The global crisis and the economies of Latin America
Late in 2008 the world economy stumbled when a banking crisis revealed financial problems at the heart of most developed economies. World trade fell 11% in a year and global savings 16%, their biggest falls in more than three decades (Figure 0.1).1 Commerce and finance thus both propagated the recessionary tide round the world, leading global gross domestic product (GDP) to fall by 2.5% in 2009 – its steepest drop since the Great Depression.2
Figure 0.1. Global trade and global savings (percent anual growth)
The joint collapse of the commercial and financial channels of global markets was strongly felt in Latin America. Demand for Latin American goods and services plummeted, exports falling 3.5% by volume in 2009. A 10% deterioration in the region’s terms of trade compounded this to produce a 14% decline in Latin America’s export purchasing power – the proportion of annual imports covered by a year’s exports. This shock was the worst experienced in the three decades for which there is standardised data for the region (Figure 0.2).
Figure 0.2. External commercial and financial shocks (years 1985-2009)
In balance-of-payments terms the shock in the last quarter of 2008 was likewise the worst since 1985. Much was restored in 2009, but not all. Latin America’s net private portfolio flows reversed from an inflow of USD 42 billion in 2007 to a net outflow of USD 24 billion in 2009. Similarly, in the four quarters following the start of the crisis in September 2008 the volume of domestic assets purchased by foreign investors fell by more than half against the preceding four quarters – from more than USD 200 billion to less than USD 100 billion (the outlined blue diamond in Figure 0.2 representing 2008Q3 to 2009Q2). Foreign direct investment (FDI), a subcomponent of purchases, also fell despite its historical stability.
Contrary to the hope expressed by many before the event that Latin America had somehow decoupled from future global crises, this external commercial and financial pressure pushed the region into deep recession. Latin America’s GDP fell by 1.8% in 2009, a greater drop than followed the Asian and Russian crises in 1997 and 1998 or the US recession in 2001.3 On the other hand, the region performed significantly better than the 3.5% average drop observed in OECD economies or the 2.5% fall which Latin America had sustained at the onset of the debt crisis in 1983.
The downturn was widespread, affecting all Latin American countries. Data for ten selected economies are shown in Figure 0.3. All slowed significantly from the average annual growth they had experienced between 2006 and 2008, and some fell into negative territory. The extent and co-ordination of the falls mean that this was more than a correction to the strong growth of preceding years.
Although all economies suffered, the extent differed. The worst hit were Venezuela and Mexico with loss of 10 percentage points, but even Uruguay — the least affected — suffered a 4 percentage-point drop. Amid these two extremes, Argentina, Costa Rica, Mexico and Peru saw a slowdown of more than 7 percentage points; followed by Brazil, Chile and Colombia which suffered less but still lost over 5 percentage points of growth.
Figure 0.3. Recessionary impact of the crisis on Latin America and the OECD
Despite this huge loss of economic activity, expectations of medium-term economic performance remained untouched.4 As emphasised in last year’s Outlook (OECD, 2009a), the impact of a global crisis on a single year’s GDP matters far less than any sustained damage to a country’s longer-term growth prospects. The "lost decade" that followed the debt crisis of the 1980s is a good and recent example. This low-growth phase in fact extended for as much as a quarter of a century in several Latin American economies and, looking back, the apparently dramatic 2.5% fall in regional GDP in 1983 dwindles in comparison to the cumulative 30% loss of potential GDP wrought by 25 years of lower long-term growth rates. It is still far too soon to draw long-term conclusions about the effects of the crisis, but there is early evidence that Latin America did better in 2009 – at the micro as well as the macro level of the economy (see Box 0.1). Current expectations of a prompt recovery certainly contrast sharply with the 1980s.
Box 0.1. The impact of the crisis on investments in innovation
When trying to assess the significance of an economic slowdown it is relevant to look at how innovation activities were affected since they will play a crucial role in any future growth (Grossman and Helpman, 1991; Aghion and Howitt, 1998). Credit tightening across Latin America combined with demand uncertainties contributed to an estimated fall in tangible capital investments of 13.6% in 2009 (World Bank, 2010). In a recent survey of (mostly large) manufacturing firms in Latin America conducted for the OECD Development Centre and analysed in Paunov (2010) most respondents said they had introduced new products and processes since 2008. Firms were equally confident about their country’s future economic performance and innovation performance. Yet, one in four of them had discontinued innovation investment projects in response to the global financial crisis.
Such evidence is economically unsurprising given that investments in innovation projects tends to be pro-cyclical (OECD, 2009b). The crisis has constrained access to financing, through both its effect on internal cash-flows and access to external funds, and this is likely to have played an important part. A deeper analysis of the survey data confirms it: more vulnerable firms were more likely to discontinue innovation projects than their less vulnerable counterparts. Notably, firms with access to public financing were less likely to discontinue their projects, while young firms – a group which chronically suffer from weaker access to credit than older firms – were more likely to do so (Paunov, 2010).