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These reforms have led among other things to a

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Unformatted text preview: al market finance (debt and equity), the deterioration of terms of trade for net commodity exporters, the decline in remittances, and the pronounced contraction of external demand for emerging economies’ goods and services. As a result, the periphery is being forced into painful adjustments and the entire world is in crisis. Global trade is declining for the first time in 25 years and world GDP is expected to fall by nearly 2 percent in 2009. The International Labor Organization predicts that global unemployment could reach 38 million workers in 2009, up from 14 million in 2008. Furthermore, the globalization of this crisis has accentuated the feedback loops between the mentioned transmission channels. For example, the world recession keeps commodity prices and exports down, causing loan quality to decay. In turn, this threatens employment, weakens profit expectations, and undermines credit flows, all of which further undercuts private investment and consumption, and so on. Timely policy responses are called for, but constraints vary across emerging countries The recessionary implications of the external shock call in principle for timely responses, including counter‐cyclical macroeconomic policies, scaling up of social protection and basic infrastructure programs, and significant real exchange realignments to dampen the output and employment sacrifices involved in the adjustment. However, the capacity of emerging economies to respond in practice along these dimensions depends not just on the availability of financial resources from multilateral institutions but also on key policy and structural factors that determine the degree of vulnerability to the shocks as well as the scope for policy maneuver. These factors include: a. The extent of pre‐existing macroeconomic and financial policy weaknesses; b. The extent of poverty and inequality, and the degree of social conflict; c. Structural features, such as the diversification of trade, the degree of trade and financial openness, the extent of integration of the local economy to the global production chain, and the allocation of labor between tradable and non‐tradable sectors. LAC is better prepared in the macro‐financial area, compared to its own past… LAC’s history has been marked by frequent and devastating financial crises. In previous episodes (such as the debt crisis in the early 80s, the Tequila crisis in 1995, and the Asian and Russian crises of the late 90s), LAC countries were usually caught with substantial, home‐grown macroeconomic and financial vulnerabilities—reflected in high inflation, overvalued currencies, ample fiscal and current account deficits, and widespread maturity and currency mismatches (Figures 1 and 2). These conditions sapped LAC’s ability to undertake counter‐cyclical policies. LAC was instead compelled to raise interest rates or deeply cut fiscal spending in the midst of the crises in order to keep investors from fleeing, but exacerbating output and employment lo...
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