United Nations Economic Commission for Latin America and the Caribbean

INDEX

1. Letter from the Executive Board…………………………………………………………………. (3)

2. Introduction to the Committee…………………………………………………………………… (4)
3. Introduction to the Agenda………………………………………………………………………. (5)
4. Present Status of Economy in LAC……………………………………………………………… (5)
5. Major Policies of Central Banks in LAC through COVID-19…………………………………... (6)
6. UNECLAC’s Preliminary Overview of the Economies 2021 (released in 2022) ………………. (8)
7. Major challenges and way forward ……………………………………………………………...(11)
8. References………………………………………………………………………………………. (12)

2
United Nations Economic Commission for Latin America and the Caribbean

LETTER FROM THE EXECUTIVE BOARD

Dear Delegates,
It is with immense pleasure that I welcome you all to the United Nations Economic Commission for Latin
America and the Caribbean (UNECLAC) to be simulated at VIT Pune MUN 2022 (―The Conference of
Change‖). It is my privilege to serve on your Executive Board for the duration of the Conference. The
Background Guide at hand will help you commence your research for the Conference. However, I strongly
recommend that you do a good amount of research beyond what is covered in the Background Guide. All of
you are entrusted with a task greater than winning a prize, that is, to do justice to the responsibility of finding
solutions to the agenda at hand, that is, Discussing Measures to Reduce Hyperinflation in Latin America
and the Caribbean.
I can assure you that I will remain at your disposal during your preparation for the conference and your time
in the committee sessions, for any queries and concerns that may arise. I hope this Conference turns out to be
a great learning experience for all of us, and we have substantive discussion and discourse on the days of the
conference.
The background guide is designed to help everyone understand the basic things about the agenda and I
strongly recommend that you research various things on your own. I also suggest understanding how various
rights get affected (legally). If you are doing an MUN for the very first time, we expect you to read the UNA
USA rules of procedure or watch videos online on youtube about conduct at MUNs. Rest, the same aspect
for research applies to you too. Do not feel taken aback by the research, foreign policy, and other details of
the allotted country.
Take the initiative to research properly. PLEASE DO READ THE GUIDE. While it is a clear agenda, it still
is open to interpretations and there shall be no direction of debate that shall be provided by the Executive
Board. Delegates are required to direct the committee at all stages unless stagnation occurs. The agenda of
an MUN is a beautiful experience and is not as difficult as it may seem. I hope to see a great level of effort
and enthusiasm from you all so that we all can take back a great experience. This Background has been
created weeks prior to the conference and it is in your best interest to stick to Reuters/CNN/BBC/UN News
and documents to find more after you have researched. Do research the updated information on various news
agencies. Feel free to contact any member of the executive board in case of any doubt or inquiry.
Happy Researching!

Regards,
Shivam Jain Kakadia
Chairperson

3
United Nations Economic Commission for Latin America and the Caribbean

Introduction to the Committee

The United Nations Economic Commission for Latin America and the Caribbean (UNECLAC) was founded
in 1948 by ECOSOC res. 106 (VI) to coordinate policies for the promotion of sustainable Latin American
economic development and to foster regional and international trade. Later, its work was extended to the
Caribbean countries, and its program of action expanded to promote sustainable social development.

In 1996, member governments updated ECLAC's mandate through res. 553 (XXVI). Under this provision, the
Commission helps the Member States analyse the development process by formulating, evaluating and
following up on public policies, as well as by providing assistance in areas of specialised information.

ECLAC experts also offer advice, training, and support on subjects such as:

 Agricultural development

 Economic and social planning

 Industrial, technological and entrepreneurial development

 International trade, regional integration, and cooperation

 Investment and financing

 Social development and equity

 Integration of women in development

 Natural resources and infrastructure

 Environment and human settlements

 Statistics

 Administrative management

 Demography and population policies.s

4
United Nations Economic Commission for Latin America and the Caribbean

Introduction to the Agenda

Agenda: Discussing Measures to Reduce Hyperinflation in Latin America and the

Caribbean

Since the onset of the COVID-19 pandemic, central banks issued trillions in fiat currency leading to inflation.
Today, the U.S. is grappling with its highest inflation reading in decades, and many of us — especially
younger generations — are getting a crash course in economics as prices continue to rise. It’s natural to
wonder if the future will become even more extreme with a hyperinflationary collapse.

Inflation is an overall rise in prices. It has more or less been accepted as inevitable with fiat currency, and
central banks have normalized inflation to some degree. Hyperinflation is runaway inflation with a sense of
panic. Often, some external event occurs, such as war, uprising, or a global pandemic. A government will
fund its crisis response with debt it can’t reasonably service, and print more money to cover the difference.
Prices rise parabolically, which prompts consumers to panic-buy anything that will hold value and thus create
massive shortages. Governments print more money to try and counter the effects, and it all becomes a vicious
cycle.

What constitutes hyperinflation is subjective, but economists tend to favour Phillip Cagan’s definition of a
monthly price increase of at least 50%. In fact, there have been some instances that far surpassed that figure.
In Zimbabwe in 2007-2008, prices doubled in about a day, according to the Cato Institute. Economies in Latin
America and the Caribbean (―LAC‖) are losing steam after making a strong comeback last year.

Present Status of Economy in LAC

After a dramatic economic collapse in 2020, growth in the region rebounded to an estimated 6.8 percent,
driven by robust trading partners’ growth, higher commodity prices, and favourable external financing
conditions. On the domestic front, progress on vaccinations, continued fiscal support in some countries (e.g.
Chile and Colombia) and accumulated savings from 2020 also supported growth.

For 2022, we expect growth to slow to 2.4 percent, a downgrade from our October forecast of 3 percent. A
slowdown is inevitable as economies return to their pre-pandemic GDP levels, but the downgrade reflects

5
United Nations Economic Commission for Latin America and the Caribbean

other challenges including slower growth in China and the United States, continued supply disruptions, tighter
monetary and financing conditions, and the emergence of the Omicron variant.

Last year was marked by rising inflation. In some of the largest economies in the region (Brazil, Chile,
Colombia, Mexico, and Peru), prices increased by 8.3 percent in 2021—the largest jump in 15 years and
higher than in other emerging markets.

This rapid increase partly reflected the surge in food and energy prices. Core inflation, excluding food and
energy prices, rose by a lesser degree (6.3 percent), but still exceeded pre-pandemic trends and outpaced core
price inflation in other emerging markets (5.3 percent on average). Core prices grew rapidly in Brazil (7.2
percent), Chile (6.4 percent), and Mexico (5.9 percent), suggesting that inflation threatens to become more
broad-based, though there is substantial variation across economies.

Major policies of Central Banks in LAC through COVID-19

In both Chile and Peru, the central bank provided substantial liquidity to the domestic financial system. In
Chile, the central bank bought bonds issued by banks while banks bought government bonds and boosted
credit to the non-financial private sector, backed by a substantial public sector guarantee scheme. In Peru, the
central bank extended repos to the banks and allowed guaranteed bank loans to firms to act as collateral. This
may have sharpened the incentives for banks to lend to firms with partial guarantees. In the case of Brazil, an
exchange rate depreciation resulted in an increase in the value of international reserves in local currency on
the asset side and an increase in the net worth of the central bank. New legislation allowed the central bank to
pass some of that increase in net worth to the government, which was then transferred to a deposit account of
the government at the central bank. As the government drew down its deposits for COVID-related spending,
the central bank issued sterilisation liabilities.

Several central banks pushed these measures to the limit. Policy interest rates were lowered to an effective
lower bound. Central banks injected liquidity by lowering required reserves on deposits and through asset
purchases (some to purchase foreign currency from external debt issuance). Still, in the end, it is households,
firms, and banks themselves that decide how much liquidity they are willing to hold. In several countries,

6
United Nations Economic Commission for Latin America and the Caribbean

policy interest rates acted as a floor system, and the excess liquidity returned to the central bank (Resinek
2019). Highly liquid banks started increasing their reserve holdings at the central bank and purchasing
sterilisation liabilities. As the old adage goes, at the limit monetary policy becomes ―pushing on a piece of
string‖ – a phrase often ascribed to both Keynes and the Federal Reserve Chair, Marriner Eccles, in the 1930s
(see also the continuing discussion regarding the efficacy of quantitative easing).

Looking forward, there are several potential risks depending on the underlying scenarios for the health crisis
and economic recovery. One risk is that as demand recovers, even as fiscal impulses reign in, supply remains
constrained, and prices are pushed higher. This has already happened in some countries, led by rises in the
price of food. Brazil is a case in point and the central bank has already reacted, increasing the policy interest
rate by 225 basis points since March 2021 – and has signaled that further rate rises might be forthcoming.

Interestingly, while there was concern about strong portfolio capital outflows at the start of the crisis, there
was substantial international bond issuance by sovereigns and corporates from Latin America and the
Caribbean. Most countries retained access to international capital markets and at the same time, current
accounts deficits narrowed. In aggregate, international reserves rose although there was some heterogeneity
across countries – see Cavallo and Powell (2021) for a more detailed analysis.

One view is that such price rises should be temporary and, while inflation may be pushed above the inflation
target, it should come back down without the need for central bank action. However, this presupposes
inflation expectations will remain anchored to a fully credible target despite central bank inaction. Emerging
economies may not be able to afford to take such risks. Mariscal et al. (2016) find that if inflation runs above
the target, then there may be a price to pay, as expectations for Latin American inflation targeters may
become de-anchored. Moreover, given the calibration of a dynamic stochastic general equilibrium (DSGE)
model for Latin American countries in Cavallo and Powell (2018), the growth impacts of a rise in policy rates
may be relatively muted while the impact on inflation is relatively strong. In other words, the action tends to
work, and the costs may not be so great. Perhaps this risk of somewhat higher inflation as recovery takes hold
with the normalization of interest rates is a good problem to have. Still, Treasury-Central Bank tensions may
arise if the latter sees fit to tighten monetary policy, raising the cost of short-term domestic government debt.

7
United Nations Economic Commission for Latin America and the Caribbean

Perhaps of greater concern, however, is a scenario in which vaccine roll-out is slow and the spread of new
mutations prolongs the health crisis, delaying recovery and requiring greater fiscal spending, while at the
same time there is a change in the patient stance regarding monetary policy in the US. On the one hand, this
would create the need for greater fiscal financing, but on the other hand may limit access to or increase the
cost of that financing in international markets, especially for those countries where debt has risen more
strongly, and financing requirements have soared.

While central banks and governments worked together closely to support economies during 2020, in this
scenario tensions might arise. There might be greater pressure to seek new ways to finance fiscal spending –
either by adopting more creative accounting under current legislation or even attempting to change central
bank frameworks. Persistent monetary financing of deficits could create the conditions for higher inflation,
which may be costly to bring back down. Central bank independence and the quality of balance sheets going
forward are key to avoiding these inflationary risks.

A further potential risk relates to the stock of short-term sterilisation liabilities on the balance sheets of central
banks. These are mostly in local currency and central banks appear to have ample buffers of international
reserves to back the commitments. But some governments are also faced with considerable debt service
obligations coming due, and central banks may need to resist sharp depreciations given inflation objectives
and corporate debts in dollars. The dual treasury and central bank roll-over risks should therefore be closely
monitored.

UNECLAC’s Preliminary Overview of the Economies 2021 (released in 2022)

The Latin America and Caribbean region will see its pace of growth decelerate in 2022 to 2.1%, after reaching
6.2% on average last year, according to new projections released today by ECLAC. This slowdown takes
place in a context of significant asymmetries between developed, emerging, and developing countries with
regard to the capacity to implement fiscal, social, monetary, and health and vaccination policies for a
sustainable recovery from the crisis unleashed by the COVID-19 pandemic.

8
United Nations Economic Commission for Latin America and the Caribbean

This is according to the annual report by the Economic Commission for Latin America and the Caribbean
(ECLAC) entitled Preliminary Overview of the Economies of Latin America and the Caribbean 2021, which
was unveiled in January 2022 during a virtual press conference held from Mexico City by the United Nations
organization’s Executive Secretary, Alicia Bárcena.

The document indicates that the region is facing a very complex 2022: uncertainty regarding the pandemic’s
ongoing evolution, a sharp deceleration in growth, continued low investment and productivity and a slow
recovery in employment, the persistence of the social effects prompted by the crisis, reduced fiscal space,
increased inflationary pressures and financial imbalances.

―The expected slowdown in the region in 2022, combined with the problems of low investment and
productivity, poverty and inequality, calls for growth and employment creation to be central elements of
public policymaking while at the same time addressing inflationary pressures,‖ Alicia Bárcena stated.

According to ECLAC, the 2.1% average growth foreseen for this year reflects great heterogeneity among
countries and sub-regions: the Caribbean will grow 6.1% (excluding Guyana) and Central America will grow
4.5%, while South America will expand by 1.4%. Meanwhile, in 2021, the region experienced higher-than-
expected growth, averaging 6.2% due to the low baseline established in 2020, greater mobility, and a
favourable external context.

According to the Preliminary Overview 2021, estimates point to advanced economies growing by 4.2% in
2022, being the only ones to resume the growth trajectory foreseen before the pandemic over the course of
this year. Emerging economies, meanwhile, are seen growing 5.1% in 2022, but they will only resume the
growth trajectory forecast before the pandemic in 2025.

In 2021, 11 countries in Latin America and the Caribbean managed to regain the GDP levels seen prior to the
crisis. In 2022, another three countries will join them, accounting for a total of 14 countries of the 33 that
make up the region.

It is of central importance that the combination of monetary and fiscal policies prioritizes growth stimulation
as well as inflation containment, ECLAC adds. This entails the need for coordinated fiscal and monetary
policies and the use of all available instruments to adequately prioritize the challenges of growth with
monetary-financial stability.

9
United Nations Economic Commission for Latin America and the Caribbean

In terms of the labour market, employment recovered at a slower pace than economic activity last year: 30%
of the jobs lost in 2020 had not been recuperated by 2021. Furthermore, the inequality between men and

women was accentuated, reflecting the larger care burden on women and less dynamism in the sectors in
which female employment is concentrated, such as services. In 2022, ECLAC projects an 11.5%
unemployment rate for women – slightly below the 11.8% recorded in 2021, but still well above the 9.5%
existing before the pandemic in 2019 – while unemployment among men is forecast at 8.0% this year, nearly
identical to that of 2021 (8.1%) and still far above the 6.8% seen in 2019.

The report also addresses one of the most worrisome economic issues today at a regional and global level: the
rise in the price of products and services. In 2021, inflationary pressures were observed in the majority of the
region’s countries, led by price increases in food and energy (inflation reached 7.1% on average by
November, excluding Argentina, Haiti, Suriname, and Venezuela), and these pressures are expected to
continue in 2022. Countries’ central banks anticipate that inflation levels will remain above the target range
established, although they will tend to converge towards the end of 2022 or early 2023. Once again, the price
of energy and food in international markets, along with the evolution of the exchange rate, will be critical to
determining future price dynamics.

ECLAC underlines that inflation is a multi-causal phenomenon, which means that monetary authorities should
continue utilizing the full range of instruments (monetary, foreign exchange, and macro-prudential) that they
have, beyond the interest rate, to confront inflationary pressures without hindering the impetus for
recuperating growth and employment and attaining sustainable, inclusive and more equal growth, the
document indicates.

In addition, the United Nations organization emphasizes that it is crucial to increase tax collection levels and
to improve the tax structure to give fiscal sustainability to a growing trajectory of expenditure demands. The
challenges foreseen in 2022 – including lower economic growth, the risks of higher interest rates, currency
depreciations and the possible weakening of sovereign credit ratings – make fiscal policy management more
complex. That is why a strategic vision for public spending is required that would link short-term demands
with long-term investments and contribute to closing social gaps. In addition, fiscal space must be expanded
by eliminating tax evasion (which amounts to $325 billion U.S. dollars, or 6.1% of regional GDP),
consolidating income taxes on individuals and corporations, extending the scope of taxes on assets and

10
United Nations Economic Commission for Latin America and the Caribbean

property, establishing taxes on the digital economy, environmental levies and others related to public health
problems, and progressively revising and updating royalties for the exploitation of non-renewable resources.

In another area, financing for development is also key for supporting policy spaces and investment. It is
necessary to expand and redistribute liquidity from developed countries to developing countries; strengthen
development banks; reform the international debt architecture; provide countries with a set of innovative
instruments aimed at increasing debt repayment capacity and avoiding over-indebtedness, and integrate
liquidity and debt reduction measures into a resilience strategy geared towards building a better future

Major challenges and way forward

The pandemic hit after a year of widespread social unrest in the region, which had built up during years of
economic stagnation following the end of the commodity boom. With a heavy election calendar looming,
social unrest remains a major risk and inequality will need to be addressed.

Countries in the region must simultaneously tackle three major challenges: ensuring the sustainability of
public finances; raising potential growth; and doing it in a manner that promotes social cohesion and
addresses social inequities.

Addressing these challenges, which started even before the pandemic, will take time. Policymakers should
start now to develop a comprehensive strategy for addressing them and building societal consensus around
this strategy.

Countries in Latin America and the Caribbean region have a unique opportunity to reinvigorate growth
engines and to build forward toward a more prosperous, sustainable, and inclusive region.

Given the region’s history of high inflation, large central banks reacted quickly and decisively to the sharp
rise in consumer prices.

The speed of monetary policy tightening has differed across countries depending on their position in the
economic cycle, and the degree and scope of price pressures and central bank credibility. In Brazil, Chile,
Colombia, Mexico and Peru, policy rates rose between 1.25 percentage points and 7.25 percentage points over

11
United Nations Economic Commission for Latin America and the Caribbean

the course of 2021. These were often combined with forward guidance that signalled further rate increases in
the coming months.

The hike in policy rates has helped maintain anchored inflation expectations, as IMF noted in October
Regional Economic Outlook while shoring up the hard-won credibility of central banks. Long-term inflation
expectations remain relatively well-anchored, which reflects trust in monetary policy to bring inflation back to
targets. However, short-term inflation expectations are elevated, suggesting the need for continued vigilance
and possible further action by central banks in some countries.

If rising inflation threatens to de-anchor inflation expectations, central banks will have to raise interest rates
further to signal a continued commitment to inflation targets and to avoid persistent price increases. This
would have to be accompanied by clear and transparent communication.

REFERENCES

1. Aguilar, A, and C Cantú (2020), “Monetary policy response in emerging market economies: why was it
different this time?”, BIS Bulletins 32, Bank for International Settlements.

2. Cavallo, E, and A Powell (2018), A Mandate to Grow, Latin American and Caribbean Macroeconomic Report,
Washington, DC: Inter-American Development Bank.

3. Cavallo, E, and A Powell (2021), Opportunities for Stronger and Sustainable Postpandemic Growth, Latin
American and Caribbean Macroeconomic Report, Washington DC: Inter-American Development Bank.

4. Kehoe, T J, and J P Nicolini (2021), A Monetary and Fiscal History of Latin America, 1960-2017, University of
Minnesota Press.

5. Mariscal, R, A Powell, and P Tavella (2018), “On the Credibility of Inflation-Targeting Regimes in Latin
America,” Economia 18 (2): 1-24.

12
United Nations Economic Commission for Latin America and the Caribbean

6. Nuguer, V, and A Powell (2020), Policies to Fight the Pandemic, Latin American and Caribbean
Macroeconomic Report, Washington, DC: Inter-American Development Bank.

7. Resinek, M (2019), “Floor versus corridor systems in monetary policy regimes Overview of the euro area
experience and forward-looking issues”, 13th ECB Central Banking Seminar.

8. Powell, A (2017), “Inflation targeting and interest rate procyclicality in the UK and in Latin America”,
VoxEU.org, 25 November.

9. https://www.cepal.org/en/datos-y-estadisticas

10. https://www.cepal.org/en/work-areas/economic-development

13