October 2002


Affected by the volatility of international financial markets, half the countries in Latin America have seen their per capita output decline in the last five years, and those countries which had enjoyed fast growth in the 1990s have seen it grind to a halt. The following article urges developing countries to push for an international economic order that provides more guarantees against financial turbulence.

By Jose Antonio Ocampo

With economic activity falling by almost 1% in 2002, Latin America will complete half a lost decade in terms of economic growth. Per capita output for this year will be almost 2% less than in 1997.

Although the strong contraction in Argentina explains part of this result, slow growth is a much more widespread phenomenon. In the past five years, half the region's countries have seen their per capita output decline and all of the countries enjoying fast growth in the 1990s have seen it grind to a halt.

The causes of such a widespread trend can only be found in a common source, the international economy. Among the possible explanations, one stands out: the behaviour of international financial markets.

The recovery in economic growth from 1990 to 1997 was associated with the return of the capital whose flight generated what ECLAC [the Economic Commission for Latin America and the Caribbean] referred to as the 'lost decade' of the 1980s. The 1997 Asian crisis once again triggered capital flight.

The volatility of financial markets has been devastating. Inherent to their functioning are alternating periods during which risk is under-  or over-estimated,  that is, periods of 'irrational exuberance', as Alan Greenspan, the chairman of the Federal Reserve, called them, followed by 'irrational panic'. 'Irrational panic' has been all too evident in the cases of Brazil and Uruguay in recent months.

Debt levels that until recently - and correctly - were considered manageable have suddenly been reinterpreted as unsustainable. The change is serious because, as the financier George Soros has pointed out, the market can sometimes impose its expectations, even when they are irrational.

Given markets' obvious failings, a profound reform to the international financial system is required. In recent years, only superficial measures have been applied in this area, and there have been some major strides backward too.

The delay in the International Monetary Fund's support for Argentina further worsened financial markets' hyper-sensitivity to Latin America. The idea that it was possible to isolate the Argentine crisis, without generating 'contagion', collapsed like a house of cards.

Faced with current tension regarding the recovery of the real economy in the United States and financial uncertainty, the hope is that the first of these options will prevail. Speculative pressures affecting the region's economies must also be defeated.

But recovery from the current moment's specific ills is not enough. An offensive on the part of the developing world in general and our region is required, pushing toward an international economic order that provides more guarantees against financial turbulence, real openness to trade in the industrialised world, more rapid technological transfer, and international agreements on migration.

In our region, it is high time we learned the lessons of the past decade of economic reforms. This would help us to consolidate achievements in terms of price stability and dynamic exports and overcome the hardships involved in volatile, insufficient economic growth and this new development pattern's inability to guarantee equitable development.

Countries should implement national strategies based on three elements: macroeconomic policies whose time-frame is the overall economic cycle, which seek to reduce vulnerability to external financial cycles; an approach to developing production suitable to open economies, which strives to improve their international competitiveness and offer greater opportunities to small and very small firms; and more active social development policies that help to ensure that the benefits of growth reach the entire population.

This also requires political leadership to launch a profound process of regional integration. This is the essence of ECLAC's proposals in recent years and most recently, in its paper, 'Globalisation and Development'. - Third World Network Features

About the writer: Jose Antonio Ocampo is ECLAC's Executive Secretary.

The above article first appeared in ECLAC Notes (No. 24, September 2002).

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