Financial & Economic Crisis hits Latin America

It was the turn of Latin America's stock market to take a nose dive this Wednesday - "Dark day for faltering LatAm stocks" . In Chile they dropped 6.3%, in Mexico by 7 %, in Brazil by 10%, and last but by no means least Argentina, where they dropped by 18%.

The magnitude of the drop in Argentina was provoked when President Cristina Fernandez announced plans to nationalise the private pension funds.

She said the nationalisation would protect retirement funds from the global financial crisis, but analysts said the move would drain company access to private capital. Argentina's Congress is expected to approve the proposal within weeks. BBC News: "Turmoil in Latin American Markets".

Privare investors have been upin arms, not least a Merrill Lynch executive who stated bluntly that his bank had now written off any investment plans in Argentina "for at least the next half decade." - AFP, "Latin America in Jaws of Global Crisis"

As I mentioned in an earlier post - "Global Depression: So What About Latin America" - much of the worry in Latin America on the back of the current world financial crisis, stems not so much from the so-called credit crunch, but rather the sharp recession that's meant to hit the world's major markets in the Northern hemisphere, and the decline in commodity prices that it will entail.

Correspondents say international demand is declining for many of Latin America's commodity exports, including oil, copper, iron ore and soy as global growth slows amid the current financial global crisis BBC News, "Turmoil in Latin American Markets".

Whilst demand may be faltering in the US and Europe, demand from the likes of China is still bouyant.

This is not to say that all is as gloomy as one could fear. Precious global recessions have tended to hit Latin America harder than most. The analogy of "when the US economy sneezes, the rest of the world cathces a cold, but Latin America catches phnuemonia" having proven to be quite fitting in th past. This time round things may be slightly different. According to former Mexican foreign minister, Jorge Castañeda:

the region would be largely impervious to the recent crisis. Mexico, Chile, Brazil and Uruguay should manage just fine, emerging with only bruises and scrapes, he argued. Colombia and Peru would weather the storm, though suffering greater harm. But he warned of "severe damage" for Venezuela, Bolivia, Ecuador, Central America and the Caribbean. BBC News, "Brazil squares up to an economic storm"

The severe damage awaiting Venezuela has much to do with the sudden drop in oil prices. Overdependent on oil revenues, Venezuela's extensive public spending could be seriouly affected if oil prices continue on this downward trend. It is therefore no surprise that Venezuela qill be pushing for oil output cuts at this week's hastily convened OPEC gathering in Vienna.

Venezuelan Oil Minister Rafael D. Ramirez said the OPEC members "have to take some action now, now," adding that Friday's meeting will reach "consensus to take a very, very, very fast action." Xinhua, "OPEC members divided over oilput cut"

Last week I attended a public meeting at the Houses of Parliament here in London, where Venezuelan ambassador to the UK, Samuel Moncada, whilst almost gleeful in his depiction of the collapse of the world's financial system, had to admit that Venezuela faced difficult times ahead. So what about all the windfall funds from record-high oil prices that the Venezuelan had been meant to have store away for precisely those times when the oil prices were on the fall? Well, according to the ambassador this would only cover Venezuela's problems for a mere 2-3 months.

Global Depression: So What about Latin America?

In the midst of the financial turmoil that has swept ominously across North America and Europe, news how this may affect Latin American economies – traditionally so dependent upon the state of the U.S economy – has been somewhat hard to come by in the British press.

Nevertheless, last week’s The Economist did have an article highlighting the numerous pessimistic scenarios that may be played out in Latin America as a result of the financial turmoil in the world’s credit markets – “Keeping their fingers crossed”. True to its right-of-centre, pro-market editorial line it predicted that the “badly behaved” economies (i.e. overly statist and anti-neoliberal), such as those in Venezuela and Argentina, are the one that are most vulnerable.

Their vulnerability stems not so much from the lack of credit available to them, but their overreliance on commodities: Venezuela on oil, Argentina on agricultural produce. The belief being that a downturn in the world economy would naturally lead to a slump in commodity prices.

Other Latin American countries look set to be hit by a decline in commodity prices as they have fallen to the age-old temptation of overspending when times have been good and consequently saving little for when times worsen. Bucking the trend, as is so often the case when it comes to perceived sound economic management, is Chile where its copper stabilization fund should insolate the economy from a slump in copper prices.

Fortunately for the likes of Brazil, Colombia and Peru – “the well-behaved countries” in The Economist’s tinted eyes – their trade surpluses and balanced budgets, records of year-on-year growth, and lack of dependency on the increasingly limited sources of foreign credit should offer their respective economies the means to avoid the recession that has so often followed in the wake of U.S. downturns.

But all isn’t rosy in the case of Mexico, and indeed with most Central American and Caribbean nations. By remaining so dependent on US markets and remittances from relatives working in the US, the severity of the economic crisis facing the US will have the inevitable effect of casting a long murky shadow over their economies. Perhaps this will nail home the argument that despite the lure of the US market Latin American nations can only benefit from diversifying trading partners, increasing regional trade and so on.

In the aftermath of all this financial mess it seems likely – especially if the Democrats retake the White House – that all proposed free trade agreements with Latin America are to be put firmly on hold; furthering the need for Latin America to look towards China and the rest of Asia.

Despite the relative upbeat tones, The Economist makes sure to hammer home that it will be the Bolivarian following of Chavéz et al and their economic populist policies that have most to fear from the global credit crunch.

Putting Those 1978 Ghosts to Bed

Whilst the Spaniards were ending 44 years of hurt with their victory over Germany in the Euro 2008 final this past Sunday, a different kind of ‘hurt’ was being put to bed in Buenos Aires.

30 years had passed since the Argentine national team lifted their first ever World Cup trophy. It was a tournament they hosted and should have gone down as a glorified moment in Argentine folklore. However it remains forever blighted by the dark military dictatorship and the so-called “Dirty War” it inflicted upon its people. The way in which the regime purposefully used the staging of the World Cup as propaganda tool, à la Hitler’s 1936 Olympics, and as to distract a population’s worries about the continuous desaparecidos has cast a black shadow over what was at the time Argentina’s greatest ever sporting triumph. Moreover, though slight in comparison, the military have been accused of bribing the Peruvian national side to lose heavily to Argentina, when the Argentines needed at least a 4-0 victory to guarantee their place in the final (they beat Peru 6-0).


This Sunday ex-members of the World Cup winning team, human rights activists took part in a memorial match - "La otra final: el partido por la vida y los derechos humanos" - for the 30,000 Argentines who lost their lives during this dark chapter of Argentine history. Many of the ex-players had wanted to put to bed once and for all that they in someway had been used by the military regime. As young football players they had little idea of the horrors being perpetrated by their leaders and little understanding of how their success was being manipulated to make a population turn a blind eye towards the atrocities.

Perhaps most chilling of all is the stories of the imprisoned opponents in the military detention and torture that was situated only a short distance from the main stadium in Buenos Aires during the World Cup. Here prisoners told how, chained to their beds, they could hear their guards listening to the game on the radio and the crowds celebrate as the goals went in. The 1980 Nobel Peace Prize Winner, Adolfo Pérez Esquivel, who was imprisoned at the time recalls how

En la prisión, cuando ponían el partido en los altoparlantes, era muy contradictorio. Porque los ejecutores, aquellos que nos torturaban, y nosotros, las víctimas, gritábamos juntos '¡Gol de Argentina!'. Y sabemos que sacaban afuera a prisioneros cuando había distracciones por la Copa Mundial y les disparaban (source BBC Mundo "A 30 años de un triunfo empañado" 30/06/2008)

When they played a game over the speakers, it was very contradictory - because the executioners, those who tortured us, and us the victims both cried 'Goal Argentina!' And we know that they took prisoners out when there were distractions caused by the World Cup and shot them (source BBC News, "Football match evokes Dirty War", 30/06/2008)

Thankfully for Argentine and Argentine football only a few years would have to pass before the dictatorship crumbled and Maradona could restore national pride with the his glorious one-man show in the 1986 World Cup in Mexico.

Reflections on a Forgotten Continet

Michael Reid the author of “Reflections on a Forgotten Continent” passed by our Institute the other day to give an informal talk on his book. A book that tries to go beyond the headlines (e.g. Chavez’s fiery rhetoric, the home of the illicit drug trade etc.) and paint a picture of Latin America that is far rosier than would otherwise be imagined.

Latin America is, as his title suggests, the “Forgotten Continent”. Unable to attract the same levels of attention as other region of the world, it persistently slips under our - not as poor as Africa, not as tumultuous and oil-rich as the Middle East nor home to booming economies such as India and China. What Michael Reid wants to point out is that Latin America deserves much greater attention. It’s a crucial laboratory for capitalist democracies, the success of which is important for the consolidation of other capitalist democracies around the world.

Despite all the doom and gloom that seems to come out of Latin America over the last 25 years - debt crises, economic stagnation, growing inequality, the return of the populist demagogue – Latin America is finding its feet. Democracy is becoming increasingly consolidated and many of the major nations of the region (Chile, Brazil and Mexico) are going through periods of substantial economic growth. And this growth is supposedly being used to tackle the immense levels of inequality.

I couldn’t help but feel as if he was unduly optimistic about the region – something he acknowledges. Perhaps he was too comfortable, for my liking, to fall into line with the post-Washington consensus view of the region. i.e. that the initial Washington Consensus reforms were implemented badly, or not at all, and should be supplemented with more institutional reform and token social justice measures. Yes, many Latin American countries are improving, but is this on the basis of the post-Washington consensus reforms, or merely because the world economy is booming. What happens when we reach the top of the current economic business cycle and economies start going slightly pear-shaped? Have the likes of Brazil and Mexico done enough to better social welfare and the likes so that when the tough times come, the tough don’t cut and run and leave the poor to bear the brunt of a crisis (as happened with the debt crisis).

Anyway that’s me just being overly pessimistic. Latin America has been on the up in the recent years, but my structuralist/dependency theory leanings has me worrying that the global economy will always eventually undermine the efforts of Latin American nations to seek out a better lot for themselves in the world economic order.

His book is probably a good read for anyone interested, but not overly familiar with Latin America. For those who already know the ins and outs of present day in Latin America it probably won’t shed too much light on the region. It’s possibly overly broad and simplistic given that it wants to cover so many issues, in so many countries, within the boundaries of a single book.

But who am I to say? Here’s a glowing review of the book from the New York Times.