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Unformatted text preview: merica and the Caribbean (LAC) is occurring through mutually reinforcing channels (financial, remittances, terms of trade, export demand), leading to a sharp downturn in economic activity. Nevertheless, LAC is better prepared than in the past to withstand the global storm. Its traditional sources of vulnerability and magnification of external shocks—local currency, fiscal stance, financial system, external sector—are this time around, and by and large, not part of the problem. As a result, LAC may be able to avert a systemic financial crisis at home and a number of LAC countries enjoy some space for counter‐cyclical policy, particularly in the monetary field. However, the magnitude of the shock is such that LAC will inevitably endure an economic recession so long as the global crisis lasts. Moreover, LAC remains vulnerable to a recession‐induced reversal in social gains. Arguably, such a reversal would be a more difficult affair to manage in a period of electoral contests and considering that social indicators in the region, while having registered significant improvements in recent years, remain generally well below those of middle‐income countries in other regions. This puts a premium on preventing an undue contraction in vital public spending in health, education, basic infrastructure, and social programs. The recovery path for LAC depends crucially on the ability of rich countries and key emerging economies to successfully contain and recover from the current crisis. It also hinges on the availability of substantial financial support from multilateral institutions and on the prudency and effectiveness of LAC’s own policy responses. The Big Storm that originated in the center… The current crisis affecting the world economy is of historical dimensions and is re‐shaping the international economic and financial landscape, including the traditional dividing lines between center and periphery. The eye of the storm is in the advanced economies, where the crisis has resulted in colossal failures of financial institutions, massive deleveraging, and a staggering collapse in asset values (some US$ 18 trillion in G‐7 stock market capitalization has vanished relative to the admittedly overvalued pre‐crisis peaks). The turmoil has also produced enormous job losses (total employment in the US and Euro area has shrunk by about 6.5 million jobs since the beginning of the recession) and a sharp contraction in economic activity (in the 4th quarter of 2008, GDP fell at an annualized quarterly rate of 6.3% in the U.S. and the Euro Area, and 12.1% in Japan). In an effort to restore confidence in financial markets and pull the economy out of the hole, governments in rich countries have resorted to large‐scale financial rescue and fiscal stimulus packages—raising the degree of state intervention in private markets to levels not seen since the Great Depression. *Prepared for the IMf/World Bank Spring Meeting of April 2009. 1 3 … has reached deeply into the periphery The ripple effects of the crisis on the periphery are in full swing and acting through multiple transmission channels. These include the sharply reduced availability of internation...
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