Review economic commission foR Latin ameRica and the caRibbean No 98 AUGUST • 2009 Review economic Alicia Bárcena commission foR Executive Secretary Latin ameRica and the caRibbean osvaldo Sunkel Chairman of the Editorial Board André Hofman Director Miguel Torres Technical Editor issn 0251-2920 The CEPAL Review was founded in 1976, along with the corresponding Spanish version, Revista de la CEPAL , and is published three times a year by the United Nations Economic Commission for Latin America and the Caribbean, which has its headquarters in Santiago, Chile. The Review, however, has full editorial independence and follows the usual academic procedures and criteria, including the review of articles by independent external referees. The purpose of the Review is to contribute to the discussion of socio-economic development issues in the region by offering analytical and policy approaches and articles by economists and other social scientists working both within and outside the United Nations. The Review is distributed to universities, research institutes and other international organizations, as well as to individual subscribers. The opinions expressed in the signed articles are those of the authors and do not necessarily reflect the views of the organization. The designations employed and the way in which data are presented do not imply the expression of any opinion whatsoever on the part of the secretariat concerning the legal status of any country, territory, city or area or its authorities, or concerning the delimitation of its frontiers or boundaries. A subscription to the CEPAL Review in Spanish costs US$ 30 for one year (three issues) and US$ 50 for two years. A subscription to the English version costs US$ 35 or US$ 60, respectively. The price of a single issue in either Spanish or English is US$ 15, including postage and handling. The complete text of the Review can also be downloaded free of charge from the ECLAC web site (www.cepal.org). This publication, entitled the CEPAL Review, is covered in the Social Sciences Citation Index (SSCI ), published by Thomson ISI , and in the Journal of Economic Literature (JEL ), published by the American Economic Association. To subscribe, please apply to ECLAC Publications, Casilla 179-D, Santiago, Chile, by fax to (562) 210-2069 or by e-mail to [email protected]. The subscription form may be requested by mail or e-mail or can be downloaded from the Review’s Web page: http://www.cepal.org/revista/noticias/paginas/5/20365/suscripcion.pdf. United Nations publication ISSN printed version 0251-2920 - ISSN online version 1684-0348 ISBN 978-92-1-121714-8 LC/G. 2404-P Copyright © United Nations, August 2009. All rights reserved. Printed in Santiago, Chile Requests for authorization to reproduce this work in whole or in part should be sent to the Secretary of the Publications Board. Member States and their governmental institutions may reproduce this work without prior authorization, but are requested to mention the source and to inform the United Nations of such reproduction. In all cases, the United Nations remains the owner of the copyright and should be identified as such in reproductions with the expression “© United Nations 2008” (or other year as appropriate). CEPAL REVIEW 98 S UMMARY The bigness of smallness: The financial crisis, its contagion mechanisms and its effects in Latin America 7 Daniel Titelman, Esteban Pérez Caldentey, Ramón Pineda Poverty reduction in Latin America: the role of demographic, social and economic factors 35 Jaime Ros Youth and feelings of belonging in Latin America: causes and risks of social fragmentation 47 Gonzalo A. Saraví Trade policy reform and poverty: successes and failures in Central America 65 Marco V. Sánchez-Cantillo The impact of remittances on macroeconomic stability: the cases of Mexico and Central America 83 Eliseo Díaz González Determinants of world manufacturing exports to China, 1990-2006 103 Roberto Álvarez E., Eugenio Figueroa B., María Pía Figueroa Z. and Macarena Palma E. Latin America: highlights from the implementation of the System of National Accounts 1993 117 Roberto Olinto Ramos, Gonzalo Pastor and Lisbeth Rivas Social benefits in Uruguay: why do some potential beneficiaries not apply? 141 Gabriel Burdín and Gioia de Melo Socio-economic and geographic profiling of crime in Chile 159 Mauro Gutiérrez, Javier Núñez and Jorge Rivera Latin American structuralism and economic theory 175 Armando Di Filippo Recent ECLAC publications 198 AUGUST 2009 Explanatory notes The following symbols are used in tables in the Review: … Three dots indicate that data are not available or are not separately reported. (–) A dash indicates that the amount is nil or negligible. A blank space in a table means that the item in question is not applicable. (-) A minus sign indicates a deficit or decrease, unless otherwise specified. (.) A point is used to indicate decimals. (/) A slash indicates a crop year or fiscal year; e.g., 2006/2007. (-) Use of a hyphen between years (e.g., 2006-2007) indicates reference to the complete period considered, including the beginning and end years. The word “tons” means metric tons and the word “dollars” means United States dollars, unless otherwise stated. References to annual rates of growth or variation signify compound annual rates. Individual figures and percentages in tables do not necessarily add up to the corresponding totals because of rounding. 7 CEPAL REVIEW 98 • AUGUST 2009 KEYWORDS United States Financial crisis The bigness of smallness: Financial institutions Securities Gross domestic product The financial crisis, its contagion Credit Unemployment mechanisms and its effects in Investments Capital movements Exports Latin America Economic indicators Latin America Daniel Titelman, Esteban Pérez Caldentey, Ramón Pineda This paper has two purposes. First, it seeks to explain the reason why a relatively small shock (in the subprime market in the United States) had a systemic effect on the world economy. It is argued that this responds to the combination of off balance sheet funding and pro-cyclical leverage management. Second, it analyses the transmission mechanisms and the possible effects of the crisis on Latin American economies. Past crises had generalized, deep and enduring effects across the region, and restricted Daniel Titelman access to external finance and the disruption of international trade turned Chief, Development Study Section ✒ [email protected] out to be their main channels transmission. In spite of specificities, the current episode and its manifestations are not an exception to the pattern Esteban Pérez Caldentey Economic Affairs Officer, of previous crises. The final outcome will depend on the type of recovery Development Study Section that takes place in the developed world and on the effectiveness of the ✒ [email protected] counter-cyclical policies applied in Latin America. Ramón Pineda Economic Affairs Officer, Development Study Section ✒ [email protected] 8 CEPAL REVIEW 98 • AUGUST 2009 I Introduction The current international financial crisis, which is pro-cyclical leverage management. Off balance sheet considered to be the most severe since the Great funding set the stage for the crisis, and pro-cyclical Depression, is set in the context of unprecedented global leverage management acted as the amplifier mechanism. imbalances and high levels of international liquidity. This combination led eventually to a contagion process The build up of liquidity was channelled through the characterized by generalized and cumulative asset banking system to the real estate sector, including to price deflation, which led to significant contractions borrowers with a high risk profile, significantly bidding in financial institutions’ balance sheets. This in turn up initially house prices and eventually those of other reduced financial institutions’ lending capacity and assets as well. This was facilitated and enhanced by paved the way for a worldwide credit crunch. a process of financial innovation in the context of The second part provides an analysis of the unregulated markets. transmission mechanisms of the current crisis and The current international crisis began in a relatively its effects on Latin American economies using as small segment of the real estate market of the United a benchmark past crises, including the debt crisis States, the subprime market, which represented roughly (1980-1983), the United States savings and loan 4% of all United States financial assets. However, the crisis (1987-91), the Mexican crisis (1994-1995), the crisis did not remain focalized within that submarket Asian-Russian crisis (1997-1999) and the Argentine and the consequent contagion effects, felt in the real crisis (2001-2002).2 and financial sectors of the developed world, have by The analysis indicates that, in general, international far outstripped the initial losses. Moreover, the effects financial crises have deep and enduring negative effects have also spread to emerging market regions of the on the region’s economies. Also, the evidence presented world, including Latin America. shows that the main transmission channels, albeit The purpose of this paper is twofold. First, it not always acting jointly, include restricted access to seeks to shed light on one of the most fundamental and external finance and the contraction of international enduring questions regarding the crisis, namely: how trade flows. Both transmission channels are present in can a shock to such a small segment of the real estate the current episode even though the initial effects of market in the United States trigger such a worldwide the crisis have not been as severe as in past episodes. debacle?1 In other words, how can something so small Finally, regardless of countries’ initial conditions, the turn into something so big? Second, bearing in mind negative economic results and the restricted access the systemic character of the crisis, the paper identifies to external finance has affected a large number of the possible effects of the crisis on Latin American countries across the region. In short, the available economies and transmission mechanisms involved.