Americas Quarterly - Spring 2009

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

floating neighbors.

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.