The past year will be remembered asone of the most fraught for the world economy in the last half-century. The financialcrisis which began in Asia in mid-1997 spread, and came close to unleashing a catastropheof enormous proportions. Fortunately, this was avoided by expansionist measures taken byindustrialized countries and emergency loans given to developing countries indifficulties. Such actions, of course, should continue. But deep reforms are also neededin the world's financial architecture, aimed at reducing the instability of capitalmarkets and, above all, moving towards a system better able to prevent such crises comingabout in the first place.

Given the magnitude of theinternational turbulence, Latin America and the Caribbean's performance this year wasreasonable. Growth fell by almost half, from 5.2% on 1997 to 2.3% (6.6% to 3.5%, if Brazilis left out), and this has begun to be felt in job creation. But these figures do notreflect the true extent of slowdown. In general, the previous year's good performancecontinued through the first six months of 1998; falling growth was only felt strongly inthe second half. Now, many of the region's principal economies are deceleratingfiercely, even falling into recession, and this will affect performance in 1999: ECLACexpects regional growth of 1% next year, or 2.3% excluding Brazil. Even if nothing elseunforeseen occurs - above all in Brazil's adjustment programme, which is critical forthe whole region -, the earliest that recovery will be begin to be felt will be in thesecond half of 1999, probably at the end.

The impact of disruption abroad wassevere in the region. In the first six months of 1998, capital flows into Latin Americaand the Caribbean were normalized, though costs were higher than in 1997. But in Augustand September the Russian moratorium on debt payments dried up the markets, and since thenthese have shown only weak signs of recovery. Foreign direct investment alone stayed firm,once again bringing more than US$50 billion into the region. The fall of internationalprimary product prices also hit Latin America and the Caribbean badly. Export prices wentdown 8%, and, together with the slowdown of export volume, this led to a 1% reduction inthe value of goods exports - the first such drop this decade. A 4% decline in importsbrought some compensation, but not enough to prevent falling terms of trade and anincreased deficit in the balance of payments current account. This deficit grew from US$64billion in 1997 to US$84 billion in 1998, the equivalent of 3.3% of GDP, an amount toogreat to be financed by the sparse capital inflows. 

Throughout the year, theregion's economic authorities showed great determination to face the crisis andcreate confidence - perhaps more so than at any time in its economic history. But a hardlesson remains: despite these efforts, and despite the structural reforms carried out overthe course of the decade, little has been achieved in reducing external vulnerability. Infact, the monetary, fiscal and exchange-rate measures taken may well have increased,rather than eased, the impact of events abroad on production. During the past year, theauthorities of the region have generally opted for significantly increased interest rates,backed by somewhat more moderate fiscal adjustment, in order to avoid pressure on exchangerates. There is no doubt that this had a favorable effect on inflation, which stayed ataround 10% for the region as a whole, and avoided the chaos in exchange rates which someAsian countries went through in 1997, followed this year by Russia. But this method ofmacroeconomic management has also tended to exacerbate the slowdown of growth, hold backthe expansion and diversification of exports, and weaken the region's financialsystems - although, thanks to previous measures, most of these continue to be strong.

This kind of management makes sensein economies like Argentina, where the stabilization of inflation has depended on a peggedexchange rate, but can be costly as a general rule. Orderly devaluations, like thoseduring the year in Mexico, Colombia, Chile (with brief interruptions) and even Brazil, maybe more advisable, especially after a continuous period of revaluation in real terms, likethat experienced by most Latin American economies this decade.

This year has also left a perhapsunprecedented legacy of meteorological disasters: first the El Niño phenomenon, then thehurricanes which hit several Caribbean and Central American countries so severely. Thedevastation left by hurricane Mitch in Honduras and Nicaragua was especially shocking.Beyond the need for international aid and new debt relief for the countries affected,events such as these alert us to the importance of creating more effective means ofhandling catastrophes and preventing damage. Among these must be steps to avoidenvironmental devastation like that perpetrated for decades in the region, and which,according to surveys carried out so far, exacerbated the scale of the damage.