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However given that the shortfall in fiscal revenues

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Unformatted text preview: f international borrowing for firms doubled; corporate issues of debt and equity securities came to a virtual halt; the flow of credit by private banks stagnated; remittances began contracting sharply; exports and imports shrunk by about 30 and 25 percent, respectively, as trade surpluses vanished; and industrial production fell by about 12 percent (Figures 12 and 13). As these developments were linked to tectonic shifts in the advanced economies, LAC countries that are closely linked to the U.S. economy (including Mexico and the small open economies of Central America and the Caribbean) have felt a more direct and stronger initial impact. For other countries in the region, the repercussions are being felt with a lag. But in all cases, growth prospects for 2009 have been downgraded dramatically as news on economic performance of advanced and developing countries were revealed on the 4th quarter. For instance, as of August 2008 the Consensus Forecasts put GDP growth for LAC in 2009 at around 3.7 percent; by contrast, the most recent Consensus Forecasts (March 2009) sees LAC growth this year in the negative territory, at around ‐0.7 percent. While the range of growth forecasts is wide—reflecting the more general uncertainty about world growth—few doubt that 2009 would be, at a minimum, a year of economic stagnation for LAC as a whole and, perhaps more likely, a year of recession. LAC is especially vulnerable to a recession‐induced reversal of social gains Poverty and inequality figures, as well as other social indicators, improved markedly in LAC during the last decade. For instance, infant mortality declined to 21.4 deaths per 1000 live births in 2006 from 36.1 in 1995, which is closely related to a larger access of the population to improved water and sanitation. Similarly, during the strong growth period of 2002‐2008, almost 60 million people in LAC were lifted out of poverty (measured at PPP‐adjusted US$4 a day) and 41 million left the ranks of extreme poverty (measured at US$2 a day). However, LAC still lags considerably other emerging regions in social dimensions. For instance, infant mortality is higher, educational achievement lower, basic infrastructure much less developed, and income distribution much more unequal in LAC compared to East Asia and Eastern Europe (Figures 14‐16). Given LAC’s unique combination of vibrant electoral processes with 16 high income and wealth inequality, these deficits in social indicators suggest that a reversal in the recently achieved social gains might be a comparatively more complicated affair to handle for LAC. Hence, there is a premium on preventing an undue contraction in public spending in health, education, basic infrastructure, and other social programs. The scope for counter‐cyclical policy responses varies considerably across LAC countries Perhaps the greatest scope for counter‐cyclical policy is in the monetary arena. LAC countries with robust inflation targeting regimes (Brazil, Chile, Colombia, Mexico, and Peru) are clearly in a better position, w...
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