LCR Crisis Briefs

10 items available

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https://hdl.handle.net/10986/9419

This series investigates the impact of the financial crisis on the Latin America and the Caribbean Region (LCR).

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Severity of the Crisis and its Transmission Channels
(World Bank, Washington, DC, 2009-12) Calderon, Cesar; Didier, Tatiana
The current global crisis, although initially circumscribed to the US housing market, spread rapidly across markets and borders. It has affected almost all countries through different reinforcing channels: the contraction in international trade, capital flows, remittances, and international commodity prices. The main goal of this note is to empirically analyze the mechanisms through which the financial crisis of 2007-2009 propagated throughout the world by characterizing the main factors behind the fall in Gross Domestic Product (GDP) growth rates. The findings indicate that a greater decline in the growth rate was registered in countries with higher de facto trade openness, less resilient domestic financial markets, and, to a lesser extent, improved macroeconomic frameworks. To complement this evidence, we construct an aggregate index of the severity of the crisis that captures the real and financial consequences in each country of this unprecedented global financial shock.
Social Consequences of the Global Financial Crisis in Latin America : Some Preliminary, and Surprisingly Optimistic, Conjectures
(World Bank, Washington, DC, 2009-11) Schady, Norbert; Ferreira, Francisco H.G.
Surprisingly, the most severe economic crisis the world has seen since the great depression does not appear to have had as dramatic an impact on poverty in Latin America as might have been expected. The exceptions to this heartening assessment are the countries geographically and economically closest to the United States, chiefly Mexico. Elsewhere, although poverty statistics for 2008-09 are not yet available, the data on output, unemployment and real wages suggest relatively modest changes in poverty. There are two candidate explanations for the smaller-than-expected increases in poverty in Latin America: lower output declines, deriving from enhanced protection against external shocks; and a lower output elasticity of poverty. If the latter is indeed observed when the required data becomes available, the report conjecture that it may reflect both the lower inflation rates now prevalent in the region, and recent reforms in the social protection system. For all their faults, the social protection systems in many Latin America and Caribbean (LAC) countries now reach the poor rather than only the middle-classes. The note concludes arguing against complacency, and pointing to areas where further research; and greater policy reform and experimentation are needed.
Containing Systemic Risk : Are Regulatory Reform Proposals on the Right Track?
(World Bank, Washington, DC, 2009-10) de la Torre, Augusto; Ize, Alain
This note questions two emerging views on ways to tackle systemic risk. As evidenced by the explosive growth of investment banks, which were regulated more lightly because they were assumed to be systemically less important, regulatory unevenness can trigger acutely destabilizing regulatory arbitrage. Hence, unless systemic footprints can be accurately measured and updated, something we think is unlikely, regulating differentially those institutions that are deemed to be the most systemically relevant looks like a perilous return to the past. Similarly, internalizing systemic liquidity risk by taxing maturity mismatches looks like a remnant of idiosyncratic thinking. Matching short liabilities with short assets can protect an individual intermediary's liquidity but at the expense of exacerbating systemic vulnerability.
Back to Global Imbalances?
(World Bank, Washington, DC, 2009-07) de la Torre, Augusto; Schmukler, Sergio L.; Servén, Luis
The 2008-2009 financial crisis has shaken the prevailing equilibrium of the global economy, with a collapse in capital flows and international trade. How will the post-crisis constellation of current account imbalances look? Will the world resume financing the United States (US), and continue sustaining large external imbalances there? Contrary to what many expected, some forces unleashed by the crisis have kept US assets attractive and the dollar strong, decreasing the need for an immediate reduction of global imbalances. Over the long run, however, real sector and financial sector forces are likely to impose a correction, perhaps involving a depreciation of the dollar and a major reallocation of international portfolios.
Labor Markets and the Crisis in Latin America and the Caribbean (A Preliminary Review for Selected Countries)
(World Bank, Washington, DC, 2009-06) Murrugarra, Edmundo; Freije-Rodríguez, Samuel
Countries in Latin America and the Caribbean are experiencing the impact of the international financial crisis on labor markets across different dimensions, such as employment, wages and the quality of labor market arrangements. This note reviews a selected group of countries to assess the speed and severity of labor market impacts. It identifies patterns in the changing labor market conditions, such as specific sectors or types of workers being affected. It also describes countries' preparedness and capacity to respond to the crisis and the specific policy responses being implemented. The review finds a large variation in impacts and responses in the context of increases in unemployment rates that range from 0.4 to 2.1 percentage points. The impacts of the crisis are evolving rapidly but seem to have a more noticeable negative effect among salaried workers in Brazil and Chile whereas in Colombia non-salaried workers have been affected the most. Mexico shows both types of workers as being seriously hit by the recession.
Patterns of Financing During Periods of High Risk Aversion : How Have Latin Firms Fared in this Crisis So Far?
(World Bank, Washington, DC, 2009-05) Didier, Tatiana
This note examines the extent to which firms in Latin America have been able to raise capital through debt and equity securities as well as syndicated loans, both abroad and domestically, since the onset of the 2008 global financial crisis. The public and the private sectors alike lost access to foreign sources of financing during the height of the turbulence. Furthermore, two months after the Lehman Brothers' collapse, only government owned firms and governments themselves were able to re-enter international markets to some extent and raise capital. Thus, the evidence suggests an important role for government guarantees in attracting foreign investors in times of high risk aversion. In domestic and syndicated loan markets, there has been a marked decrease in the total amount raised, although they have remained a viable option for the private sector in Latin America. To the extent possible, non-government borrowers have been able to raise capital in these markets and have generally met their rollover needs. In contrast, the role of sovereign guarantees in attracting local investors seems to have been more important in Eastern Europe and Southeast Asia, where government entities have accounted for respectively 80 and 44 percent of all new issues in local markets, compared to less than 15 percent in LAC.
Crisis in LAC : Infrastructure Investment and the Potential for Employment Generation
(World Bank, Washington, DC, 2009-05) Tuck, Laura; Schwartz, Jordan; Andres, Luis
Infrastructure investment is a central part of the stimulus plans of the Latin America and Caribbean Region (LAC) as it confronts the growing financial crisis. This paper estimates the potential effects on direct, indirect, and induced employment for different types of infrastructure projects with LAC-specific variables. The analysis finds that the direct and indirect short-term employment generation potential of infrastructure capital investment projects may be considerable-averaging around 40,000 annual jobs per US$1billion in LAC, depending upon such variables as the mix of subsectors in the investment program; the technologies deployed; local wages for skilled and unskilled labor; and the degrees of leakages to imported inputs. While these numbers do not account for substitution effect, they are built around an assumed "basket" of investments that crosses infrastructure sectors most of which are not employment-maximizing. Albeit limited in scope, rural road maintenance projects may employ 200,000 to 500,000 annualized direct jobs for every US$1billion spent. The paper also describes the potential risks to effective infrastructure investment in an environment of crisis including sorting and planning contradictions, delayed implementation and impact, affordability, and corruption.
How Much Room Does Latin America and the Caribbean Have for Implementing Counter-Cyclical Fiscal Policies?
(World Bank, Washington, DC, 2009-04) Calderón, Cesar; Fajnzylber, Pablo
Latin America's government debt has exhibited a clear downward trend since 2003. While this has been partly due to rapidly increasing commodity prices, more sustainable fiscal policies have also been a contributing factor. In effect, in a significant break with the past, cyclically adjusted government balances have raised (fallen) in response to increases (reductions) in debt levels. However, Latin governments have continued to under?save in good times and therefore fiscal policy has remained pro-cyclical, thus weakening the ability to protect the poor and maintain infrastructure investments during bad times. Financing and institutional constraints to more counter?cyclical fiscal policies still remain in most countries. They are lowest in Chile, followed by Brazil and Colombia, and highest in Ecuador and Venezuela. Looking forward, long?term sustainability considerations cannot be ignored as decisions are made regarding the size, composition and targeting of fiscal stimulus packages.
How will Labor Markets Adjust to the Crisis? A Dynamic View
(World Bank, Washington, DC, 2009-03) Maloney, William
Tracking flows of workers among different sectors of employment during economic downturns can shed light on the mechanism of labor market adjustment and inform the design of safety net programs. Though patterns may differ across recessions, the author find that the generally countercyclical rise in unemployment and informality is driven primarily by a reduction in hiring in the formal sector, rather than increased labor shedding. Further, changes in the rate of separations from informality are the largest determinant of changes in unemployment. Both suggest that safety nets should focus less on formal job loss per se and more generally on movements in family incomes, perhaps revealed through self targeting mechanisms.
Will FDI be Resilient in this Crisis?
(World Bank, Washington, DC, 2009-01) Calderon, Cesar; Didier, Tatiana
Although foreign direct investment (FDI) flows have tended to remain resilient during previous crises, they may not behave in a similar fashion during the current crisis. Why? In past crises, the stability of FDI flows was significantly associated with an increase in mergers and acquisitions (M&A), reflecting 'fire-sale FDI'. In the present crisis, by contrast, M&A activity decreased significantly in the last quarter of 2008, and this trend may continue as long as the global crisis constrain the purchasing ability of foreign (acquiring) firms. These developments further illustrate that the nature of the current crisis differs considerably from previous ones, suggesting that certain key lessons from past crisis lessons might not apply in the current context.