Is Latin America Ready for the Return of Normal?

November 27, 2013

This is a joint post with Maria Cecilia Ramirez

New uncertainties come to the fore now that the global economy, after six years of turmoil, is showing signs of a return to a more normal situation, where real interest rates in the United States turn positive and commodity prices stabilize at a somewhat lower level, due to a cooling of red-hot demand from China. How will Latin America, which has been buoyed by capital inflows seeking higher returns, respond to the return of normal?  Will the economic and social progress observed during the past two decades hold?

Latin America’s performance has indeed been impressive. High growth rates and huge efforts to improve the social policy framework have cut the regional poverty rate from 48% in 1990 to 31% in 2010; inequality has declined and there has been remarkable growth in the size and influence of the middle class. Moreover, the region’s resilience to the 2007-08 financial crisis and its aftermath contrasts favorably with previous crisis episodes, when Latin America battled serious financial troubles and endured painfully slow recoveries that imposed huge social costs. This time, Latin America’s improved performance during the global crisis resulted from better macroeconomic policy frameworks, including the accumulation of ample foreign reserves stocks and exchange rate flexibility as key shock buffers. Moreover, this crisis came in the midst of an unprecedented commodities prices boom, so the region enjoyed strong terms of trade and solid fiscal positions.

While most analysts agree that Latin America’s response to the global crisis was exceptionally favorable, there is no consensus on how the region will fare in the years ahead. Some think that exchange rate flexibility and the timely adoption of macroprudential policies by many countries will allow them to cope with future difficulties. Others suggest that sustained and equally shared growth depend on the region’s capacity to undertake major structural reforms.  

These contrasting perspectives will be debated at the Latin American Shadow Financial Regulatory Committee (CLAAF) meeting hosted by CGD’s Latin America Initiative next week. Members of the CLAAF—many former senior finance officials from the region—will seek to reach a consensus on how Latin America will fare with the return to normal, and what policies can increase the chance of continued success.  Our recommendations will be summarized in a statement to be released on Tuesday, December 3rd at CGD’s terrific new headquarters. If you have read this far and you will be in Washington, please join us! You can sign up here.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.