The current global economic crisis brought a string of five years of sound economic growth in Latin America and the Caribbean to an abrupt end. The forecast for regional growth, which averaged 5.3% between 2003 and 2008, has been revised downward as the crisis intensified. Growth last year was 4.3 percent, but the region is projected to contract around 2 percent in 2009, before recovering to approximately 3% percent in 2010.
The effects of the crisis are being felt mostly in the real economy—drop in demand, declining remittances, and falling commodity prices. Nonetheless the region has weathered the current downturn without experiencing massive currency devaluations, bank collapses, debt defaults, inflationary spikes or capital flights. All this is due in part to improved financial regulation and supervision implemented in the wake of the 2001–02 financial crises.
This time around, Latin America is not the epicenter of the crisis; on the contrary, the region is a victim of the collapse at the center of the global economy. And although the situation is volatile, Latin America—as Brazil is already showing—is likely to bounce back faster than other regions because of sound economic fundamentals and better preparedness.
While countries in the region entered the crisis in a relatively favorable position thanks to prudent fiscal policies and the reduction of macroeconomic vulnerabilities during the boom years, all are suffering from the external shock—albeit in diverse ways.
Mexico and Central America are suffering the most from the recession in the United States given their close economic ties and trade relations with their northern neighbor. Remittances were down six percent in 2008 and are expected to fall 10 percent in 2009. Mexico will experience significant negative growth in 2009.
In South America, the initial collapse of commodity prices hit hard commodity rich countries from the region. But recent rebound in prices gives hopes for a fast economic recovery.
Oil exporting nations such as Venezuela and Ecuador will need to adjust spending in response to declining revenues resulting from the steep drop in international oil prices, from US$147 per barrel in July 2008 to around US$ 70 in August 2009.
Countries such as Brazil, Chile, Colombia and Peru have managed to save during the good times, and have more diversified markets and stronger ties to Asian economies. Overall, the best-positioned countries are those with autonomous central banks, flexible exchange rates, inflation targeting regimes, and sound fiscal processes.
Challenges Ahead – Turning The Crisis Into Opportunity
An unprecedented global economic crisis demands unprecedented initiatives to restore growth. Policy makers are facing significant challenges managing the short-term difficulties of the crisis while also maintaining conditions for long-term growth. While 60 million people were lifted out of poverty from 2002-2008 in Latin America and the Caribbean, this trend is now in danger of being reversed. World Bank projections indicate that by the end of 2009 as many as 4 to 6 million people in the region may fall into poverty, earning less than US$4 a day. These circumstances greatly dim the prospect of reaching the anti-poverty Millennium Development Goals by 2015.
As a response to the crisis, Latin American nations are implementing a variety of countercyclical measures including increasing subsidies, lowering taxes and raising public spending, particularly in infrastructure. At first, most policy initiatives sought to ensure the liquidity of local financial markets, but the focus gradually has shifted to fiscal policy and generating employment.
The crisis is also an opportunity for the region to implement reforms necessary for a rapid recovery and a better post-crisis economy. Critical reforms in education standards, logistics and infrastructure will make the region more competitive globally.
In addition, the region has an opportunity to better target financial support to vulnerable groups by reducing the widespread practice of universal subsidies in areas such as college education and utilities. Latin America spends between five and 10 percent of GDP on universal subsidies annually, with one-third captured by the wealthiest quintile of the population.
If redirected to programs such as Conditional Cash Transfer (CCT), such an amount could triple stipends to families to ensure that children and youth get regular health check-ups and attend school. These transfers were pioneered in the region and are becoming more widespread. Programs similar to Brazil’s “Bolsa Familia”, and Mexico’s “Oportunidades” have been launched in Colombia, El Salvador, Jamaica and Nicaragua.
World Bank Assistance
In response to the global crisis, the Bank dramatically increased its support to Latin America and the Caribbean during its fiscal year ending June 2009. The Bank approved US$14 billion in new commitments, almost tripling its regular lending volume, with $13.8 billion in loans from its International Bank for Reconstruction and Development (IBRD) and $203 million in International Development Association (IDA) commitments. Nearly US$3 billion went to expand CCT programs. A similar volume is expected to be delivered during fiscal year 2010.
Brazil, Mexico, and Argentina were the largest borrowers, while the environment, economic policy, and social protection sectors received the largest amount of funding. Support to the region during fiscal 2009 represents 42 percent of total IBRD lending and nearly a third of total Bank IBRD/IDA lending.
Deferred Drawdown Option (DDO), a type of committed credit line, was instrumental for several countries. Nine DDOs were approved for seven countries in fiscal 2009—Colombia, Costa Rica, El Salvador, Guatemala, Mexico, Peru, and Uruguay—and provided an immediate source of liquidity. The new financing instrument reflects the Bank’s commitment to assisting governments in providing positive market signals by creating a preventive source of financing.
The World Bank Group is helping with the financial rescue but believes that world leaders must remain focused on the human consequences. The Bank is calling on developed countries to pledge the equivalent of 0.7 percent of their stimulus packages, or as much as they can in additional money, to a global vulnerability fund to help developing countries that cannot afford to assume deficits or underwrite bailouts.
The Bank responded quickly to unanticipated challenges. It approved US$205 million in rapid response funds to support Mexico’s efforts to fight the spread of the Influenza A/H1N1 virus. It has provided direct support to several countries in the region to mitigate the impacts of the Influenza A/H1N1 virus, including Argentina, Belize, Costa Rica, Dominican Republic, Honduras, and Nicaragua.
The Bank is supporting efforts to develop effective and sustainable ways to promote good governance and transparency. The Bank also offers its clients in the region innovative financial and knowledge products on several issues related to poverty, climate change and competitiveness.
A new Human Opportunity Index, jointly developed by the Bank and researchers from institutions in Argentina and Brazil, shows how circumstances within individual nations enable or prevent access to potable water, sanitation, electricity, and basic education. This opens up a whole new field of study dedicated to targeting public policy focused on improving opportunities for all citizens in the region.
In June, the Spanish government and the Bank launched a US$40 million economic development fund, the Fondo Español para América Latina y el Caribe (Spanish Fund for Latin America and the Caribbean (pdf)). The main purpose of the two-year fund is to share lessons learnt from the successful Spanish economic and social development strategy with Latin American and Caribbean countries, as well as support World Bank strategies in key areas for the region including infrastructure, sustainable development, private sector development, governance and accountability.
The Bank has customized its regional strategy to meet the increasingly diverse needs of countries in the region. For middle-income countries, the Bank offers an integrated package of services, including analysis and advice, new financial products, and technical assistance.
Active G-20 members such as Argentina, Brazil, and Mexico are key players on issues of global concern. The Bank seeks to shore up their efforts by partnering with them through innovative programs and by supporting South-South cooperation.
In December, the Chief Economist’s Office released its annual flagship report, “Low Carbon, High Growth: Latin American Responses to Climate Change (pdf).” The report notes that Latin America produces only 6 percent of global emissions from energy sources and has a cleaner energy mix than other regions in the world. It concludes the region can become a “solution-provider” for global warming mitigation and adaptation to climate change impacts.
The region has piloted new technologies and approaches to reduce emissions. Brazil is moving towards energy independence through the expansion of alternative energy sources such as hydroelectricity, ethanol, and biodiesel. Its sugar-based ethanol production is financially and environmentally sustainable without diverting land from food crops.
Environmentally friendly public transport policies demonstrated by Curitiba (Brazil) and expanded in Bogota (Colombia) are now underway in dozens of cities in the region. Costa Rica has received worldwide recognition for its efforts to place a financial value on preserving ecosystems through several initiatives on “payments for ecosystems services.”
To better respond to these countries’ development agendas, the Bank has introduced several innovative programs:
A US$400 million loan to Uruguay in support of the government’s reform program and additional financing to face the impact of the global economic crisis.
A US$100 million loan to launch a public bond in Uruguayan Pesos, the Bank’s first ever to be issued for the purpose of a back-to-back disbursement of a specific loan.
Helping the Poorest
The region’s conditional cash transfer programs were expanded with nearly US$3 billion from the Bank in fiscal 2009 as a way of protecting the most vulnerable from the impact of the global crisis. IDA provided US$203 million in assistance to the poorest countries in Latin America and the Caribbean in fiscal 2009, with non-concessional lending and grants to five countries.
Some examples of these programs include:
A US$1.5 billion loan to Mexico to expand its Oportunidades CCT program.
A US$636.5 million loan to Colombia for its Familias en Acción CCT program.
A US$40 million grant and credit financial support to improve water and sanitation services in Nicaragua.
US$30 million in financial support for the Rural Alliances Project in Bolivia, which aims to improve accessibility to markets for poor rural producers in selected sub regions.
A US$25 million grant approved for Haiti to finance the reconstruction and emergency maintenance of infrastructure destroyed or damaged by the hurricanes and tropical storms that struck the country in August and September 2008.
A US$10 million zero-interest loan to address the food crisis in Honduras.
On June 30, 2009, the last day of the fiscal year, Haiti was granted US$1.2 billion of debt relief by reaching the completion point under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative approved by the Boards of the International Development Association (IDA) and the International Monetary Fund. Haiti is now the 26th country to reach the completion point under the Initiative. The HIPC Initiative and the Multilateral Debt Relief Initiative saved Haiti US$265 million and US$972.7 million.
Engaging Stakeholders
In April 2009, the Latin America and Caribbean region held a seminar on the financial crisis during the 2009 Spring Meetings. Newly elected President Mauricio Funes from El Salvador was the keynote speaker.
In November 2008, more than 100 senior lawmakers and executives from key energy companies in the Western Hemisphere as well as representatives from the G-8 group of nations met in Mexico City. They agreed that efforts to solve the global financial crisis should be economically sustainable and help reduce greenhouse gas emissions by 80 percent below 1990 levels by 2050. The meeting, hosted by the Mexican Congress, and co-sponsored by the World Bank and the Global Legislators’ Organization (GLOBE), marked the first time lawmakers from the Americas assembled specifically to discuss and agree on measures to address climate change.
In October 2008, the Ministry of Finance of Mexico and the World Bank organized the first forum for finance spokespeople from the region. A Web-based platform was launched to provide spokespeople with a forum to continue the conversations and exchanges that began in Mexico.
An unprecedented 
The crisis is also an opportunity for the region to implement reforms necessary for a rapid recovery and a better post-crisis economy. Critical reforms in education standards, logistics and infrastructure will make the region more competitive globally.
Brazil, Mexico, and Argentina were the largest borrowers, while the environment, economic policy, and social protection sectors received the largest amount of funding. Support to the region during fiscal 2009 represents 42 percent of total IBRD lending and nearly a third of total Bank IBRD/IDA lending.
Active G-20 members such as Argentina, Brazil, and Mexico are key players on issues of global concern. The Bank seeks to shore up their efforts by partnering with them through innovative programs and by supporting South-South cooperation.
The region’s conditional cash transfer programs were expanded with nearly US$3 billion from the Bank in fiscal 2009 as a way of protecting the most vulnerable from the impact of the global crisis. IDA provided US$203 million in assistance to the poorest countries in Latin America and the Caribbean in fiscal 2009, with non-concessional lending and grants to five countries.
In April 2009, the Latin America and Caribbean region held a seminar on the financial crisis during the 2009 Spring Meetings. Newly elected President Mauricio Funes from El Salvador was the keynote speaker.
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