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Issue 32, November 1998

Neo-liberal model dies

LATIN AMERICA was heralded as the 'darling' of 'neo-liberal' policies during the 1990s. Now the continent is once again poised to plunge into turmoil, the latest region to be hit by the economic tornado that began in Asia.

A downturn in Latin America will have a critical impact on the world economy and in particular the USA, 40% of whose exports go south of the Rio Grande. Even before the Asian crisis hit the region, Cepal (Economic Commission for Latin America and the Caribbean) was revising down the regional growth rate, from 4.3% in 1997, to 3% for 1998. Now the region is threatened with a recession or slump.

Firstly Colombia and then Ecuador were forced to devalue their currency, and Venezuela is set to follow. So far the crisis has mainly been manifested on the region's financial markets - stock markets have fallen by 60% in dollar terms since July. But it is only a matter of time before the real economy is hit, with devastating consequences for the working and middle classes.

A crucial factor is the crisis now unfolding in Brazil, which accounts for 45% of the region's output. Cardoso's government is currently fighting a loosing battle to avoid devaluing the Brazilian currency, the Real, which according to most economists is currently over-valued by between 20-30%. The government spent US$12 billion defending the Real in August, leaving a total reserve of only US$50 billion.

Despite attempts to cut public expenditure, the fiscal deficit still stands at 7% of GDP. Reversing the influx of foreign capital that has taken place since the late 1980s and 1990s, there has been a flight of capital from Brazil - in September, a staggering US$1 billion per day! This is despite the fact that the government has raised interest rates to nearly 50% to stem the flood. A similar flight of capital from Mexico in 1994 pushed that country into its deepest recession for 50 years. The situation in Brazil is potentially worse, given the deepening international crisis. Brazil once again faces the prospect of a slump and spiraling inflation when the currency is eventually devalued.

With unemployment in the industrial heartland of Sao Paulo already standing at nearly 20%, the Cardoso 'miracle' is over. However, it may take a few months for this to become clear to the majority of Brazilian voters. Unfortunately, with no clear socialist alternative being offered by Lula, the Workers' Party (PT) candidate, this may enable Cardoso to win another victory in October's presidential elections.

  Nevertheless, the developing crisis in Brazil will have devastating effects throughout the region. Argentina, a key trading partner with Brazil, will also be dragged further into the crisis. The Merval stock index is already down 53% since January. The threat of a new Latin American debt crisis is clear. Argentina will have to use 33% of its existing reserves to pay the interest alone on its foreign debt in 1999. A regional debt default would devastate the world banking system, especially US banks - half of their banking credits go to Latin America.

The sharp fall in the price of oil has impacted on the economies of Venezuela, Mexico and Peru. Venezuela has been particularly hard hit as oil is its main export earner. The government has spent US$5 billion of its reserves to cover its loss of tax revenues from oil. It will probably be forced to devalue the currency in the next few weeks, despite raising commercial interest rates to 70%. The Bolivar has already fallen 14% this year.

Venezuela has already entered recession, and thousands of workers have been laid-off as a result of government cuts. Elections are due later this year and the lead in the polls at present is held by the populist presidential candidate, Hugo Chavez, who has threatened to halt some of the foreign debt repayments and to reverse the economic 'reforms of neo-liberalism'. Chavez attempted to overthrow the government in 1994 at the head of an unsuccessful military coup.

Although one of the smallest regional economies, Chile is very exposed to the crisis. The grandiose hopes of Chile's rulers that this 'Latin American Tiger' was about to 'join the first world' are about to be shattered. Chile's capitalists had switched exports away from Latin America and the USA and turned to Asia for new markets for its fruit, wine and fish products etc - 30% of its exports were destined for Asia, but these are now drying up. There is also a fall in the price of copper, which accounts for 40% of exports. Now Chile's rulers are warning of impending recession, rising unemployment and cuts.

Tony Saunois

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