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.