Sebastián Edwards, a Professor of Economics at UCLA’s Anderson Graduate School of Management, was the World Bank’s Chief Economist for Latin America from 1993-96.
By Sebastián Edwards
LOS ANGELES – A few weeks ago, the world was on the edge of disaster. Fortunately, the decisive actions taken by the advanced countries’ monetary authorities – including provision of unprecedented amounts of liquidity – prevented a complete financial meltdown. The world has avoided the “Argentinization” of the international financial system.
What has not been avoided is a recession that will be deep, long, and global. In the coming months, nearly every region in the world will experience economic deceleration, with exports declining and unemployment increasing.
Recent events have disproved the notion that emerging nations had “decoupled” themselves from the advanced economies. The facts have shown the opposite to be true. Most emerging economies are still fragile and affected by what goes on in the advanced countries. The effects of this recession will be particularly severe in Latin America.
Brazil and Mexico have been the hardest hit so far, to the point that the value of their firms has fallen by approximately 50%. The situation in these countries is so serious that a few days ago the United States granted them credit for up to $60 billion.
But Brazil and Mexico are not the only ones hit by financial volatility: Chile’s currency has lost a third of its value, in Peru the cost of external financing has soared, and in Argentina the government has had to resort to extreme measures – such as the nationalization of the pension system – in order to avert an imminent fiscal calamity.
Indeed, with the recession possibly lasting 18 months or more – which would make it the longest since World War II – Argentina will be one of the hardest hit. Its external financing needs are enormous, and its exports will fall sharply. But politics will also play a role in Argentina’s economic distress.
The administration of President Cristina Fernández de Kirchner generates a great deal of distrust among local and foreign investors, who fear arbitrary measures. The recent decision of Standard and Poor’s to lower Argentina’s rating is fully justified and reflects many analysts’ fear that Argentina will again default on its public debt.
Mexico and Central America will also suffer from the long recession. For many years, their economic fate has been closely tied to that of the US. These ties increased with the signing of bilateral free-trade treaties with the US, so there is a good chance that they could experience negative growth in 2009 and, perhaps, in the first half of 2010, as the US goes into recession.
Less affected by the financial crisis and the US recession will be those that have developed with an eye toward Asia nations – particularly Chile, Colombia, and Peru –, and have accumulated resources to meet unexpected financial storms. They will be quicker to recover their levels of employment.
But the most important question is what will happen in Brazil, Latin America’s giant. Over the past few years, analysts and investors around the world began to see Brazil as an economic power in the making. There was mention of a miracle, and many argued that Brazil would grow spectacularly like China and India, and no longer be the eternal country of “the future.” Unfortunately, everything suggests that this was an illusion based on wishful thinking.
Brazil’s boom of the past few years stood on an incredibly weak foundation. President Luiz Inácio Lula da Silva did indeed decide to avoid the rampant populism of Hugo Chávez of Venezuela, and successfully tackled inflation. But it takes more than that to become a great economic power.
What Lula did was simply to decide that Brazil would be a “normal” country. But more than controlled inflation is needed to create a robust economy with a high and sustainable growth rate. Agility, dynamism, productivity, and economic policies that promote efficiency and enterprise are required.
As many studies have shown, Brazil has not been able – or has not wanted – to adopt the modernizing reforms needed to promote a productivity boom. Brazil is still an enormously bureaucratic country, with an educational system in crisis, very high taxes, mediocre infrastructure, impediments to the creation of businesses, and a high level of corruption.
It is sad but true: in recent years Brazil did not opt for modernization and efficiency and will have to pay the consequences during the difficult years ahead.
This article was received from Project Syndicate, an international not-for-profit association of newspapers dedicated to hosting a global debate on the key issues shaping our world.
This very same crisis that has befallen the USA and the rest of the world was orchastrated against Argentina and Mexico by the very same investment banks that have now been left standing and their derivitive traders, sending the countries monetary system plunging and causing Argentina to default.
Argentina was the closest thing to a European country in Latin America, thousands of Nazi war criminals found safe refuge there, facilitated by the Vatican and the USA. There is still a large German community living there. So it is Argintina instead of Brazil, that should have been the economic giant in the region if not for the derivitive trading activity of the bankers.
I do believe that the reason why Brazil has shunned total modernization is because of the population that must be kept employed. One of the setbacks of modernization is the need for less manpower.
Many of the worlds motor companies including those in Japan and the USA, have full blown factories and plants in Brazil. Total modernization, means total automation and mechanization, which translates to less people employment.
I saw a picture of sugarcane harvesting in Brazil for the purpose of producing ethanol, I counted 32 rice combine size harvesters in a single row, ripping through a cane field so large you could fix the entire population of Guyana in it, so when these western experts talk about modernization, they are talking relative to western standards.
Japan can afford total modernization because it is an island with just so much people. China on the other hand with all of its capacity to produce, is done by a worker intensive system.
Modernization is part of what killed industry in America, since they were run by corporations, which were given all the rights of a human person, but without a human heart and soul, whose sole purpose is ever increasing profits for the shareholders, therefore robotic and computerized everything was a more viable option over people.
That is why I am convinced that muscle power and horse drawn mechanization, is the answer to Guyana’s agricultural development, we have lots of it and cheap, in a couple of years time we can plow up the entire length and breadth of Guyana, with the kind of intensity, that would force those alarmist tree huggers to want to bury us with their carbon credit dollars.
Joe.