In other words the crises translated into losses of

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Unformatted text preview: continue to decline as long as the housing market in the G7 does not recover. And, if the global recovery does not materialize in 2010, a significant number of Latino migrants might return to their countries of origin. Policy Responses – Today’s Priorities Latin‐American governments reacted swiftly to the crisis and, on the whole, appropriately. This has defined a short‐term policy agenda that is not entirely similar to the one observed among G7 countries—and rightly so. For the region, the first priority continues to be to avoid a permanent loss of human capital. This is because its countries have a fairly advanced system of social assistance (thirteen of them make direct cash transfers to their poor) but lack a comprehensive system of social insurance (both unemployment and pensions benefits cover only a fraction of the population). The latter automatically reacts to falls in income; the former doesn’t. As a result, past crises in Latin‐America quickly translated into increases in malnutrition, high‐school drop‐outs, and interruptions in the provision of preventive and primary health care. In other words, the crises translated into losses of cognitive capacity amongst young children, a life of informal work for more teenagers, and jumps in mortality rates among adults—even in otherwise middle‐income countries. The mechanisms to avoid those impacts are in place (from school feeding programs to decentralized health budgets), and the costs involved are relatively small (possibly less than a tenth of one percent of GDP). At the same time, Latin‐American governments will need to see through the various stimulus packages that they have put in place. By necessity, those packages have had a limited scope. On the fiscal side, 4 Poverty is defined here as US$4 PPP per day. 2 room for counter‐cyclical policies is small in all but a few countries (Chile, Brazil, Colombia). This is due to a combination of traditionally low tax collection, insufficient institutional capacity to implement additional public investment quickly enough, and a dearth of lenders willing to finance enlarged fiscal deficits at a time of global crisis. Put differently, fiscal stimulus has been easier for those that saved during the years of bonanza. Things look better on the monetary side. Several countries in the region have built their inflation‐fighter credentials during the period of fast growth and now find themselves able to cut interest rates and let their currencies depreciate to stimulate domestic and external demand, without risking a rise in inflationary expectations.5 More fundamentally, Latin‐America as a whole has not resorted to state ownership as a means of stimulus: governments have not had to take over private corporations, and central banks have not had to open their balance sheets to fund either of them directly. There have been no “bail‐outs” and no “quantitative easing”. The institutional equilibrium built over the past decade has been largely preserved. However, the crisis is beginning to seriously challenge Latin‐America on two fronts—unemployment an...
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