Download from global collapse to recovery

From Global Collapse
to Recovery
Economic
Adjustment
and Growth
Prospects
in Latin America
and the Caribbean
THE WORLD BANK
Office of the Chief Economist
Latin America and the Caribbean
1818 H St. NW
Washington, DC 20433
www.worldbank.org/lac
THE WORLD BANK
From Global Collapse
to Recovery
Economic Adjustment and Growth
Prospects in Latin America
and the Caribbean
Office of the Chief Economist
Latin America and the Caribbean
THE WORLD BANK
Foreword
This semiannual report—a product of the Office of the Chief Economist for the Latin America and the Caribbean Region of the World
Bank—analyzes where the Latin America and the Caribbean (LAC)
region stands following the global crisis, its growth prospects and
main challenges. The first part of the report focuses on macroeconomic and financial aspects, emphasizing the outlook going forward.
The second part examines some aspects of the adjustment in labor markets during this crisis in comparison to previous ones. The
preparation of this report was led by Augusto de la Torre, Regional
Chief Economist, in close collaboration with César Calderón, Tatiana
Didier, Julian Messina, and Sergio Schmukler. Paula Pedro, María
Virginia Poggio, and Carlos Felipe Prada provided outstanding research assistance. We would like to thank Tito Cordella, Francisco H.
G. Ferreira, Samuel Freije-Rodríguez, Gladys López-Azevedo, William
Maloney and Lars Christian Moller for their invaluable comments.
We also extend our gratitude to M. Ayhan Kose (IMF) for providing
us with the results of his research on the decomposition of business
cycles into their global, regional, and idiosyncratic components.
From Global Collapse to Recovery
3
Part I
Executive Summary
LAC Recovering
in a Multi-Polar
Global Economy
The global crisis is now in the rear view mirror and world growth is
being restored. In sharp contrast with past episodes of global turmoil, this time the recovery is led by the periphery—specifically by
the larger and more dynamic emerging markets (Brazil, China, India,
South Korea, Malaysia, Philippines, and Thailand). For this group of
emerging markets (EMs), the contraction in economic activity was
much smaller than that of rich countries, the recovery started earlier, and the rebound has been much steeper. LAC is second among
emerging regions, after Asia, in the strength of the recovery.
LAC comes out of the crisis with a bruised “income statement”,
no doubt, but its economic downturn in 2009 was less dramatic
than that other of regions and it led to a milder than expected
increase in unemployment when compared to past downturns.
Moreover, LAC’s “balance sheet” was not impaired by the crisis.
Due to greatly improved macro and financial policy frameworks
in LAC, factors that used to magnify external shocks (i.e., weak
currencies, weak fiscal processes, and weak banking systems) this
time helped cushion the shock. Several LAC countries were able to
conduct countercyclical policy, particularly in the monetary front,
for the first time in decades. The effectiveness of countercyclical
policies in LAC was complemented and enhanced by multilateral
institutions’ sizeable, flexible, and timely provision of liquidity and
budget-support financing.
The current pattern of global recovery has favored LAC so far.
Countercyclical policies have supported domestic demand in
the larger LAC countries and external demand from fast-growing
EMs, especially China, has boosted exports and terms of trade
for LAC’s net commodity exporters—which are mainly located in
South America and account for over 90 percent of the region’s
population and GDP. Prospects for LAC in the short-term thus
look good—regional economic activity is forecast to expand by a
solid 4 percent in 2010. Beyond the cyclical rebound, however, a
higher trend growth will not be as easy to sustain for LAC because
future economic dynamics for the rest of the world are clouded
by uncertainty and complexity. It is unclear if rich countries will
be able to overcome the growth-impairing effects of high government indebtedness without a significant increase in inflation further down the line. And while growth in LAC (especially in South
America) can continue on the strength of its ties to emerging
Asia, there are doubts about the sustainability of China’s invest-
From Global Collapse to Recovery
5
Office of Regional Chief Economist
ment-reliant/export-based growth model. A smooth
shift towards more of a consumption-based growth
model in China would be easier to achieve with the
help of international macroeconomic policy coordination, which seems unlikely to materialize at this
stage.
While central banks in rich countries will have to keep
interest rates low to support their sagging economies,
EMs will have hike them earlier to control inflation expectations as signs of economic overheating surface.
The resulting widening of the interest rate differential will further boost capital flows to LAC, intensifying
policy tensions vis-à-vis the risks of an overshooting
in the appreciation of LAC currencies (with potentially
permanent adverse effects on export competitiveness)
and excessive credit expansion (which may threaten
financial fragility down the line). The policy debate in
LAC going forward will thus tend to focus on macroprudential policies to dampen credit creation as well
as on policies to curb undue currency appreciation
(international reserve accumulation, controls on capital inflows, fiscal tightening).
The region’s major longer-run challenge going forward
will be to craft a bold productivity agenda. While the
process of convergence towards rich-country standards of living has eluded LAC for more than a century, hopes that this trend may be changing emerged
before the crisis, when several LAC countries other
than Chile recorded visible productivity growth. With
LAC coming out of this crisis relatively well positioned,
such hopes are rekindling, especially considering that
the improved macro-financial resiliency of the region
gives greater assurance that future gains from growth
will not be wiped out by financial crises. In addition,
LAC has been making significant strides in the equity
agenda and this could help mobilize consensus in favor of a long overdue growth-oriented reform agenda.
But the jury is out on whether the region will be able to
seize the opportunity to boost long-run growth, especially considering the large gaps that LAC would need
to close in such key areas as saving, human capital
accumulation, physical infrastructure, and the ability
to adopt and adapt new technologies.
6
From Global Collapse to Recovery
LAC’s natural resource wealth can broaden the scope
for seizing the growth opportunity, but only if the associated windfall earnings are managed judiciously
within a long-term horizon, so as to avoid falling victim
to the so-called “natural resource curse.” A clear sign
that the downside risks of commodity abundance are
being avoided would materialize if commodity exporting countries mange to save (via cyclically adjusted
primary fiscal surpluses) a substantial fraction of the
commodity-related revenue windfalls.
After the fall, LAC stands tall
As discussed in our previous semi-annual report of
September 2009, “Update on the Global Crisis: The
Worst is Over, LAC Poised to Recover,” the 2008–09
crisis reached its darkest phase in the fourth quarter
of 2008 and the early months of 2009, when the global credit crunch originated in the US shut down all
economic engines of world growth. During that time,
the systemic and global propagation of the downturn
dominated country-specific strengths and rates of
economic growth took a nose dive across countries in
a highly synchronized manner. A full meltdown of financial intermediation in the rich countries was averted and confidence began to stabilize, on the strength
of a broad menu of unprecedented risk-absorption
and stimulus policies, led by the U.S. Federal Reserve
Bank. In the process, however, the balance sheets of
public sectors in rich countries were weakened by a
major increase in indebtedness, raising the risk of fiscal crises down the line (see below).
While the downturn in growth was globally synchronized, economic performance and policy reactions
varied across countries, with some coping better than
others. Like most countries in the world, LAC came
out of the crisis with a bruised “income statement”
but, unlike rich countries and some of the emerging
economies in Eastern and Southern Europe, LAC’s
“balance sheet” was not impaired. This remarkable
fact stands in sharp contrast with LAC’s own past experience, where domestic currency, banking and/or
debt crises tended to wreak havoc at home following
The World Bank
a major external shock. In other words, while LAC experienced a marked slowdown in growth it did not suffer systemic damage, and this has raised the relative
attractiveness of many LAC countries as destinations
for investment and placed them in a good position to
resume growth.
In particular, LAC’s recession in 2009 (a GDP contraction of 2.3 percent) was deeper than that of the East
Asian Tigers (0.1 percent) but milder than that of highincome countries (3.4 percent) and Eastern Europe
(5.7 percent) (Figure 1.A). Excluding Mexico, moreover, whose output contraction of about 6.5 percent
was a regional outlier, LAC’s GDP hardly contracted in
2009. In addition, LAC’s “growth collapse” (the difference in GDP growth rates between 2009 and 2007) of
6.3 percentage points (pp), although large in absolute
terms, was just under that of the industrial countries
and East Asian Tigers (6.9 pp and 7.4 pp, respectively) and much smaller than that of Eastern Europe
(12.9 pp) (Figure 1.B).
To be sure, the recession in LAC, while milder than
expected, led to a partial reversal of the robust poverty reduction gains that the region achieved in the
five years prior to the crisis. While 60 million Latin
Americans are estimated to have left the poverty
ranks during 2002–2008, some 9–10 million people
joined the poor in 2009, and that number would have
been greater had it not been for the fact that—again
breaking with history—LAC governments were able to
maintain, and in many cases actually step up, social
assistance programs, including the very effective conditional cash transfers schemes that have become a
LAC trademark in social policy.
From a cross-country perspective, as analyzed in
greater detail in Appendix I.A, growth collapses
around the world tended to be larger in economies
characterized by greater trade openness, higher trade
dependence on rich country markets, higher share of
manufacturing exports, and weaker banking systems.
Moreover, improvements in LAC’s macro-financial
Figure 1 Real Growth and Growth Forecasts Across Regions
A. Growth Across Regions, 2009
B. Growth Collapse
Real GDP Growth in 2009 Around the World
Annual Real GDP Growth Rate
GDP Growth Collapses Around the World
Differences Between Growth in 2007 and 2009
10%
0%
8%
–2%
6%
–4%
4%
2%
–6%
0%
–8%
–2%
–10%
–4%
–12%
–6%
–8%
ECA
OECD
LAC
East
Asian
Tigers
SSA
MENA South
Asia
China
–14%
ECA
East
Asian
Tigers
OECD
LAC
China
SSA
MENA South
Asia
Note: Growth collapse is defined as the difference between the GDP growth rate in 2009 vis-à-vis growth in 2007. ECA refers to Eastern Europe and Central Asia countries. East Asian Tigers are Hong Kong,China; Indonesia; Korea,Republic of; Malaysia; Singapore; Taiwan,China;
and Thailand. OECD refers to OECD-member countries. LAC refers to countries in Latin America and the Caribbean. SSA refers to SubSaharan Africa countries. MENA makes reference to Middle East and North African countries. Data comes from Consensus Forecast as of
December 2009 for countries that have not published 2009 growth figures yet. Source: Bloomberg, IMF International Financial Statistics
(IFS) and Consensus Forecasts.
PART I LAC Recovering in a Multi-Polar Global Economy
7
Office of Regional Chief Economist
Importantly, the flexible, sizeable, and timely provision
of liquidity and budget support financing by multilateral financial institutions (including the IMF, World Bank,
IDB, and CAF) complemented and boosted the ability
Figure 2 LAC: A Safer Integration
Net Creditor
A Safer Integration in LAC
10%
5%
0%
Net Debt Position vis-a-vis
Rest of the World
–5%
–10%
–15%
–20%
–25%
–30%
–35%
–40%
Net Equity Position vis-a-vis
Rest of the World
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Countercyclical capacity is a new and certainly notable feature in LAC’s macroeconomic policymaking,
a region where in the past external shocks were instead amplified by weak macroeconomic fundamentals. This capacity, furthermore, is a fruit of steady
institution building over the past 25 years involving a
virtuous combination of: more robust monetary policy
frameworks (including greater exchange rate flexibility
and credible and professional central banks), more
viable fiscal processes (although these tend to remain
pro-cyclical in most of LAC, with the salient exception
of Chile), sounder and better regulated banking systems, a significant reduction of currency mismatches
in debtor balance sheets, and a safer integration into
international financial markets. The latter reflects a
process that begun in this millennium, whereby LAC
became a net creditor to the rest of the world on the
debt side (that is, the side where systemic vulnerabilities can easily arise) while the rest of the world has become an increasing net claimant on LAC on the equity
side (that is, the side where systemic vulnerabilities
are much less likely to emerge) (Figure 2).
of LAC’s more robust macro-financial and social policy frameworks to cushion the effects of the external
shock.1 Indeed, the prompt response by multilaterals
constituted a more prominent feature in the management of this crisis compared to previous ones. In this
connection, a recent IDB study (Izquierdo and Talvi,
2010) that quantitatively assesses the impact of multilateral finance during the crisis finds that: (i) developing countries with access to multilateral resources
outperformed those without it; and (ii) it was the combination of multilateral financial support and improved
macro-financial fundamentals which enabled LAC to
better withstand the crisis. The shock absorption capacity resulting from this combination also helps explain why labor markets in LAC behaved differently
this time around, with unemployment rising less than
in past crises (controlling for the size of the economic
downturn) and the share of informal employment (surprisingly) not increasing. Part II of this report provides
a detailed comparative analysis of the dynamics of labor markets in this and previous downturns.
Net Debtor
policy frameworks paid off. They enabled LAC to better cushion the external shock and undertake countercyclical policies, especially on the monetary front
but also, to a lesser extent, on the fiscal side. While
banking system weaknesses did not play a role in
most LAC countries (with the possible exception of
some Caribbean countries), the rest of the mentioned
factors help explain why, for instance, the growth collapse was more pronounced in Argentina, Mexico,
Costa Rica, Panama and Peru compared to, say, Brazil and Chile, and why the growth collapse was comparatively very small in, say, Bolivia.
Source: The net debt position (vis-à-vis ROW) is the sum of debt
assets and reserves minus debt liabilities. In turn, the net equity position (vis-à-vis ROW) is the sum of net FDI assets and net portfolio
equity assets. The sample ranges from 1990 to 2007. Source: Lane
and Milesi-Ferretti (2007).
The World Bank’s commitments to disburse to the LAC region rose from an average of nearly US$ 5 billion per year during
FY2003–FY2008 to around US$ 14 billion in FY2009. The average size of IBRD loan to countries in the region increased from
US$ 116 million in FY2003–FY2008 to US$ 271 million in FY2009, as a large share of World Bank lending in 2009 took the form
of fast-disbursing budget-support finance.
1 8
From Global Collapse to Recovery
The World Bank
The global recovery: contrasting
paths for the center and the
periphery
A year has passed since the first signs of a recovery, or
the so-called “green shoots,” started to sprout systematically across countries. For the world as a whole, the
cyclical recovery has so far taken a sharper V-shape
than was expected a year ago, not least because economic activity is rebounding from a very low base.
There has been a strong and steady comeback in as-
set prices, a sharp compression of spreads over U.S.
Treasury securities, and a robust pick-up in commodity prices. Moreover, world trade volume, after falling
more than 20 percent between April 2008 and May
2009, has rebounded significantly, already reaching
mid-2007 levels and thus attenuating fears of a tradeless recovery. Global liquidity remains abundant and
a vigorous search for yield seems underway, spurred
by low interest rates, and capital flows are returning
to pre-crisis paths while increasingly being directed
towards emerging markets (Figure 3).
Figure 3 Recovery in Financial Markets:
A. Stock Prices
B. World Trade Volumes
Stock Prices Around the World
Indexes:
Jan-06=100
Stock
Prices Around
the World
World Trade Volumes
Seasonally
Adjusted,
2000=100
World
Trade Index
Volumes
Seasonally Adjusted, Index 2000=100
LAC
145
150
140
145
ECA
UK
ECA
80
Japan
80
Japan
Jan-06
Jan-06
Mar-06
Mar-06
May-06
May-06
Jul-06
Jul-06
Sep-06
Sep-06
Nov-06
Nov-06
Jan-07
Jan-07
Mar-07
Mar-07
May-07
May-07
Jul-07
Jul-07
Sep-07
Sep-07
Nov-07
Nov-07
Jan-08
Jan-08
Mar-08
Mar-08
May-08
May-08
Jul-08
Jul-08
Sep-08
Sep-08
Nov-08
Nov-08
Jan-09
Jan-09
Mar-09
Mar-09
May-09
May-09
Jul-09
Jul-09
Sep-09
Sep-09
Nov-09
Nov-09
Jan-10
Jan-10
Mar-10
Mar-10
30 S&P
125
130
120
125
120
Net Private Capital Flows to Emerging Economies
Net Private CapitalUS$
FlowsBillion
to Emerging Economies
US$ Billion
Private Flows
1,000
800
Private Flows
800
600
600
400
400
200
FDI
2010f
2010f
2008
2008
2009f
2009f
2007
2007
2006
2006
2005
2005
Portfolio Equity
Investment
Portfolio Equity
Investment
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
1997
1997
1996
1996
–200
Debt Investment
1995
1995
0
–200
FDI
Debt Investment
200
0
D. Commodity Prices
Wheat,
Copper
Soybean,
01-Jan-05=100
Wheat,
Copper
and and
Soybean,
01-Jan-05=100
C. Capital Flows
1,200
1,000
Imports
135
140
130
135
30 S&P
1,200
Exports
Imports
Commodity Prices
Wheat, Copper and
Soybean: Prices
Index Jan-01-05=100
Commodity
in Current
US$
Wheat, CopperOil
andWTI
Soybean:
Index
Jan-01-05=100
Oil WTI in Current US$
350
150
130
Wheat
350
300
Wheat
130
110
Copper
300
250
Copper
250
200
150
Soybean
Soybean
110
90
200
150
90
70
150
100
70
50
100
50
50
Oil (rhs)
Oil (rhs)
50
30
Oil WTI,
Oil WTI,
Current
Current
US$US$
UK
Exports
155
160
150
155
Jan-06
Jan-06
Mar-06
Mar-06
May-06
May-06
Jul-06
Jul-06
Sep-06
Sep-06
Nov-06
Nov-06
Jan-07
Jan-07
Mar-07
Mar-07
May-07
May-07
Jul-07
Jul-07
Sep-07
Sep-07
Nov-07
Nov-07
Jan-08
Jan-08
Mar-08
Mar-08
May-08
May-08
Jul-08
Jul-08
Sep-08
Sep-08
Nov-08
Nov-08
Jan-09
Jan-09
Mar-09
Mar-09
May-09
May-09
Jul-09
Jul-09
Sep-09
Sep-09
Nov-09
Nov-09
Jan-10
Jan-10
Mar-10
Mar-10
180
LAC
Jan-06
Jan-06
Mar-06
Mar-06
May-06
May-06
Jul-06
Jul-06
Sep-06
Sep-06
Nov-06
Nov-06
Jan-07
Jan-07
Mar-07
Mar-07
May-07
May-07
Jul-07
Jul-07
Sep-07
Sep-07
Nov-07
Nov-07
Jan-08
Jan-08
Mar-08
Mar-08
May-08
May-08
Jul-08
Jul-08
Sep-08
Sep-08
Nov-08
Nov-08
Jan-09
Jan-09
Mar-09
Mar-09
May-09
May-09
Jul-09
Jul-09
Sep-09
Sep-09
Nov-09
Nov-09
Jan-10
Jan-10
Mar-10
Mar-10
EAP
180
130
165
170
160
165
EAP
230
130
170
Indexes: Jan-06=100
230
30
Note: EAP represents East Asia and the Pacific region. Note that the 2009 and 2010 figures on capital flows are forecasts from the Institute
of International Finance. Source: Bloomberg, CPB (Netherlands Bureau for Economic Policy Analysis), and Institute of International Finance.
PART I LAC Recovering in a Multi-Polar Global Economy
9
Office of Regional Chief Economist
Thus, industrial production for the dynamic EMs fell
by 13.4 percent from the peak, touched bottom in
February 2009, and has been increasing sharply
since then, reaching pre-crisis levels by the time of
this writing (Figure 4). When emerging regions are
compared, emerging Asia and LAC have dominated
the recovery, posting posted cumulative gains of
18.7 and 9.1 percent in industrial production since
their troughs, respectively. By contrast, average
industrial production for the rich countries fell by
16.9 percent from its peak, reached bottom in May
2009, and has been rising sluggishly since then
(a cumulative increase of only 3.5 percent in the
May 2009-December 2009 period), thus remaining substantially below pre-crisis levels by the time
of this writing. Moreover, capacity utilization in the
rich countries is still below the minimum of previous downturns and unemployment rates remain at
stubbornly high levels (slightly below 10 percent in
the U.S., more than 8 percent in Germany, almost
20 percent in Spain, and still rising in France and
Ireland). By contrast, available data suggest that
capacity utilization and employment are at around
pre-crisis levels for the dynamic EMs as well as for
many countries in LAC.
10
From Global Collapse to Recovery
Figure 4 World Industrial Production
World Industrial Production
Index Apr-08 = 100
105
100
Developed Countries
95
90
Emerging Economies
85
Jul-09
Oct-09
Apr-09
Jan-09
Jul-08
Oct-08
Apr-08
Jan-08
Jul-07
Oct-07
Apr-07
Jan-07
Jul-06
Oct-06
Apr-06
80
Jan-06
While global economic growth is being restored overall, there is great heterogeneity in the strength of the
post-crisis recovery across regions and within regions.
Growth engines are being reignited at different paces
and intensities across nations. In particular and in
sharp contrast with past episodes of global economic
and financial turmoil, the recovery this time around
has been led not by the center but by the periphery
—specifically by the larger and more dynamic emerging markets (namely, Brazil, China, India, South Korea, Malaysia, Philippines, and Thailand, which jointly
account for nearly 55 percent of emerging markets
GDP). For this group of emerging markets (dynamic
EMs), not only was the fall from peak to through in
average industrial production smaller than that of the
advanced economies (mainly the U.S., Europe and
Japan) but the through was reached three months
earlier and the rebound since then has been much
steeper.
Note: The group of developed countries refers to OECD countries
excluding Turkey, Mexico, Republic of Korea, and Central European
countries. Source: CPB (Netherlands Bureau for Economic Policy
Analysis).
Consistent with the heterogeneity of the recovery described above, GDP growth forecasts range widely
across regions. The most recent forecasts (i.e., Consensus forecasts as well as IMF and World Bank projections) put growth in the rich countries at 2.1 percent
for 2010 and 2.25 percent for 2011. The U.S. is envisaged to grow slightly above that average—flattening
at 3.1 percent per annum during 2010–2011—and
Western Europe somewhat below—at 1.2 percent in
2010 and 1.7 percent in 2011. By contrast, a much
stronger rebound is forecast for the dynamic EMs.
China is expected to post the highest growth rates, at
9.9 percent in 2010 and 9.1 percent in 2011. East
Asia’s GDP is forecast to grow by 5.5 percent in 2010
(5.1 percent in 2011) and LAC’s economic activity is
expected not to lag much behind, growing at a solid 4
percent per year during 2010–2011, with Brazil, Peru,
Chile and Panama leading the pack (see below). The
GDP growth forecast for countries in the Middle East
and North Africa is 4.4 percent per year in 2010–11
whereas growth in Eastern Europe is the lowest among
emerging market regions (3.5 percent) (Figure 5).
The considerable variation in the recovery across
countries is not surprising given that the idiosyncratic
strengths of individual economies play a greater role as
The World Bank
Figure 5 Regional Growth Forecasts for
2010 and 2011
Real GDP Growth Forecasts for 2010–2011
Annual Real GDP Growth Rate
12
2010
2011
10
8
6
4
2
0
Western Japan Eastern
Europe
Europe
US
LAC
MENA
East
Asian
Tigers
China
Note: Western Europe comprises Euro Zone countries, Denmark,
Sweden, UK, Norway, and Switzerland. Source: Consensus Forecasts (December 2009 and March 2010), and Bloomberg.
the effect of the global systemic shock fades. A more
systematic analysis of cross-country data suggests
that this is indeed the case (Appendix I.B provides
a more detailed analysis, including a comparison of
the collapse-rebound patterns around the current and
previous crises). In effect, countries that were able to
conduct counter-cyclical policies are experiencing a
faster recovery and so are countries that are experiencing a rebound in their net exports after the crisis.
A purely arithmetic bounce-back effect also seems at
play, as countries that recorded greater growth collapses also tend to register faster recoveries.
The recovery in LAC: things are
looking good overall
As noted, despite being one of the most financially
globalized regions in the world, LAC is coming out of
this crisis without systemic damage and is experiencing a relatively strong recovery in economic activity
on average. This recovery was preceded by a strong
V-shaped rebound in stock prices and a sharp compression of (sovereign and corporate) spreads. After
reaching a trough in October 2008, stock prices in
LAC recovered vigorously. The Brazilian stock price
index was back to its pre-crisis peak levels already by
end-March 2010. Analogous behavior is observed in
stock markets in Chile, Colombia, Mexico, and Peru.
While LAC’s is forecast to grow by 4 percent in 2010
on a weighted average basis, there is significant heterogeneity in projected growth rates within the region.
South America is envisaged to have a stronger recovery (4.7 percent over 2010–11) than Central America
(4 percent) and the Caribbean (3.2 percent). Countries in LAC that are experiencing stronger rebounds
tend to be characterized by: (i) vigorous expansion
in domestic demand; (ii) extensive use of countercyclical policies; (iii) economic complementarity to
Asia (especially China); and (iv) commodity abundance. The leader is Brazil, where industrial production has increased by almost 20 percent from the
trough and its 2010 GDP growth forecast is at 5.5
percent. Peru, Chile, Panama and Mexico are also
expected to record relatively faster GDP growth within
the region—between 4 and 5 percent in 2010. Growth
rates in the 3–4 percent range for 2010 are expected
for Argentina, Bolivia, Colombia, Costa Rica, Dominican Republic, Paraguay, and Uruguay. Lagging behind but rebounding nevertheless are most countries
in Central America and the Caribbean. Lastly, Jamaica
and Venezuela are expected to grow very little or even
contract in 2010 (Figure 6).
A few countries in LAC may begin to face the risk of
economic overheating, with inflationary pressures expected to increase over the next months. Brazil is the
most visible case in point—economic activity is beginning to expand at a pace above the pre-crisis trend
growth and inflation forecasts are already above the
center of the targeted inflation. Moreover, the fiscal
and quasi-fiscal stimulus measures taken in Brazil,
which are estimated to have totaled around 4 percent
of GDP, will likely not be undone in the near future
due mostly to the electoral cycle. Hence, markets
expect the initiation of a monetary policy tightening
in the near future. For many countries in the region,
however, output is expected to remain below potential
(Mexico and Colombia) and/or inflationary pressures
are not yet mounting to significant levels (Peru and
PART I LAC Recovering in a Multi-Polar Global Economy
11
Office of Regional Chief Economist
Figure 6 Growth Forecasts for 2010 and 2011 among LAC Countries
B. 2011 Growth Forecasts
Real GDP Growth Forecasts for 2010
LAC countries
Real GDP Growth Forecasts for 2011
LAC countries
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
0.0%
–1.0%
–1.0%
–2.0%
–3.0%
–3.0%
Venezuela
Ant. & Barb.
Bahamas
St. Kts. & Nv.
Barbados
Jamaica
St. Vc. & Grs.
Dominica
St. Lucia
Nicaragua
Belize
Guatemala
Haiti
Tri. & Tob.
Honduras
Ecuador
Guyana
Colombia
Costa Rica
Dom. Rep.
Paraguay
Suriname
Bolivia
Argentina
Uruguay
LAC
Mexico
Panama
Chile
Peru
Brazil
–2.0%
Venezuela
St. Vc. & Grs.
Haiti
Jamaica
Belize
Nicaragua
Argentina
Ecuador
Guatemala
St. Lucia
Honduras
Dominica
Guyana
Mexico
Colombia
Uruguay
LAC
Costa Rica
Paraguay
Bolivia
Dom. Rep.
Brazil
Peru
Chile
Panama
6.0%
A. 2010 Growth Forecasts
Source: Latin American Consensus Forecasts as of March 2010, IMF’s World Economic Outlook, IMF’s Regional Economic Outlook.
Chile). After engineering a massive cut in policy rates
(Figure 7), Latin central banks are thus expected to
start a gradual normalization of interest rates, but the
timing and extent of interest rates increases will likely
vary significantly across countries depending on the
output gap and inflationary expectations (Figure 8).
For the small, open economies in Central America and
the Caribbean, where the scope for independent monetary policy is very narrow or non-existent, domestic
price increases will tend to reflect developments in
import prices (including foods and fuels) as well as
supply conditions in the agricultural sector. Be it as it
Figure 7 Output Gap and Inflation
A. 2010
B. 2011
2010 Output and Inflation Gaps
2011 Output and Inflation Gaps
0.001
0.0006
0.0002
0
COL
–0.0005
CHL
DOM
SLV
–0.001
–0.0015
–4
BOL PRY
PAN
ECU
GUA
MEX
–2
0
2
HND
–0.0004
–0.0006
PER
PAN
MEX
COL
ARG
SLV
GUA
–0.001
NIC
Inflation Pressure in percentage points
–0.0002
BOL
CHL
–0.0008
CRI
4
PRY
0
ARG
BRA
PER
Output Gap
Output Gap
0.0005
URY
BRA
0.0004
URY
ECU
–0.0012
6
–0.0014
–2
DOM
CRI
NIC
HND
0
2
4
6
Inflation Pressure in percentage points
Note: Inflation pressures are calculated as the difference between the 2010 inflation rate forecast and an estimated target of 4% (assumed
to be the target for most countries in the region). The output gap calculated as the difference between the (log of) actual and potential GDP,
with the latter being calculated using the Hodrick-Prescott filter. Source: LCRCE Staff calculations based on Consensus Forecasts as of
March 2010.
12
From Global Collapse to Recovery
The World Bank
Figure 8 Monetary Policy Rates in LAC
countries
15.0%
Monetary Policy Rates
Inflation-Targeting Latin American Countries and the US
Brazil
13.0%
11.0%
9.0%
7.0%
very short-run, however, is plagued by great complexity and uncertainty. Some of the regional differences
and relevant factors affecting growth prospects outside LAC are briefly and selectively discussed in the
rest of this section.
Colombia
Mexico
Peru
Chile
5.0%
3.0%
US
1.0%
Jan-10
Mar-10
Nov-09
Jul-09
Sep-09
Mar-09
May-09
Oct-08
Dec-08
Aug-08
Apr-08
Jun-08
Feb-08
Oct-07
Dec-07
Jun-07
Aug-07
–1.0%
Source: Bloomberg.
may, as interest rates increase in most of LAC while remaining low in rich countries, capital inflows are likely
to surge, creating complex challenges for LAC central
bankers, as discussed in more detail below.
Global growth prospects:
obscured by clouds
Whereas the prospects for growth in LAC countries
in the near future are promising, the region is not
isolated from the world economy and a significant
fraction of the downside risks to growth lies in the external environment. To be sure, due to the mentioned
substantial improvements in macro-financial policy
frameworks LAC is much less vulnerable to shocks
than it used to be. Hence, domestic macro-financial
crisis are arguably less likely than in the past to erase
LAC’s gains from growth going forward. But the sad
fact remains that LAC has not managed to sustainably
grow above the world average during the last hundred years! In general, LAC’s growth has tended to
track closely global growth. Full decoupling between
LAC’s growth and world growth is thus a chimera, implying that the growth prospects for LAC can only be
assessed in the context of the growth prospects for
the world. Growth in the rest of the world beyond the
One important point to keep in mind in this regard is
that, as the region diversifies its linkages to the rest of
the world, the sources and nature of external shocks
will also diversify. In particular, shocks coming from
other emerging countries may become increasingly
more relevant for LAC in the future. The volatility of
such shocks may be higher than those coming from
international financial markets and rich country demand for LAC exports. In the past, LAC’s trade was
on average mostly linked to the U.S. and, to a lesser
extent, Europe. The region now relies much more on
external demand from other emerging markets, particularly China and the South East Asian countries
(Figure 9). Kose, Otrok and Prasad (2008) find that
business cycles among LAC-7 countries are increasingly accounted for by “regional” factors (that is, factors affecting individual regions rather than the whole
world) and, although there is no one-to-one mapping,
it is likely that those regional factors are mainly driven
by regional shocks. As a result, the share of output
variation for LAC-7 countries accounted for by regional
Figure 9 Variation in Export Market
Shares in LAC
Variation in Export Market Shares for LAC Countries
2008 vs. 1990, in percentage points
20%
Euro Zone
US
China
15%
10%
5%
0%
–5%
–10%
–15%
ARG BRA CHL COL ECU MEX PER
PRY URY VEN
Source: IMF’s Direction of Trade Statistics (DOTS).
PART I LAC Recovering in a Multi-Polar Global Economy
13
Office of Regional Chief Economist
factors increased from 1.3 percent to 7.8 percent on
average between 1960–1984 and 1985–2008, reaching almost 16 percent in Peru and 10 percent in Brazil. Global (rather than “regional”) factors (i.e. related
to fluctuations affecting the entire world) are nonetheless still important for LAC, explaining more than 17
percent of output variations in Brazil and around 9
percent for non-LAC7 countries (e.g., mainly Central
American and the Caribbean countries) (Figure 10).2
Consider now the growth prospects for the rich countries. The recovery in the United States has so far been
driven mostly by a restocking of inventories, massive
stimulus policies, and a revival of net exports. There
is uncertainty about the sources of future growth as
the process of inventory restocking ends and the effects of the stimulus fizzle away—towards the second
half of this year in the absence of additional stimu-
lus injections. So, prospects will largely depend on
domestic private demand, which is still relatively
weak and shows no clear signs of a solid recovery
yet. Moreover, the management of the crisis implied
that balance-sheet problems shifted from the private
to the public sector, and this is likely to pose downside risks to a sustainable growth path in the medium
term. The extraordinarily high level of government
indebtedness significantly limits the scope for fiscal
expansionary policies and this shifts the countercyclical burden to monetary policy. While the U.S. Fed is
already unwinding some credit support facilities that
help stabilized the financial system, interest rates in
the U.S. are likely to remain at near-zero for a while in
order to continue providing an expansionary impulse
to the economy. But this, in the absence of vigorous
and well-designed regulatory reform, may foster a
buildup of financial excesses similar to those that led
Figure 10 The Increased Importance of Regional Factors and Decreased Global Ones
A. Global Factors
B. Regional Factors
Percentage of Output Fluctuations
Explained by Global Factors
50.0%
Percentage of Output Fluctuations
Explained by Regional Factors
22.0%
1960–1984
45.0%
1985–2008
40.0%
1960–1984
1985–2008
17.0%
35.0%
30.0%
12.0%
25.0%
20.0%
7.0%
15.0%
10.0%
2.0%
5.0%
0.0%
–3.0%
Colombia Venezuela, Brazil
RB
Mexico
Peru
Chile Argentina
Venezuela, Mexico
RB
Brazil
Chile
Peru
Colombia Argentina
Note: Global factors encompass all fluctuations that are common among industrial countries, emerging markets and other developing countries. Regional factors capture fluctuations that are common only within a particular group of countries (say, emerging markets). Source:
Kose, Otrok, and Prasad (2008).
Kose, Otrok and Prasad (2008) use dynamic factor models to decompose the fluctuations in output, consumption and investment
for a sample of 106 countries over the period 1960–2008 into global factors, regional factors, country factors, and idiosyncratic
factors. The global factor includes all fluctuations that are common to industrial countries, emerging markets and other developing
countries, and across all variables. Regional factors, on the other hand, are those that capture fluctuations that are common only to
a particular group of countries, and across all variables. For instance, the regional factors for LAC-7 countries involve fluctuations
affecting only theirs and other emerging markets’ output, consumption and investment.
2 14
From Global Collapse to Recovery
The World Bank
to the crisis. Moreover, there are strong doubts that
the U.S. will be able to grow at the very high rates, or
undertake the extent of fiscal adjustment, required to
restore public sector debt to robust viability. This, in
turn, raises the inflation specter—i.e., the specter that
debt might have to be inflated away down the road.
In Western Europe things look even worse and overall
growth prospects are grim, although there is a wide
variation in macro-financial circumstances among its
countries. The forces of Western European growth recovery have been the same temporary ones at work in
the U.S.—inventory restocking and stimulus packages,
along with net exports. Domestic demand is also at depressed levels and investment is not expected to pick
up significantly in the near future. But the challenges
for growth in Western Europe are more daunting. Unemployment is extremely high and unyielding, not least
because of the well-known rigidities in European labor
markets which are politically difficult to alter. Perhaps
more importantly, the European Union (EJU) does not
have the flexibility to tailor monetary policy to the different needs of different EU countries. In the absence of
differentiated exchange rate adjustment mechanisms
and given the severe restrictions on the ability to transfer fiscal resources among Euro members, recessionary forces are likely to be stronger and more persistent.
This is particularly troublesome for EU countries with
high debt levels and/or weak fiscal stances such as
Greece, Ireland, Italy, Portugal, and Spain. The problems with Greece’s debt have already led to increased
fears of a double-dip recovery path in the EU, as the
contractionary effects of fiscal austerity measures may
spread.3 Given the sluggish recovery and the challenges faced on the fiscal side, an exit from the monetary
stimulus is unlikely to occur soon, and interest rates in
the EU will also remain at very low levels for a while.
Japan has experienced a slow export-based recovery
so far. But it has still not seen a recovery in domestic
(consumption and investment) demand and unemployment remains high. Moreover, the export-led rebound might slow down as inventory restocking ends.
The country remains caught in a long-lasting liquidity
trap, with deflationary pressures ensuring that interest
rates will stay at near zero levels. The lack of room on
the monetary policy front is putting an excess burden
on fiscal policies. However, the country does not have
much space on this front due to its large (gross) debt
position of almost 200 percent of GDP.
Turning now to emerging markets, China is playing an
important role in the world’s recovery. During the crisis, its main engine of growth, exports, collapsed. To
sustain economic activity, the government launched a
massive and unprecedented stimulus focused on infrastructure investments at the local government level,
which were spurred by a gigantic increase in domestic
credit. The resulting investment boom in China (investment is estimated to have risen to nearly 60 percent of
GDP) led to a sharp rise in imports, particularly of industrial metals and minerals, which contributed to the
rebound in commodity prices and helped with the recovery in other emerging markets, including of course
the net commodity exporting countries of South America. However, household consumption in China seems
to be growing at the same pace as real GDP (even if
real wages seem to be rising a bit faster), suggesting
that the high domestic saving rate has remained essentially unchanged. While China is expected to continue to grow strongly in the short-run, as its stimulus
dwindles (a few measures have already been taken
towards a normalization of conditions) uncertainties
rise about the durability and sustainability of China’s
investment-based growth pull on the rest of the world.4
A resolution to Greece’s debt sustainability problems seems to be underway with both the IMF and Euro zone members involved
in a rescue package, but this will have to be accompanied with painful fiscal austerity measures.
4 China is capable of designing the appropriate mix of policies to stimulate domestic demand, and consumption in particular, if
external demand indeed remains weak. This would entail a shift towards a domestically-oriented growth model. Another way to
stimulate domestic (private) consumption is the real appreciation of the Chinese Yuan. Real appreciation can be achieved through
either domestic price inflation or a change in the current exchange rate policy. This is more likely to happen through a slow and
gradual change in the nominal exchange rate in the event of high inflation. In the event of mounting inflationary pressures, Chinese
authorities may allow the exchange rate to gradually adjust, thus giving a boost to domestic consumption.
3 PART I LAC Recovering in a Multi-Polar Global Economy
15
Office of Regional Chief Economist
16
From Global Collapse to Recovery
Figure 11 Gross nominal liabilities for
developed countries and LAC-7
Gross Nominal Liabilities
% of GDP
200
200
2007
2010
167
160
120
98
80
63
89
89
100
74
71
47
40
0
33 33
US
Euro
Japan
UK
OECD
LAC-7
Source: EIU and Consensus Forecasts (various issues).
Figure 12 Required Fiscal Adjustments
Required Fiscal Adjustment Between 2010 and 2020
To Reach Debt Levels of 60%
in % of GDP
20
Developed Countries
15
10
Other Emerging Economies
5
Latin America
–5
Germany
Italy
France
Portugal
Spain
UK
US
Japan
Ireland
Greece
0
Hungary
Bulgaria
Ukraine
Turkey
Philippines
Indonesia
Russia
Romania
South Africa
In sum, the prospects for global growth are clouded
by great uncertainty and complexity regarding at least
two main questions. The first question is whether rich
countries will be able to overcome the growth-impairing
effects of their damaged balance sheets (Figure 11).
The difficulty involved in meeting this challenge is
clear when one considers the large size of primary fiscal surpluses that the U.S., Europe and Japan would
have to generate in order to bring down their debts to
sustainable levels without inflation (Figure 12). The
second question is whether Asian EMs will be able to
sustain in the medium-term their current growth pattern. This is equally uncertain considering that their
current growth model remains frankly reliant on exports. While the domestic market has played an important role in the recovery for some of the dynamic
EMs (including Brazil), world consumption demand
needs to be recomposed to put world export growth
on a high and sustainable path over the mediumterm. Ideally, more consumption demand will have
to come from the surplus EMs, Germany and Japan
(and less from the U.S.) and this is difficult to envisage in the absence of stronger currencies in Asia, particularly China. But it is utterly unclear whether and
how this might happen in the absence of effective international macroeconomic policy coordination involving not just the rich countries but also the dynamic
EMs. That type of coordination unfortunately appears
unfeasible in the near future. In the meantime, how-
ever, capital flows to EMs are likely to pick up further
as the interest rate differentials rise—that, is, as EMs
increase interest rates to control inflation expectations
in the midst of a possible economic overheating while
rich countries keep interest rates low to stimulate their
sagging economies.
Colombia
Brazil
Chile
Mexico
Peru
Argentina
The significant growth recovery in other Asian countries has been driven by their position in the global
production chain, including in particular the integrated distribution of manufacturing production stages
within Asia. Together with China and India, East Asian
countries, have been the main drivers of global growth
since January 2009 and will likely continue to be so in
the near future. At the same time, however, with actual GDP growth rapidly approaching potential growth,
inflationary pressures are surfacing, and this is inducing Asian EMs to normalize monetary conditions and
even initiate the cycle of monetary policy tightening
that would cool down growth. Malaysia already raised
the policy interest rate and others are expected to follow soon.
Source: IMF Fiscal Affairs Deparment, 2010. “Strategies for Fiscal Consolidation in the Post-Crisis World.” Washington, DC: IMF,
February.
The World Bank
Challenges ahead for LAC
So far for LAC, the pattern of global recovery discussed
above has brought benefits. Countercyclical policies
have supported domestic demand in the larger LAC
countries and external demand from fast-growing
EMs, especially China, has boosted exports and terms
of trade for LAC’s net commodity exporters—which
are mainly located in South America and account for
over 90 percent of the region’s population and GDP
(Figure 13). Until now, moreover, the rebound in commodity prices and relatively fast pace of recovery in
LAC has not awaken major inflationary pressures. This
has hitherto allowed LAC central bankers to keep interest rates low and this has, in turn, helped dampen
the pressures for LAC currencies to strengthen relative to other currencies. Things will not be as easy for
LAC going forward, however, given the prospects and
policy complications outside LAC as discussed in the
previous section. This section briefly discusses some
of the challenges ahead for LAC.
Living with capital inflows and exchange
rate appreciations
As noted, interest rate differentials (already at nontrivial levels given the near zero rates in developed
countries) will widen further, likely leading to greater
capital flows to LAC. And this will happen in a context
where foreign capital, especially from the equity side,
is already flowing to LAC in considerable amounts, not
least because of many LAC countries withstood the
global crisis well and came out of it as relatively more
attractive destinations for investment. The pressures
for LAC currencies to appreciate will be further enhanced in the case of commodity exporters—where a
commodity export boom can easily materialize.
Consequently, countries in the LAC region will continue to face significant challenges in the monetary/
exchange rate front. Having moved to more robust
monetary policy frameworks that rely on greater exchange rate flexibility, and given a generally limited
scope for fiscal policy adjustment, the feasible fiscalmonetary policy mix will likely shift the burden to-
Figure 13 Terms of Trade
Cumulative Change in Terms of Trade
Bolivia
Ecuador
Chile
Paraguay
Trin. & Tob.
Colombia
Peru
Argentina
Mexico
Uruguay
Brazil
Panama
Guatemala
Costa Rica
Nicaragua
Dominica
Dom. Rep.
Honduras
–40% –20%
2008q4–2009q4
2001q4–2008q2
0%
20% 40%
60%
80% 100% 120%140%
Note: The cumulative variation in the terms of trade index is calculated using quarterly data. The blue bars represent the cumulative
percentage change during the recent commodity price boom up
to the peak in 2008q2. The red bars capture the cumulative percentage change in terms of trade from its trough in 2008q4 to the
most recently available quarter (2009q4). Source: WDI, DECPG,
and Haver Analytics.
wards monetary policy. LAC policy makers will thus
likely face increasingly difficult policy tensions vis-àvis the risks of overshooting in currency appreciations
(which could inflict adverse and permanent effects on
export competitiveness) and capital inflows-induced
excessive credit expansion (which could weaken the
financial system down the line). There is of course
no easy way out of these tensions. The option to step
up exchange rate intervention—aimed at dampening
appreciation pressures—will naturally be considered
despite its costs—for it calls for a significant degree
of sterilization, via the issuance of relatively expensive
local-currency debt securities, of the monetary impact
of such intervention. The ongoing strengthening of
LAC currencies and/or the accumulation of international reserves in several LAC countries (e.g., Brazil,
Chile, Colombia, Mexico, and Peru) already reflects
the interventions in the exchange rate market motivated by the need to find a reasonable balance in the
face of the tensions (Figure 14).
Not surprisingly, therefore, alternative options to “lean
against the wind” in exchange rate markets might
PART I LAC Recovering in a Multi-Polar Global Economy
17
Office of Regional Chief Economist
Figure 14 Exchange Market Pressures
A. Brazil
B. Chile
8
6
8
3
4
6
2
3
1
2
2
4
0
1
Jan-03Jan-03
May-03May-03
Sep-03Sep-03
Jan-04Jan-04
May-04May-04
Sep-04Sep-04
Jan-05Jan-05
May-05May-05
Sep-05Sep-05
Jan-06Jan-06
May-06May-06
Sep-06Sep-06
Jan-07Jan-07
May-07May-07
Sep-07Sep-07
Jan-08Jan-08
May-08May-08
Sep-08Sep-08
Jan-09Jan-09
May-09May-09
Sep-09Sep-09
Jan-10Jan-10
–4
–2
Reserve Accumulation
Appreciation Pressures
Exchange Market Pressure
Reserve Accumulation
Appreciation Pressures
Exchange Market Pressure
–4
8
C. Colombia
6
8
4
6
2
4
0
2
–2
0
Jan-03Jan-03
May-03May-03
Sep-03Sep-03
Jan-04Jan-04
May-04May-04
Sep-04Sep-04
Jan-05Jan-05
May-05May-05
Sep-05Sep-05
Jan-06Jan-06
May-06May-06
Sep-06Sep-06
Jan-07Jan-07
May-07May-07
Sep-07Sep-07
Jan-08Jan-08
May-08May-08
Sep-08Sep-08
Jan-09Jan-09
May-09May-09
Sep-09Sep-09
Jan-10Jan-10
–4
–2
Reserve Accumulation
Appreciation Pressures
Exchange Market Pressure
Reserve Accumulation
Appreciation Pressures
Exchange Market Pressure
–4
–1
0
–2
–1
–3
–2
Reserve Accumulation
Appreciation Pressures
Exchange Market Pressure
Reserve Accumulation
Appreciation Pressures
Exchange Market Pressure
Jan-03Jan-03
May-03May-03
Sep-03Sep-03
Jan-04Jan-04
May-04May-04
Sep-04Sep-04
Jan-05Jan-05
May-05May-05
Sep-05Sep-05
Jan-06Jan-06
May-06May-06
Sep-06Sep-06
Jan-07Jan-07
May-07May-07
Sep-07Sep-07
Jan-08Jan-08
May-08May-08
Sep-08Sep-08
Jan-09Jan-09
May-09May-09
Sep-09Sep-09
Jan-10Jan-10
–2
0
–3
5
4
5
3
4
2
3
1
2
0
1
–1
0
–2
–1
–3
–2
D. Peru
Reserve Accumulation
Appreciation Pressures
Exchange Market Pressure
Reserve Accumulation
Appreciation Pressures
Exchange Market Pressure
Jan-03Jan-03
May-03May-03
Sep-03Sep-03
Jan-04Jan-04
May-04May-04
Sep-04Sep-04
Jan-05Jan-05
May-05May-05
Sep-05Sep-05
Jan-06Jan-06
May-06May-06
Sep-06Sep-06
Jan-07Jan-07
May-07May-07
Sep-07Sep-07
Jan-08Jan-08
May-08May-08
Sep-08Sep-08
Jan-09Jan-09
May-09May-09
Sep-09Sep-09
Jan-10Jan-10
0
2
–3
Note: The Exchange Market Pressure Index is the weighted average of year-on-year percentage changes in: (a) the nominal exchange rate
of the local currency vis-à-vis the US dollar (such that an increase represents an appreciation of the LAC currency), and (b) the level of
international reserves. The weights are given by the inverse of the annual standard deviation of the changes in the nominal exchange rate
and the standard deviation of the changes in reserves. An increase in the Exchange Market Pressure index signals appreciation pressures
and/or accumulation of reserves. Source: LCRCE Staff calculations based on IMF’s IFS.
become an important item in the monetary policy debate in LAC going forward. To the extent that currency
appreciation in LAC would be lower if China’s currency
were allowed to strengthen, LAC countries might also
interpret their intervention in exchange rate markets as
a way to offset a global distortion. The actual mix of
policies will, however, depend on whether flows and
associated appreciation pressures are perceived to be
permanent or temporary. Controls on capital inflows, as
pointed out in a recent IMF Staff Position Note (Ostry
et al, 2010), is likely also to be part of the menu of op-
18
From Global Collapse to Recovery
tions, although these controls might bring distortions to
financial systems that would be hard to reverse in the
future. Furthermore, such controls tend to be easy to
circumvent and thus become less and less ineffective
over time. Alternatively, LAC authorities might focus on
averting the excessive credit expansion that could result
from the surge in capital inflows. In this case, macroprudential policy tools could be considered, including,
for instance, unremunerated reserve requirements on
financial intermediaries and/or counter-cyclical prudential (capital or provisioning) norms. Lastly, although
The World Bank
Some of the key conditions for LAC to raise its growth
rate sustainably above the world’s average are, therefore, in place. But the jury is still out on whether the
region will be able to seize the opportunity, as LAC faces a very tall order in this regard. Seizing the opportunity will require well-designed, but not necessarily
80.0%
70.0%
Interwar
Period
60.0%
US
Recovers
Gold Standard
Period
50.0%
Alliance
for
Progress
Lost
Decade
Imports
Substitution
Washington
Dissensus
Washington
Consensus
40.0%
LAC/US
30.0%
20.0%
10.0%
Asian Tigers/US
2002
2008
1996
1990
1984
1978
1972
1966
1960
1954
1948
1942
1936
1924
1930
1918
0.0%
1912
With the possible exception of Chile, LAC has failed to
engineer sustained high growth. The process of convergence towards rich-country standards of living has
in fact eluded LAC for more than a century, in sharp
contrast with the East Asian tigers where convergence
has been taking place at a rapid rate since the 1970s
(Figure 15). Some hope that this trend may be changing emerged before the crisis, during the 2002–2008
period, where several LAC countries other than Chile
(chiefly Peru and Panama, but also Brazil and Colombia) recorded significantly higher growth rates than in
rich countries on the strength not just of favorable external conditions (low interest rates, abundant liquidity, and high commodity prices) but also of productivity
growth. With LAC coming out of this crisis relatively
well positioned, those hopes appear to be rekindling.
Moreover, as noted, the improved macro-financial
resiliency of the region gives greater assurance that
whatever gains from growth that LAC could achieve in
the future will be less likely to be wiped out by financial crises, as tended to be the case in the past. In addition, LAC has been making significant strides in the
equity agenda—through noticeable improvement in
poverty-reducing social policies—and this could help
mobilize consensus in favor of a long overdue reform
agenda aimed at raising productivity growth.
Relative GDP Per Capita of Selected Regions
relative to the US
1906
Assembling a productivity agenda while
averting the downside risks of commodity
wealth
Figure 15 Trends in GDP per capita of
Latin America and East Asian Tigers vis-àvis the United States
1900
harder to implement, fiscal tightening will also have
to be considered, as it could allow interest rates to be
lower, and the real exchange rate to appreciate less,
than otherwise. In the end, with no simple solution in
sight, countries in LAC are likely to have to learn to live
with more appreciated real exchange rates, for which
the only lasting solution is productivity growth.
Note. The group of East Asian tigers includes Hong Kong (China),
Indonesia, Malaysia, Republic of Korea, Singapore, Thailand, and
Taiwan (China). Source: LCRCE Staff calculations based on Maddison (2007, 2009), WDI and DECPG.
numerous or unduly complex, policies to ignite growth
that are adequately tailored to the circumstances of
individual countries. Once ignited, growth would have
to be sustained through perseverant and major reform efforts aimed at eliminating well-know obstacles
that undercut efficient resource allocation—such that
competitive market forces are honed and relative prices better reflect relative scarcities. Also, the large gaps
that LAC has in education, physical infrastructure,
and the ability to adopt and adapt new technologies
relative to, say, the Asian Tigers would have to be systematically closed. The associated need for high investment levels would have to be supported via higher
national savings (and the willingness to keep savings
in the country) as well as prudent access to foreign
savings, particularly in the form of FDI. That would
in turn require a leap in the quality of the investment
climate, including through a better contractual and
informational environment, much reduced corruption
levels, sensible regulation, a major reduction in crime
and violence, a major thinning of red tape, etc.
The scope for seizing the opportunity to move to a higher growth path can be greatly enhanced in commodity
PART I LAC Recovering in a Multi-Polar Global Economy
19
Office of Regional Chief Economist
rich countries. But this can become a reality only if the
associated windfall earnings are managed judiciously
within a long-term horizon, so as to avoid falling victim
to the so-called “natural resource curse.” This would
require that policies and institutions are in place to
dampen the possible welfare-reducing “Dutch Disease effects” (via an overvalued currency that unduly
hinders non-commodity export diversification) and
“rent-seeking effects” (i.e., the weakening of institu-
20
From Global Collapse to Recovery
tions and work effort that could result from the ability of special interests to capture the natural resource
rents to boost wasteful current spending). A clear sign
that these bad side effects are being avoided would
be given by a demonstrated ability of governments to
save a substantial fraction of the commodity-related
revenue windfall—that is, by the materialization of
significant and continuous cyclically-adjusted primary
fiscal surpluses going forward.
Part II
Executive Summary
Labor Markets in
LAC during the
2009 Downturn:
In a refreshing break from the past, economic activity in the Latin
American and Caribbean (LAC) region was not hit as hard by the
global financial crisis as in previous recessions, or as compared
to other regions. In addition, controlling for the size of the economic downturn, the region experienced significantly milder labor
market adjustments than in previous crises. Unemployment did
increase (about 3.5 million joined the ranks of the unemployed)
but at a slower pace than in the recessions of the late 1990s. Perhaps even more surprisingly, the share of informal employment
—a commonly used indicator of deterioration of the quality of
employment—did not rise. These mild quantity adjustments in
the labor market are especially puzzling in light of evidence that
real wages in LAC did not decline during the 2009 recession, reflecting the combination of low inflation and downward rigidity in
nominal wages. The overall picture of labor market adjustments
during this crisis therefore stands in sharp contrast with past crisis episodes, during which significant increases in unemployment
were generally combined with increasing informality and a sharp
fall in real wages.
Common Patterns,
Surprises & Puzzles
Behind these general patterns, substantial differences across
countries remain. Unemployment rose relatively rapidly in some
countries, such as Chile and Mexico, while in Brazil and Peru
it returned to pre-crisis levels rather quickly. Another common
trend is that the crisis had a differential impact across genders,
hitting males harder than females. While labor force participation remained relatively stable overall, the share of female workers
increased relative to males. Hence, the crisis did not reverse the
trend towards closing the gap between male and female participation rates. In the countries studied, with the exception of Colombia
and Mexico, men became unemployed proportionally more than
women.
While the reasons behind the better labor market performance
remain to be studied, several factors may have played a role. The
recent shock was transmitted mainly through the trade channel,
thus affecting primarily the relatively land- and capital-intensive
tradable sectors. In addition, the domestic policy environment
has also changed: Sounder macro-financial policy frameworks
and timely finance from multilateral institutions allowed the implementation of counter-cyclical fiscal policies that helped dampen
the unemployment response. Finally, specific labor market policies, such as temporary employment programs and employment
subsidies, may have also contributed to mitigating the impact of
the external shock.
From Global Collapse to Recovery
21
Office of Regional Chief Economist
Adjustments in employment,
unemployment, and labor force
participation5
In the last quarter of 2008, the world economy entered into the worst recession since the Great Depression. As discussed in Appendix I.A of the Part I of this
report, the Latin America and the Caribbean (LAC)
region’s economic performance during this crisis was
better than in most of its own past downturns, and
than in other emerging regions. Nonetheless, some of
the pains of a recession were unavoidable.
While the consequences of the crisis on labor markets
around the world are still unfolding, it is clear that the
impact is quite large. In Eastern Europe, the unemployment rate increased by 2 percentage points (pp) during 2009 while it grew by 2.4 pp on average in the
developed world, with the largest increases in countries
such as Ireland (10pp since 2008Q1) and Spain (9pp
within the same period). In LAC, the unemployment
rate rose by 1.2 pp, from 7 percent in 2008 to 8.2 percent in 2009, according to the latest estimates, implying that the number of the unemployed increased by
3.5 million to a total of 22.5 million by the end of the
2009 (ILO, 2010). In spite of this general pattern, both
the level and the change in unemployment rates varied
widely across countries. Encouragingly, unemployment
started to fall in some countries starting in 2009Q2, but
it is still too early to tell if this favorable development
constitutes a change in trend. It might instead simply
reflect a seasonal pattern, as employment in the region
typically rises in the second half of the year.
Employment in most LAC countries started to contract
after the fourth quarter of 2008 (2008Q4). Thus, Ar-
gentina and Brazil experienced a decline in employment rates of around 1pp but quickly bounced back
in 2009Q3 to pre-recession levels. Chile also experienced a sharp decline in employment but it had not
rebounded by 2009Q3. In other LAC countries the labor market response actually began earlier. This was,
for example, the case of Mexico and Peru. Whereas
in Mexico the employment rate fell by 2.1 pp from
2008Q1 to 2009Q1, employment declined by 1.6 pp
in Peru over the same period.6
The unemployment rate is affected both by labor
supply and labor demand forces. During downturns,
labor demand typically falls while the effect of a recession on the supply for labor is in principle ambiguous.
Two opposite forces operate on the supply of labor
and, hence, on the degree of labor force participation
during recessions. On the one hand, the prospects
of finding a job shrink as the unemployment rate increases, hence reducing the incentives for actively
looking for a job. On the other hand, the reduction
of employment, hours worked, or real wages among
the breadwinners of the family might provide an incentive for the females and youth in the family (who
are traditionally less attached to the labor market)
to search for a job.7 The final impact on overall labor force participation rates depends on the relative
strengths of these forces, and of the generosity and
coverage of safety nets in the economy, which might
alleviate the welfare consequences of unemployment
among some of the members of the household. In
LAC, the relative paucity of functional unemployment
insurance schemes tends to strengthen incentives to
remain in the job search, including in the informal
sector. What was the actual net effect of these forces
in LAC during the crisis?
This section draws on data from Argentina, Brazil, Chile, Colombia, Mexico, and Peru, for which aggregate labor market data are
available up to the third quarter of 2009.
6 For an early assessment of the impact of the crisis on labor markets in the LAC region, see Freije-Rodríguez and Murrugarra (2009)
7 Labor force participation varies substantially by gender among LAC countries. On average, female participation rates are lower
than those of males, although these differences are quite heterogeneous across LAC countries. Participation rates for females in the
region are lowest in Chile and Mexico (slightly above 40 percent) and highest in Peru (around 60 percent). In Colombia, Argentina
and Brazil they are rapidly approaching 50 percent. There is also quite a lot of heterogeneity across countries in the participation of
men, with a relatively low rate in Brazil, around 66 percent, that is, more than 10 pp below the rates in the countries with the highest
rates in our sample, Mexico and Peru.
5 22
From Global Collapse to Recovery
The World Bank
The overall participation rate remained relatively
constant in most countries, but female participation
increased relative to males. During the global downturn, overall participation rates have barely changed
in Brazil, Chile, Mexico and Peru. The largest exception to this pattern was observed in Colombia, which
experienced a net increase of 2.5 pp during 2008Q3–
2009Q3, followed by Argentina (a 1 pp increase during the same period). While the actual response of
male and female participation rates to the recession
varied across LAC countries, the pre-existing trend
toward the narrowing of gender gap in labor force participation was either maintained or even accentuated
during the crisis. This was because, similarly to previous crisis, male participation rates tended to decline
while female participation rates tended to increase;
or in the countries where both increased in tandem,
female participation tended to increase more (see
Figure 16).
Even with rising female participation relative to males,
the unemployment rate of males rose relative to females in the LAC-6 (Figure 17). Male unemployment
rates increased the most in Chile, by 2.9 pp yearon-year (yoy) in 2009Q3, followed by Argentina and
Mexico (2.2 and 1.4 pp, respectively). Male unemployment remained relatively stable in Peru whereas
it increased mildly in Brazil and Colombia (around 0.5
pp). The increase in female unemployment rates, by
contrast, has been weaker. Again, Chile experienced
a relatively large increase in female unemployment in
2009Q3 (1.6 pp yoy)—which is however only about
half the increase in the rate of male unemployment.
Female unemployment declined mildly in Brazil, and
more sharply in Peru (by 1.7 pp yoy) to reach 9.5
percent (the lowest in the last 5 years). The outlier
was Mexico, where female unemployment rates rose
by 2.4 pp.
The effect of the crisis on the gender composition of
employment and unemployment is likely related to
its differential effect across the manufacturing and
service sectors. As shown in Appendix I.A of Part 1,
countries with higher trade exposure and specialized
in manufacturing exports experienced larger growth
collapses. Hence, the external shock was transmitted
to the region through a fall in the demand for tradable goods. It is well known that manufacturing traded
sectors tend to employ males in a larger proportion
than females. Hence, a shock hitting those sectors is
likely to have a larger impact on males. Figure 18 illustrates that the reduction in employment was strongest
in manufacturing sectors during the recession. It depicts the variation in the share of workers employed in
Figure 16 Participation Rate by Gender in Selected LAC Countries
A. Male Population
85%
B. Female Population
85%
Peru
Mexico
75%
75%
Argentina
Chile
Colombia
65%
65%
Brazil
Peru
55%
55%
Argentina
45%
45%
Brazil
Colombia
Mexico
Chile
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
35%
Sep-05
Mar-05
35%
Source: International Labor Organization
PART II Labor Markets in LAC During the 2009 Downturn
23
Office of Regional Chief Economist
Figure 17 Unemployment Rate by Gender in Selected LAC Countries
A. A. Male Population
B. B. Female Population
20%
20%
18%
18%
16%
16%
14%
14%
12%
12%
Argentina
10%
10%
Colombia
Peru
Chile
Mexico
4%
Mexico
2%
2%
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
0%
Sep-05
Mar-05
Brazil
Peru
6%
Brazil
Chile
4%
0%
Argentina
8%
8%
6%
Colombia
Figure 18 Change in Employment Levels by Activity
A. Industry
B. Services
in Percentage Points
in Percentage Points
2.5%
2.5%
Female
2.0%
Male
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
0.0%
–0.5%
–0.5%
–1.0%
–1.0%
–1.5%
–1.5%
–2.0%
–2.0%
–2.5%
–2.5%
Argentina
Brazil
Chile
Mexico
Female
Argentina
Brazil
Chile
Male
Mexico
Note: Differences in the change of the share of manufacturing and services employment share between June 2009 to June 2008 and June
2008 to June 2007. Source: Cho and Newhouse (2010).
manufacturing and services in the 2008Q2–2009Q2
period compared to the preceding year (2007Q2–
2008Q2) in Argentina, Brazil, Chile and Mexico.8 We
observe that the share of employment in services has
increased faster relative to manufacturing during the
recession than during the last year of expansion in all
major countries, except for Argentina. Hence, in contrast with previous recessions in the region, when the
external sector actually helped dampen the labor market response to the shock, these numbers suggests an
asymmetric effect of the downturn in global demand
for tradable versus non tradable goods in LAC.
The double difference is intended to isolate the change in shares associated with the recession from the secular structural change
towards the service sector that is taking place in every country.
8 24
From Global Collapse to Recovery
The World Bank
No clear signs of a crisisinduced expansion in informal
employment
Not only were unemployment increases relatively mild
in most countries, but rises in informality—a typical
byproduct of economic downturns in Latin America—
were conspicuous only by their absence. The deterioration in economic activity in LAC labor markets has
traditionally led to an increase in informal employment, or in hidden unemployment. Although informal
employment had progressively lost ground relative
to formal employment in the years preceding the
global crisis, one might have expected the crisis to
have reversed this trend, especially considering the
countercyclical nature of informal unemployment and
the dearth of formal hiring observed in previous recessions (Bosch and Maloney, 2008). The indicators
Zooming in on the dynamics
of labor markets: the cases of
Argentina and Brazil
Figure 19 Type of Labor Contracts in
Selected LAC Countries
Share of Workers Relative to the Total Number of Employees
Change from 2008 to 2009, in Percentage Points
7
6
With Contract
With Health Insurance
5
4
3
2
1
0
–1
–2
–3
Argentina
Brazil
Colombia
Ecuador
Mexico
available so far, however, do not suggest a reversal
of the rising trend in the formal employment share,
although the rate of increase in formality did appear to
decelerate during the crisis.9 The evolution of formal
employment during this global crisis can be gauged
by looking at the share of workers with a labor contract
and that of workers with health insurance. The share
of formal employment in total employment (using having a labor contract as a measure of formality) kept on
rising during the crisis in all countries but Colombia:
between 2008Q2 and 2009Q2 in Brazil (by 3.4 pp),
Mexico (1.4 pp), and Peru (3.1 pp) (Figure 19). When
we use workers with access to health insurance as an
indicator of formality the message is less clear. Formal
employment declined considerably in Mexico (by 1.8
pp) and Colombia (by 1.4 pp), but increased sharply
in Argentina (by 3.5 pp) and Peru (by 6.6 pp).
Peru
Note: For Argentina and Brazil, LCRCE Staff calculations based on
Households Surveys. When the bars are not shown in the graph is
because the information for that specific country is not available.
Source: International Labor Organization.
We now examine the behavior of the different segments
of the active labor force—formal employment, informal
employment, unemployment and self-employment—
during the business cycle in Argentina and Brazil, using quarterly information for the period 1991–2009.10
Figure 20 depicts their evolution in Argentina and Brazil. The shaded areas in the figures represent recessions—as defined in Appendix II.A. The message from
the previous section is reinforced. Formal employment
stagnated somewhat with respect to the expansion period, but it did not lose relative weight in favor of informality as it did during previous recessions.
In Argentina, the unemployment rate increased rapidly in the previous downturn (1998Q2–2002Q1),
There is no consensus on the best definition of informality (Perry et al., 2007) and data availability limitations preclude us from
presenting a full picture of the behavior of the informal segment of the labor market (under alternative definitions) during this crisis.
10 The quarterly data on the different segments of the labor market spans from 1995Q2 to 2009Q3 in Argentina, and from 1991Q1
to 2009Q4 in Brazil. Formal employment in Argentina is defined as the share of workers having access to both health insurance
and a pension benefit through their jobs. In the case of Brazil, formal employees are defined as those with “carteira de trabalho
assinada,” a signed labor card that gives access to social insurance or social protection. Lastly, we consider a residual employment
condition, which we call “other employees” and comprises owners of firms and unpaid employees.
9 PART II Labor Markets in LAC During the 2009 Downturn
25
Office of Regional Chief Economist
reaching a peak close to 21 percent in 2002Q3 before declining sharply (see Figure 20.A). The initial
absorption of this large number of unemployed workers coincided with a massive increase of the share of
informal employment, which rose by 9 pp between
2002Q3 and 2004Q3. The formal sector remained
stubbornly closed to new hires with the result that
the share of formality continued a downward trend
for more than a year after the recession. When the
recovery strengthened, starting in the second half
of 2003, the formal sector reactivated and started
absorbing unemployed and informal workers. At
the start of the current downturn, by contrast, the
upward trend in formal employment in Argentina
leveled off somewhat but did not decrease. Interestingly, the share of informal employment continued
to lose ground during this period (by 0.9 pp) in favor
of formal employment and the self-employed. This
finding reflects some degree of substitution between
informality and self-employment during the last recession in Argentina.
Brazil exhibits an upward trend in formal employment
since the second half of 2004, which led to a net cumulative gain of the share of formal workers of 8 pp by
2009Q4 (Figure 20.B). This steady increase in formal
employment was not reversed by the crisis, although
the share of informality declined at a slower pace in
the second half of the 2000s (falling by only 0.7 pp
in 2009). The share of self-employed increased by
nearly 0.4 pp during 2009.
A milder labor market response
to crisis this time around
In sum, while unemployment did rise in the LAC-6
countries during the recent recession, these increases were relatively muted. Labor force participation
rose, especially among females, and there were no
clear signs of deterioration in the quality of employment, at least in terms of growing informality.11 Next,
we investigate whether labor market responses during
Figure 20 Active Labor Force by Status
A. Argentina
B. Brazil
60%
60%
50%
50%
Formal Employee
40%
Informal Employee
30%
Self-Employed
20%
20%
Unemployed
Informal Employee
Self-Employed
Unemployed
10%
Employed. Others
Employed. Others
Oct-08
Jul-07
Jan-05
Apr-06
Jul-02
Oct-03
Apr-01
Jan-00
Oct-98
Jul-97
Apr-96
Jan-95
Sep-93
Jun-92
Apr-09
Jan-08
Oct-06
Jul-05
Apr-04
Jan-03
Oct-01
Jul-00
Apr-99
Jan-98
0%
Sep-96
0%
Jun-95
30%
Mar-91
10%
Formal Employee
40%
Note: Shaded areas are recessions, as defined in Appendix II.A.
Source: LCRCE calculations based on Households Surveys. For Argentina, Encuesta Permanente de Hogares (EPH) y Encuesta Permanente
Continua de Hogares (EPHC), for Brazil, Pesquisa Mensal de Emprego (PME).
In an earlier assessment, Ferreira and Schady (2009) have a relatively benign view of the effects of the global crisis on Latin
American labor markets.
11 26
From Global Collapse to Recovery
The World Bank
the current downturn were similar to those in previous
recessions.12
The main conclusion of our analysis is that, controlling for the size of the downturn, the rise in unemployment this time around was significantly smaller
than in previous crisis episodes. This result is even
more surprising considering that average real wages
(in the economy as a whole) did not fall during this
recession—given the combination of low inflation and
downward rigidity in nominal wages—whereas they
fell sharply in previous crises (on account of significant inflation spikes). Let us now consider some of the
details behind this result.
Figure 21.B illustrates the fact that the rise in unemployment during previous recessions substantially exceeded that observed in the current one. Argentina
and Chile experienced the largest surges in the rate of
unemployment in previous recessions, with increases
of 8.3 pp and 5.6pp, respectively. In contrast, unemployment rose only mildly during the current recession
—by 0.4 pp and 2.3 pp in Argentina and Chile, respectively. Note also that even in Mexico, which experienced the sharpest GDP contraction in the region
this time around, the unemployment response was
less than half that observed during the Tequila crisis,
i.e., between 1994Q4 and 1995Q3.
The milder unemployment response this time around
could be attributed either to softer GDP contractions
(than in previous crises) or to a weaker link between
the change in economic activity and the change in
unemployment (that is, to a lower elasticity of unemployment to output). First, GDP did contract by
less during the current crisis, but not in all countries
(Figure 21.A). Argentina, Colombia and Mexico experienced larger contractions in economic activity
Figure 21 GDP Growth and Change in the Unemployment Rate During Recessions
A. GDP Growth (%)
B. Change in Unemployment (p.p.)
Current Recession
Mexico
Previuos recession
Colombia
–30
–25
–20
–15
–10
–5
Chile
Brazil
Brazil
0
Previous recession
Colombia
Chile
Argentina
Current Recession
Mexico
Argentina
0
2
4
6
8
10
Note: Previous recession periods are: Argentina (1998.Q4–2002.Q2); Brazil (1997.Q4–1998.Q2); Chile (1998.Q3–1999.Q4); Colombia
(1998.Q3–1999.Q4); and Mexico (1995.Q1–1996.Q1). Current recession periods are: Argentina (2008.Q3–2009.Q2); Brazil (2008.Q4–
2009.Q2); Chile (2008.Q3–2009.Q3); Colombia (2008.Q3–2009.Q2); and Mexico (2008.Q2–2009.Q2). Source: LCRCE Staff calculations
based on National Statistical Institutes data.
The samples used are constrained by the availability of quarterly unemployment data. We use the Harding and Pagan (2002)
adaptation of the Bry-Boschan algorithm (BBQ) to date recessions from quarterly GDP series in Argentina, Brazil, Chile, Colombia,
and Mexico. A more detailed description of the algorithm is provided in Appendix II.A. As a result, the measures of GDP contraction,
i.e., of decreases in the level of GDP, used in this part of the report do not coincide with those in Part I, where growth collapse is
defined simply as the difference in the annual GDP growth rate between 2007 and 2009.
12 PART II Labor Markets in LAC During the 2009 Downturn
27
Office of Regional Chief Economist
during their respective previous downturns compared
to the recent global crisis. In the case of Argentina, the
crisis of 1998–2002 was associated with a dramatic
collapse of GDP in real terms (28 percent), while during the current episode GDP contracted by almost 10
percent. Mexican GDP fell in real terms by nearly 15
percent during the Tequila crisis, while it shrank by 12
percent during 2008–2009. In Colombia differences
are marked, but the contractions are overall smaller
(7 percent during the previous recession vs. 1 percent
during the global crisis). Brazil and Chile instead suffered a similar contraction in GDP during the current
crisis compared to certain previous episodes.
Figure 22 Sensitivity of Unemployment
to Economic Activity
Elasticity of Unemployment With Respect to GDP Growth
2.5
Previous recession
Current Recession
2.0
1.5
1.0
0.5
0.0
Argentina
Brazil
Chile
Colombia
Mexico
Second, while there is a great deal of heterogeneity in
the responses among the 5 LAC countries analyzed, it
is clear that the rise in the unemployment rate (in percentage points) for each one percent contraction in
GDP (i.e., the semi-elasticity of unemployment to output) was significantly larger in past downturns compared to the current one (Figure 22). For instance,
the semi-elasticity of unemployment to output has
halved in Chile, from 1 in the previous recession to
0.5 during the last episode. A similar reduction is observed in Mexico, although the semi-elasticities there
are smaller (0.25 during the Tequila crisis vs. 0.12
during the current one). In Argentina and Brazil, the
semi-elasticities of unemployment were 6 and 3 times
larger in past downturns, respectively, than in the current one.
tion in Colombia merit further study. Other elements
might be at play behind the sharp output elasticity of
unemployment in Colombia. Colombia has one of the
most binding minimum wages in the region, and previous studies have established their negative impact
on employment (Cunningham, 2007). During the recession, these negative effects on employment might
have exacerbated.
The sole exception is Colombia, where the semi-elasticity of unemployment to output during the previous
recession was about one third the one observed in
the recent downturn. The Colombian result might be
related to the massive increase in labor force participation observed during the downturn. During 2008Q3
and 2009Q2, overall participation increased by 2.5 pp
in Colombia while in the other four countries it barely
changed. The forces behind this increase in participa-
Aggregate wage behavior fails to explain the relatively
muted response of unemployment to output contraction among LAC countries during the current global
crisis. While in previous recessions average real wages
in the whole economy fell rapidly due to high inflation, this time around they exhibited an upward trend,
pointing towards downward rigidity in nominal wages
in a new LAC context of low inflation.13 In Argentina,
real wages for males (formal and informal workers)
Note: Previous recession periods are: Argentina (1998.Q4–2002.
Q2); Brazil (1997.Q4–1998.Q2); Chile (1998.Q3–1999.Q4); Colombia (1998.Q3–1999.Q4); and Mexico (1995.Q1–1996.Q1).
Current recession periods are: Argentina (2008.Q3–2009.Q2);
Brazil (2008.Q4–2009.Q2); Chile (2008.Q3–2009.Q3); Colombia
(2008.Q3–2009.Q2); and Mexico (2008.Q2–2009.Q2). Source:
LCRCE Staff calculations based on National Statistical Institutes
data.
Unfortunately, we only had access to quarterly data on average wages for Argentina and Brazil. Instead, most countries publish
data on compensation per employee in the industrial sector, which are shown in the case of Mexico. In Figure 2.8 recessions are
represented by the shaded areas, and we have set the CPI and wage index to 100 for the first quarter of the recession to highlight
the behavior of prices during recessions.
13 28
From Global Collapse to Recovery
The World Bank
declined sharply in the previous recession, especially
after the convertibility was abandoned and inflation
spiked at the end of 2001. During the current recession, real wage behavior has been apparently different, although the interpretation of the data is clouded
by well-know concerns with an underestimation of the
CPI. After a moderate decline in the first quarter of the
recession, reported real wages returned to their pre-recession upward trend (Figure 23.A and Figure 23.B).14
In Brazil, after an initial upward spike real wages declined sharply throughout the 1997–1998 recession,
while they showed an upward trend during the current
turmoil (Figure 23.C and Figure 23.D). The acceleration of inflation in Mexico during 1995–1996 led to a
major downward adjustment in real wages (18 pp in
a year), and while there are signs of wage moderation
during the current crisis there was no clear downward
adjustment (Figure 23.E and Figure 23.F).
The milder response of unemployment to the decline
in real economic activity during the global crisis compared to previous recessions constitutes an apparent
puzzle that deserves further research, especially since
we observe, if anything, stronger wage rigidities in the
recent past rather than in previous recessions with the
available data. What explains the different behavior this
time around? Among the many conjectures, it could be
argued first that the nature of the recent shock is different. Whereas the current crisis originated outside the
region, previous recessions were either home-brewed
or externally generated but magnified by internal weaknesses. Previous recessions affected most sectors of
economic activity while the current global shock was
transmitted mainly through the external sector, which
is typically (land or) capital intensive. Moreover, to the
extent that this recession was perceived as a temporary phenomenon, firms in sectors where training and/
or firing are costly (i.e., formal sectors) might have
opted for labor hoarding rather than layoffs.
Another conjecture could be that the rising formal employment in the second half of the 2000s might have
reduced the volatility of LAC labor markets inasmuch
as it came with increasing job protection. If this is the
case, one might expect a slower job recovery this time
around compared to previous recessions. This would
be because firing costs/restrictions can be expected
to reduce also hiring when conditions turn favorable,
as firms anticipate costs associated with future layoffs
(Bentolila and Bertola, 1990).
Lastly, countercyclical fiscal policies, to the extent that
they were implemented in LAC, might have supported
employment, for example, through spending on public works. In addition, efforts to prevent labor shedding
were an important ingredient of stimulus packages in
some LAC countries. Overall, it is estimated that the
region’s government had planned to invest an additional US$25 billion in 2009, which would imply a 20
percent increase in public spending on infrastructure
above the original targets (Schwartz, Andrés, and Dragoiu, 2009). Although it is premature to assess the
effectiveness of these programs on employment, they
might have helped mitigating the unemployment response. Regarding labor market policies, Appendix
II.B provides a description of policy interventions specifically designed to cope with the effects of the international financial crisis on labor markets in selected
LAC countries.
We conclude this section with a closer look at the evolution of formal and informal employment and wages in
Argentina and Brazil. Compared to Figure 20 presented
above, we focus our discussion here on the comparative performance of the shares of formal and informal
employment in the active labor force during the recessionary periods associated to the current crisis vis-à-vis
previous crises (Figure 24).15 Formal employment decreased significantly in Argentina and Brazil in previous
The corresponding graphs for females present a qualitatively similar pattern. We prefer to show the evolution of male wages since
it is well known that compositional changes in the labor force across the business cycle are more pronounced for females than for
males.
15 As before, in Argentina the point of comparison is the recessionary period from 1998Q2 to 2002Q2 associated to the financial
crisis. In Brazil we identify two previous recessionary periods, 1997Q4 to 1998Q2 and 1999Q4 to 2002Q2.
14 PART II Labor Markets in LAC During the 2009 Downturn
29
Office of Regional Chief Economist
Figure 23 Evolution of Real Wages and CPI (Males)
B. Argentina
Previous Crisis
Index
Jun-98
= 100
Previous
Crisis
Previous
Crisis
Index
Jun-98
= 100
Index Jun-98 = 100
Current Crisis
Index
Jun-08
= 100
Current
Crisis
Current
Crisis
Index
Jun-08
= 100
Index Jun-08 = 100
Jun-09
Jun-09
Jun-09
Dec-09
Dec-09
Dec-09
Mar-09
Mar-09
Mar-09
Sep-09
Sep-09
Sep-09
Dec-08
Dec-08
Dec-08
Mar-09
Mar-09
Mar-09
Dec-08
Dec-08
Dec-08
Jun-09
Jun-09
Jun-09
Jun-08
Jun-08
Jun-08
Sep-08
Sep-08
Sep-08
Sep-08
Sep-08
Sep-08
Mar-08
Mar-08
Mar-08
Jun-08
Jun-08
Jun-08
Dec-07
Dec-07
Dec-07
Sep-07
Sep-07
Sep-07
CPI
Real Compensation
CPIper
Employee-Industry
Real Compensation per
Employee-Industry
Real
Compensation per
Dec-09
Dec-09
Dec-09
Sep-09
Sep-09
Sep-09
Employee-Industry
Jun-09
Jun-09
Jun-09
Jun-96
Jun-96
Jun-96
Mar-96
Mar-96
Mar-96
Employee -Industry
Dec-95
Dec-95
Dec-95
Sep-95
Sep-95
Sep-95
Jun-95
Jun-95
Jun-95
Mar-95
Mar-95
Mar-95
Dec-94
Dec-94
Dec-94
Sep-94
Sep-94
Sep-94
Real Compensation per
Employee -Industry
Real Compensation per
Employee
-Industry
Real
Compensation
per
CPI
Mar-09
Mar-09
Mar-09
CPI
Dec-08
Dec-08
Dec-08
CPI
Current
Crisis
F. Mexico
Index
Dec-07
= 100
Current
Crisis
Current
Crisis
Index
Dec-07
= 100
Index Dec-07 = 100
Sep-08
Sep-08
Sep-08
CPI
180
180
170
180
170
160
170
160
150
160
150
140
150
140
130
140
130
120
130
120
110
120
110
100
110
100
90
100
90
80
90
80
70
80
70
70
Mar-08
Mar-08
Mar-08
Mar-00
Mar-00
Mar-00
Dec-99
Dec-99
Dec-99
Jun-99
Jun-99
Jun-99
Sep-99
Sep-99
Sep-99
Mar-99
Mar-99
Mar-99
Dec-98
Dec-98
Dec-98
Jun-98
Jun-98
Jun-98
Sep-98
Sep-98
Sep-98
Mar-98
Mar-98
Mar-98
Dec-97
Dec-97
Dec-97
Jun-97
Jun-97
Jun-97
Sep-97
Sep-97
Sep-97
Mar-97
Mar-97
Mar-97
Sep-96
Sep-96
Sep-96
Dec-96
Dec-96
Dec-96
Jun-96
Jun-96
Jun-96
Mar-96
Mar-96
Mar-96
Previous
Crisis
E. Mexico
Index
Dec-94
= 100
Previous
Crisis
Previous
Crisis
Index
Dec-94
= 100
Index Dec-94 = 100
Jun-08
Jun-08
Jun-08
CPI
CPI
D. Brazil
Current Crisis
Index
Sep-08
= 100
Current
Crisis
Current
Crisis
Index
Sep-08
= 100
Index Sep-08 = 100
Mar-08
Mar-08
Mar-08
CPI
115
115
110
115
110
105
110
105
100
105
100 Real Mean Wage
95 Real Mean Wage
100
95 Real Mean CPI
Wage
90
95
CPI
90
CPI
85
90
85
80
85
80
80
Mar-07
Mar-07
Mar-07
Real Mean Wage
Real Mean Wage
Jun-94
Jun-94
Jun-94
180
180
170
180
170
160
170
160
150
160
150
140
150
140
130
140
130
120
130
120
110
120
110
100
110
100
90
100
90
80
90
80
70
80
70
70
Real Mean Wage
Mar-94
Mar-94
Mar-94
115
115
110
115
110
105
110
105
100
105
100
95
100
95
90
95
90
85
90
85
80
85
80
80
Real Mean Wage
Dec-07
Dec-07
Dec-07
C. Brazil
Previous Crisis
Index
Sep-97
= 100
Previous
Crisis
Previous
Crisis
Index
Sep-97
= 100
Index Sep-97 = 100
Real Mean Wage
Dec-07
Dec-07
Dec-07
Jun-97
Jun-97
Jun-97
Sep-97
Sep-97
Sep-97
Dec-97
Dec-97
Dec-97
Mar-98
Mar-98
Mar-98
Jun-98
Jun-98
Jun-98
Sep-98
Sep-98
Sep-98
Dec-98
Dec-98
Dec-98
Mar-99
Mar-99
Mar-99
Jun-99
Jun-99
Jun-99
Sep-99
Sep-99
Sep-99
Dec-99
Dec-99
Dec-99
Mar-00
Mar-00
Mar-00
Jun-00
Jun-00
Jun-00
Sep-00
Sep-00
Sep-00
Dec-00
Dec-00
Dec-00
Mar-01
Mar-01
Mar-01
Jun-01
Jun-01
Jun-01
Sep-01
Sep-01
Sep-01
Dec-01
Dec-01
Dec-01
Mar-02
Mar-02
Mar-02
Jun-02
Jun-02
Jun-02
Sep-02
Sep-02
Sep-02
Dec-02
Dec-02
Dec-02
Mar-03
Mar-03
Mar-03
Jun-03
Jun-03
Jun-03
Sep-03
Sep-03
Sep-03
Dec-03
Dec-03
Dec-03
Mar-04
Mar-04
Mar-04
Real Mean Wage
Real Mean Wage
CPI
Jun-07
Jun-07
Jun-07
Real Mean Wage
CPI
Sep-07
Sep-07
Sep-07
Real Mean Wage
CPI
Jun-07
Jun-07
Jun-07
CPI
Sep-07
Sep-07
Sep-07
CPI
Mar-07
Mar-07
Mar-07
CPI
150
150
140
150
140
130
140
130
120
130
120
110
120
110
100
110
100
90
100
90
80
90
80
70
80
70
60
70
60
60
Jun-07
Jun-07
Jun-07
150
150
140
150
140
130
140
130
120
130
120
110
120
110
100
110
100
90
100
90
80
90
80
70
80
70
60
70
60
60
A. Argentina
Note: The graph depicts the evolution of quarterly average male real wages for the whole economy (all sectors) and the CPI index around
recession periods for Argentina and Brazil. For Mexico, wage data refers to average compensation per employee in the manufacturing sector. Source: LCRCE calculations for Argentina based on Encuesta Permanente de Hogares (EPH) and Encuesta Permanente Continua de
Hogares (EPHC) and for Brazil based on Pesquisa Mensal de Emprego (PME). For Mexico, Banco de México and INEGI.
30
From Global Collapse to Recovery
The World Bank
Figure 24 Changes in Active Labor Force by Status During Recessions (Percentage Point
Variation Between Peak and Trough)
A. Argentina
B. Brazil
1.0
Previous Recession (98q2–02q1)
0.5
1.0
Current Recession (08q3–09q1)
0.0
0.5
Previous Recession (97q3–98q1)
Previous Recession (99q3–00q1)
Current Recession (08q3–09q1)
–0.5
–1.0
0.0
–1.5
–2.0
–0.5
–2.5
–3.0
–1.0
–3.5
–1.5
–4.0
Formal Employment
Formal Employment
Informal Employment
Informal Employment
Source: LCRCE calculations based on Households Surveys: Pesquisa Mensal de Emprego (PME); Encuesta Permanente de Hogares (EPH)
and Encuesta Permanente Continua de Hogares (EPHC).
crises while it slightly increased in both countries during the current downturn. In contrast, informality either increased or remained constant in previous crises
while it has declined in Argentina and Brazil this time
around. Counter-cyclical fiscal policies, to the extent
that they targeted public works and contracts with
firms in the formal sector, might help explaining the
differential behavior across the recessions.
Real wages in the formal and informal sector in Argentina and Brazil might also help to shed some light
on the different behavior of LAC labor markets during
the current recession. In Argentina, the sharp decline
of relative wages of informal with respect to formal
workers in previous crises (especially after exiting the
convertibility program) may help understand the different behavior of quantities during the recession. Instead, the lack of dynamism of informal employment
during the current downturn might be related to wage
setting: wages of informal workers have grown as fast
as the wages of formal employees (Figure 25.A and
Figure 25.B). In contrast, we do not find a differential
wage behavior across crises episodes in Brazil (Figure
25.C and Figure 25.D). During the two recessions,
wages of formal employees decline relative to wages
of informal workers.
Final remarks
Our exploratory assessment of the evolution of labor
market aggregates in selected LAC countries during
the recent crisis shows that labor markets were not hit
as hard as in previous recessions. Neither quantities—
unemployment, employment—nor wages suffered
as much as in the past, while indicators of labor quality such as the share of formal employment continued
growing, albeit at a slower pace. While the differential impact of the crisis with respect to past episodes
deserves further study, it may be explained partly by
the nature of the external shocks. The greater ability of
the region to withstand shocks (due to sounder macrofinancial policy frameworks) may also have played an
important role. Counter-cyclical fiscal policies were implemented to one extent or another in most countries
studied here, which may have dampened the initial
unemployment response. It is also possible that labor
market policy responses may have helped mitigate the
impact of the shocks on labor markets. A thorough
evaluation of the effectiveness of these policies and
their role in dampening the labor market response in
the region constitutes an important issue that warrants
additional research.
PART II Labor Markets in LAC During the 2009 Downturn
31
Office of Regional Chief Economist
Figure 25 Evolution of Real Wages and CPI (males) by Status
B. Argentina
Previous Crisis
Index Jun-98 = 100
Previous Crisis
Index Jun-98 = 100
Current Crisis
Index Jun-08 = 100
Current Crisis
Index Jun-08 = 100
160
CPI
160
140
Real Wages Formal Employee
120
100
100
80
Real Wages Formal Employee
100
80
Real Wages CPI
Informal Employee
Real Wages Informal Employee
60
40
40
40
Dec-07
Dec-07
Real Wages Informal Employee
Sep-07
Sep-07
60
40
Jun-07
Jun-07
80
60
Mar-07
Mar-07
Real Wages Informal Employee
Jun-97
Jun-97
Sep-97
Sep-97
Dec-97
Dec-97
Mar-98
Mar-98
Jun-98
Jun-98
Sep-98
Sep-98
Dec-98
Dec-98
Mar-99
Mar-99
Jun-99
Jun-99
Sep-99
Sep-99
Dec-99
Dec-99
Mar-00
Mar-00
Jun-00
Jun-00
Sep-00
Sep-00
Dec-00
Dec-00
Mar-01
Mar-01
Jun-01
Jun-01
Sep-01
Sep-01
Dec-01
Dec-01
Mar-02
Mar-02
Jun-02
Jun-02
Sep-02
Sep-02
Dec-02
Dec-02
Mar-03
Mar-03
Jun-03
Jun-03
Sep-03
Sep-03
Dec-03
Dec-03
Mar-04
Mar-04
80
60
CPI
C. Brazil
D. Brazil
Current Crisis
Previous Crisis
Index Sep-97 = 100
Previous Crisis
Index Sep-97 = 100
115
110
115
Index Sep-08 = 100
Current Crisis
Index Sep-08 = 100
115
110
115
105
110
Real Wages Informal Employee
105
110
100
105
Real Wages Informal Employee
100
105
95
100
90
95
85
90
CPI
Real Wages Formal Employee
CPI
Real Wages Formal Employee
80
85
Real Wages Informal Employee
Real Wages Formal Employee
Real Wages Informal Employee
Real Wages Formal Employee
CPI
95
100
90
95
CPI
85
90
Dec-09
Dec-09
Sep-09
Sep-09
Jun-09
Jun-09
Mar-09
Mar-09
Dec-08
Dec-08
Sep-08
Sep-08
Jun-08
Jun-08
Mar-08
Mar-08
Dec-07
Dec-07
Sep-07
Sep-07
Jun-07
Jun-07
80
Mar-07
Mar-07
Mar-00
Mar-00
Dec-99
Dec-99
Jun-99
Jun-99
Sep-99
Sep-99
Mar-99
Mar-99
Dec-98
Dec-98
Jun-98
Jun-98
Sep-98
Sep-98
Mar-98
Mar-98
Dec-97
Dec-97
Jun-97
Jun-97
Sep-97
Sep-97
Mar-97
Mar-97
Sep-96
Sep-96
Dec-96
Dec-96
Jun-96
Jun-96
80
85
Mar-96
Mar-96
80
Jun-09
Jun-09
120
100
Mar-09
Mar-09
Real Wages Formal Employee
Real Wages Formal Employee
140
120
Dec-08
Dec-08
140
120
Sep-08
Sep-08
CPI
Jun-08
Jun-08
160
140
Mar-08
Mar-08
160
A. Argentina
Source: LCRCE Staff calculations based on Households Surveys. For Argentina, Encuesta Permanente de Hogares (EPH), and Encuesta
Permanente Continua de Hogares (EPHC); for Brazil, Pesquisa Mensal de Emprego (PME).
32
From Global Collapse to Recovery
Appendix I.A
The Great Growth
Collapse in 2009
The global financial crisis hit the world economy suddenly, severely,
and in a synchronized fashion. No country was left unscathed. However, the growth consequences of the crisis vary considerably across
countries. So far several explanations have been put forth and, although there is still no consensus on the relative importance of different factors in the international transmission of this crisis, it has
been argued the cross-country differences in growth response at the
onset of the crisis may reflect differences in: (i) the exposure to real
and financial manifestations of the global shock, (ii) the institutional
and macroeconomic framework in place, and (iii) the response engineered by policymakers. In other words, provided that all countries
were hit by a global shock (similar in nature across countries), the
differences in growth performance may reflect the cross-country variance in terms of resilience (external and macroeconomic vulnerabilities as well as other factors that might amplify shocks). This appendix
investigates the relationship between the growth collapse at the onset
of the crisis and pre-crisis characteristics of the domestic economy
and its linkages to the rest of the world. The findings are presented in
Table I.A and compared in light of recent empirical work.
Our dependent variable is the change in the GDP growth rate in 2009
relative to 2007. Earlier attempts to characterize the crisis focus on
measuring the severity of the crisis in its different financial and real
manifestations (Rose and Spiegel, 2009a, b). These studies are unable to link the growth decline since the beginning of the crisis to
either pre-existing conditions in the domestic economies (except
for sharp rises in equity prices) or international trade and financial
linkages. We conduct a regression analysis for a sample of 103 countries and find that output during the crisis was hit the hardest in
advanced countries (see Table A). Controlling for income per capita,
we estimate the link between the growth collapse in 2008–9 and its
potential causes, as classified in the following groups: (a) trade and
financial linkages, (b) macroeconomic and financial vulnerabilities,
and (c) regulatory quality.
Trade and financial linkages. The decline in growth performance
was larger in countries with higher trade exposure, although no significant role for the composition of trade was found. On the other
hand, recent evidence suggests that the growth collapse was deeper
in countries with high shares of manufacturing exports (Berkmen
et al. 2009; Lane and Milesi-Ferretti, 2010), but this effect ceases
to be significant when the sample is restricted to emerging markets
(Blanchard et al. 2010).
From Global Collapse to Recovery
33
Office of Regional Chief Economist
We fail to find a robust link between the overall measure of financial openness and the growth collapse.
However, the structure of foreign assets and liabilities
may have played a significant role. Table I shows that
safer modes of integration (i.e., lower debt-to-equity
ratios) were associated to milder growth declines. This
finding may reflect the insulation properties against
external shocks of this mode of integration (Lane and
Milesi-Ferretti, 2010). Finally, Blanchard et al. (2010)
show that countries with external finance vulnerabilities (i.e. higher short-term debt to GDP ratios) have
also suffered larger growth collapses.
Macroeconomic and financial vulnerabilities. Our evidence suggests that the growth collapse (if any) was
milder in countries with ability to implement countercyclical policies and with lower pre-crisis inflation.
However, we fail to find a robust role for the flexible
exchange rate arrangements.
34
From Global Collapse to Recovery
Countries with financial vulnerabilities also tended to
suffer a larger growth collapse. Table A shows that
high pre-crisis credit growth and highly-leveraged
economies (i.e., high loan-to-deposit ratios) faced
sharper declines in growth. Existing evidence shows
that this effect was particularly more severe among
EU accession countries (Berkmen et al. 2009).
Quality of the regulatory framework. Giannone et al.
(2010) examines the relation between regulation
quality and growth performance during the crisis. Although countries with deeper financial markets may
be better prepared to cope with crisis episodes, the
authors find that countries that adopted more marketfriendly policies (i.e., deregulated credit markets) were
hit the hardest. However, the quality of regulation in
credit markets ceases to explain the growth collapse
if only emerging markets are analyzed (Blanchard et
al. 2010).
The World Bank
Table I.A Characterizing the Growth Collapse
Dependent Variable: Growth Collapse between 2007 and 2009
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Openness
Trade Openness
(Export and Imports, % of GDP)
0.028*** 0.018*
(0.009) (0.011)
Financial Openness
(Foreign Assets and Liabilities, % of GDP)
–0.030
(0.178)
0.022
(0.013)
0.019 0.019** 0.020** 0.022**
(0.011) (0.009) (0.008) (0.009)
0.097
(0.092)
Domestic Demand
–0.078*
(0.040)
Private Consumption
(% of GDP)
Composition of Trade
Share of Natural Resource Exports
(% of Total Exports)
–0.026
(0.029)
Share of Manufacturing Exports
(% of Total Exports)
0.011
(0.027)
Structure of External Liabilities
Equity-related Financial Openness
(Assets and Liabilities, % of GDP)
–1.554
(0.937)
Debt-related Financial Openness
(Assets and Liabilities, % of GDP)
0.861**
(0.389)
International Reserves
(% of GDP)
4.851
(3.404)
Resilience of Domestic Financial Systems
“Excess” Credit Growth
(Average 2006–7 vs. 2002–5)
16.02**
(6.179)
Loan to Deposit Ratios
(Ratio, 2007)
3.521**
(1.548)
Macroeconomic Policies
Fiscal Pro-Cyclicality
(Correlation of Govt. Spending and GDP)
4.797***
(1.505)
Inflation Rates
(Level of YoY CPI)
Observations
R-squared
0.396***
(0.128)
103
85
83
84
50
99
96
99
0.106
0.081
0.047
0.101
0.155
0.188
0.173
0.208
Robust standard errors are reported in brackets. All regressions include controls for GDP per capita (PPP measure). ***, **, and * indicate
statistical significance at one, five, or ten percent, respectively.
APPENDIX I.A The Great Growth Collapse in 2009
35
Appendix I.B
Characterizing
the Global
Recovery:
How fast? What
is driving it?
This appendix characterizes the main features of the current recovery from the global downturn of 2008–9 and contrasts this episode
with previous recoveries from financial crises and global downturns.
An exploratory econometric assessment of the forces driving the recovery is presented in Table I.B.
We find robust evidence of a bounce-back effect: countries that suffered a larger collapse in GDP growth rates between 2007 and 2009
are expected to have a stronger recovery (see regression [1]). However, our estimates suggest that the recovery is not steeper than the
recession. For example, Mexican real output growth declined by 9.9
percentage points (from 3.3 percent growth in 2007 to a contraction in economic activity of 6.5 percent in 2009), and our estimates
suggest a cumulative growth surge of only 5.5 percent for the years
2010–11. It should be highlighted that these figures are based on
current forecasts and can be altered significantly if the perspectives
for global growth (and the US in particular for the Mexican example)
change. In short, our estimations suggest—regardless of the econometric specification used—that the rebound in economic activity will
be sluggish. This result is consistent with recoveries from financial
crises as well as those from global downturns (Terrones et al. 2009).
Weak and slow recoveries from these turmoil periods tend to reflect
declining asset prices, decreased levels of investment, and weak
credit growth.
The current rebound in economic activity is only partly engineered
by a recovery in trade flows—see regression [2]. The unconditional
correlation suggests only a modest economic impact: an increase
in total trade of 10 percentage points of GDP would lead to an increase in GDP growth of only 0.2 percent. Moreover, the boost from
greater trade flows appears to be negligible when controlling for the
bounce-back effect, suggesting that the trade channel might also reflect a bounce-back effect from the collapsed trade volumes in the
last quarter of 2008. It should be noticed that the trade effect on
the recovery is primarily driven by a rebound in the manufacturing
sectors—see regression [3]. In comparison to past episodes, net exports have typically operated as an engine that pulls the economy out
of the recession (especially from those caused by financial crises).
However, this pull factor loses steam during global downturns, which
is the current case. The evidence suggests that export growth is sluggish during global downturns due to a sharp decline in U.S. imports
(Terrones et al. 2009).
As noted in the main text, advanced economies and emerging markets quickly implemented policies to counteract the recessionary
From Global Collapse to Recovery
37
Office of Regional Chief Economist
effects of the global financial crisis. Our estimations
show that the recovery was indeed stronger in countries with the ability to run countercyclical policies,
while the floating exchange rate regimes did not seem
to play a significant role. Terrones et al. (2009) find
that stronger recoveries in industrial economies are
also characterized by discretionary increases in government spending and reductions in nominal and real
interest rates. However, the authors suggest that the
stimulus engineered by the government becomes less
effective if it compromises the sustainability of the fis-
cal position. Moreover, Cerra et al. (2009) add that
monetary policy appears to have no significant effect
on the strength of the recovery among developing
countries and that floating rates have helped developing countries rebound from previous recessions.
The main messages from our regression analysis are
summarized in the last four columns of Table B. Controlling for the bounce-back effect and openness to
trade, we analyze the effect of different components
of aggregate demand separately on the strength of the
Table I.B. Characterizing the Growth Recovery
Dependent Variable: Expected Recovery in Growth Rates between 2009 and 2011
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Bounce Back Effects
Growth Collapse between 2007–2009
(Percentages)
0.557***
(0.073)
0.546*** 0.542*** 0.441*** 0.527*** 0.494*** 0.467***
(0.083) (0.075) (0.079) (0.084) (0.083) (0.083)
Openness
Trade Openness
(Export and Imports, % of GDP)
0.018** 0.000
0.000
(0.008) (0.006) (0.005)
0.003
(0.005)
0.002
(0.005)
0.001
(0.005)
0.000
(0.006)
Financial Openness
(Foreign Assets and Liabilities, % of GDP)
Composition of Trade
Share of Manufacturing Exports
(% of Total Exports)
0.022*
(0.012)
Pull and Push Factors and Macroeconomic Policies
Fiscal Pro-Cyclicality
(Correlation of Govt. Spending and GDP)
-1.461*
(0.814)
Increase in Government Consumption
(2007 vs. 2009, % of GDP)
87.93***
(26.74)
Increase in Private Household
Consumption
2007 vs. 2009 (% of GDP)
Increase in Investment (Capital
Formation)
2007 vs. 2009 (% of GDP)
R-squared
-2.596
(7.206)
Increase in Net Exports
(2007 vs. 2009, % of GDP)
Observations
-11.39
(10.62)
13.02**
(5.917)
81
75
68
74
70
71
71
71
0.684
0.104
0.665
0.645
0.711
0.638
0.656
0.669
Robust standard errors are reported in brackets. All regressions include controls for GDP per capita (PPP measure). ***, **, and * indicate
statistical significance at one, five, or ten percent, respectively.
38
From Global Collapse to Recovery
The World Bank
recovery in economic activity. The results suggest that
the recovery from the current global financial crisis
is driven by a rebound in domestic demand, in particular by higher government consumption, and to a
lesser extent net exports.
Next, we conduct an event study analysis to examine
whether the different components of aggregate demand have played a different role this time around in
comparison to past recoveries from crises episodes
(See Figures I.B.1–I.B.6).16 The decline in GDP growth
rates has been sharper during the current global
downturn among high-income countries (HICs) and
the expectations of a swift recovery are disappointing. On the other hand, GDP growth in middle-income
countries (MICs) has declined at a similar pace to that
of HICs (although growth rates were higher in the former group) but has quickly rebounded. Even though
MICs seem to have a growth engine of their own, the
sustainability of growth in the medium term may still
depend largely on the growth prospects of advanced
countries. Analogously to MICs, growth in LAC was
above trend in the run-up to the crisis. Afterwards, it
experienced a sharp decline; however, a fast rebound
to trend growth is expected during the recovery phase
(See Figure I.B.3).
When looking at the different components of aggregate demand, we find some distinctive features that
characterize the current global downturn vis-à-vis
previous episodes of severe crises (i.e., episodes in
which a country was hit by more than one crisis type:
banking, currency, external debt, or domestic debt
crises). First, countries have emerged from the global
16 downturn thanks in part to bold actions on the fiscal
front. The ratio of government consumption to GDP
moved from a below-trend average before the crisis
to above trend at the onset. Although not reported
here, there is no qualitative difference in the behavior
of government consumption between HICs and MICs.
They both have increased on average 1 percent of
GDP in 2009 and are expected to remain at this new
level for the next couple of years.
Second, the decline in investment was not as sharp,
especially in MICs, as in previous episodes of severe
crisis (say, the collapse of investment in the East Asian
tigers after the 1997–8 crisis). In the current cycle, investment fell on average less than 2 percentage points
of GDP for both HICs and MICs whereas it dropped
by more than 4 percentage points in MICS in past
episodes. Lastly, this recovery has also been strengthened to some extent by a rebound in net exports that
have risen to above trend levels after an initial collapse
on the onset of the crisis. This pattern is somewhat
unusual and weaker if compared to previous crises
episodes, especially in MICs. The typical behavior of
net exports is to simply increase as the crisis unfolded
from slightly below trend to significantly above trend
levels, pulling economies out of the crises. This time,
however, we only observe a sharp decline from above
trend levels and a mild recovery compared to previous severe episodes. In other words, the prospects of
a sluggish growth in trade (and, especially, in imports
from advanced countries) may hinder the likelihood
of a stronger and faster recovery based on an external
push.
The data for GDP and its demand components for 2010 and 2011 are forecasts from the Economist Intelligence Unit.
APPENDIX I.B Characterizing the Global Recovery: How fast? What is driving it?
39
Office of Regional Chief Economist
Figures I.B.1–I.B.6
A. I.B.1. Real GDP Growth: High-Income
Percentage
Percentage
Percentage
PointsPoints Points
4%
3%
Severe Crises Episodes
Severe Crises Episodes
Current Crisis
Current Crisis
Current Crisis
T-2
T-1
T
T+1
T+2
T+3
T-2
T-1
T
T+1
T+2
T+3
T-1LAC Countries
T
T+1
T+2
Real GDP Growth Around Crises
LAC Countries
Real GDP GrowthCurrent
Around
Crises
Crisis
LAC Countries
T+3
Real
LACCrises
Countries
RealGDP
GDP Growth:
Growth Around
T-2
Severe Crises Episodes
Severe Crises Episodes
Severe Crises Episodes
T-2
T+1
T+2
T-1
T
T+1
T+2
Net Exports Around Crises
T-2
T-1 % ofTGDP T+1
T+2
E. I.B.5.
Net Exports
Net Exports Around Crises
% of GDP
Net Exports Around Crises
% of GDP
3%
2%
1%
Current
T+3
T+3
1%
0%
–1%
Severe Crises Episodes
Severe Crises Episodes
Severe Crises Episodes
T-3
T-2
T-1
T
T+1
T+2
T+3
T-3
T-2
T-1
T
T+1
T+2
T+3
D. I.B.4.
Government
Consumption
Government
Consumption
Around Crises
T-3
Severe Crises Episodes
Severe Crises Episodes
0.4%
0.0%
0.2%
0.2%
–0.2%
0.0%
0.0%
–0.4%
–0.2%
–0.2%
–0.6%
–0.4%
Current Crisis
T-3
T-2
T-1
–0.6%
T
T+1
T+2
T+3
T-3
T-2
T-1
T
T+1
T+2
T+3
T-3
T-2
T-1
T
T+1
T+2
T+3
Current Crisis
T-2
T-1
T
T+1
T+2
T+3
T-1
T
T+1
T+2
T+3
Current Crisis
T-3
T-3
2%
1%
Severe Crises Episodes
T-2
T-1 % ofTGDP T+1
T+2
T+3
Government Consumption Around Crises
% of GDP
Government Consumption Around Crises
Severe Crises Episodes
% of GDP
Severe Crises Episodes
0.6%
0.2%
0.4%
2%
Severe Crises Episodes
T-3
Current Crisis
0.8%
0.4%
0.6%
T+3
Current
2%
1%
0%
–2%
T
Current Crisis
–0.4%
–0.6%
Current
–1%
–2%
T-1
0.8%
Percentage
Percentage
Percentage
PointsPoints Points
Current Crisis
T-2
4%
3%
2%
4%
1%
3%
4%
0%
2%
3%
–1%
1%
2%
–2%
0%
1%
–3%
–1%
0%
–4%
–2%
–1%
–5%
–3%
–2%
–6%
–4%
–3%
–7%
–5%
–4%
–8%
–6%
–5%
–9%
–7%
–6%
–10%
–8%
–7%
–9%
–8%
–10%
–9%
–10%
Real GDP Growth Around Crises
Middle-Income Countries
Real GDP Growth Around Crises
Middle-Income Countries
Real GDP Growth
Around
Current
Crisis Crises
Middle-Income Countries
0.6%
0.8%
Current Crisis
4%
3%
2%
0%
–1%
–2%
Percentage
Percentage
Percentage
PointsPoints Points
Real GDP Growth Around Crises
High-Income Countries
Real GDP Growth Around Crises
High-Income Countries
Real GDP Growth Around Crises
Severe Crises Episodes
High-Income Countries
Percentage
Percentage
Percentage
PointsPoints Points
Percentage
Percentage
Percentage
PointsPoints Points
Percentage
Percentage
Percentage
PointsPoints Points
4%
3%
2%
4%
1%
3%
4%
0%
2%
3%
–1%
1%
2%
–2%
0%
1%
–3%
–1%
0%
–4%
–2%
–1%
–5%
–3%
–2%
–6%
–4%
–3%
–7%
–5%
–4%
–8%
–6%
–5%
–9%
–7%
–6%
–10%
–8%
–7%
T-3
–9%
–8%
–10%
–9%
T-3
C. I.B.3.
–10%
T-3
4%
3%
2%
4%
1%
3%
4%
0%
2%
3%
–1%
1%
2%
–2%
0%
1%
–3%
–1%
0%
–4%
–2%
–1%
–5%
–3%
–2%
–6%
–4%
–3%
–7%
–5%
–4%
–8%
–6%
–5%
–9%
–7%
–6%
–10%
–8%
–7%
–9% T-3
–8%
–10%
–9% T-3
–10%
T-3
4%
B. I.B.2. Real GDP Growth: Middle-Income
2%
1%
0%
T-2
Investment Around Crises
T-2
T-1 % ofTGDP T+1
T+2
F. I.B.6.
Investment
Investment Around Crises
% of GDP
Investment Around Crises
% of GDP
1%
0%
–1%
Current Crisis
0%
–1%
–2%
Current Crisis
Current Crisis
–1%
–2%
–3%
–2%
–3%
–4%
–3%
–4%
–4%
T+3
Severe Crises Episodes
T-3
T-2
T-1 Crises TEpisodes T+1
Severe
T+2
T+3
T-3
T-2
Severe
T-1 Crises TEpisodes T+1
T+2
T+3
T-3
T-2
T+2
T+3
T-1
T
T+1
Note: For the current crisis the T-period is 2008. The periods T+1, T+2 and T+3 are forecasts from EIU. Source: LCRCE Staff calculations
using WDI and EIU data.
40
From Global Collapse to Recovery
Appendix II.A
Business Cycle
Dating
Our goal is to compare the behavior of labor markets during the current economic recession relative to previous ones. Hence, we need
to identify the cyclical turning points for each country. We follow the
so-called BBQ algorithm for dating recessions, which was developed
by Bry and Boschan (1971) and later extended by Harding and Pagan (2002) to accommodate quarterly series. The algorithm defines
cycles by identifying troughs and peaks—any quarter lower/higher
than the preceding and succeeding two quarters—and using various
censoring rules about the minimum duration of the overall cycle as
well as the phases of expansion and contraction.
We define economic cycles based on movements in quarterly real
GDP in Argentina, Brazil, Chile, Colombia and Mexico. Sample sizes,
reported in Table II.A.1, vary across countries. Overall, we find 28 recessions. The duration of a recession (expansion) counts the number
of quarters between a peak and trough (between a trough and peak).
The average duration of a recession in the five countries studied is
slightly above a year, at 5 quarters. Table II.A.2 below provides some
summary statistics on the average severity of each recession in each
country in our sample. We report the duration of its recession and its
amplitude. The amplitude of a recession (expansion) measures the
percentage change in GDP between a peak and trough (between
trough and peak).
Table II.A.1 Dating Recessions in Selected LAC Countries
Recessions
Country
Sample
Expansions
Nº of
Quarters
Nº of
Episodes
Nº of
Quarters
Avg.
Duration
Nº of
Episodes
Nº of
Quarters
Avg.
Duration
Argentina
1990q1–
2009q3
79.00
5.00
37.00
7.40
4.00
42.00
10.50
Brazil
1991q1–
2009q3
75.00
7.00
25.00
3.57
6.00
50.00
8.33
Chile
1980q1–
2009q3
119.00
5.00
28.00
5.60
3.00
91.00
30.33
Colombia
1994q1–
2009q2
62.00
3.00
11.00
3.67
2.00
51.00
25.50
Mexico
1980q1–
2009q3
119.00
8.00
42.00
5.25
7.00
77.00
11.00
Source: LCRCE Staff Calculations
From Global Collapse to Recovery
41
Office of Regional Chief Economist
Table II.A.2 Dating Recessions in Latin America
A. Argentina
Period
B. Brazil
Quarter
Duration Amplitude Amplitude
Quarter
Duration Amplitude Amplitude
Period
1992q2–1993q1
4
–6.7%
–1.7%
1991q3–1992q1
3
–11.2%
–3.7%
1994q2–1996q1
8
–8.1%
–1.0%
1993q3–1994q1
3
–7.5%
–2.5%
1998q2–2002q1
16
–28.0%
–1.8%
1994q4–1996q1
6
–8.0%
–1.3%
2008q2–2009q1
4
–9.9%
–2.5%
1997q3–1998q1
3
–8.7%
–2.9%
1999q3–2000q1
3
–2.8%
–0.9%
2001q2–2000q2
4
–3.7%
–0.9%
2008q3–2009q1
3
–9.2%
–3.1%
C. Chile
Period
D. Colombia
Quarter
Duration Amplitude Amplitude
Quarter
Duration Amplitude Amplitude
Period
1981q2–1982q4
7
–20.5%
–2.9%
1998q2–1999q2
5
–6.8%
–1.4%
1985q2–1986q3
6
–2.8%
–0.5%
2002q2–2002q4
3
–0.7%
–0.2%
1988q1–1988q3
3
–3.6%
–1.2%
2008q2–2008q4
3
–1.2%
–0.4%
1998q2–1999q3
6
–5.5%
–0.9%
2008q2–2009q2
5
–4.7%
–0.9%
E. Mexico
Period
Duration
Amplitude
Quarter Amplitude
1981q4–1984q3
12
–5.9%
–0.5%
1985q4–1986q3
4
–8.6%
–2.1%
1987q4–1988q3
4
–6.4%
–1.6%
1992q4–1993q3
4
–5.2%
–1.3%
1994q4–1995q3
4
–15.0%
–3.8%
1997q4–1998q3
4
–3.0%
–0.8%
2000q4–2001q3
4
–5.6%
–1.4%
2007q4–2009q1
6
–11.7%
–1.9%
Source: LCRCE Staff Calculations
42
From Global Collapse to Recovery
Appendix II.B
Labor Market
Policy Responses
to the Crisis17
This Appendix provides some examples of policies that were either
introduced in Latin American labor markets or reinforced as a consequence of the international crisis. Its aim is not exhaustive, and
the country coverage responds to the countries included in this note.
Argentina
Argentina responded to the global crisis both reinforcing existing labor
market policies and creating new ones. Labor market policies aimed
at mitigating the effects of the international crisis can be grouped on
three fronts: i) active labor market policies, ii) social protection and
policies for unemployment protection, and iii) employment subsidies.
Argentina introduced “Jóvenes con más y mejor trabajo,” a new active labor market program in June 2008, providing training and an
opportunity to finish regular school to unemployed young workers
(between 18 and 24) with unfinished primary or secondary school.
It also reinforced an existing program, the “Seguro de capacitación
y empleo,” which combines elements of non-contributory benefits
for the unemployed with active labor market policies in the form of
assistance in finding a job and training. While individuals were in
principle eligible for the program for a maximum of 24 months, the
government decided to extend eligibility beyond this limit up to December 31st 2009 in case the worker remained unemployed. Similarly, contributory unemployment benefits were extended. Regarding
the protection of jobs, the “Programa de recuperación productiva”
(REPRO) provides income support to firms in distress in exchange of
a compromise not to cut employment. In principle, any firm engaged
in a declining activity in the private sector is eligible to receive a
monthly fixed-sum of AR$150 (US$ 38) for each of its employees up
to a maximum period of six months. In exceptional circumstances,
the benefit can be extended as well as the receiving period, up to no
more than 12 months. Participating firms have to show the severity
of the economic crisis hitting them, and provide plans to show their
future viability. The program was extended as a consequence of the
crisis up to December 31st 2009.
Brazil
Some parts of this appendix draw heavily
on Freije-Rodríguez and Murrugarra (2009).
17 Brazil articulated the response of its labor market policies to the international crisis on three fronts: strengthening contributory unemployment insurance, extending non-contributory income support
From Global Collapse to Recovery
43
Office of Regional Chief Economist
programs and raising minimum wages. Unemployment insurance in Brazil is quite limited. As a consequence of the international crisis, the government
extended the eligibility of the “Seguro desemprego”
for two additional months for the “most affected sectors and states.” The maximum period of eligibility
became 7 months. Non-contributory benefits through
the social assistance program “Bolsa familia” were
also strengthened. The ceiling of eligibility was raised
from R$120 (US$ 68) per capita to R$137 (US$ 77)
per capita, which implies that some 1.3 million new
families became eligible by the end of 2009. The
third income support measure was to increase the
minimum wage. In February 2009, the minimum
wage was raised from R$415 (US$ 235) to R$465
(US$ 262), which has effects not only on low wage
workers, since the minimum wage is used to define
the benefits obtained through several social security
and social assistance transfers.
is included in a package of reforms of the “Seguro de
cesantía” that was launched before the start of the
international crisis, but came into effect around May
2009 and included special provisions to cope with the
crisis. Among the latter, an interesting supplementary
measure is the program of “Protección al empleo y
capacitación laboral,” which allows workers on a voluntary basis and as an alternative to a layoff to collect
during up to 5 months benefits from the “Seguro de
cesantía” while on training. The benefits are defined
as 50 percent of the average wage of the worker during the previous 6 months. During the period the benefits are collected, the worker keeps his or her labor
contract and all its related benefits (e.g. health insurance, pension contributions and different insurance
policies). The measure was designed to be in effect
between July 1st 2009 and July 1st 2010.
Colombia
Chile
We identify two set of reforms that tried to mitigate
the impact of the international financial crisis on the
Chilean labor market. The first falls within the broad
umbrella of employment subsidies, while the second
is related to the innovative program of unemployment
benefits “Seguro de cesantía.” Within the employment subsidies, a new youth employment subsidy
law was launched on January 2009. This program
provides a 30 percent subsidy of the annual income
for those individuals aged between 18 and 24, with
finished secondary education and working in the formal sector, whose monthly (annual) incomes is below
Ch$360,000 (approximately US$ 690). Within the
same set of policies, and during the same month, a
second law was passed that provides temporary income tax reductions for individuals and tax credits
for firms that carry out training activities with their
workers. The law provides special tax reductions to
firms employing individuals who are beneficiaries of
certain social programs such as “Subsidio familiar,”
“Asignación familiar,” “Chile solidario” and “Asignación maternal.” The second set of policy reforms
44
From Global Collapse to Recovery
Colombia articulated its labor market policy response
to the crisis on two fronts: i) a series of tax cuts for
small and medium size enterprises, in an effort to revitalize this sector and ii) enhancing a major training
program, through the “Servicio nacional de aprendizaje” (SENA) to provide additional training to 250.000
young workers. Eligible individuals are between 14
and 26 years of age, unemployed, who live in conditions of severe or extreme poverty in rural and urban
areas. SENA will provide to these young workers some
187 training programs. Up to 70 percent of the new
training positions were posted during 2009. The program also includes some support to participants in
the form in kind transfers (e.g. covering transportation). Firms interested in hiring trainees from the program may not have cut employment in the previous
three months.
Mexico
Mexico has in place several active and passive labor
market policies. During the recent crisis, some of
these policies were strengthened or expanded. On the
The World Bank
side of active labor market policies, the “Programa de
empleo temporal” (PET) which originally was operative only in marginal rural areas was extended to cover
urban areas. The new program is called “Programa
de empleo temporal ampliado” (PETA). In order to
make this expansion operative, some 500 million pesos were added to the program, with a budget total in
2009 of 2,200 million pesos (approximately US$ 179
million). Also related to active policies, 1,250 additional million pesos (about US$ 100 million) were added
to the budget for intermediation services controlled
by the Labor secretary. Passive labor market policies
were also enhanced. Individuals’ ability to withdraw
funds from retirement accounts while unemployed
was extended, and health insurance coverage of up to
six months after dismissal for the unemployed worker
and his or her family was granted. A new program,
the “Programa para la preservación del empleo” was
launched in January 2009 with the objective of maintaining employment in firms operating in tradable
sectors in manufacturing that have been especially
hit by the slowdown in global demand. The program,
operating from February to September of the same
year, was funded with 2,000 million Mexican pesos
(US$ 162 million). Eligible firms who can prove they
are under temporary distress might receive a subsidy
of up to 5,100 pesos per worker (US$ 414) during this
period. In exchange, firms commit to limit the layoffs
up to September in a maximum amount that equals
a third of the fall in sales during the corresponding
period.
Peru
In 2009, the Peruvian Congress introduced temporary
payroll tax holiday measures. Bonuses payable twice
yearly and equivalent to two monthly wages have been
exonerated from social and pension contributions until 2010. As a result, workers’ income will increase by
3.7 percent relative to pre-tax incomes, while firms
will not have to pay social security contributions on
these bonuses. The estimated fiscal cost of this measure of US$212 million is initially covered by the social security administration (EsSalud) and the public
pension system (ONP), although these institutions are
expected to seek compensation from the Central Government. The Peruvian Government also launched
a publically financed retraining program, “Revalora
Peru”, for workers who have lost their job since 2008.
Training by the relevant technical education institutions is offered in the areas of construction, manufacturing, and tourism. Unemployed workers can register
themselves in decentralized Labor Ministry offices to
enroll in the program.
APPENDIX II.B Labor Market Policy Responses to the Crisis
45
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The worst is over, LAC poised to recover.” Washington, DC: The World Bank, LCRCE Semi-Annual Report
for the 2009 Annual Meetings, October
From Global Collapse to Recovery
From Global Collapse
to Recovery
Economic
Adjustment
and Growth
Prospects
in Latin America
and the Caribbean
THE WORLD BANK
Office of the Chief Economist
Latin America and the Caribbean
1818 H St. NW
Washington, DC 20433
www.worldbank.org/lac
THE WORLD BANK