Latin America

A tradition has formed in economic thought since the 1960s in comparing two regions with similar levels of poverty and inequality. Both regions have traditionally been open to economic measures to promote growth and achieve the level of development of North America and Europe. Asia and Latin America are both regions which have suffered historical economic problems and large structural reforms, and in the 1960s were considered at the beginning of new forms of development. While many Asian countries set off to promote trade and investment and increase Foreign Direct Investment in their economies, Latin America sought to follow the trend started by Raul Prebisch, by raising tariffs and trade barriers and producing their own products internally and keeping investment inside their own individual economies. The independence of Latin America from the industrialized world would take its form in Import Substitution Industrialisation policy for the region. The exception to the rule in Asia was China. A Communist system left China locked into trade with other Communist countries and limited trade with the West. Upon the onset of problems between China and the Soviet Union in the 1970s, some moves towards greater trade with the West came after Nixon’s trip to open relations with China. Since then the progressive growth and eventual acceptance of China into the WTO has made China the world’s next Superpower, or at least the country that manufactures everything for the world’s current Superpower.

With economic progress came inequality. In Latin America economic success could always be measures by the percentage of people that benefitted or were lifted out of poverty by a boom in any of the Latin American economies. Boom and Bust cycles dominated Latin America well into the 1990s and beyond into Argentina’s financial collapse in 2001. This debate dominated the World Bank, as neo-liberal ideas were debated comparing Latin America’s failures to East Asia’s successes in the report on The East Asian Economic Miracle, giving credit to reduced barriers and increased trade as the reason for East Asia’s success. Dissent came from the head of the World Bank itself when Joseph Stiglitz published Rethinking the East Asian Miracle after the financial turmoil of many of the Asian Tigers at the time and clear collapse of Argentina later on. Equality was still an issue as 30-40% of Latin Americans remained in poverty, East Asia reorganized and China slowly started to rise as an economic giant.

Lessons learned from the World Bank’s debates and the past economic crisis in Latin America and Asia showed that fast growth often promotes cultures of decadence for those who benefit from it and marginalize other parts of a society which do not have the means to raise themselves out of poverty. Systemic poverty among rapid growth was often the result, and became entrenched in the society in the long run.

In an article this week in FT.com, China is advised by the author to take lessons from Brazil in dealing with inequality while managing an economic boom. Not until the late 1990’s did progressive governments in Brazil seek to challenge the country’s historical inequality while absorbing slow positive growth and attacking poverty in a country of over 170 million people. Brazil’s past reflected much of that of Latin America’s with short periods of growth followed by economic collapse which left the impoverished in Brazil in constant chaos. While China does have a large amount of savings as opposed to those nations in East Asia and Latin America in the 60s, poverty still must be challenged in China as not to create an underclass in society. Economic booms have always been used to justify economic policies, but in almost every case the boom eventually turns to bust as economic cycles often do. Past policies to absorb the gains of booms are not put into addressing social problems that are often historical and require time and money to resolve past the boom cycle. While China is not Brazil, these two giants could learn a lot from each other. Both economies are considered to be economic miracles in their own right, but stability and long term growth are only truly successful if it benefits all citizens to a greater degree over a long period of time. While poverty is a constant reality in all countries, the plague of poverty inherited or created can be helped by proper economic and social policy during times of prosperity. With proper economic policy, the trend of inequality with growth do not have to be the result of economic progress.

Messages of distrust between the Colombian Government and Hugo Chavez were considered no more than showboating after Hugo Chavez made headway in getting two Colombian citizens released, followed by open support for the rights of the kidnappers to be represented as a legitimate political party. Anger and frustration in Colombia which has been literally torn apart by the FARC and other rebel groups over the last 30 years put Chavez on the hit list of Colombians inside their own country and those in the Colombian Diaspora who often left their places of birth due to problems derived from the conflict in Colombia. Upon the death of Raul Reyes, one of the FARC leaders killed in a camp in Ecuador, a diplomatic scrum has begun between Ecuador, Colombia and Venezuela. Ecuador is accusing Colombia of intentional violations of their territory with the recent attack. Colombia did apologize, yet made clear their claim today of support by the Ecuadorian and Venezuelan Governments for the FARC and Colombia’s right to protect its own sovereign territory from terrorist attacks. The last piece of the drama comes with Hugo Chavez. By placing a number of heavily armed troops on its border to add flames to his theory that Colombia wishes to attack its neighbor and himself personally, an Andean War has perhaps taken its first steps. Currently, Ecuador and Colombia have removed their diplomats from each other’s embassies and have no diplomatic communication beyond Chavez’s saber rattling, or more specifically the sound of marching and the screeching of tanks surrounding the borders of Colombia on either end.

Conflict in South America has always been considered much as a Cold War between neighbors who never took actions beyond minor skirmishes. In the era of South American military governments in the 60s and 70s, many disputes over territory were the catalyst for countries like Argentina, Chile, Brazil and most everyone else purchasing some of the most advanced equipment, Exocet missiles and even in the case of Brazil, an old aircraft carrier to keep their neighbors at bay in the event of a hot conflict. Ironically, the heaviest conflict was in the early 80’s between the UK and Argentina when local unrest and economic tensions lead General Galtieri of Argentina’s military government to divert attention away from local issues by attacking a disputed territory known as the Maldives Islands/Falkland Islands. Galtieri’s strategy of conquest did nothing more than to end his own career and reduce the last of his support in Argentina to nil and deal one of the final blows to the era of South America’s military dictatorships.

In a classic sense the political fate of Chavez may come with his verbal, and now physical adoption of the dispute between Colombia and Ecuador. Along with verbal accusations of Colombia’s intention to murder him and his recent mobilsation of his armed forces, Venezuela has been investing in some very advanced and high tech weapons from the Russian army since the Presidency of Chavez began. In addition to Chavez’s rearming of Venezuela, his support has also started to wane with some Venezuelan groups as seen in his loss in a referendum to increase his powers under the Venezuelan constitution. Some may see Chavez as taking the strategy of General Galtieri in assuming a conflict, but the will of the Venezuelan people to give their children and blood on behalf of the FARC and Chavez is likely not as strong as Colombia’s wish to turn itself back into one of the most promising countries in the region, free of terror, economic strife and threats from their borders. Support from the US may balance out Colombia’s military capabilities as well, as its Air Force and Army are equipped for conflict with rebels and AK-47’s and not new Venezuelan Sukhoi fighters or armored tanks.

Another territory in the world this week that seems to have similar problems as Colombia are Israel and the Palestinian Territories. Like Colombia, conflicts from outside its border are influencing the lives of its people. As well, parts of the country considered to be under the right of control of the government and people are in constant civil distress. Another similarity is that no one knows how to solve the problems, but everyone can agree that aggressive influences from outside the border will do nothing more than keep Israel, the Palestinian people and Colombians in constant conflict at the behest of a Chavez or similar malcontent in their respective regions. Colombia has always had unfortunate experiences with rebels inside its territory, but hardly anyone can doubt the impatience the Colombian Government will have with a full attack from its neighbors who are seen as supporting rebels and making the Andean region into the next Middle East.

I was lucky to be able to see a lecture at the LSE by the newly minted head of Argentina’s national bank after the first President Kirchner came into power. This was, as many know after a series of failed Presidents in a record amount of time and a massive financial collapse of Argentina’s economy. He was an impressive speaker, and basically said he was the new guy, he was sorry about what happened with the old guy, and that fiscal responsibility, proper market regulations, and slow and progressive growth was the only way to cure burst economic bubbles and ultra liquid financial markets.

In an op-ed by Paul Krugman of IHT.com he seeks out to compare the recent financial sub prime mortgage crisis to failed economies of Latin America pre-2001. While the United States definitely has come into financial crisis because of immoral lending practices, the foundations of the US economy are still strong and has a history of reforming market practices through economic policy and legal enforcement.

While many industries in the US are strong, the comparison between Latin America and the US is like comparing Bananas to Big Macs. In Latin America the crisis of Mexico, Brazil and Argentina were often not just connected to one product market or one industry, but was a result of hyper investment in newly promoted ventures in those countries, a response to state run industries being sold off while they still could produce a profit for in debt governments, and investment regulations which did not regulate hyper liquid investments which could leave the economy with one click of a mouse. While the US also has a massive amount of debt, perhaps one third of it via China, payment of debt was never and is not currently regulated by outside forces such as the World Bank and IMF. Outside debt lending obligations often put many Latin American countries into situations where debt payments pushed more of their population into poverty. At crisis levels of around 30-40% under the poverty line on average in the region, the effect on a country like Argentina is one of a Great Depression, not merely a Great Recession.

In Latin America the economic crisis often resulted in complete systems and economies collapsing due to market bubbles bursting in the Developed world. While the US dollar is down against many currencies, it also allows for US made good to become more attractive to local consumers and leaves foreign imports at a competitive disadvantage. There is also the fact that many trading partners of the US kept their currencies artificially low in order to sell more to the US. The current accusation is that China is currently doing this, and not more than three years ago it was known that Canada’s 64 cents US to one Canadian dollar was so low to help exporters to the US even though the value was likely 74 cents at the time. While Latin American countries such as Mexico, Chile and Brazil are now seen as surviving the current global economic storm, the US will also do so as they all currently have decent regulations and good economic fundamentals.

The issue with the US sub prime mortgage market and the new complexities of the banking system in recent years will effect the US greatly, but mostly it is a massive shot against the world banking markets and that industry. This has come about due to regulations which are not in time with the current markets, but also is a result of immoral, irresponsible and illegal business practices taking place in that industry which create overvalued products and economic bubbles. What the United States has in its favour however is the willingness and ability to prosecute those in any industry who seeks to hurt US markets and the economy with illegal business practices. While not always prosecuted in Latin America or worldwide, corruption and illegalities in commerce in the US is becoming more difficult as competition authorities and regulators crack down on actions which hurt the US and world economy. With actions against Enron, Microsoft, Conrad Black and others, the US economy has the ability to never enter a Peso Crisis or another Depression as their fundamentals will often adjust with haste to address any minor crisis in the US Economy. This does not mean the US will do well, but it does show that it can avoid hyper-inflation and market crashes which has plagued Latin America since the 1960s. Let us hope this becomes the case in most of Latin America as well.