The Region And The Recession: Some Views From The IMF

It is opportune that Barbados' PM gave a warning a few days ago about how the country may fare at the end of the recession. The IMF, whose business it is to try to make economic assessments, has just published some interesting reports on how the recession has affected the Caribbean (and Latin America) region.

First, they have just published their periodic Regional Economic Outlook, which basically says that we have escaped the worst, but major challenges lay ahead. Of particular interest is the IMF assessment of why the region has done better during this downturn. Basically, it reports that resilience was better, vulnerabilities were less and policy frameworks were stronger. That's another way of saying that the region learned well from its past encounters with economic problems. But that view is the general one and does not mean that each country was well placed before the downturn or will move out of the downturn well.

The region has particular problems due to the heavy reliance on tourism from developed countries. Today's data release from the UK that its GDP declined by 0.4% in the third quarter rather than an expected increase, and fell by 5.9% on an annual basis, highlights how deep the problems have been for one of Barbados' major markets for tourism. This is the longest downturn for the UK since the Second World War and is on a par with the recession of 1979-81 (see Financial Times report).

The second report, on the IMF's own blog, looks at how rising commodity prices are affecting the region. It notes:

What does the recovery of commodity prices mean for economies of the region? Clearly it’s not welcome from the point of view of countries that are net importers of commodities, including, for example, most countries of Central America and the Caribbean. Many of these economies are already at a disadvantage these days, given their reliance on income from remittances or foreign tourism—both flows are sensitive to employment conditions in the United States and other advanced economies, which are expected to recover only slowly. "On the other hand, for net exporters of commodities—including the largest economies of the LAC region—the recovery of these prices is a piece of good luck. Still, these countries need to bear in mind that commodity prices are rarely stable and that their future path is always uncertain.

The implication is that fiscal policy should respond cautiously when commodity prices trigger big gains in government revenue, saving rather than spending revenue gains that are seen as temporary. The eventual reward to such fiscal caution comes when times turn bad, and prudent governments find that they are able to implement counter cyclical fiscal policies.