Warning signs in South America

By Ruiz Pereyra Faget

The crisis which has bitten the three centers of developed capitalism, the United States, the European Union and Japan, since 2008 has begun to be felt in South America. While the impact is to be expected because there are no national shields because all economies are interrelated, economists generally agreed that the continent was better prepared in the 2000's to address it. In support of this argument is the fact of the less debt, a high growth rate, better income distribution that strengthened the domestic market and proper management of three key macroeconomic variables: fiscal deficit, current account balance and monitoring inflation.

In South America, the leading economies are Brazil and Argentina. However the growth of their production depends on exports of agricultural and mining production. Industrial development is at an intermediate stage. The Brazilian economy is the most advanced. The concern of the center-left governments that came after 2002 in both countries, was to abandon the neoliberal policies that drove the "Washington Consensus" and its trustee, the International Monetary Fund and whose main tool was the exchange rate of a currency artificially pegged to the dollar and therefore overvalued. The objective of this policy was to facilitate the entry of speculative capital attracted by high interest rates, the banking sector and the stock market, creating a great euphoria of "easy money" that charmed the middle class but that was undermining the competitiveness of exports, gradually paralyzing production and increasing unemployment, fiscal deficits and domestic and foreign debt.

The economist Luiz Bresser Pereira, has written that the developmental theory of Raul Prebisch and Celso Furtado, dominant in CEPAL (Economic Commission for Latin America and the Caribbean) in the 1960s, as an economic theory to liberate Latin America from dependence on the "core economies" lacked an analysis of the strategic role of the exchange rate. If the continent is behind in industrial development, the economies need a high exchange rate to provide an additional benefit to industry until it reaches the state of the technologically advanced industries. Today China practises this policy.

This approach will never be shared by the developed economies and their financial institutions like the IMF, which have built a model for the global economy and countries capital exporting and industrial products, and at the other extreme, countries exporting food and raw materials. The free trade promoted by the United States in Latin America, has this aim.


Brazil and Argentina, pursuing a developmental objective, did not follow the same policy towards the exchange rate. The first, under the Lula government, reconciled with the financial sector in São Paulo, designating the banker Henrique Meirelles as president of the Central Bank. This raised the basic interest rate, Selic, at a level broadly advantageous for capital inflows of all types that  overvalued the Real. The competitiveness of the industry was because speculation in the U.S. and the European Union was, at that time, gigantic. Therefore, Brazil was for several years running a large trade surplus and was able to accumulate a high amount of foreign reserves.

The situation changed with the crisis in both regions. The overwhelming flood of money released by the Federal Reserve Bank (USA) sought placement where there existed overvalued currencies and high interest rates, devaluation of the dollar and the increase of money available, which led to a critical situation in Brazil - the real strengthened further and exports began to slow down due to the contraction of the two great purchasing markets. This is the situation which president Dilma Roussef found when she took office. While Meirelles was removed and the economic team became more consistent, now with the Minister Guido Mantega with a freer hand, the change in monetary and exchange policy called for caution. It raised taxes on capital "swallows" to weaken the Real and at the same time, barriers were established on certain imports, in order to control the spending of foreign currency and simultaneously protect the domestic industry under a competitive disadvantage created by the low exchange rate.


A similar situation was found in Argentina, although the exchange rate and monetary policy has been different to that of Brazil. Since the abandonment of the fixed convertibility 1 x 1 (one dollar for one peso) in January 2002, the governments following De la Rua, considered the high exchange rate is a strategic issue as stated by Bresser. This meant a strong boost to exports. A growing accumulation of currency reserves and the retention of the high profits of exporters of soybeans, returned to the country a comfortable fiscal position which enabled it to address the most pressing aspects of social debt caused by the economic crisis of the second half of the 90s. But Argentina had an outstanding problem inherited from the end of convertibility, which was the debt to the Paris Club. Although it canceled its debt to the IMF, like Brazil, it stopped fulfilling its obligations to European lenders, and now intends to solve this. The amount of these obligations for this year are very large and, along with shrinking traditional markets and the measures taken by Brazil, the government headed by Mrs. Cristina Fernandez, has resolved extreme foreign exchange control, including imports (which require prior authorization), to strengthen the domestic industry and the domestic market.

All these measures have affected the obligations of the Treaty of Asunción which established MERCOSUR because this cannot replace the shortfall in world trade that is generating the crisis in the three poles of advanced capitalism. Neither can it replace UNASUR - South American integration - because cross-continental exchange of products is only 20% of exports and the export markets that account for the other 80% are outside the continent. Reversing this relationship is the fundamental challenge facing our continent in the coming years for which unity is necessary if we participate successfully in a world which economically and politically is being shaped in large blocks.


Uruguay, meanwhile, has a very open economy. Its domestic market is very small, agricultural production being the main provider of foreign exchange. The tax-free zones have developed industrial parks whose production is placed inside MERCOSUR. Production is subsidized with tax reduction to make it more competitive. Uruguay has also been, since 1974, as a financial center that is fed largely by black capital arising from tax evasion in production and trade within Argentina and Brazil. If we add to this the devaluation of the dollar, this explains the overvalued peso which carries the potential risk to our economy from the contraction of trade with the Euro-North American axis, as do also restrictions, for the reasons stated, that Argentina and Brazil have set in place.

 In the opening ceremony on  March20, the Assembly of the Inter-American Development Bank (IDB), held in Montevideo, with his peculiat style and language, President Mujica was graphic in describing the situation in Uruguay:

"We have a Mercosur that has its contradictions, which we respect little, and every day we make some criticism. But woe to us if it did not exist!", he stated.

"Who would we sell our little cars to? To Germany, the United States?"

"What would I say to Conaprole? (Milk industry) You have lost your main market, Brazil, because we are going to bet on the open world. Kill me!"

"The defects of Mercosur are our faults and we will fight to death, without compromise and without loosening up. (...) If we can not negotiate with dollars, we will (sic). If we have to exchange, then we shall exchange. If we have to set quotas then let us have quotas and we will tell our industry "this is the parameter that exists."

 "We do not believe that we have to fight with the rest of the world, nor do we believe in a war. But together we will build transports, we need to try to raise our energy systems together, we must gather together our universities and our research and our consciousness and our dignity as Latin Americans. We must not and we cannot give this up... "

 "Then, welcome the IDB, our IDB, here, committed to our problems, our pains, our anguish, with our limitations because a thousand times in the history of America we reason looking at the other side which turns its back on us and and today, in this globalizing world we have to build much larger things, be much more open, much more powerful to have any impact on the world to come and it is good that, with humility, the largest in Latin America understand this because they need us; in the globalised world, alone they are also nothing. That is why we are fanatics of the struggle for integration, for the creation of our America and we are not willing to abdicate this despite the great difficulties".

These words of the Uruguayan president werea strong response against the oligarchic opposition parties supporting the abandonment of MERCOSUR if differences with Argentina and Brazil are not resolved quickly, redefining the concept of "buffer state" that England assigned to Uruguay in 1820, and which was reiterated by the IMF in 1976, something that the military dictatorship adopted.

Translated by Timofei Belov


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Author`s name Timothy Bancroft-Hinchey