LOS ANGELES - A few weeks ago, the world was on the edge of disaster. Fortunately, the decisive actions taken by the advanced countries' monetary authorities - including provision of unprecedented amounts of liquidity - prevented a complete financial meltdown. The world has avoided the "Argentinization" of the international financial system.
What has not been avoided is a recession that will be deep, long, and global. In the coming months, nearly every region in the world will experience economic deceleration, with exports declining and unemployment increasing.
Recent events have disproved the notion that emerging nations had "decoupled" themselves from the advanced economies. The facts have shown the opposite to be true. Most emerging economies are still fragile and affected by what goes on in the advanced countries. The effects of this recession will be particularly severe in Latin America.
Brazil and Mexico have been the hardest hit so far, to the point that the value of their firms has fallen by approximately 50%. The situation in these countries is so serious that a few days ago the United States granted them credit for up to $60 billion.
But Brazil and Mexico are not the only ones hit by financial volatility: Chile's currency has lost a third of its value, in Peru the cost of external financing has soared, and in Argentina the government has had to resort to extreme measures - such as the nationalization of the pension system - in order to avert an imminent fiscal calamity.
Indeed, with the recession possibly lasting 18 months or more - which would make it the longest since World War II - Argentina will be one of the hardest hit. Its external financing needs are enormous, and its exports will fall sharply. But politics will also play a role in Argentina's economic distress.
The administration of President Cristina Fernández de Kirchner generates a great deal of distrust among local and foreign investors, who fear arbitrary measures. The recent decision of Standard and Poor's to lower Argentina's rating is fully justified and reflects many analysts' fear that Argentina will again default on its public debt.
Mexico and Central America will also suffer from the long recession. For many years, their economic fate has been closely tied to that of the US. These ties increased with the signing of bilateral free-trade treaties with the US, so there is a good chance that they could experience negative growth in 2009 and, perhaps, in the first half of 2010, as the US goes into recession.
Less affected by the financial crisis and the US recession will be those that have developed with an eye toward Asia nations - particularly Chile, Colombia, and Peru -, and have accumulated resources to meet unexpected financial storms. They will be quicker to recover their levels of employment.
But the most important question is what will happen in Brazil, Latin America's giant. Over the past few years, analysts and investors around the world began to see Brazil as an economic power in the making. There was mention of a miracle, and many argued that Brazil would grow spectacularly like China and India, and no longer be the eternal country of "the future." Unfortunately, everything suggests that this was an illusion based on wishful thinking.
Brazil's boom of the past few years stood on an incredibly weak foundation. President Luiz Inácio Lula da Silva did indeed decide to avoid the rampant populism of Hugo Chávez of Venezuela, and successfully tackled inflation. But it takes more than that to become a great economic power.
What Lula did was simply to decide that Brazil would be a "normal" country. But more than controlled inflation is needed to create a robust economy with a high and sustainable growth rate. Agility, dynamism, productivity, and economic policies that promote efficiency and enterprise are required.
As many studies have shown, Brazil has not been able - or has not wanted - to adopt the modernizing reforms needed to promote a productivity boom. Brazil is still an enormously bureaucratic country, with an educational system in crisis, very high taxes, mediocre infrastructure, impediments to the creation of businesses, and a high level of corruption.
It is sad but true: in recent years Brazil did not opt for modernization and efficiency and will have to pay the consequences during the difficult years ahead.
Sebastián Edwards is professor of economics at UCLA and was formerly the World Bank's chief economist for Latin America.
Photo Ricardo Stuckert