Search for other papers by International Monetary Fund. Western Hemisphere Dept. in
Current site
Google Scholar
Abstract
As a net commodity-exporting region, Latin America—and especially South America—has significantly benefited from the commodity price boom of recent years. At the current juncture, however, uncertain global economic prospects have raised questions about its vulnerability to a sharp fall in commodity prices and the policies that can shield it from such a shock. This chapter examines the region’s commodity dependence and the history of commodity price busts in the last four decades to address these questions. Despite shifting trade structures in some countries, Latin America is—on average—as reliant on commodities today as 40 years ago. With commodities responding sensitively to global output fluctuations, the region is particularly vulnerable to a global economic slowdown. However, we find evidence that policies in the run-up of sharp terms of trade drops—especially when those are preceded by booms—play an important role in shaping the economic impact. Limited exchange rate flexibility, a weak external position, and loose fiscal policy tend to amplify the negative effects of these shocks on domestic output. Financial dollarization also appears to act as a shock “amplifier.” With improved fundamentals in many of these dimensions, the region appears to be better placed to withstand a turnaround in commodity prices today than in the past.
International Monetary Fund Copyright © 2010-2025. All Rights Reserved.