The Economic Survey recently released by ECLAC includes a complete evaluation of theeffect of the recent international economic crisis on the countries of Latin America andthe Caribbean. In the long run, the impact of the crisis in the region has been much moreprofound than analysts initially predicted. Most countries entered recession in the secondhalf of last year, and remained there during the first six months of 1999. Due to thatcontinued slump, the region will probably end the year with no growth, or even negativegrowth.

There have been signs of normalization over the last few months, however, which willallow generalized recovery over the next few months. Positive indications associated withcapital flows have facilitated exchange-rate stability and a strong drop in internalinterest rates in various countries. However, the fall in the current account deficit withthe rest of the world has been achieved largely as a result of reduced economic activityand demand for imports rather than increased exports. The latter continue to be seriouslyaffected by deteriorating raw material prices and contracting trade in the region'stwo large trading blocks, Mercosur and the Andean Community. The slowdown of trade inthese two dynamic integration processes is, in fact, one of the greatest costs of thecrisis.

This overall panorama, of course, obscures particular situations. Some of the smallcountries of Central America and the Caribbean will show positive growth as they did in1998, aided by exports to the U.S. and lesser dependence on volatile capital flows. Themost dynamic economies in the region are the Dominican Republic and Costa Rica, two smallcountries. Among the largest, Mexico will turn in a performance far superior to those inSouth America, where recession is most severe. Most South American economies willexperience weak growth or even outright recession, except for Peru and Bolivia, which willenjoy moderate growth. The pleasant surprise is Brazil, whose performance will be betterthan was predicted by many analysts at the beginning of 1999.

What have we learned from this crisis? First, that our economies continue to beextremely vulnerable to the effects of a highly volatile international capital market. Atinternational level, instruments to handle the crisis have been improved, but advances arestill insufficient. The sense of complacency that appears to have overtaken the maininternational players on this front is worrying, as it will weaken much-needed efforts atimproving an international financial architecture which was identified during the crisisas the main source of instability in the world economy.

Domestically, it is clear that insufficient resources were invested during the reformprocess in reducing the volatility triggered by external financial cycles, especially indealing with excessive capital inflows and the unsustainable expansion of spending duringperiods of financial euphoria. There have been advances - albeit insufficient - in thearea of public spending, but not in that of private spending, which tends to growexcessively during boom periods. This is one of the issues ECLAC has persistently calledattention to. It is imperative that we address it decisively in the future.

During periods of abundant capital, there is an often irresistible temptation to anchoranti-inflation policies to exchange rates. Time and again we have learned that thisstrategy may bear fruit for a while, but is costly over the long haul. During the recentcrisis we have also learned that avoiding pressures to devalue through rising interestrates can carry a high price in terms of production losses and create instability indomestic financial systems. In fact, in today's liberalized economies, production tends tobe more sensitive to interest rates than ever before. But the fear that devaluations wouldunleash new waves of inflation has been unfounded up until now, reflecting an increasedbelief that economic authorities are committed to the battle against inflation.

The choice of exchange regime, of course, is a complicated one. Two countries,Argentina and Panama, have put their currency on U.S. dollar parity systems, which wouldbe very costly for them to abandon. In all countries growing indebtedness in foreigncurrency has generated greater sensitivity by private-sector balance sheets to theexchange rate. And, above all, exchange markets continue to be thin and very prone tospeculation, which is why authorities should actively intervene. Overall, and leavingaside Argentina and Panama, we have learned that for open economies facing a globalcontext as volatile as the one we face today, an important degree of exchange flexibilityis not only convenient but also necessary.