Political effects of the economic crisis.

• Author: Insulza, Jose Miguel

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The economic crisis has been doubly bad news for Latin America and the Caribbean. First, because a recession that was not caused in the region threatens to inflict serious harm to it, reducing or paralyzing growth and causing severe difficulties in the social arena, especially in the areas of employment and poverty reduction. Second, because it puts an abrupt end to seven years of growth in which the region as a whole grew more than it had in the previous fifteen years, improving the quality of life of a significant number of its inhabitants.

Since the crisis originated in the developed world, and particularly in the United States, it was a natural reaction at first to say it would not have a serious impact on our countries. Until early this year, in fact, many in Latin America were still saying that the crisis was not generated in the region, that it would not reach us, or that we were prepared to face it if it did. Unfortunately, this thinking did not take into account a simple truth: our growth has been driven in large part by the expansion of our external sector, and so a crisis in the largest economies of the world was bound to affect us. And, of course, it has. The reduction in the volume and value of our exports, the decline in tourism, and the decrease in remittances from abroad have all led to lower economic activity and employment in our region.

The situation is complicated substantially by the enormous reduction in the flow of financial resources to the region. It is true that our economies are better prepared than before, because in general they have had prudent macroeconomic policies, they have accumulated reserves, and their financial systems have not been contaminated. But not all countries are going to be able to implement countercyclical policies because they do not have sufficient capital to do so and because credit to our countries has dried up. It is recommended that we adopt vigorous public policies to counteract the effects of the crisis, but without external financing, it is impossible to do so.

The political risks of this situation are clear. Several million citizens of Latin America and the Caribbean have escaped poverty in the last seven years, and rising unemployment is a direct threat to that achievement, a reversal they are not willing to accept. The same can be said of the millions who are part of the vast Latin American "middle class," which has grown a great deal in the last decade. We...