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Widening Worries in South America

August 5, 2002 at 12:00 AM EST
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MARGARET WARNER: To discuss South America’s economic troubles, we’re joined by Nancy Birdsall, president of the Center for Global Development, a research/policy think-tank in Washington. Jerry O’Driscoll, director of the Center for International Trade and Economics at the Heritage Foundation, and Walter Molano, chief Latin American economist at BCP Securities, an investment firm. Welcome to you all. Before we get into particulars of individual countries, let’s just look at the big picture.

Jerry O’Driscoll, it wasn’t long ago really that South America as a region began embracing free market economic policies, with a lot of promise and high hopes. What went wrong?

JERRY O’DRISCOLL: What went wrong is that most of these countries have weak institutions, they don’t have constitutions that control the scope and size of government and that when reforms are made, they don’t take hold with any permanence.

A lot of these countries reform were partial, they weren’t followed through, they were partly reversed so they have four or five years of reform, good growth, then they would slide back by the end of the decade of the 90s, the problems were beginning to show.

MARGARET WARNER: What would you add to that list, Nancy Birdsall, to the list of basically incomplete economic reforms? And I think you’re saying the lack of political will to really push them through.

JERRY O’DRISCOLL: Yes.

NANCY BIRDSALL: I think that I would put what Jerry said in a more positive light. These were tremendous changes in the 90s that many countries instituted, both on the economic side and on the political side.

Many, all of the Latin American countries were democracies in the 90s, they deepened their democracies in various ways, we’re most familiar in the case of Mexico, but it was happening in other countries — more local elections, decentralized government. And on the economic side, inflation was brought down from thousands of percents to inflation that looks like Europe or the U.S.

There was privatization and deregulation. So it’s very true that the institutions are not as good as they might be. But I would say a tremendous amount was accomplished, and therefore the lack of growth is very disappointing.

MARGARET WARNER: The lack of growth now. Walter Molano, what would you add to that? And I’ll just mention in terms of lack of growth I think the UN is now saying that South America is going to have negative economic growth this year. What factors would you add in general to what you’ve just heard?

WALTER MOLANO: Well, I would add an adverse international environment. We have to remember that the global economy has been suffering for the last few years, and that’s not to say about commodity prices. Commodity prices have really been declining since the Asian crisis, so we’ve had more than five years of declining commodity prices.

But you have to remember that Latin America is a major commodity producer, countries like Argentina and Brazil have, commodities comprise almost half their exports. And the other thing has been inconsistency in economic policy by the multilaterals.

During the Clinton Administration we had endless bailouts and then we have the Bush Administration comes in and puts in tariffs on imports from many of the emerging market countries, and also has a policy of no more bailouts.

MARGARET WARNER: Jerry O’Driscoll, would you also add that these countries seem to spend a lot, and borrow a lot?

JERRY O’DRISCOLL: The number of them have serious fiscal problems, particularly Argentina where basically the 30 billion dollars of IMF money plus other loans have gone into financing the fiscal deficit, and it’s chronic, structural and indeed constitutional until they change that, Argentina changes that, that deficit will not go away.

MARGARET WARNER: All right. So Argentina, this latest crisis I think we’d all agree was triggered when Argentina had its big meltdown in December and January. How much of now what we’re seeing in Brazil and Uruguay and elsewhere is just, as they say, contagion from Argentina and how much is it other problems they have?

JERRY O’DRISCOLL: Well, each of these countries has its own problems, of the three I think Uruguay has had the best policies and the best institutions and I think it’s why the U.S. has tried to come to their assistance because they have been by and large doing the right thing. It was inevitable there would be some spillover from Argentina.

MARGARET WARNER: What would you add to that?

NANCY BIRDSALL: I add to that, I’d be a little kinder on Brazil. Brazil has done a really brilliant macroeconomic management in the last few years, cutting inflation, privatization, the things that I mentioned. And the fact is that if you abstract from what the government has to pay to cover its debt, its debt service, Brazil has been running a fiscal surplus for the last several years of a rather substantial fiscal surplus.

The other thing is that unlike Argentina, several years ago Brazil at the central government level made a deal with most of the states, which were fiscally irresponsible, and they sorted out their problems. And that means that there’s an important difference from Argentina where at the provincial level lay many of the fiscal problems that Argentina was suffering from.

MARGARET WARNER: So Mr. Molano, then, why has the real, Brazil’s currency, lost all this value, when international investors look at say Brazil and look south in general what do they see?

WALTER MOLANO: Well, they see an enormous amount of uncertainty. They see uncertainty because Brazil is about to undergo presidential elections, the slate has candidates from the left, central left, which really dominate the scene. I think that they are afraid of not seeing a follow through in many of the economic policies, and again they’re concerned about the international environment. They see a global environment where there’s a lot of question marks about growth.

MARGARET WARNER: So are the investors, you and your company talk to and advise, are they pulling their money out of South America?

WALTER MOLANO: Many are. In fact, we’re giving our recommendations to go ahead and not take any chances and to sell their positions in Brazil. Some investors are staying put because they have to, they’re in dedicated funds that have to keep on investing part of their portfolios in Brazil. But many of our investors are escaping.

MARGARET WARNER: Nancy Birdsall, why is this important to the U.S. or how important is it to the U.S.?

NANCY BIRDSALL: It should be and it’s very important to the U.S. Brazil is the largest economy in Latin America. We have — our corporations and our banking system have lots of commitments in Brazil. If the Brazilian economy collapses, it will have profound effects on all of its own trading partners.

Argentina’s problem has already created a problem for Brazil in terms of Brazil’s capacity to export in the last year when Argentina has been. So we lose if Latin America loses, and if this big economy goes into collapse.

MARGARET WARNER: But, Mr. O’Driscoll, isn’t Latin America or South America a pretty small part of U.S. trading relationships and so on?

JERRY O’DRISCOLL: Yes. Partly because most of these countries are not really open economies, but also because of the trade flows. We’re not mentioning one country that’s done relatively well in this, Chile, which has been subject to all the adverse impact that has been discussed and is a commodity producer but has sound institutions, not a corrupt society at all, it looks like a European society. And they’re getting through this much better, which goes back to my opening point.

MARGARET WARNER: Mr. O’Driscoll, isn’t there also a political component here? There was a recent poll done I think by the Inter American bank that shows that over 60% of South Americans now just don’t believe free market reforms deliver.

JERRY O’DRISCOLL: Yes. It’s a shame because what was done in the name of the free market sometimes was liberalization and sometimes was not. Privatizing a public monopoly making it a private monopoly is not the free market.

NANCY BIRDSALL: In fact, that’s another important reason that goes beyond trade and investment, why the U.S. needs to be concerned, because here we have a movement for ten years of democracy and open markets, everything that we want, in good neighbors and in good markets for ourselves. And then we have this political reaction that’s more and more worrying.

MARGARET WARNER: Mr. Molano, how do you see the impact on and the importance to the United States of what’s going on there now?

WALTER MOLANO: Well, I think it’s a very important thing in the United States. Latin America, although it’s not a big part of U.S. exports, I think it’s one of the only parts of the world or it is the only part of the world where the U.S. consistently enjoys a trade surplus. This is our back yard. These are people that emulate us.

And I think it’s a place where a lot of firms have a lot of foreign investment. So I think we should take a more important stand in Latin America. I think that there’s been a lot of neglect under this administration.

MARGARET WARNER: What do you mean by neglect?

WALTER MOLANO: Well, I think the previous administration had an enormous amount of focus on Latin America. They dedicated a lot of resources on Latin America. In this administration, we’re not putting a lot of attention onto it. In fact, I think that the neglect has been that there’s going to be no more bailouts, that the countries have to sort out problems for themselves. It’s almost been an isolationist type of view when it comes to Latin America.

MARGARET WARNER: What’s your view, Mr. O’Driscoll on the bailout policy? First of all, do you think it’s been somewhat inconsistent from the Bush Administration, and do you think there should be more or less?

JERRY O’DRISCOLL: I think the Bush Administration signaled it was going to do less of this and I think that’s good. I think the previous bailouts are part of the problem. They aren’t the solution. The Mexican bailout let to the Asian financial crisis and helped lead to the Russian for sure. And the expectation that Mexico will be bailed out has led these countries in South America to say we’ll be treated like Mexico, we’re going to get bailed out.

MARGARET WARNER: So then do you disagree with the Bush Administration’s decision, for instance, just this week to make that $1.5 billion loan?

JERRY O’DRISCOLL: If you’re going to give aid it should go to countries that are doing the right thing in Uruguay, and the region is. But the result of this loan plus the previous loan is to levy $1,000 of debt burden per person, in Uruguay in a short period of time and unless they can come up with some awfully good policies to grow out of that, they’re going to be in the hole.

MARGARET WARNER: Your view, Ms. Birdsall, on both what the IMF and U.S. have been doing and what they should be doing?

NANCY BIRDSALL: I think that the U.S. should have been much more aggressive in helping Latin America in the last few years, this new administration. The signal that there would be no bailouts was very important in compounding the problem of confidence, which is what is Brazil’s problem today.

Brazil is suffering from a combination of panic, caused in part by the upcoming elections, and in part by a sense that the U.S. and the IMF, or the IMF may not have U.S. support to be helpful, at a time when it is the role of the international system to provide a certain kind of assistance when the problem is not the fundamentals but a lack of confidence and an impending self-fulfilling sort of panic.

MARGARET WARNER: What about the point Mr. O’Driscoll may that a lot of these countries, one of their big problems is debt. I think Brazil’s is $250 billion or 300 billion, and to talk about taking more debt on economies, as you yourself said, they spend a lot of their revenues now paying off debt.

NANCY BIRDSALL: There is a history that plagues these economies, that they are not developed advanced economies. By nature they’re emerging markets; they’re still emerging; they’re not emerged. Brazil’s debt is very unfortunate. The same as is the case with Argentina.

But I don’t think we should suggest in any way that it is acquiring more debt or behaving badly because it expects bailouts. That’s absolutely not really what has been happening. In the 90s in Brazil, the country very happily stayed without any IMF support for most of the mid 90s, and it was only when came the Asian crisis followed by the Russian default, which created a kind of impending panic in the market, that Brazil went to the IMF for help.

And I think today we’re in the same situation. It is — the Brazilians are not behaving one way or another because they want bailouts.

MARGARET WARNER: Mr. Molano, your view on this, I know you said you thought the policy has been inconsistent, but where do you come down on whether bailouts are helpful or whether they contribute to this vicious circle?

WALTER MOLANO: Well, I think that the bailouts do create problems. But I think the key point here is consistency, which we have not seen. Because when we saw the new administration come in, there was a message of no more bailouts, and the U.S. Treasury took a very strong stance against Argentina all throughout the beginning of 2001.

Then all of a sudden August of 2001, the administration did a complete 180-degree shift and gave Argentina an $8 billion rescue package. In December then of 2001 they unceremoniously pulled that package away. So you have rescue and then you have tough love. Then after that comes 2002 with Brazil, again, the administration gives signals of no more bailouts, and now again here we are in August of 2002 and the Treasury secretary then does an about face and he goes down to Brazil talking about the need to help Brazil.

What our investors need is consistency. We can live in a world of bailouts, or we can live in a world where countries have to adjust for themselves, but we need to have one world.

MARGARET WARNER: And briefly again, Mr. Molano, to you because I know you look at these countries, we haven’t talked about a lot of the others, to what degree is the political backlash that’s going on in a lot of these countries against the free market reforms causing these very governments to back track on the reforms that I think probably all of us in the United States would say ultimately really need to be done and followed through on.

WALTER MOLANO: I think that the back tracking has been immense, and I think it’s been very dangerous, and I think the key example here is Argentina. For most of the 1990s, Argentina was the poster child of the IMF; every time they went to a World Bank IMF meeting we had an Argentine minister, we had the Argentine president giving the keynote speech.

The IMF, IDB, World Bank officials, fell over each other just talking about how well Argentina did. And now Argentina has done a complete reversal and it’s reversed many of the major policies and reforms that they did. In fact, the Congress applauded the president when he decided to default on the external debt. I think this is very worrisome, and I think that we could see this spreading to other countries. In Peru there’s been enormous backlash against economic reforms.

MARGARET WARNER: Mr. Molano, thank you very much. I’m afraid we have to leave it there, we’re out of time. Thanks.