Latin America After The 1998 Market Tumble

Contemporary Review, July, 2000 by Joaquina Pires-O'Brien

THE onset of globalisation was a daunting time for Latin America which some countries met by forming Mercosur (see last month's issue of Contemporary Review). In the 1980s most countries were crippled by an economic depression that showed no signs of ending. The level of stagnation was such that Brazilian economists named the 1980s 'the lost decade'. The state of oblivion worsened in the months that followed the fall of the Berlin Wall, when Eastern Europe became the 'new kid on the block'. The change came after 1991, when foreign investment began to arrive on a grand scale in Mexico, Argentina, Chile and Brazil. Latin America became an 'emerging market', offering promising returns for anyone who dared to risk their money there. Mobile capital was received with open arms and was crucial in restoring optimism.

One of the consequences of the free movement of capital is that what happens in one economy may affect the others related to it. A strong framework of democratic institutions and the full control of internal finances are the only buffers against the shakes or eruptions in other markets. However, the new environment of capital and market liberalisation caught developing countries and even some industrialised ones, like the former Soviet Union, unprepared. To dive head first into globalisation without taking the trouble to put order in the house is a recipe for disaster. In 1994, Mexico was the first country in Latin America to feel the impact of a sudden withdrawal of capital. The alarm was raised in Brazil, Chile and Argentina for the threat of a rebound, which was named the 'tequila effect'. The timely intervention of the International Monetary Fund (IMF) and the United States prevented the domino-effect.

Later in 1997 the stock markets of the Far East plummeted. The problem had started in Thailand and from there it spread to South Korea and eventually reached Japan in much larger proportions. Like a plague, the crisis crawled its way into Russia, where it lingered, threatening even the strong economies of Central Europe. Analysts predicted that the next stop would be Latin America. And so it was. From June to the end of September 1998, the value of Brazilian shares dropped from $220 to $155 billion dollars, and by August Chilean shares reached the lowest values in four years. In November, over half of the money invested in Brazil was suddenly withdrawn. The Brazilian Central Bank reacted by raising interest rates. Still, in November 1998, before the spread of panic, the World Bank and the IMF agreed to a rescuing loan of $30 billion ([pound]17.5 in), if it carried out a number of tough measures needed to bring the Brazilian economy back on track. In early January 1999, Brazil's real which was pegged to the d ollar was floated with an immediate devaluation. Fearing a collapse of the economy, many savers rushed to the banks to buy foreign currency, something that lowered the real even further. Although there was no meltdown, the effect of all this hurt not only ordinary Brazilians but the ordinary people in most of Latin America.

As a result of the financial crisis Brazil had to endure a bumpy ride that lasted all through 1999. The year ended with a trade deficit of $1.2 billion and an inflation of 19.98 per cent. The required belt tightening of the administrative reforms meant great sacrifices for all Brazilians, except for the bankers who had inside information and exchanged their money in the previous five days. The most directly affected was the middle-class, roughly defined as those living on a salary at the end of the month, who were forced to cut all superfluous expenditure like sending their children to private school, taking cabs, eating out, hiring domestic help, the weekly visit to the hair dressers and holidays. This soon cascaded down to the providers of those services.

The mishaps were just the fodder which the opposition wished for. The blame was put on the government and on globalisation. At the end of August 1999, the Workers Party (PT) organised a massive protest in Brasilia to demand the President's resignation. The venue was called 'March of the 100 Thousand', the same name used in 1968 for another march, in Rio de Janeiro, against the military ruler's decision to close Parliament and to limit the freedom of the press. The naming was an unfair provocation for President Cardoso himself was in exile because of his opposition to the military dictatorship. According to Veja, a Brazilian current events magazine (Sept 1 1999), the total number of people that joined the protest was unknown but the guesses ranged between 50 and 130 thousand. Protesters carried a huge black and white banner with the same design as the Brazilian flag, with the saying 'Out FHC and IMF'. (FHC were the President's initials.) In the opinion of journalist Antenor Nascimento Neto, the source of disc ontentment was personal: 'A person who has lost a job, or was forced to withdraw his children from fee-paying schools because of a reduction in the spending power of his salary, can only think about his personal problem'.