Doing It Their Own Way: Venezuela, Argentina, Bolivia, EcuadorSunday, Dec 31, 2006 By: Mark Weisbrot - International Herald Tribune A new wave of Latin American leaders is changing the face of the region and its relations with the United States, multilateral institutions, international financial markets and foreign investors. While this is often seen in Washington in political terms, as the rise of populism or anti-Americanism, much can be explained by looking at the economics of these changes. Rafael Correa, Ecuador's newly elected president, is a case in point. Correa recently sent the country's bond markets tumbling by announcing that he would seek to restructure Ecuador's foreign debt. He is looking toward a 75 percent debt reduction, and will use the savings on debt service to increase social spending. Correa, who got his Ph.D. in economics at the University of Illinois in Urbana, understands very well that foreign capital can, in some circumstances, contribute to development. But when a country is borrowing simply to pay off debt, it may make more sense to clear some debt off the books and start over, just as someone who declares bankruptcy in the United States does. Argentina defaulted on its debt in December 2001. The government drove a hard bargain with its foreign creditors and with the International Monetary Fund, which wanted the government to pay more to the defaulted bondholders and to follow more orthodox macro- economic policy prescriptions. In the end the Argentines were proven right. The economy shrank for only about three months after the default; it has since grown at an annual rate of more than 8 percent, pulling more than 8 million people out of poverty in a country of 36 million. President Néstor Kirchner of Argentina has pursued these policies outside of the international spotlight. But the way he led Argentina out of its depression of 1998-2002 is comparable to President Franklin D. Roosevelt's leadership in the United States during the Great Depression. Like Roosevelt, Kirchner had to reject the advice of the majority of the economics profession (Roosevelt did this even before Keynes had published his General Theory), stand up to powerful interests (foreign bondholders and utility companies, the IMF and World Bank), and do what was best for the country. A stable and competitive exchange rate, reasonable interest rates and the use of unorthodox measures to control inflation were some of the policies that Argentina needed to produce its remarkable economic recovery. Venezuela's Hugo Chávez is a more controversial leader, but his government's economic policies are working. The year 2006 will be the second in a row in which Venezuela has a 10 percent growth rate, the highest in the region, after a 17.8 percent jump in 2004. To put the country on a solid growth path, the government needed to get control over the national oil company PDVSA, which is the source of nearly half the government's revenues and 80 percent of the country's export earnings. The opposition resisted fiercely, with a U.S.-backed military coup and an oil strike that devastated the economy in 2002-2003. But since the government prevailed it has been able to assure not only rapid growth but vastly expanded social programs for the poor, including free health care, subsidized food and increased access to education. Some say this is just an oil boom that will collapse when oil prices drop, but the Chávez government has budgeted conservatively for oil prices that were about half of what they are now. The governments of Argentina and Venezuela are transforming not only their own countries but also the region by finally breaking the IMF's control over credit. Only a few years ago, a government that did not agree to IMF conditions would find itself denied credit not only from the Fund but from the much larger World Bank, Inter-American Development Bank, G-7 governments and even the private sector. This was the major instrument of Washington's influence in the region, and helped bring higher interest rates, tighter budgets, privatization, indiscriminate liberalization of international trade and capital flows and the abandonment of development strategies. Venezuela has now provided an alternative source of credit, with no economic policy strings attached, to Argentina, Bolivia, Ecuador and other countries. The dissolution of the IMF's "creditors' cartel" is the most important change in the international financial system since the collapse of the Bretton Woods system of fixed exchange rates in 1973. Now even poor countries like Bolivia can say no to the "Washington consensus," capture billions of dollars of additional revenues from resources like natural gas, and use them to deliver on their promises of a New Deal for the region's poor. The region's first indigenous president, Evo Morales, is also making history as he completes his first year in office. President Luiz Inácio Lula da Silva of Brazil has continued the neoliberal policies (and resultant sluggish economic growth) of his predecessor. But he has been a team player internationally, forging a close alliance with Argentina and Venezuela that has buried Washington's proposed "Free Trade Area of the Americas," and pursuing increased regional economic integration. Latin America has clearly taken a turn in a new economic direction, and it looks to be overwhelmingly positive. After 26 years of slow economic growth, it would be difficult for the new leaders to do worse. Mark Weisbrot is co-director of the Washington-based Center for Economic and Policy Research.
