, and the state's guarantee of public goods founded on rights-based universalism rather than assistance. "Politics is back," Bárcena declared. The state must concern itself with the provision rather than the ownership of goods, and pursue a vision of integration that goes beyond trade. CEPAL will endeavor to help politicians make the difficult choices and trade-offs in order to pursue a long-term development policy and build better quality democracies.