Hemisphere’s Salvation May Be Overrated

Some U.S. pundits and Latin American paper-peddlers have tried to put the best face on recent events in the region, emphasizing that the hemisphere could fare worse than it has in the current international financial crisis.

Compared with Asia or Russia, they say, countries such as Argentina, Brazil, Chile and Mexico could be in far poorer shape. True, stock markets have fallen, but have not totally collapsed; interest rates are up, but have not skyrocketed; currencies have been sporadically attacked by speculation, but have not plummeted in value; and the so-called real economies--growth rates, inflation--all remain sound, if not booming. Finally, the boosters claim, Latin American democracy is alive and well; coups, revolutions and riots have not broken out from Tijuana to Patagonia.

While most of this is true, it is also naive and abstract. First, the numbers themselves are less categorical than the optimistic assessment suggests. According to the always upbeat United Nations Economic Commission for Latin America, the region’s economies will grow 3% this year, down from nearly 5% in 1997; moreover, this judgment was made at midyear, before the Asian and Russian financial crises had really begun to strike Latin America.

Inflation will be up, along with current account deficits; plunging prices for the region’s raw materials, from copper to oil, will buffet external accounts and rising domestic interest rates hiked in order to retain speculative capital could unleash severe recessionary tensions.

If, in addition to these forecasts and realities, one adds the last few weeks’ meltdown of Latin stock exchanges (the Mexican Bolsa has lost half its value in a few months and the major Mexican companies quoted on Wall Street have seen their shares fall 75% in value), the scenario is far less rosy than claimed. It is only the comparison with the Russian and Asian situations that make it appear more attractive.

Two additional reasons exist for concern and skepticism about the hemisphere’s capability for weathering the storm.

Most nations in the region are just emerging from a costly, protracted, painful process of economic reform, of the sort now being foisted on Russia and Asia. As a result of the previous international crisis (or “external shock,” as economists like to call it) in 1982, when real interest rates reached unheard-of levels and a U.S. recession brought down prices for raw materials, Latin America plunged into what came to be known as the “lost decade.” The ensuing foreign debt crisis detonated a lengthy and deep recession, which in turn stimulated a series of economic reforms--trade liberalization, privatizations, opening to foreign investment.

The purpose of these changes was to bring back growth and to render the region less vulnerable to the external pressures that had shattered its economies, social fabric and political regimes on countless occasions. By the mid-1990s, most countries in the area had implemented the recommended reforms and were hoping to reap the fruits of their efforts.

If it now turns out that--despite the enormous cost and pain inflicted upon the people of the region since 1982--the difference between previous shocks and this one is only of degree, the game will hardly have been worth the candle. The Asian crisis that started the current chaos began barely a year ago; it is still too soon to tell exactly what the cost to the region will be. But the risk of incurring the same wounds as before is looming larger and larger.

The second reason for concern is that the main thrust of the reforms encouraged in Latin American over the past 15 years was to develop a competitive, broad-based sector of nontraditional exports, from manufactured goods to agricultural products. Instead of the inward-looking development of the previous half-century, Latin America was now going to thrive, thanks to comparative advantage, foreign investment and open markets abroad.

In many countries, the reforms were successfully carried out. But now they will face the truest of tests: How will they be affected by real recessions in Asia and by an increasingly likely one in the United States? In a nutshell, is Latin America really less vulnerable to recessions in the industrialized world than before, or is there little new under the region’s sun?

History matters in the political realm, too. Representative democracy in Latin America did not appear in the mid-1980s, even if Ronald Reagan and graduate students posing as foreign correspondents or analysts for Wall Street firms thought otherwise. Coups, revolutions, social strife and violence in the hemisphere have accompanied economic crises in Latin America since time immemorial--and especially throughout the 20th century.

Maybe this time things truly have changed and political stability will emerge unscathed from financial and economic turmoil. And then again, maybe not; patience before making up one’s mind is both a lasting virtue and wise counsel in these southern latitudes.