2009, down from 4. 6 percent in 2008.
With financial conditions deteriorating globally,
especially after the collapse of Lehman Brothers, the
region was hit by a sudden and quite massive reversal
in capital inflows. Growth slowed drastically as the
region suffered simultaneous shocks to the terms of
trade and to capital flows—a double blow not seen
since 1982. The party, it seems, is over. Or is it?
The Only Way To Save
Capitalism Is Capitalism
For those who consider global capitalism an unruly
beast, the current crisis is additional proof that market-friendly policies lead to disaster. Yet the alternatives have the distinction of being worse. Venezuelan
President Hugo Chávez likes to boast that his country is immune to the “capitalist crisis” because it has
embraced twenty-first century socialism. Nothing
seems further from the truth.
Rather than demonstrate the intellectual failure of
Latin American macroeconomic thinking, the crisis
of 2008–2009 confirms the value of the hard-earned
lessons of the recent past. Countries that adopted
strongly counter-cyclical policies in boom times, as
epitomized by Chile’s 7 percent of GDP fiscal surplus
in 2007, are now able to adopt expansionary fiscal and
monetary policies in order to cushion the fall.
In contrast, countries such as Venezuela that ran deficits in the boom
years by expanding government spending and cutting taxes are now forced to
contract even more, thus aggravating
the crisis’ impact on their economies.
Countries with floating exchange
rates, such as Brazil, Colombia, Chile,
Mexico, and Peru, are protected by the
automatic depreciation of their currencies, thus softening the impact on the cash flow and
the profitability of exporting and import-competing
activities. In contrast, countries that peg to the dollar, such as Argentina, Ecuador and Venezuela, are
left in the uncomfortable situation of being unable
to change relative prices with the U.S. at a time when
they are massively losing competitiveness with their
Here We Go Again Ricardo Hausmann
Argentina, in particular, seems to be repeating the
mistakes of 1999–2001, when the depreciation of the
Brazilian real coupled with U.S. dollar appreciation left
it with the wrong parity at the wrong time. The same
can be said in comparing Venezuela with Colombia.
Whereas the Bolivarian revolution pegs to the dollar,
its neighbor and second-largest trading partner floats.
It may not be a coincidence that the two Latin
American countries that have led calls for the downfall of the Bretton Woods international financial
institutions (IFIs) —Venezuela and Argentina—are
suffering more than their market-friendly neighbors.
In February 2009, Venezuela, with an international
price of oil of $40 per barrel, was running a fiscal deficit close to an unheard-of 20 percent of GDP. Argentina is facing an appreciation of its currency vis-à-vis
its neighbors, a deterioration in its terms of trade,
and the worst crop in 40 years. For a government that
has relied on extraordinary taxes on its agricultural
exports to balance its public accounts, and has prided
itself on its repeated defaults, Argentina now faces a
fiscal hole and no access to finance.
The only hope for both countries is a quick recovery of the world economy. But that, perhaps ironically, will require a stronger and more proactive role for
IFIs. This will not happen overnight. The IFI arsenal
must be restored by a recapitalization campaign, and
multilaterals must learn to operate with the speed
and flexibility to compensate quickly for the dramatic breakdown in private credit markets. In the case of
some IFIs, this shift may mean revisiting the business
model to redesign—or in some cases, resurrect—some
core institutional capabilities.
It seems likely that, as this crisis runs its course,
market-friendly Latin American nations will do much
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