Published on Jobs and Development

What Latin America Might Advise Europe

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The latest surge in eurozone fiscal tensions took place this week with the protests in Athens and Madrid bringing home the difficulties faced by the region's elected representatives as they struggle to reduce fiscal deficits. For the young generation of Europeans, this crisis will mark them for life, just as the Latin American debt crisis of 1982 marked my generation.

That is why when I watch the images of these violent protests on TV, I become overwhelmed by a sense of déjà vu. Most Latin Americans learned the hard way the consequences that the debt crisis entailed for them. For example, in 1982, Chile’s GDP fell by 14.1 percent, with GDP in manufacturing dropping by 21 percent. Unemployment in Greater Santiago shot up to almost 24 percent the following March, and it took the country almost 10 years for unemployment to return to its pre-crisis level.

Latin American economists, as well as other academics, published numerous papers on the debt crisis, discussing its causes, consequences, and lessons for the future. So what would Latin American economists have advised their European counterparts if they had been consulted?

Andres Velasco, former Minister of Finance in Chile, took up this question on April 14, 2012, at the Institute for New Economic Thinking’s (INET) Paradigm Lost Conference in Berlin. He argued that European policymakers have failed to grasp the seven key lessons from the Latin American debt crisis. These lessons involved (1) forming a currency zone; (2) judging the depth of a financial crisis; (3) watching for real exchange rate appreciation; (4) hoping for a “phoenix miracle” (recovery without credit); (5) convincing banks to lend; (6) crafting an “expansionary fiscal contraction”; and (7) adopting fiscal rules (see the 10-minute video below).

In 1986 the Chilean rock band Los Prisioneros gave voice to the sentiment of a generation with their song "Muevan las Industrias" (in English "Move the Industries").

This post was first published on the Jobs Knowledge Platform.


Claudia Sepúlveda

Lead Economist, Development Economics Vice Presidency, World Bank

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