the destination of choice for investments in these
Alas, to apply the words of Brazilian samba composer Vinicius de Morais: “Tristeza não tem fim, feli-cidade sim.” (Sadness has no end, but happiness
certainly does.) Just as Latin America was getting
used to growth rates that topped 5 percent, the music
stopped abruptly in the fourth quarter of 2008. The
fabled decoupling disappeared and the so-called commodity super-cycle shrunk super-quickly.
Can Latin America, and the world, recover momentum? The answer is yes—but only by turning to the
international financial institutions that have been
largely ignored in the run-up to the present crisis. A
look at Latin America’s own turbulent economic history over the past decades can help to explain why.
More Things Change,
More They… Never Mind
In the mid 1970s, skyrocketing commodity prices
made Latin America a preferred destination for the
ample international liquidity that Middle Eastern
petrodollars and lax U.S. monetary policy funneled
toward financial institutions. That ended, however,
in 1982, with a debt crisis caused by a sudden cutback in global liquidity, as the U.S. tried to contain
rampant inflation by slamming on the brakes of its
It took the better part of the 1980s—the so-called
Lost Decade—to arrive at a new policy consensus: fiscal policy needed to become more austere and sustainable; financial systems needed to be liberalized and
reformed; trade had to be opened up; and state-owned
enterprises needed to be privatized. This agenda,
together with the Brady Plan, was supposed to provide
a way out of the debt crisis and revive growth.
And so it did—for a while. The courageous
market-oriented reforms enacted in countries like
Ricardo Hausmann is Director of Harvard
University’s Center for International Development and
Professor of the Practice of Economic Development
at the John F. Kennedy School of Government.
Argentina, Mexico, Colombia, Peru, Uruguay, and Venezuela fueled a boomlet in the early 1990s—only to
collapse in late 1994 with the Tequila Crisis. In hindsight, the growth seemed less a product of reform
than of the temporary upsurge in short-term capital
inflows brought about by the easing of Washington
monetary policy during the 1990–92 U. S. recession. As
soon as the U.S. started to raise interest rates in 1994,
international liquidity tightened, and the region fell
into currency and banking crises.
The boom-bust cycle continued through the early
years of this century. A wobbly recovery during 1996
and 1997 was followed by another commodity price
collapse in 1998. Between 1998 and 2002, which some
refer to as the “lost half-decade,” the region was beset
by a sequence of crises brought on once again by the
drying-up of capital flows that occurred after the Russian 1998 crisis.
Still, after 2003, there was reason to believe that
this time it really would be different. As the region
started to run hefty current account surpluses, fueled
by demand from China and India, Latin American
countries seemed finally strong enough to finance
their own market-led growth.
A small but significant number of countries used
the terms-of-trade improvement of 2004–2008 to reassert state-led approaches and nationalize industries
ranging from oil and gas to cement, steel, telecoms,
pension funds, and banks. But most of the region’s
countries used the good times to deepen their commitment to market-friendly approaches. Even as the
U. S. economy got into trouble in the summer of 2007,
the region kept moving ahead confidently.
Then, in the summer of 2008, terms of trade collapsed. As the global economy slowed down, the
commodity price bubbles of 2007 burst. Oil, copper,
soy beans, iron ore, steel, and rice fell to 2004 levels.
Countries such as Argentina, Ecuador and Venezuela
saw the yield on their bonds move above 20 percent,
indicating an imminent probability of default. The
best Latin American corporations from the best countries in the region lost access to international finance.
Floating currencies such as the Brazilian real, and the
Chilean, Colombian and Mexican pesos depreciated
by over 40 percent. In early 2009, the IMF lowered its
projected growth for Latin America to 1. 1 percent for
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