January 15, 2007
Altered map in Latin America: New Politicians – New Economic Policy
By Mark Weisbrot
International Herald Tribune – December 28, 2006 Flamman – January 11, 2007 Information Letter World Economy & Development – January 2007
A new generation of Latin American politicians changed the face of the region and its relationship with the United States, the multilateral institutions, international financial markets and foreign investors. This is often analyzed in political terms – as the rise of populism or an alleged “anti-Americanism”. But much can be explained if one turns to the economic side of these changes.
Rafael Correa, the newly elected president of Ecuador, is a striking example. Shortly before Christmas sparked Correa from a slump in the bond markets of the country, because he announced that he would seek a restructuring of Ecuador’s foreign debt. He advertises for a debt reduction of 75% and wants to use the savings on debt service to increase social spending. Correa, who has obtained his PhD in economics at the University of Illinois in Urbana, knows very well that foreign capital can contribute to development in certain circumstances.
Yet when a country only because debt in order to repay its debts, it makes more sense to remove some debt from the books and start fresh, as does also an individual who declares in the U.S. bankrupt.
Argentina agreed in December 2001 for insolvent. The government introduced tough negotiations with foreign creditors and the IMF, who wanted that the country pays back more to the holders of Argentine bonds and orthodox macro-economic policy concepts follows. But the Argentines were right. The economy shrank for the “default” only three months long and growing since then at an annual rate of over 8%. So already over 8 million people of the 36 million people were lifted out of poverty. Argentina’s President Nestor Kirchner has operated this policy without loud noise and without international spotlight. However, as he led Argentina out of the Depression (1998-2002), is comparable with the performance of President Franklin D. Roosevelt in our own Great Depression of the 1930s. Like Roosevelt, he had the advice of the assembled economic guild reject (Roosevelt did this even before Keynes published his “General Theory”), he had to resist powerful interests (the foreign bond holders and supply companies, the IMF and the World Bank) and do what was best for the country. A stable and competitive exchange rate, reasonable interest rates and unorthodox methods to control inflation were among the policies that took the country to obtain a remarkable economic recovery, which now lasts almost five years. Hugo Chávez
Venezuela’s Hugo Chavez is certainly controversial, but the economic policy of his government work. In 2006, a growth of 10% for the second time in succession reached, the highest in the region after it had been in 2004 a growth spurt of 17.8%. In order to put the country on a solid growth path, the government had control over the national oil company, PDVSA, winning, which is the source of almost half of government revenues and 80% of the export earnings of the country. The opposition made feverish resistance – with an attempted military coup with U.S. backing and a strike in the oil sector, which over the years had 2002/2003 a devastating economic impact. But since the government survived, she was not only able to quickly restore growth, but also greatly enhance the social programs for the poor, including free health care, subsidized food prices and increasing access to education. It is often written that this was only an oil boom that will collapse when prices fall. But the Chávez government has very conservatively calculated in their budget with oil prices and about half the planned amount of oil revenue, as were actually achieved.
The resolution of the IMF creditors cartel
The governments of Argentina and Venezuela transform not only their own countries but also the region where by they have broken the control of the IMF on the international credit system. Just a few years ago was a government that refused the terms of the IMF agreement, any credit not only fails the Fund, but also the much larger World Bank, the Inter Amerikanischene Development Bank, the G7 governments and even the private sector. That was the main instrument through which Washington in the region exerted influence, and with a heavy hand the economic reforms of the past 25 years through continued: rising interest rates, budget cuts, privatizations, indiscriminate liberalization of foreign trade and capital flows and the abandonment of development strategies in general. Venezuela offers Argentina, Bolivia, Ecuador and other countries, an alternative source of credit without economic policy conditions. The resolution of the IMF “creditors cartel” is the most important change in the international financial system since the collapse of the Bretton Woods system of fixed exchange rates in 1973.
Now even poor countries like Bolivia to say no to the “Washington Consensus”, achieving billions of dollars in additional revenue from resources such as natural gas and use them to keep their promise of a New Deal for the poor of the region. Also, the first indigenous president of the region, Evo Morales, who just completed his first year in office, history today. President Lula da Silva in Brazil, however, the neo-liberal policies of his predecessors continued (and consequently their ailing economic growth inherited). But on the international level, he played on the team, forged a close alliance with Argentina and Venezuela, from Washington’s “total American Free Trade Agreement” (FTAA) was buried in favor of growing regional integration. Latin America has taken a significant turn in a new economic direction. The image is overwhelmingly positive. After 26 years of the slowest economic growth in more than a century, it was for the new politicians but also hard to make it even worse.
Mark Weisbrot is co-director of the Center for Economic and Policy Research (CEPR) in Washington.