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Guillermo Perry is a non-resident fellow at the Center for Global Development. He was chief economist of the Latin America and Caribbean region of the World Bank from 1996 to 2007. Before joining the World Bank, Perry served his native country, Colombia, in various capacities: he was minister of finance and public credit; minister of mining and energy; director of national taxes; and deputy director of the Departamento Nacional de Planeación y Consejo Nacional de Política Económica (CONPES). He was also a member of the Constitutional Assembly (1991) and of the Senate of the Republic (1990).
Perry has been the director of two of Colombia’s leading economic think-tanks, Fedesarrollo and the Center for Economic Development Studies.He is currently the Robert F. Kennedy Visiting Professor in Latin American Studies at Harvard Kennedy School.
The Pacific Alliance, an agreement by Chile, Colombia, Mexico, and Peru to achieve deeper integration and jointly promote economic relations across the Pacific, constitutes one of the few bright spots in current Latin American integration efforts.
A slowdown in China’s growth is a serious concern for Latin America, especially for those countries that have benefited from a record-setting boom in commodity prices since 2003. Much of the slowdown is due to structural reforms in China, partly prompted by the tepid and uncertain recovery of its large trade partners, namely, the US and EU.
Lurking in the background, however, is growing concern about possible macroeconomic instability due to China’s domestic credit boom, which has been accompanied by the emergence of unregulated and fast growing “shadow banks.” A disruption of the banking system cannot be ruled out and could result in a major growth contraction in China.
How big is this risk? And what are the implications for Latin America? What are the advantages of China’s financial expansion in the region, and how can policymakers make the most of these, while minimizing the risks?
The upcoming meeting of the Latin America Shadow Financial Regulatory Committee, CLAAF, will explore these questions by addressing the following topics:
• Should Latin American policymakers be delighted or concerned about the increasing presence of Chinese banks in the region?
• What are the financial channels of contagion from China to Latin America? If there is a Chinese credit crunch, will the US—Latin America’s other major market—become entangled?
• Are there lessons for China from Latin America regarding the sequencing of financial liberalization and the resolution of financial troubles?
For almost half a decade, the aggressive expansion of liquidity by advanced economies’ central banks aimed at reigniting growth has fueled a surge of capital inflows into Latin America. Under the influence of dizzying terms of trade and extremely low world interest rates, the region’s central banks tried to prevent excessive domestic credit expansion by increasing intervention in foreign exchange markets, raising reserve requirements and, in some cases, imposing capital controls. The role of fiscal policy remained extremely limited.
But, as key commodity prices appear to have peaked and growth in Europe remains non-existent is the current policy stance in the region appropriate? The CLAAF members will deal with this issue by addressing, among others, the following questions:
Should Latin American countries continue with the current policy mix in the expectation that increasing global liquidity will eventually deliver growth in advanced economies, which will in turn support the region’s economic activity? What are the risks for the region’s financial stability if it continues down this path?
If, alternatively, policymakers reduce barriers to capital inflows to boost economic activity, will they compromise the strength of the financial system?
By implicitly pursuing multiple goals, do central banks run the risk of jeopardizing their credibility?
If the advanced economies recover and global liquidity is drastically reduced, can Latin America deal with such reversal? What should be the priorities to assuage the effects of a sudden stop of inflows?
Are low international interest rates inducing a mispricing of risk in Latin America?
Guillermo Perry assesses whether arguments in favor of such MDB direct support are valid and whether MDBs are living up to priorities coherent with such arguments and finds that they do so only partially.
After the slowdown of the Chinese economy and the sharp decrease in commodity prices, the Latin American macroeconomic outlook has worsened substantially in relation to the boom that occurred between 2003 and 2012, despite favorable external conditions characterized by significantly high liquidity in international capital markets and a strong economic recovery in developed nations.