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The International Financial Crisis: Eight Lessons for and from Latin America
Liliana Rojas-Suarez

Abstract
The international financial crisis of 2008–09 exposed the strengths and weaknesses of the current paradigm of development in Latin America, a paradigm based on liberalized capital accounts and significantly improved macroeconomic conditions. This paper presents lessons derived from thecrisis, not only for the region itself, but also for other developing countries that might seek economic growth in the context of greater integration to the international capital markets. Some of the lessons are not new but have been reinforced by the crisis, such as Latin America’s imperative need for export diversification (not only in products but in partners). Other lessons break withlongstanding myths about the region, such as its inability to undertake counter-cyclical policies—at least on the monetary side. Yet other lessons reflect new developments in the current growth paradigm, such as a renewed assessment of (1) the relative roles of foreign and domestic banks in shielding the financial system against external shocks and (2) the potential costs of adopting blanket internationalfinancial regulations that do not account for a country’s degree of development. Taken together, the lessons in this paper bring a new sense of optimism for growth in Latin America. A final version of this paper will appear in the book tentatively titled New Ideas in Development after the Financial Crisis edited by Francis Fukuyama and Nancy Birdsall (forthcoming,The Johns Hopkins UniversityPress). No part of this paper may be reprinted or reproduced electronically without the expressed permission of the Center for Global Development. All rights reserved 2010.

www.cgdev.org

Working Paper 202 January 2010

The International Financial Crisis: Eight Lessons for and from Latin America

Liliana Rojas-Suarez Center for Global Development

The author is grateful for the valuablecomments and suggestions from Nancy Birdsall, Seth Colby, and Francis Fukuyama and for the excellent research assistant support from Veronica Gonzales and Ted Collins. All remaining errors are the author’s.
Liliana Rojas-Suarez. 2010. “The International Financial Crisis: Eight Lessons for and from Latin America.” CGD Working Paper 202. Washington, D.C.: Center for Global Development.http://www.cgdev.org/content/publications/detail/1423709

Center for Global Development 1800 Massachusetts Ave., NW Washington, DC 20036 202.416.4000 (f ) 202.416.4050 www.cgdev.org

The Center for Global Development is an independent, nonprofit policy research organization dedicated to reducing global poverty and inequality and to making globalization work for the poor. Use and dissemination of thisWorking Paper is encouraged; however, reproduced copies may not be used for commercial purposes. Further usage is permitted under the terms of the Creative Commons License. The views expressed in this paper are those of the author and should not be attributed to the board of directors or funders of the Center for Global Development.

Introduction and Background Over the last century Latin America hasnot been short of ideas about development models. Indeed, some analysts have concluded that the region has tried it all: from a focus towards exports as a growth engine to massive tariffs and an inward bias, from large government interventions to a free market approach, and from autocracy to democracy. In spite of all these different approaches, Latin America has demonstrated a repeated patternof intense economic volatility. To be more exact, since the beginning of the twentieth century, there have been three distinct economic models for development. Two models have been overthrown, and the current model has been under intense criticism during the current decade. The trend of these overarching paradigms has been simple. An economic crisis has led to a new paradigm which slowly expanded...
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