Latin America seems to have fared relatively well during the recent international financial crisis, in contrast to previous financial crises episodes, in that domestic banking systems remained stable and no runs against local currencies took place.

But crisis has exposed  the strengths and weaknesses of the current development in the region which is  based on liberalised capital accounts and significantly improved macroeconomic conditions. This paper presents lessons derived from the experience of Latin America, and provides a brief history of the evolution of growth models in Latin America in order to explain current choices made by policymakers and to derive lessons for future decisions.

The author argues that:

• because of a shifting geo-economic international landscape accentuated by the crisis, it is more important than ever for Latin American countries to increase their trade diversification, not only in products but also in partners
• increased flexibility of exchange rates in the context of inflation targeting is the right policy choice for Latin America
• lacking the capacity to issue hard currencies, accumulating large stocks of international reserves and implementing other forms of insurance against volatility is highly desirable
• fiscal stabilisation funds are a must, especially in democratic and unequal Latin America
• sound banks are a key shield against external shocks, but domestic rather than foreign banks might play a greater stabilising role
• financial regulation in Latin America needs to be designed to meet the particular features of the region, not those of industrial countries
• as in previous episodes of adverse external shocks, the global international crisis once again demonstrated that low savings rates are an important constraint for Latin America’s development Model
• because the likelihood of large and unexpected international shocks will be there in the foreseeable future, multilateral organisations need to stand ready to provide liquidity to developing countries, including those in Latin America

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