FOR much of the past two centuries Latin America has been a byword for the profligate squandering of economic promise and for financial crisis. So ingrained is this reputation that when Chile's president recently met Britain's prime minister and boasted of her government's foresight in saving some of its windfall revenues during the boom years, George Osborne, the shadow chancellor of the exchequer, sneered: “Gordon Brown is getting lessons from the Latin Americans about sound public finances. You couldn't make it up.”

Happily, Mr Osborne's view of Latin America is outdated, or at least it now applies in only a few places. Over the past decade, most of the bigger countries in the region have greatly improved their economic policies and the government institutions that implement them. That is the main reason why Latin America was until recently a spectator in the world financial crisis. Its banks are generally conservative and well-regulated. Many countries eschewed their past habit of abusing a boom to borrow. Public finances were mostly in balance, public debt fell and the region ran a current-account surplus. Indeed Chile is one of the world's best-managed economies by almost any yardstick, but Mexico, Brazil, Colombia, Peru and Uruguay are not all that far behind.

Sadly none of this has shielded the region from the world recession (see article). Most forecasters predict that Latin America's output will contract this year and recover only modestly next year, so income per head will shrink. Some countries are doing worse than others. Even before the flu outbreak, Mexico had been especially hard hit, because its economy is so closely tied to that of the United States. Brazil is better placed. Argentina, Venezuela and Ecuador have spurned the prudence of their neighbours and antagonised investors. Only the uncertain prospect of Chinese aid stands between these three countries and possible financial crisis next year.

Yet overall, in contrast to its past recessions, Latin America is doing no worse than the world as a whole. In other words, it is not adding to its troubles with internal weaknesses. What's more, its governments have been able to cushion the blow with counter-cyclical policies of the kind that the rich world has taken for granted since Keynes but which Latin America's habitual profligacy and lack of credibility denied it in the past. So instead of having to cut spending as tax revenues fall, this time many governments have been able to increase it. Their central banks have earned sufficient credentials as inflation fighters, and many have enough reserves, to cut interest rates without prompting a dangerous weakening of the currency.

Know your limits

Still, there are limits to what governments can do to mitigate the pain. While there's scope, by and large, for easing monetary policy, fiscal policy is more constrained. The IMF, the World Bank and the Inter-American Development Bank will plug much of the gap this year, but next year looks harder. Tax revenues will have fallen further and Latin American governments' dodgy past records may hamper their ability to raise money in debt markets that will be heavily oversubscribed.

The priority for those governments should be to maintain their hard-won reputation for financial stability. That will mean keeping a tight rein on budgets. Some of the social gains of recent years will inevitably be lost. But governments can help the poor by focusing spending on, for instance, preventing child malnutrition, discouraging pupils from dropping out of school and beefing up health services.

There is another, harder lesson. Latin America's recent growth owed much to the outside world, cheap money and high commodity prices. With the world economy facing (at best) several sluggish years, the region will have to look closer to home for growth, by raising its productivity. That needs a huge effort not just to improve education, but also to implement long-postponed reforms of, for instance, labour markets. Such things are never easy in Latin America, where democratic politicians face voters who have to bear the world's widest inequalities of income. But if the region is to consolidate its still novel reputation for prudent progress and good management, they will have to be done.