South America Unites Against “Irresponsible Debtors” in the North

Rio de Janeiro – Default, insolvency, fiscal irresponsibility, debt crisis and similar terms form part of the vocabulary used to describe countries in the developing South in the 1980s and 1990s. A decade later, the world seems to have turned upside down.

The “irresponsible debtors” are now in the industrialised North, and the countries of South America, victims of the “lost decade” of the 1980s and the subsequent financial crises, are now working hard to protect themselves against contagion from the crisis in the United States and Europe.

A meeting of economy ministers in Lima Thursday and Friday and another scheduled for Aug. 12 in Buenos Aires, where the ministers will be joined by central bank presidents, are being held to discuss the coordination of policies among the Union of South American Nations (UNASUR) to deal with the knock-on effects of the crisis still lingering in the developed world.

There is talk about working together to mitigate the impact. But the developing world does not have financial power, nor does it have anything like the International Monetary Fund (IMF) to impose the adoption of fiscal adjustment policies or to “aid” the rich countries, like what occurred when it was the poor countries that were insolvent.

The crisis today is universal, very different from the recessions suffered by some countries as a result of contagion from the “Mexican”, “Argentine”, “Asian” or “Turkish” crises of the 1990s.

With the recently decided budget cuts in the United States, a condition set by the Republicans to agree to raise the debt ceiling, in order to head off default, and the increasing stagnation in Europe, the impact is global, with recession or slowdowns everywhere.

Fernando Cardim, a retired Federal University of Rio de Janeiro professor, told IPS that Brazil, one of the emerging economies, is not likely to suffer much in the short term as a result of the U.S. deficit reduction package agreed on Sunday Jul. 31, which he called “a disaster, politically.” But he added that prospects for the future “are dim.”

The long-term effects are “unpredictable,” but the tendency is for things to get worse, since “the right wing in the United States could demand more and more,” such as further fiscal tightening, while Europe's crisis could spread to other countries, he said during a break at a meeting of economists.

In the case of Brazil, the effects on trade of reduced demand from the United States would be less harmful than in the past, when that country was the chief market for Brazil's exports, absorbing one-quarter of the country's sales abroad. By last year, that share had shrunk to 9.5 percent, while China's share had risen to 15.2 percent.

While Brazil has diversified its export markets, its trade deficit with the United States climbed to 7.7 billion dollars last year – due to imports of 27 billion dollars – after the country had chalked up a surplus of 9.9 billion dollars in 2006.

The losses in the U.S. market are not just quantitative but qualitative as well, because Brazil mainly exports manufactured goods to that country, while China almost exclusively buys commodities from Brazil, such as iron ore, soy and oil.

The increasing concentration of exports in mineral and agricultural commodities, a phenomenon that goes hand in hand with the process of “de-industrialisation,” is a problem facing Brazil that could be aggravated by the economic troubles in the United States and Europe.

Besides the trade surplus it achieves thanks to high commodity prices, Brazil is likely to attract greater financial flows, leading to a further overvaluation of the local currency and thus to a reduction of the weight of industry in the national economy, a loss of exports, and an increase in imports of industrial goods.

For that reason the government has cut taxes and labour costs to benefit industries that employ large numbers of workers, like the textile and footwear sectors, and the car industry – in this latter case on the condition that it increase investment in technological innovations and purchases of domestically-manufactured parts.

It has also worked to curb the influx of speculative capital by means of various short-term measures that have so far failed to curtail the overvaluation of the real, which now stands at 1.57 against the dollar, compared to 2.34 in late 2005.

But broader-reaching measures are needed to stem these flows, which do not leave loopholes like the ones adopted up to now, said Cardim, because of the possibility of a sudden bout of capital flight “that would generate panic and inflation.”

A worsening of the crisis in Europe, for example, could prompt a rapid repatriation of capital, he pointed out.

With regard to coordinated action on the part of the countries of South America, Cardim was sceptical. Interests in the region are too diverse, he noted, saying it might be more effective to agree on certain responses to the crisis with other emerging countries, like India or South Africa.

In Argentina, the impact of the U.S. fiscal tightening will likely be a result of slower global economic growth and the subsequent drop in demand, according to Enrique Aschieri with the International Society for Development.

Argentina is much less vulnerable today after running up a trade surplus in the last eight years, he told IPS. The United States is now the fourth biggest importer of goods from Argentina, after Brazil, China and Chile, in that order.

“If the crisis affects us because we can export less, like what happened in 2009, we still have a large margin for inward growth,” he said, stressing the importance of the domestic market as an alternative for warding off the effects of the crisis in the industrialised world.

But in his assessment, the U.S. debt ceiling dispute, which thrust the world into unprecedented uncertainty, “is not a real economic problem, but a political issue,” because “the United States has no problem putting a ceiling on its debt, since it becomes indebted in the same currency with which it pays,” said Aschieri.

“The underlying issue,” he said, “is a coalition that has no problem exacerbating the inequality that has been growing in the United States over the last 30 years,” he said.

Although it does not form part of the 12-member UNASUR, Mexico was invited to the ministerial meeting in Lima. The country has a unique position in Latin America, as it belongs to the North American Free Trade Agreement (NAFTA), which made it the chief victim of the 2008 financial crisis that broke out in the United States.

Mexico is already suffering from the weakness of the economic recovery in the United States and Europe, especially “in trade and national manufacturing based on U.S. demand, like the auto industry, agriculture, and maquila manufacturing (export assembly plants),” independent analyst Edgar Amador told IPS.

The government says the key to dealing with the situation lies in strengthening the domestic market. Moreover, Mexico has 132 billion dollars in foreign reserves, and has been the largest buyer of gold this year to date, according to the IMF.

“An unsettling outlook,” is how Carlos Ibarra, an economist at the private Universidad de las Américas in the southern Mexican state of Puebla, describes the fact that Mexico “has failed to maintain a fast pace of growth” after freeing up trade and “significantly increasing exports of manufactured goods” as a proportion of GDP.

In Ibarra's view, it is feasible to coordinate regional policies to stem the impact of the crisis from the North, but their effects would be marginal, especially for countries like Mexico, “because of the enormous dependence on the United States.”

UNASUR is made up of Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay and Venezuela and includes nearly 400 million people, accounting for just under 70 percent of the population of Latin America.

* With reporting by Marcela Valente (Buenos Aires) and Emilio Godoy (Mexico City).