By Gustavo Adler and Sebastián Sosa
(Version in Español)
The risks that policies and shocks in major economies can spillover on other countries and regions have become a matter of renewed concern since the global crisis of 2008–09. Brazil is South America's giant; how important is its influence on neighboring countries?
Brazil accounts for 60 percent of South America's output and its economic fluctuations are closely correlated with those of many of its neighboring countries. This would appear to suggest that economic activity in Brazil's neighbors is strongly influenced by Brazil's business cycle.
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But these close comovements could also reflect common global factors that affect all South American countries similarly, such as commodity prices, international financial conditions, and global demand.
Our latest Regional Economic Outlook: Western Hemisphere examines this question, quantifying the importance of spillovers from Brazil to the rest of South America.
What are the linkages?
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Trade linkages are the likely channel of transmission between Brazil and its neighbors. Direct financial ties, the other common channel, are almost negligible.
Although intraregional trade in South America increased markedly in the past decade, trade with Brazil contributed only marginally to this process. Brazil's share in total exports of its neighbors dropped in the early 2000s and reverted to the levels of the early 1990s.
The story, however, varies significantly across countries.
Southern Cone economies (Argentina, Uruguay, Paraguay, Bolivia and—to a lesser extent—Chile) have relatively high export exposures to Brazil (measured both as percent of total exports and as a percent of GDP).