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Commodity cycle management in Latin America: The importance of resilience in face of vulnerability

Abstract:

This paper investigates the impact of the commodity price bust on economic activity across Latin American countries. The investigation proposes that the impact of price falls in primary products depends on factors that increase economic vulnerability to the shock, alongside institutional resilience. A key source of vulnerability is the way in which resource earnings are channeled into the country; entrance through public sector accounts results in broader based exposure to commodity price shocks. On the other hand, we find that while countries may be vulnerable to external trade shocks, institutional and structural characteristics can bolster their resilience. Such characteristics include improving society's trust in government effectiveness, the adequacy of business regulations, financial market institutional quality, and property right protection. Higher levels of educational obtainment also bolster resilience. High vulnerability and low resilience in face of economic trade shocks result in large increases in informal sector employment rather than unemployment. The informality response is considered the best measure of the state of the economy in the largely informalized economies of Central and South America.