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Unformatted text preview: the success of the fiscal stimulus and financial rescue packages. There is still no consensus on the effectiveness of such policies or on when things will bottom out. What is clear is that the crisis is far from over, although the rate of decline seems to be slowing down in some 17 respects. In any case, the global nature of the crisis mutes two channels that have helped emerging markets rebound quickly from past crises—namely,the ability to export to the center and attract foreign direct investment from it. This time around, the real devaluations in LAC will not have those salutary effects on exports as long as the economies of the center and key emerging countries, particularly China, remain in crisis. In all, whether the large economies of the world rebound, remains stagnant, or further deteriorate will greatly determine the periphery’s prospects in the medium term. While all emerging regions are being hit hard, the impact of the crisis has been very heterogeneous. The crisis is creating havoc in the financial systems of emerging countries where pre‐existing macro‐financial weaknesses were substantial—the most notable case is that of several countries in Eastern Europe. Emerging countries, where such weaknesses were low or non‐existent, are better able to avert a systemic financial crisis at home. LAC, fortunately, appears to be, by and large, in this latter category, thanks to significant institutional and policy improvements in macroeconomic and financial arenas achieved in recent years. These are now affording a number of LAC countries some room for counter‐ cyclical policy responses. However no emerging country, regardless of how well‐prepared or managed, is escaping the recessionary effects of the global crisis. The propagation of these effects is also marked by heterogeneity. For instance, countries that are tightly linked to world trade and highly integrated to the global production chain have experienced more severely the first‐round effects of the crisis on manufacturing production and employment. In contrast, the impact is lagged in countries where growth was supported mainly by domestic demand. Unemployment effects have also tended to be initially smaller in countries with a higher share of labor in the non‐traded sector. Finally, while LAC seems well‐positioned for a fast post‐crisis growth rebound, the recessionary effects of the current crisis threaten to reverse important social gains achieved in recent years. Such a reversal can be highly problematic for democratic‐but‐unequal LAC. The availability of financial resources as well as technical and policy advice from multilateral institutions can be highly relevant in this regard. It can help LAC countries in maintaining their spending plans, or adequately recomposing them, to protect vital infrastructure and social protection programs in the face of falling revenues. 18 Figure 1 Figure 2 Current account balance in LAC as % of GDP Inflation in LAC annual variation 4% 50% 280 45% 3% 40% 2% 35% 1% 30% 0% 25% ‐1% 20% ‐2% 15% ‐3% 10% ‐4% 5% ‐5% 0% ‐6% 1981 1994 1996 2007 1981 1...
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