Latin America at the Crossroads

Voces del Sur
          nro. 4

May-June 2003

Latin America at the Crossroads
by Mark Weisbrot

With all eyes focused on the war in Iraq, the U.S. press and even the foreign
policy establishment has seemingly lost interest in the political and social unrest
taking place in Latin America. Populist electoral victories beginning with Venezuela's Hugo
Chávez in 1998 and 2000, Luis Inacio Lula da Silva in Brazil (October), and Lucio

Gutierrez in Ecuador (November), have already changed the map of Latin American politics.
Even if widespread populist and anti-IMF sentiment in Argentina does not end in a
similar result there, all signs are that the revolt is spreading.

What is happening in Latin America? If we listen to extreme right-wing voices in
the United States-such as Congressman Henry Hyde, Chair of the House International
Relations Committee-a new "axis of evil"  is being created right in our own backyard. It's
headed by Brazil's Lula, Venezuela's Chávez, and of course, Fidel Castro.

From the liberal-really centrist-wing, we get bland assurances that everything
will be alright so long as Brazil and Ecuador continue to follow the advice of the U.S.
government and the financial markets. (Chávez is another story. Most liberals and
conservatives follow the State Department line and single him out for criticism.) The main
fear in both wings of U.S. policy-makers is that Latin America might reject the teachings
Washington has labored so hard to instill over the last two decades. These are policies
often described-inaccurately-as "free market" policies.

Both sides of the U.S. debate have it dead wrong. They have misunderstood the
Latin American economic crisis and its relation to current political upheaval. And
they stubbornly refuse to see that Washington has been, and continues to be, an
enormous part of the problem.

First, almost no one has been willing to acknowledge the magnitude of the
economic failure that has occurred in Latin America. This is understandable, because the
economists and policy-makers who have advocated opening up to wholesale privatization, foreign

trade and investment, and conservative-to-extremist fiscal and interest-rate policies,
have staked their careers on the belief that these policies will raise living standards.
Often this belief was based on little more than faith and oversimplified economic theory.

There was little or no empirical evidence that opening up to foreign financial flows would
increase economic growth. Rather, this a deeply held faith happens to coincide with the
interests of powerful transnational corporations and banks.

From 1980 to 2000, real (inflation-adjusted) income per person in Latin America
grew by about 7 percent over the whole period. This is the period when U.S.-led
"free-market" policies really kicked in. This period compares to a 75 percent income increase
in the previous 20 years, from 1960-1980. In other words, the region went from 20 years
of a reasonable economic growth rate to almost no growth at all. If we take into
account that the upper income groups received more than their share of what little economic
growth occurred, most people in Latin America are probably worse off than they were in
1980.

Most people do not understand how profound and unprecedented a failure this is.
In fact there is no twenty-year period in the last century, even including the Great
Depression, that registered so dismal an economic performance in Latin America. And per
capita income for the region is expected to decline even further this year.
Yet Washington insists that everyone stick with the program.

Think of what this means for Brazil: its public debt soared from 29 percent to
more than 65 percent of gross domestic product (GDP) during the eight years of the Cardoso
administration that preceded newly elected Lula. To avoid an Argentine-style
debt explosion and potential crash, they have to either lower interest rates or
restructure their debt. But the International Monetary Fund (IMF), backed by Washington, is
against both of these alternatives. So the Brazilian central bank currently has set
short-term interest rates at 26.5 percent, as compared to the U. S. Federal Reserve bank,
which has set this rate at 1.25 percent. It's not surprising the Brazilian economy is
barely growing now.

In other words, Washington is pressuring Brazil to adopt policies that are-over
the not-so-very-long-run-impossible. In the short run, they will try to squeeze as
much debt service from Brazil as possible, by having the federal government run larger
primary budget surpluses. (The primary surplus is the budget surplus not including
interest payments). But Lula won his election on a promise to restore economic growth,
increase employment, and provide food assistance to the poor. He will not be able to
fulfill those promises and keep to IMF policies at the same time.

Venezuela is a different case: it does not have a serious debt problem. The
economy is in a deep recession, with the IMF projecting a 17 percent decline in the country's
GDP this year. But the main drag on the economy is the enormous shock it took from the
63-day oil strike and business lockout in December and January, as well as the overall
political instability that has resulted from opposition attempts to topple the government.

Once again, Washington has been a major part of the problem. Top officials of
the Bush administration met in advance several times with the leaders of the failed
Venezuela coup of April 11, 2002. They welcomed the coup when it happened, and then did nothing to discourage their friends in the opposition from carrying their disastrous oil
strike to its final conclusion, even as the Bush administration was preparing to invade
Iraq and presumably wanted to have a stable supply of oil. Venezuela is the world's fifth
largest oil exporter.

What all of these countries have in common is that the majority of the people
have, through democratic elections, rejected these failed economic policies. In doing
so, they find they must now confront not only the power of their own oligarchies, but the
political and financial muscle of the United States as well.

Ironically, all of these Latin American countries have the ability, should they
so choose, to grow and prosper without any "help" from Washington or the international
financial institutions it controls, such as the IMF. This is true even for Argentina,
which has suffered through nearly five years of recession and depression due to policies
supported by the IMF. The IMF helped maintain Argentina's disastrous currency board
system-where the peso was pegged to the U.S. dollar at a one-to-one rate-advising that continued
spending cutbacks would resolve their explosive debt crisis. The crisis worsened with
every shock from the international financial system (Mexico, Asia, Russia, and Brazil from
1995-1999).

The result was an Argentine default at the end of 2001 on $95 billion of public
debt. Then, instead of offering help to get the economy back on its feet, which many
people believe is the IMF's function, the IMF strung the Argentine government along for
a year, moving the goal posts when an agreement seemed near, and making politically
impossible demands such as enormous increases in the prices charged by foreign-owned
utility companies.

Argentina began to show signs of recovery last year, and finally signed an
agreement with the IMF this past January. The country is running a large trade and current
account surplus, and therefore does not need to borrow from abroad. Ironically, the
years of recession and depression have "structurally adjusted" the economy-since imports
collapsed as the economy shrank-to the point where it no longer needs foreign financing.
And the IMF agreement provides little or no new resources-the money will be used to pay the
IMF, World Bank, and other official creditors-yet still demands fiscal and monetary
austerity from Argentina that could end the country's recent moves toward recovery.

"The international financial community wants to punish Argentina, but the
country has already been sufficiently punished," said Mario Blejer, referring to the painful
and ever-changing demands that the IMF placed on Argentina in the year of
negotiations following its 2001 debt default. And Blejer is no populist firebrand-until last
year he was head of Argentina's central bank. Before that he spent 20 years at the IMF.

But what is true for Argentina is true for Latin America as a whole: it has
already been sufficiently punished. Those who insist -from either side of Washington's narrow
political spectrum-that the people should suffer more before they can experience the
economic changes they demand, would do well to consider the warning of John F. Kennedy:
"Those who make peaceful revolution impossible will make violent revolution inevitable."

Mark Weisbrot is co-founder and co-Director of the Center for Economic and
Policy Research, in Washington DC. He has a Ph.D in economics with a specialization in
international economics and political economy, and writes a weekly column
distributed to more than 400 newspapers. He wrote "Latin America at the Crossroads" as an
original piece for AMERICAS.ORG.