The “Great Recession” of 2009/??:2009/??:

Implications for LAC

Eugenio Díaz Bonilla Executive Director,

Argentina and Haití IDBArgentina and Haití, IDB

Questions and ApproachesCh t i ti f i dCharacterization of recessions and impacts

F isch (1933) and the ooden ocking ho seFrisch (1933) and the wooden rocking horse: “impulse” and “propagation”Origin and size shocks Channels ofOrigin and size shocks. Channels of transmission Conditions of the economy affected yImpacts on LAC

• The economy as a whole• The agricultural sector• The poor

Historical View versusHistorical View versus Projections/Simulations

Impacts AgricultureAgriculture

Differentiate by tradability, main market, source of inputsinputsExport crops benefitted by devaluationDomestic market, higher income elasticity, and dependence on imported inputs more affectedBanking crisis (credit crunch). Fiscal crisis

P tPovertyEmployment, wages and incomes (urban/rural; formal/informal)formal/informal) Prices of food and other items in consumption basket of the poor Government services and safety net. Impact on human capital

HistoricalWhat is the right historical comparison?

The Great Depression?The 1980s?

Great Depression:M l i (G li i l N l i lMany explanations (Geopolitical, Neoclassical, Marxist, Popular, Monetary/Keynesian)Many countries affected US, Europe, most of LAC,Many countries affected US, Europe, most of LAC, Japan, many in Asia. Falls of 10-30% PIB; unemployment 20-40%; 4-6 years before going back to pre depression GDP levels US 28%back to pre-depression GDP levels. US -28%, unemployment > 25%; +7 years to go back to previous GDP level. LAC: -13% GDP average 7 main countries; almost 4 years to go back to previous GDP level

World Growth and Trend (1960-2009)

7

8

2008 estimated and 2009 projected

5

62009 projected

3

4

2

3

0

1

3 9 3 9 3 9 3 9 3 9

-1196

119

63196

5196

719

6919

71197

319

7519

7719

79198

119

8319

8519

87198

919

9119

9319

95199

719

9920

0120

03200

520

0720

09

World Growth Trend

Origins of the Recessions1980 ti ht t li i US d1980s: very tight monetary policy in US and Europe (to combat inflation…) Increase in interest rates: 6-7% in real terms over previousinterest rates: 6 7% in real terms over previous levels. Absolute nominal levels of > 15%.Now: global expansionary monetary policy and i i l i l diincrease in leveraging, leading to an endogenous deleveraging (“credit crunch”)

Increase in labor supply low inflation andIncrease in labor supply, low inflation and expansionary policy in industrialized countriesAccumulation of reserves in developing countries, leading to expansionary monetary policy there andleading to expansionary monetary policy there, and lowering medium term interest rates in industrialized countriesFinancial and institutional innovation, reducing perception of risk, and increase in leveraging

Debt/Income

300

350

200

250

100

150

50

100

0

Mar-87

Mar-88

Mar-89

Mar-90

Mar-91

Mar-92

Mar-93

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

M M M M M M M M M M M M M M M M M M M M M M

Government HouseholdsFinancial institutions Nonfinancial corporations

Indices de Acciones y Casas en los EEUU desde 1920(Enero 1995=1)3 (Enero 1995=1)

2.53

1 52

11.5

00.5

0

19201924192819321936194019441948195219561960196419681972197619801984198819921996200020042008

Dow Jones (real) S&P 500 (real) Indice de Casas Case-Shiller (real)

Structural Conditions in LAC1980s: LAC had greater vulnerabilities

Larger current account and fiscal deficitsMore rigid exchange rate systemsLarger currency mismatches in banking systemsystemDollarized debt (public/external, but also internally, in the banking system)internally, in the banking system)Less open economiesLow level of reserves in Central BanksLow level of reserves in Central Banks

Result: multidimensional crisis (economic, currency, debt, financial,(economic, currency, debt, financial, and fiscal aspects)

Results 1980sG th t t l 1982/3 (%)Growth total 1982/3 (%)

LAC -1.8Developing 2.0World 1.6

GDP Agriculture (%)LAC -0.1Developing 3.6World 2.3

Poverty (US$ 2/day as % of population)LAC went from 24.6% in 1981 to 28.1% in 1984 (byLAC went from 24.6% in 1981 to 28.1% in 1984 (by 1990 it was 21.9%). At the world level the values were 69.9 (1981), 68.1 (1984) and 63.8 (1990)

GDP Growth (%)

10

8

10

4

6

2

4

-2

0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

-4

2

-6

Advanced economies Emerging and developing economies Western Hemisphere

Current Situation and PerspectivesN b tt d t t l h kNow: better prepared, yet external shock bigger

bi h di i iBut bigger on what dimensions? GDP in industrialized, global trade, terms of trade, interest rates and spreads capital flows?interest rates and spreads, capital flows?

Now: better policy reaction (the “benefit of normalcy”)of normalcy”)

In 1980s reaction was strong devaluation, tightening monetary and fiscal policiestightening monetary and fiscal policies…Now: smooth devaluation, somewhat expansionary monetary and fiscal policies noexpansionary monetary and fiscal policies, no banking crisis…

Current Situation and Perspectives

Now: G-20 process; expansionary monetary and fiscal policy in industrialized countries; expansion of lending in IFIs (including SDRs) and more flexible conditions)Now: smoother adjustment in ER, and j ,no banking and fiscal crisis, better safety net programs.y p gTherefore, better performance for agriculture and poverty indicatorsagriculture and poverty indicatorsFuture: VLU and other projections…

Scenarios for GrowthGDP GrowthGDP Growth

(LAC(LAC--7, annual growth rate)7, annual growth rate)

7%125

Economic ActivityEconomic Activity(LAC(LAC--7 GDP, 2006 = 100)7 GDP, 2006 = 100)

5%

6%

7%

2003-2007 Avg.: 5.8%120

VV Sh dSh d

V-Shaped L-Shaped

Peak Dec-08 Dec-08Trough Sep-09 Dec-10P-to-T -3.9% -5.1%Recovery* Mar-11 Dec-13

2%

3%

4%1991-2007 Avg.: 3.3%

V-Shaped 2009-13 Avg.: 1.9%110

115

Pre-Crisis Levels

VV--Shaped Shaped ScenarioScenario

-1%

0%

1%

VV--Shaped Shaped

LL--Shaped Shaped 20092009--13 Avg.: 0.1%13 Avg.: 0.1%105 LL--Shaped Shaped

ScenarioScenario

-3%

-2%

1%

2006 2007 2008 2009 2010 2011 2012 2013

LL--Shaped Shaped ScenarioScenario

ppScenarioScenario

95

100

2006 2007 2008 2009 2010 2011 2012 2013

LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.

*Recovery to pre-crisis levels of output

Thanks...Thanks...

Real Indices (CPI deflated)

4

4.5

5

3

3.5

4

2

2.5

3

1

1.5

0

0.5

M1 M11 M9 M7 M5 M3 M1 M11 M9 M7 M5 M3 M1 M11 M9 M7 M5 M3 M1 M11 M9 M7 M5 M3 M1 M11 M9 M7 M51957 1958 1960 1962 1964 1966 1968 1969 1971 1973 1975 1977 1979 1980 1982 1984 1986 1988 1990 1991 1993 1995 1997 1999 2001 2002 2004 2006 2008

Oil Metals Agriculture

8

10

6

8

2

4

0

2

-4

-2195419561958196019621964196619681970197219741976197819801982198419861988199019921994199619982000200220042006

1-YEAR US DEP. LONDON OFFER US BANK PRIME LOAN RATE US BOND YIELD: 10 YEAR

50%

60% 19921982

19871975

40%1999

19871975

20%

30%

10%

0%

19611963196519671969197119731975197719791981198319851987198919911993199519971999200120032005

19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20

% Developing Countries in Recession

7

8

6

7

4

5

3

4

1

2

160 65 70 75 80 85 90 95 00 05

OECDOECDDeveloping CountriesDeveloping Countries w/o China

Mecanismos Actuales?Política monetaria EXPANSIVA desde 1990s y alto apalancamientoPolítica monetaria EXPANSIVA desde 1990s y alto apalancamiento

Millones nuevos trabajadores; baja precios y salarios Política monetaria expansiva en EEUU y otros países. Mantiene baja tasa interés corto plazo (2001-2004)

á ó í áSuperávit en China, Japón, países asiáticos, productores de petróleo, ALC: exportan capitales a EEUU. Mantiene baja la tasa interés en dólares a plazos más largosRequerimientos regulatorios/contables luego de EnronRequerimientos regulatorios/contables luego de Enron Innovación “tecnológica” en finanzas: crédito e hipotecas a consumidores de bajos ingresos, seguros de default, securitización, división activos en segmentos y construcción de nuevos activosnuevos activos. Innovaciones institucionales: “sistema bancario en las sombras”Largo período de crecimiento que baja percepción del riesgoConsumidores en países industrializados, mayormente EE.UU.Consumidores en países industrializados, mayormente EE.UU. (el alza del consumo hasta 2007 llevaba 27 años de expansión), mantuvieron alto el ritmo de crecimiento económico, basado en endeudamiento creciente, sostenido por burbujas de valuación en las acciones, y desde los 2000s, las casas.en las acciones, y desde los 2000s, las casas.Como cada uno pensaba que riesgo era bajo, SISTEMA tomó demasiado riesgo y se apalancó. Ahora, desconfianza e incertidumbre: falta información acerca de dónde está el riesgo

Es otra Gran Depresión?Medidas tomadas:

Monetarias (baja tasas, expansión de liquidez)Fiscales (transferencias, baja impuestos, i f t t )infraestructura)Financieras/bancarias (recuperar solidez de los bancos eg lación ampliada)los bancos; regulación ampliada)

Problema ha pasado a los países temergentes:

Fuga de capitalesCaída precios productos exportaciónCaída comercio

Importancia de la reunión G-20C di tí l di lCoordinar estímulo mundialRegulación sistema financiero privadoAumento capital en organismos internacionales

FMI• China y DEGs

BIDBID• Principal organismo de ALC. Larga historia• Dueños igualitarios países de ALC yDueños igualitarios países de ALC y

desarrollados (más participativo)• Problema ciclo: apoyo demanda mundial

P bl t d i í t ibl• Problema tendencia: energía sostenible y cambio climático

1.5

0.5

1

0

980

981

982

983

984

985

986

987

988

989

990

991

992

993

994

995

996

997

998

999

000

001

002

003

004

005

006

007

008

-0.5

198

198

198

198

198

198

198

198

198

198

199

199

199

199

199

199

199

199

199

199

200

200

200

200

200

200

200

200

200

1 5

-1

-2

-1.5

China, Japan, NIAE European UnionMiddle East Developing w/o China and Middle EastUnited States

Mirando hacia adelanteEscenario 1: crecimiento más lento

De crisis va a surgir un sistema financiero más regulado, con menos apalancamiento, y más conservador en sus prácticas crediticias.Pasado lo peor de la crisis autoridades monetarias y fiscales dePasado lo peor de la crisis, autoridades monetarias y fiscales de los países industrializados deben revertir políticas expansivas.Consumidores y gobierno de los EE.UU. tendrán que bajar relación deuda/ingresos y el déficit de cuenta corriente de la b l d El d t d á l t dbalanza de pagos. El mundo no tendrá esa locomotora de crecimiento.

Escenario 2: Alta inflación; política monetaria restrictivaPasado ciclo (siempre se sale) hay que afrontar desafíoPasado ciclo (siempre se sale), hay que afrontar desafío de pasar de proveer energía alimentaria (unos 28 exajoules) y no alimentaria (unos 460 exajoules) a población de 6400 millones de personas ahora, a 39/43población de 6400 millones de personas ahora, a 39/43 exajoules y 800/900 exajoules, respectivamente, de una manera sostenible para población de 9000/10000 millones en el 2050. Hay que mejorar significativamente mecanismos internacionales para manejar ciclos y el patrón de crecimiento de mediano y largo plazo.

GDP per capita growth (annual %) 1974/75 1980/82 1991/93 2001/02p p g ( %)Latin America & Caribbean -1.8 -3.2 3.6 -2.4Low & middle income countries -0.5 -1.7 0.1 -0.2High income -4.7 -3.0 -2.2 -1.8USA -5.1 -4.2 -1.6 -2.8World -4.1 -2.8 -1.7 -1.4

Changes Interest Rates (%) 1974/75 1980/82 1991/93 2001/023 m US LIBOR 1 8 5 8 4 1 3 13-m US LIBOR 1.8 5.8 -4.1 -3.11-y US LIBOR Na 3.9 -4.0 -3.0Federal Funds 2.2 5.8 -4.2 -2.7Treasury Bill 1.7 4.6 -3.5 -2.6Treasury Bill 1.7 4.6 3.5 2.6Govt. Bond 3 y 1.5 4.7 -2.8 -2.0Govt Bond 10 y 1 4 4 4 1 7 0 8Govt. Bond 10 y 1.4 4.4 -1.7 -0.8Bank Prime Loan Rate 3.0 6.8 -3.2 -2.7

Change in Commodity Prices During Recessions (%)1974/75 1980/82 1991/93 2001/021974/75 1980/82 1991/93 2001/02

Food 6.7 10.5 -7.1 -8.7B 21 7 30 0 24 2 38 0Beverages -21.7 -30.0 -24.2 -38.0Agricultural Raw Materials -1.0 -10.4 -0.5 -5.3Metals 14.4 18.8 -26.9 -7.6Average crude price 99.5 83.8 -0.8 46.9World Bank LMICs 10.4 1.1 -12.4 -20.3