In mid-2011, conditions deteriorated in the industrialized economies. Early in the year, instability in North Africa combined with other factors to push up fuel prices. Then, in March, the tragedy of the earthquake, tsunami and nuclear disaster in Japan damaged global production chains. Although the impacts of these factors eased in the second semester, concern mounted over the threat of default in Greece, Ireland and Portugal and the repercussions of such an event for larger European economies. In late July, the difficulties in securing congressional approval on the United States public debt ceiling added to the volatility prevailing in financial markets. The downgrading of the United States’ sovereign debt rating for the first time ever and lacklustre economic growth rates in the euro area and the United States added to the uncertainty. Volatility and uncertainty are again reaching worrying levels. Following the agreement by the United States Congress on the country’s public debt ceiling and the approval by European authorities and the International Monetary Fund (IMF) of a second support package for Greece, the major stock exchanges have been highly volatile and have seen falls reminiscent of past financial crises. Economic stagnation in the euro area, including in its largest economies, France and Germany, is another cause of volatility. International commodity prices are beginning to reflect this uncertainty and volatility and have declined sharply in a short time span, although they remain above their long-term trend, particularly in the case of metals and minerals. Leading composite indicators show that slower growth in the industrialized countries is starting to act as a drag on the main emerging economies. Data for mid-2011 suggest that the slowdown in the industrialized countries is affecting China and, particularly, Brazil and India. If these trends continue, exports to Europe and the United States should be expected to slow in 2012 and export growth will be compromised in economies whose exports depend heavily on those markets. As growth slows in the emerging economies and the industrialized economies show increasing weakness, international commodity prices are likely to fall, affecting the trade and current account balances of net commodity exporters. The industrialized economies will experience slack growth for the next few years. The outlook in these economies is for several years of growth below potential, high unemployment rates and latent financial threats amid considerable instability and jittery financial markets. The inability of political leaders to find credible and sustainable solutions to fiscal deficits and high sovereign debt adds another element of uncertainty. The fiscal adjustments needed in Europe and the United States are highly complex and will need a long process of consolidation, which will prove difficult to achieve without broad political support over several administrations. This scenario limits the political space for agreement on the governance of globalization. Economic turbulence and high unemployment in the industrialized economies may prompt a resurgence of protectionist forces and reduce the margin for new initiatives for responding to the challenges of globalization. The Doha Round of trade talks, for example, has failed to achieve even the minimal agreements which could conclude the Round after 10 years of unsuccessful negotiations. The early announcements by the Group of Twenty (G-20) on reform of the international financial system appear to have disappeared from its agenda. Successive summits on climate change have not been able to tackle the issues with the required speed. Furthermore, the increasing weight of emerging economies in the main variables of the global economy seems to have inspired apprehension and defensiveness on the part of the industrialized economies. The decade 2011-2020 could still be a boom period for the emerging economies. The engines of the global economy will depend increasingly on growth in the emerging economies and on South-South trade and investment. As emerging economies achieve high and stable growth rates and their population growth slows, their per capita income will rise and move towards convergence with the industrialized economies, particularly for the middle class in these countries. This trend is not without risks. The announcements of the United States Federal Reserve concerning the possibility of a third package of quantitative easing and a near-zero interest rate for the next two years will heighten dollar liquidity in financial markets, amid continuing weakness in the industrialized economies. This may accentuate the diverging monetary cycles between industrialized and emerging economies, generating additional upward pressure on emerging-economy currencies. In the absence of an effective mechanism for currency coordination among the main economies, some emerging economies will find it difficult to avoid taking trade measures to defend their markets from competitive advantages arising from inefficiencies in the international monetary system. Given the great uncertainty augured for 2012, the main recommendation for Latin American and Caribbean economies is macroeconomic prudence. Financial volatility is affecting economies with deep financial and stock markets in the region and the slowdown in Europe and the United States will limit export growth and depress commodity prices. Fresh quantitative easing in the United States could worsen currency appreciation in those countries already grappling with large capital inflows. In these circumstances, Latin American and Caribbean economies should strengthen macroeconomic management, pursue sustainable fiscal and external accounts, reinforce macroprudential measures, and steer their policy decisions by the long-term behaviour of main economic variables. Prudent macroeconomic management must be complemented with more strenuous efforts to further regional cooperation. Deeper commitment to integration and regional cooperation, with extra support for intraregional trade, the consolidation of macroeconomic and social achievements made thus far and progress in forming an enlarged regional market, could help to cushion the impacts should international conditions take another turn for the worse. There is room for more initiatives on trade facilitation and greater cooperation on infrastructure, transport, logistics, custom rules, innovation and technology. Initiatives of this sort would not only open opportunities for exports by small and medium-sized enterprises (SMEs) with a stronger manufacturing content, but also make the region a more attractive partner for trade and foreign direct investment (FDI) (see section C).