Finding Shelter From the Winds of Change

The resurrection of the Brazilian economic crisis and the threat of its extension to Argentina and the rest of Latin America seem to suggest that orthodox remedies and promises of international support, no matter how substantial, appear insufficient to sustain a currency once speculators have decided to attack it and once governments have acknowledged that their economic “fundamentals” are in bad shape.

There are a growing number of trends emerging from the current travails of the southern giant. The first has to do with the increasing awareness of the need for a major correction of the so-called Washington consensus of the late 1980s and early 1990s of free-market economic reforms. From the World Bank’s growing focus on social issues, inequality and institutions, to George Soros’ call for international regulation of capital flows, the mainstream of the public policy debate is shifting, slightly but surely, away from the Reagan-Thatcher-IMF paradigm of recent years. The shift is most palpable in three specific directions.

* Capital flows. Without going as far as Prime Minister Mahathir Mohamad of Malaysia and blaming speculators for devaluations and capital flight, there is a growing sense that some restriction on the entry of short-term, portfolio investment is probably a good idea in Latin America.

While right now no nation would attempt to dissuade capital from entering its borders, since they all need hard currency desperately, the absence of clear benefits of attracting speculative funds and the enormous damage wrought by their sudden departure are encouraging previously dogmatic governments to contemplate and design mechanisms to regulate these flows. Since it is almost impossible to do so effectively at a strictly national level, there are growing calls for regional or international schemes. It’s a timely idea.

* Taxation. Latin societies, particularly those whose public finances have been devastated by the plunge in key commodity prices--oil for Mexico, Venezuela and Ecuador; copper for Chile--are beginning to conclude that a major increase in tax take is indispensable. They are finally understanding that with tax revenues as a percentage of national income below 15%, it is impossible to provide the education, health, housing and infrastructure that modern, competitive and cohesive societies require.

Indeed, short of raising that proportion to the 25% to 30% that even the lowest-taxing industrial nations have achieved, significant improvement in living standards is a pipe dream. Just a few years ago, this argument was anathema in many quarters; today it is rapidly establishing its legitimacy.

* Social rights. There is a growing sense that in terribly unequal societies, the path of minimal universal entitlements is perhaps preferable, despite undeniable problems and costs. Establishing a basic floor of social rights that is no longer funded by payroll taxes and consequently reserved only for those with jobs, but is funded rather through a central tax fund, is seen as a first step toward broadening the struggle against poverty to one against inequality.

In the world’s most unequal region, though not its poorest, and one where inequality seems to have begun centuries ago, not just last year, such an effort appears not only worthwhile but indispensable if recent democratic gains are not to be swept away by social violence, crime and the collapse of the rule of law.

The Brazilian crisis is partly home-grown, partly rooted in the region’s endemic problems. Nations with more solid economic foundations are less vulnerable to international turbulence, but the domestic political origins of the renewed financial difficulties are common to many Latin American countries.

Mexico, Chile and Argentina may boast that they are more capable of weathering the current storm than Brazil, but if the shifts in intellectual discourse mentioned above do not soon enter the political mainstream, these countries too may be buffeted by the same combination of domestic and external turbulence.