The “Great Recession” of
       2009/??:
  Implications for LAC
     Eugenio Díaz Bonilla
      Executive Director,
   Arg...
Questions and Approaches
Ch    t i ti      f       i      d
Characterization of recessions and
impacts
 Frisch
 F isch (19...
Impacts
Agriculture
  Differentiate by tradability, main market, source of
  inputs
  Export crops benefitted by devaluati...
Historical
What is the right historical comparison?
  The Great Depression?
  The 1980s?
Great Depression:
  Many explanat...
-1
                          0
                              1
                                  2
                       ...
Origins of the Recessions
1980 : very ti ht monetary policy in US and
1980s       tight     t      li i         d
Europe (...
M
                                ar
                                -




                                       0
      ...
Indices de Acciones y Casas en los EEUU desde 1920
 3                              (Enero 1995=1)

2.5
 2
1.5
15
 1
0.5
 0...
Structural Conditions in LAC
1980s: LAC had greater vulnerabilities
 Larger current account and fiscal deficits
 More rigi...
Results 1980s
G
Growth t t l 1982/3 (%)
    th total
 LAC              -1.8
 Developing        2.0
 World             1.6
...
GDP Growth (%)


10


 8


 6


 4


 2


 0
 80

       82

              84

                    86

                   ...
Current Situation and Perspectives
N
Now: b tt prepared, yet external shock
     better      d    t t      l h k
bigger
 B...
Current Situation and Perspectives
Now: G-20 process; expansionary
monetary and fiscal policy in
industrialized countries;...
Scenarios for Growth
                                   Economic Activity
                                      (LAC-
    ...
Thanks...
Real Indices (CPI deflated)


 5

4.5

 4

3.5

 3

2.5

 2

1.5

 1

0.5

 0
   M1 M11 M9 M7 M5 M3 M1 M11 M9 M7 M5 M3 M1 ...
-4
                                    -2
                                           0
                                   ...
0%
                                                   10%
                                                         20%
   ...
8

7

6

5

4

3

2

1
    60   65   70    75   80   85    90   95   00    05

                   OECD
                   ...
Mecanismos Actuales?
Política monetaria EXPANSIVA desde 1990s y alto apalancamiento
   Millones nuevos trabajadores; baja ...
Es otra Gran Depresión?
Medidas tomadas:
 Monetarias (baja tasas, expansión de
 liquidez)
 Fiscales (transferencias, baja ...
Importancia de la reunión G-20
C    di     tí  l      di l
Coordinar estímulo mundial
Regulación sistema financiero privad...
-2
                                                                                  15
                                  ...
Mirando hacia adelante
Escenario 1: crecimiento más lento
  De crisis va a surgir un sistema financiero más regulado, con
...
GDP per capita ggrowth ((annual %) 1974/75 1980/82 1991/93
      p p                                                    20...
Changes Interest Rates (%) 1974/75 1980/82 1991/93 2001/02
3-m
3 m US LIBOR                   1.8 5.8 4 1 3 1
            ...
Change in Commodity Prices During Recessions (%)
                             1974/75 1980/82 1991/93 2001/02
Food        ...
The great Recession of 2009: Implications for LAC
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The great Recession of 2009: Implications for LAC

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Eugenio Díaz Bonilla, Executive Director, Argentina and Haití, IDB
30th April 2009, International Food Policy Research Institute, Washington D.C.

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The great Recession of 2009: Implications for LAC

  1. 1. The “Great Recession” of 2009/??: Implications for LAC Eugenio Díaz Bonilla Executive Director, Argentina and Haití, IDB Haití
  2. 2. Questions and Approaches Ch t i ti f i d Characterization of recessions and impacts Frisch F isch (1933) and the wooden rocking ho se ooden ocking horse: “impulse” and “propagation” Origin and size shocks Channels of shocks. transmission Conditions of the economy affected y Impacts on LAC • The economy as a whole • The agricultural sector • The poor Historical View versus Projections/Simulations
  3. 3. Impacts Agriculture Differentiate by tradability, main market, source of inputs Export crops benefitted by devaluation Domestic market, higher income elasticity, and dependence on imported inputs more affected Banking crisis (credit crunch). Fiscal crisis Poverty P t Employment, wages and incomes (urban/rural; formal/informal) Prices of food and other items in consumption basket of the poor Government services and safety net. Impact on human capital
  4. 4. Historical What is the right historical comparison? The Great Depression? The 1980s? Great Depression: Many explanations (G M l i (Geopolitical, N li i l Neoclassical, l i l Marxist, Popular, Monetary/Keynesian) 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%, pre depression levels 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
  5. 5. -1 0 1 2 3 4 5 6 7 8 19 61 19 63 19 65 19 67 19 69 19 71 19 73 19 75 19 77 19 79 19 81 19 83 World Growth 19 85 19 87 19 89 19 91 19 93 Trend 19 95 19 World Growth and Trend (1960-2009) 97 19 99 20 01 20 03 2009 projected 20 05 2008 estimated and 20 07 20 09
  6. 6. Origins of the Recessions 1980 : very ti ht monetary policy in US and 1980s tight t li i d Europe (to combat inflation…) Increase in interest rates: 6 7% in real terms over previous 6-7% levels. Absolute nominal levels of > 15%. Now: global expansionary monetary policy and increase in leveraging, leading to an i i l i l di endogenous deleveraging (“credit crunch”) Increase in labor supply, low inflation and supply expansionary policy in industrialized countries Accumulation of reserves in developing countries, leading to expansionary monetary policy there and there, lowering medium term interest rates in industrialized countries Financial and institutional innovation, reducing perception of risk, and increase in leveraging
  7. 7. M ar - 0 50 100 150 200 250 300 350 M 87 ar - M 88 ar - M 89 ar - M 90 ar - M 91 ar - M 92 ar - M 93 ar - M 94 ar Government - M 95 ar - M 96 ar Financial institutions - M 97 ar - M 98 ar - M 99 Debt/Income ar - M 00 ar - M 01 ar - M 02 ar Households - M 03 ar - M 04 ar - M 05 ar - Nonfinancial corporations M 06 ar - M 07 ar -0 8
  8. 8. Indices de Acciones y Casas en los EEUU desde 1920 3 (Enero 1995=1) 2.5 2 1.5 15 1 0.5 0 19 0 19 4 19 8 19 2 19 6 19 0 19 4 19 8 19 2 19 6 19 0 19 4 19 8 19 2 19 6 19 0 19 4 19 8 19 2 20 6 20 0 20 4 08 2 2 2 3 3 4 4 4 5 5 6 6 6 7 7 8 8 8 9 9 0 0 19 Dow Jones (real) S&P 500 (real) Indice de Casas Case-Shiller (real)
  9. 9. Structural Conditions in LAC 1980s: LAC had greater vulnerabilities Larger current account and fiscal deficits More rigid exchange rate systems Larger currency mismatches in banking system Dollarized debt (public/external, but also internally, in the banking system) Less open economies Low level of reserves in Central Banks Result: multidimensional crisis (economic, currency, debt, financial, and fiscal aspects)
  10. 10. Results 1980s G Growth t t l 1982/3 (%) th total LAC -1.8 Developing 2.0 World 1.6 GDP Agriculture (%) LAC -0.1 Developing 3.6 World 2.3 Poverty (US$ 2/day as % of population) LAC 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)
  11. 11. GDP Growth (%) 10 8 6 4 2 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 -2 2 -4 -6 Advanced economies Emerging and developing economies Western Hemisphere
  12. 12. Current Situation and Perspectives N Now: b tt prepared, yet external shock better d t t l h k bigger But bi bigger on what di h dimensions? GDP i i in industrialized, global trade, terms of trade, interest rates and spreads, capital flows? spreads Now: better policy reaction (the “benefit of normalcy”) In 1980s reaction was strong devaluation, tightening monetary and fiscal policies… policies Now: smooth devaluation, somewhat expansionary monetary and fiscal policies, no policies banking crisis…
  13. 13. 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 g Therefore, better performance for agriculture and poverty indicators Future: VLU and other projections…
  14. 14. Scenarios for Growth Economic Activity (LAC- (LAC-7 GDP, 2006 = 100) GDP Growth (LAC- (LAC-7, annual growth rate) 125 7% V-Shaped L-Shaped Peak Dec-08 Dec-08 Trough Sep-09 Dec-10 6% 2003-2007 Avg.: 5.8% 120 P-to-T -3.9% -5.1% Recovery* Mar-11 Dec-13 5% V-Sh Shaped d 4% 115 Scenario 1991-2007 Avg.: 3.3% Pre-Crisis Levels 3% V-Shaped 110 2% 2009-13 Avg.: 1.9% 1% L-Shaped L-Shaped 105 2009-13 Avg.: 0.1% 2009- Scenario 0% -1% 1% V-Shaped p 100 Scenario L-Shaped -2% Scenario 95 -3% 2006 2007 2008 2009 2010 2011 2012 2013 2006 2007 2008 2009 2010 2011 2012 2013 *Recovery to pre-crisis levels of output 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.
  15. 15. Thanks...
  16. 16. Real Indices (CPI deflated) 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 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 M5 1957 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
  17. 17. -4 -2 0 2 4 6 8 10 19 5 19 4 5 19 6 5 19 8 6 19 0 6 19 2 6 19 4 6 19 6 6 19 8 70 19 7 1-YEAR US DEP. LONDON OFFER 19 2 7 19 4 7 19 6 7 19 8 8 19 0 8 19 2 8 19 4 86 19 8 19 8 9 US BANK PRIME LOAN RATE 19 0 9 19 2 9 19 4 9 19 6 9 20 8 0 20 0 0 20 2 04 20 US BOND YIELD: 10 YEAR 06
  18. 18. 0% 10% 20% 30% 40% 50% 60% 19 61 19 63 19 65 19 67 19 69 19 71 19 73 1975 19 75 19 77 1982 19 79 19 81 19 83 19 85 19 8 1987 19 7 8 1992 19 9 9 % Developing Countries in Recession 19 1 9 19 3 9 19 5 9 19 7 1999 99 20 01 20 03 20 05
  19. 19. 8 7 6 5 4 3 2 1 60 65 70 75 80 85 90 95 00 05 OECD Developing Countries Developing Countries w/o China
  20. 20. Mecanismos Actuales? Política 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) Superávit en China, Japón, países asiáticos, productores de á ó í á petróleo, ALC: exportan capitales a EEUU. Mantiene baja la tasa interés en dólares a plazos más largos Requerimientos 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 activos. activos Innovaciones institucionales: “sistema bancario en las sombras” Largo período de crecimiento que baja percepción del riesgo 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. 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
  21. 21. Es otra Gran Depresión? Medidas tomadas: Monetarias (baja tasas, expansión de liquidez) Fiscales (transferencias, baja impuestos, infraestructura) i f t t ) Financieras/bancarias (recuperar solidez de los bancos; regulación ampliada) bancos eg lación Problema ha pasado a los países emergentes: t Fuga de capitales Caída precios productos exportación Caída comercio
  22. 22. Importancia de la reunión G-20 C di tí l di l Coordinar estímulo mundial Regulación sistema financiero privado Aumento capital en organismos internacionales FMI • China y DEGs BID • Principal organismo de ALC. Larga historia • Dueños igualitarios países de ALC y desarrollados (más participativo) • Problema ciclo: apoyo demanda mundial • P bl Problema tendencia: energía sostenible y t d i í t ibl cambio climático
  23. 23. -2 15 -1.5 -1 -0.5 0 0.5 1 19 1.5 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 Middle East 19 United States 88 19 89 China, Japan, NIAE 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 European Union 20 01 20 02 20 03 20 04 20 05 20 06 Developing w/o China and Middle East 20 07 20 08
  24. 24. Mirando hacia adelante Escenario 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 de crisis, 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 balanza de pagos. El mundo no t d á esa locomotora d b l d d tendrá l t de crecimiento. Escenario 2: Alta inflación; política monetaria restrictiva Pasado ciclo (siempre se sale) hay que afrontar desafío sale), de pasar de proveer energía alimentaria (unos 28 exajoules) y no alimentaria (unos 460 exajoules) a población de 6400 millones de personas ahora, a 39/43 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.
  25. 25. GDP per capita ggrowth ((annual %) 1974/75 1980/82 1991/93 p p 2001/02 Latin America & Caribbean -1.8 -3.2 3.6 -2.4 Low & middle income countries -0.5 -1.7 0.1 -0.2 High income -4.7 -3.0 -2.2 -1.8 USA -5.1 -4.2 -1.6 -2.8 World -4.1 -2.8 -1.7 -1.4
  26. 26. Changes Interest Rates (%) 1974/75 1980/82 1991/93 2001/02 3-m 3 m US LIBOR 1.8 5.8 4 1 3 1 1 8 5 8 -4.1 -3.1 1-y US LIBOR Na 3.9 -4.0 -3.0 Federal Funds 2.2 5.8 -4.2 -2.7 Treasury Bil 1.7 4.6 -3.5 -2.6 3.5 2.6 Govt. Bond 3 y 1.5 4.7 -2.8 -2.0 Govt. Govt Bond 10 y 1.4 4.4 1 7 0 8 1 4 4 4 -1.7 -0.8 Bank Prime Loan Rate 3.0 6.8 -3.2 -2.7
  27. 27. Change in Commodity Prices During Recessions (%) 1974/75 1980/82 1991/93 2001/02 Food 6.7 10.5 -7.1 -8.7 Beverages B -21.7 -30.0 -24.2 -38.0 21 7 30 0 24 2 38 0 Agricultural Raw Materials -1.0 -10.4 -0.5 -5.3 Metals 14.4 18.8 -26.9 -7.6 Average crude price 99.5 83.8 -0.8 46.9 World Bank LMICs 10.4 1.1 -12.4 -20.3

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