Americas

The world financial crisis has been the main news item for weeks now. The media is running out of adjectives and synonyms to describe the daily events of the uncertain times. With plenty of blame to go around, a proliferation of contradictory explanations abounding, and the perception that world leaders are chasing an elusive magic solution, the reality is just beginning to sink in.

Following the decline of commodity prices in world markets, Canada has seen its currency go down. But the manufacturing sector will not be able to benefit much from the weaker dollar, given the slowdown in its main market, the United States. Soon the inflationary impact of the higher costs of imports will be felt.

Our economy's forecast growth has been revised; we might avoid a recession, but the next two years could see little improvement. Provincial governments will be running deficits, and, most likely, the federal one, too.

Yet for all we know, our country will weather these troubled times fairly well.

Country-specific vulnerabilities to this crisis are quite different in an increasingly integrated world where no one is immune. This is a worldwide crisis, as are its potential solutions. From the concerted actions of governments and central banks to initiatives to redesign the international financial institutions, we are seeing a high degree of creativity and unorthodoxy, and much more might be demanded. Hopefully new regulatory, surveillance and enforcing capabilities for the international financial system will not come at the price of decreasing openness and integration of the world economy.

In general, those countries that had stronger macro-economic fundamentals—their "house in order"—prior to the crisis will cope better. But when solutions going forward are evaluated at a national level, the fiscal and monetary policy options at the disposal of individual countries seem limited in their effectiveness.

For the economies of Latin America, the impact of this crisis presents serious challenges, not all that different from those facing Canada. Although it won't have the disastrous proportions of the financial and banking crises that Mexico, Brazil and Argentina saw in the past—as its causes are structurally different—it will test the preparedness and resilience of the region in adverse economic times.

The end of times of high commodity prices was to be expected, and the financial crisis has only accelerated its arrival. One of the key clues to assess the impact of the crisis on the Latin American economies is how well countries prepared for the pendulum swing. By examining government spending, the implementation of counter-cyclical policies, the diversification of the economy, the progress in creating an attractive environment for foreign investment, and the soundness of their macro-economic indicators, it becomes apparent which ones will be hit the hardest.

The economies of South America showcase a wide spectrum, from the resourcefulness of Chile, and its surplus fund created with high copper prices, to Venezuela and Argentina's unsustainable government spending—even in good times—and their inflation figures. Argentina's government failed in its attempt to massively increase taxes on agriculture exports when the price was high and is now extending its grabbing hand to the private pension system, passing legislation to nationalize it. The Venezuelan economy is totally dependent on the price of oil, and the implications of its contraction go beyond domestic concerns as other economies of the region are relying on this country's assistance commitments.

Indeed, the most vulnerable economies of Latin America were already feeling the adverse impacts of the food and energy price increases and could have done little to prepare for worse times. Most Central American countries will be negatively impacted by the slowdown in the U.S. economy not only through the contraction of their exports' market, but with the decrease in remittances sent home by their émigrés. Matters will arguably be worse in those countries that disdain the importance of foreign investment and are already isolating themselves.

The last three days of October, the 18th Ibero-American Summit took place in El Salvador. At the gathering, which brought together the Latin American countries and Spain, Portugal, and the Principality of Andorra, from Europe, discussions about the world financial crisis shared centre stage with the original agenda of "Youth and Development." The highest representatives of each country signed a special communiqué expressing concerns on the impact of the crisis on the real economy and the social and political stability of the region.

The Ibero-American countries expressed their determination to actively participate in the re-design of the international financial system. The communiqué also mentioned the links between finances and trade, emphasizing the urgency of a satisfactory and balanced conclusion to the multilateral negotiations and the Doha Round.

Yet profound differences lie beneath these shared general principles. Stances range from those who believe that decoupling from the international financial system is not only feasible but should be pursued, to those who aim for achieving more equitable participation within its reformed architecture. Positions also diverge when evaluating the role of the state and governments, from advocates of total control of the economy, to those that acknowledge its social responsibilities and see spending and investment as policy tools.

When it comes to trade, the divide is between the two sides of a re-energized debate, where a country's insertion within the global economy is seen as desirable or to be avoided. A clear example took place within the South American regional group Mercosur, where Brazil strongly opposed Argentina's idea of increasing the bloc's Common External Tariff. Brazil's foreign minister, Celso Amorin, made the case against the financial crisis being used as an excuse to implement protectionist measures, as "these only generate more protectionism."

The "side-effect" of the crises of giving new impetus to protectionism—and isolationism—is not exclusive of Latin America. We are already hearing some of those voices here in Canada. The debate is open. While some list openness, integration and globalization as the things that went wrong and make us more vulnerable, others see them as essential components of the way forward. A global crisis demands global solutions and like it or not we are all part of it.