Economic Policy Changes With New Latin American Leaders
International Herald Tribune, December 28, 2006
Flammen (Sweden), January 11, 2007
Informationsbrief Weltwirtschaft & Entwicklung (Germany), January 2007
A new wave of Latin American leaders is changing the face of the region, and its relations with the United States, multilateral institutions, international financial markets, and foreign investors. While this is often seen here in political terms – the rise of "populism" or alleged "anti-Americanism," much can be explained by looking at the economics of these changes.
Rafael Correa, Ecuador's newly elected president, is a case in point. Last week Correa sent the country's bond markets tumbling by announcing that he would seek to restructure Ecuador's foreign debt. He is looking toward a 75 percent debt reduction, and will use the savings on debt service to increase social spending.
Correa, who got his Ph.D. in economics at the University of Illinois in Urbana, understands very well that foreign capital can, in some circumstances, contribute to development.
But when a country is borrowing simply to pay off debt, then it may make more sense to clear some debt off the books and start over – just as an individual does when he or she declares bankruptcy in the United States.
Argentina defaulted on its debt in December 2001. The government drove a hard bargain with its foreign creditors and with the IMF, which wanted the government to pay more to the defaulted bondholders and to follow more orthodox macroeconomic policy prescriptions. The Argentines were proved right. The economy shrank for only about three months after the default; it has since grown at an annual rate of more than 8 percent, pulling more than 8 million people out of poverty in a country of 36 million.
Argentina's President Nestor Kirchner has pursued these policies rather quietly and outside of the international spotlight. But his leadership of Argentina out of its depression (1998-2002) is comparable to that of President Franklin D. Roosevelt in our own Great Depression of the 1930s. Like Roosevelt, he had to reject the advice of the majority of the economics profession (Roosevelt did this even before Keynes had published his General Theory), stand up to powerful interests (foreign bondholders and utility companies, the IMF and World Bank), and do what was best for the country. A stable and competitive exchange rate, reasonable interest rates, and the use of unorthodox measures to control inflation were some of the policies that the country needed to produce this remarkable economic recovery that is now approaching five years duration.
Venezuela's Hugo Chavez is a more controversial leader, but his government's economic policies are clearly working. This year (2006) will be the second in a row at 10 percent growth, the highest in the region, after a 17.8 percent jump in 2004. To put the country on a solid growth path, the government had to get control over the national oil company (PDVSA), which is the source of nearly half the government's revenues and 80 percent of the country's export earnings. The opposition resisted fiercely, with a U.S.-backed military coup and an oil strike that devastated the economy in 2002-2003. But since the government prevailed it has been able to assure not only rapid growth but vastly expanded social programs for the poor, including free health care, subsidized food, and increased access to education. It is often written that this is just an oil boom that will collapse when oil prices drop, but the Chavez government has budgeted conservatively for oil prices that were about half of what has materialized.
The governments of Argentina and Venezuela are transforming not only their own countries but also the region, by finally breaking the IMF's control over credit. Just a few years ago, a government that didn't agree to IMF conditions would find itself denied credit not only from the Fund but from the much larger World Bank, Inter-American Development Bank, G-7 governments and even the private sector. This was the major instrument of Washington's influence in the region, and had a heavy hand in bringing about the economic reforms of the last 25 years: higher interest rates, tighter budgets, privatization, indiscriminate liberalization of international trade and capital flows, and the abandonment of development strategies. Venezuela has now provided an alternative source of credit with no economic policy strings attached, to Argentina, Bolivia, Ecuador, and other countries. The dissolution of the IMF's "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 can say no to the "Washington Consensus," capture billions of dollars of additional revenues from resources like natural gas, and use them to deliver on their promises for a New Deal for the region's poor. The region's first indigenous president, Evo Morales, as he completes his first year in office, is also making history.
President Lula da Silva of Brazil has continued the neoliberal policies (and resultant sluggish economic growth) of his predecessor. But he has been a team player internationally, forging a close alliance with Argentina and Venezuela that has buried Washington's proposed "Free Trade Area of the Americas," and pursuing increased regional economic integration. Latin America has clearly taken a turn in a new economic direction, and it looks to be overwhelmingly positive. After 26 years of the slowest economic growth in more than a century, it would be difficult for the new leaders to do worse.
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research, in Washington, DC.