Saturday, March 31, 2012

The world of forking paths – report by InterAmerican Development Bank (IADB) March 2012

" The world of forking paths – Latin America and the Caribbean facing global economic risks " is the title of the report IADB released during its annual meeting in Montevideo this month. The report has projected different global scenarios and their possible impact on Latin America. They have also given some policy recommendations to the Latin American governments.

The major factors which will impact the region are: commodity prices, Chinese growth, European crisis, inflow of capital, the role of foreign and particularly European banks in the region and US recovery. A deceleration of Chinese growth is likely to affect producers of metals more than producers of grains.

The report concludes, " while the world is one of forking paths and it is impossible to know which alternative will become a reality, Latin America has good reason to be optimistic thanks to the new set of tools it has developed and the experience it has gained deploying them effectively". This is based on their following assessment:

-The region has made substantial economic progress both in terms of growth and in the ability to respond to external shocks.

-Many of the region's economies have achieved reduction in external public debt and increase in a greater proportion of public sector debt issued in local currency, have been able to use effective countercyclical fiscal policies, have greater possibilities of employing the exchange rate as a shock absorber while maintaining stable prices and have deployed several macro-prudential tools.

On the other hand vulnerabilities remain due to excessive commodity dependence of most South American countries, capital inflow and credit boom and the role of the European banks.

I must compliment the IADB for choosing the most appropriate and interesting title for their report. The inspiration for the title is " The garden of forking paths " a story written by the famous Argentine author Jorge Luis Borges. The story is about the revelation of a labyrinth that had many paths that forked once and then forked again and again providing many alternative realities. The main characters in the story is a Chinese professor acting as a German spy in England and his ancestor who wanted to construct a vast and intricate labyrinth in which all men would lose their way.

Fiction is becoming a reality...In the real Latin American economic story, the Chinese are playing a similar important role, opening many labyrinths, as in the Borges fiction. The Latin Americans should not get lost in the labyrinth. They should play their part smartly and find their best way forward...

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