Americas Quarterly - Spring 2009

is doomed to instability feel vindicated by recent events. The indefensible excesses of Wall Street and the City of London appear to have added weight to the claims of those in the region who decry the free-market economics, deregulation and political liberalism of the Washington Consensus, and who argue that Latin America’s embrace of free trade and globalization was all a huge mistake.

Policies that seemed to be part of Latin America’s bad old past are being revived in surprising places. The British government has nationalized several banks. Barack Obama may yet do the same in the United States. To the casual observer all this might seem to vindicate Cristina Fernández de Kirchner’s takeover of Argentina’s private pension funds last November. And even as they warn against the risks of protectionism, politicians in rich countries are bailing out carmakers and other manufacturers with subsidies skewed toward safeguarding jobs at home.

There is bound to be a policy rethink in Latin America too.

Dear Prudence

Yet there are reasons to believe that the region will not see a generalized turn against the market economy. Latin American countries that have followed prudent policies and have tried to diversify their economies are better placed to weather the storm than those, such as Venezuela and Argentina, that have largely squandered their commodity windfalls and spurned private enterprise. Thanks to more responsible fiscal and monetary policies, several governments in the region—notably Chile, Mexico, Peru, and Brazil— have been able to mitigate the recessionary tide with countercyclical policies.

Independent central banks have cut interest

rates as falling commodity prices have translated into falling inflation. Lower levels of public debt have allowed deficit spending without alarming bond markets. All this forms a sharp contrast with previous recessions in which governments were obliged to cut spending (or aggravate inflation).

Chile is the strongest example. As in

1929, its small open economy is vulnerable to the price of copper (which fell by almost two-thirds from its peak of mid-2008). But because of a rigorous fiscal rule which requires the government to save most of the windfall when the copper price rises above its long-term average, Chile was able to launch a fiscal stimulus worth 2. 7 percent of GDP in January. It has plenty of scope for further measures: it has accumulated $20.3 billion (about 12 percent of GDP) in an offshore sovereign wealth fund that it can now spend. Much of the stimulus involves immediate spending on housing for poorer Chileans and maintaining rural roads, which will generate tens of thousands of jobs.

But to mitigate the impact of recession is not necessarily to prevent it. Despite similar measures, Mexico is especially vulnerable because its economy is so closely linked to slumping manufacturing industry north of the border. It is already in a recession that may not be brief. Falling remittances and fewer tourists are adding to the problems in Mexico, as well as in Central America and the Caribbean. Brazil should fare less badly, because its economy is less open and its trade more geographically diverse. The same goes for Peru.

Even at his moment of apparent ideological triumph, it is Hugo Chávez’ Venezuela that may be the region’s biggest victim of world recession. Chávez’ “twenty-first century socialism” was a creation of the extraordinary rise in the oil price over the decade until July 2008. Economic growth and poverty reduction in Venezuela owe everything to the massive oilfired rise in public spending. The precipitate fall in the oil price has put an end to that. Chávez, like Chile, has saved some of the windfall in development funds. The difference is that Venezuelans have not been told how much of their money these funds contain.