The current crisis in Latin America and the international economy

Monthly Review, Feb, 1985 by Arthur MacEwan

Furthermore, even if one accepts some of the basic premises of the optimistic diagnosis, stable adjustment and a return to the status quo ante seems unlikely. Formal econometric forecasts that hold out the possibility of a return to normal after the mid-1980s contain at least two fundamental weaknesses. First, the project continuing and stable (though not necessarily rapid) economic expansion in the advanced capitalist countries. Both a projection of past experience and an appraisal of current conditions and policies make it appear unlikely that the strong upswing of 1983 and early 1984 in the United States and the recovery that seems to be fllowing in Europe will be durable. Indeed, the huge government deficits in the United States are leading some to predict reversals of policy by early 1985 and consequent sharp changes in economic conditions. Second, forecasts that discount the likehood of continuing debt crisis tend to understate the potential difficulties arising from debt problems in individual countries. Although the third world generally may have sufficient funds to meet its obligations in coming years, Argentina or Brazil or Mexico may not. Were default to occur in the case of one nation, its impact could spread--both through a shortage of liquidity in the financial system and through a political demonstration effect.

If neither financial collapse nor a return to stability in the near future appears likely, then the prognosis must be for a continuation of the crisis. Of course, since conditions in the central capitalist economies are a major cause of the crisis, generally and in Latin America, any full appraisal of the probable course of future events would require an analysis of conditions in the center. Nonetheless, within the realm of the financial problems that are centered in Latin America, several factors point toward a continuation of instability for the visible future.

First, the threat of financial collapse--the understanding that it "could happen"--makes a great deal of difference to the functioning of the international economy. Under such circumstances, interest rates rise as lenders insist upon getting a higher payment for greater risk. High interest rates tend to curtail any economic expansion that could contribute to a solution to the debtor countries' difficulties.

Second, these same conditions of uncertainty make businesses reluctant to commit themselves to long-term projects. In late 1984, for example, even as the Mexican government seemed to be having some success with its economic programs, foreign investors still did not show a willingness to return, and Mexican capital continued to flow out of the country. Without a growth of investment, there will be no new round of expansion.

Third, the austerity programs imposed on the debtor countries have the same impact as does the uncertainty. The programs force continued slump rather than expansion. Stimulatory government programs are directly curtailed in the name of eliminating inflation, and austerity programs that drastically cut back wages undermine consumer spending and assure that no stimulation will come from that quarter.