Volume 43, Number 168, January-March 2012


revista164 The situation currently facing Europe, with her failure to pay sovereign debt and fragile euro, is reminiscent of Latin America in the 1980s. The imminent failure of sovereign countries to pay their debts serves to highlight the banking crisis caused by the very banks that have seen their profits wagered in the face of financial markets. Financial instruments, which for years were considered secure and highly profitable, are showing their true value, becoming toxic assets that harm the value of all assets and drain the banks of huge reserves and capital. Large financial conglomerates, often larger than the annual product of their respective countries and requiring vast yearly flows of capital, only to face losses in the value of their assets, have demonstrated the fragility of the whole European banking system and consequently the uncertainty facing the global financial system. The path to rescue the strong leaves the Welfare State and human rights, in a futile, vulnerable position. Furthermore, the service to external debt and transfer of state resources to the financial markets represents job losses for the population and profits for economic operators for new investments. Likewise, representative democracy and the economic and social human rights of all those who claim employment is suppressed.

Latin America's experience in the 1980s is a lesson not to repeat those economic and political mistakes that resulted among other things in the so called "lost decade." The subsequent renegotiation of external debt, from the implementation of the Brady Plan with debt capital reductions, to interest rate cuts and the cancelation of debt, gave some countries economic and political relief. The result was years of financial recovery for the banks, fiscal transfers, reductions in interest rates, regulatory changes and enormous salary cuts, which permitted credit recovery. The consequences of this period were disastrous for the economy of the region, not only because the flow of external credit was reduced, but also because of the austere economic and political reforms enforced. The economic reforms were centered on Washington Consensus guidelines and a process of trade and financial deregulation and liberalization. One need only look back at history in the 1980s and 1990s to understand the enormous social and political setbacks that occurred as a result, setbacks which were economically unjustifiable.

There are important lessons to learn.

  1. Latin America's external debt problem and the alternatives that existed at the time shaped and accelerated structural change in Latin America's economies. The interests of large foreign company investment projects in the region led to increased financial and productive sector insertion in the global market. Financial globalization together with the process of financialization led to the integration of financial and productive circuits during the first decade of the nineteenth century. An example is the recurring crises of the period.
  2. The sovereignty of the central bank, not only as lender, but also as an employer of last resort, was cancelled to restrict public spending on education, housing and health. There was no better way to service external debt than to cancel investment for the future. Many projects that benefitted small and medium industry were cancelled. In many less industrially developed countries, maquila industry had arrived to stay. Priority sectors in the hands of the State were closed. National economic groups strengthened their alliances with international business groups. The Southern Cone region, like Central America and Mexico, felt the effects of the transfer of wealth to private, mostly transnational banks.
  3. The economic, political and social relationship between the national states and lenders became so strained that confrontation broke out between business leaders and the Central Bank and State. Financial repression, which had sustained the commercial and development banking sectors to guarantee the profitability of private economic agents, was affected before the liberalization of interest and exchange rates.
  4. The trend followed by the International Monetary Fund (imf) was to manage contractionary and austerity policies. Many were stabilization programs established in Argentina, Brazil, Mexico and other countries of the region. Each plan had its own name but was of the same backbone. Plan Cruzado, Plan Primavera, Plan Bresser-Pereira, Plan Real and even a dollarization plan. The Dollarization Plan was the most accomplished project, creating not only a monetary area, but also a region integrated under one monetary and trade agreement. This project was stopped at the end of the 1990s before the failure of Argentina's Convertibility Plan (2001), which terminated with the so called "corralito" (bank freeze), a mass capital flight and banking crisis.

The solution to the sovereign debt problems in Europe's periphery countries, or Pigs as the Financial Times has classified them, now joined by Italy, is the series of measures aligned to the interests of the imf, the European Central Bank (ecb) and the European Financial Stability Facility (efsf). These institutions represent the interests of the financial markets and institutional investors, whose objectives are motivated by an appetite for profitability and not for welfare. Further debt relief is needed, as well as interest rate cuts and capital reductions. What is important is a big government as Minsky refers to it in his major works, as well as the role of the ecb as an employer of last resort, and a return to the autonomy of the central banks in each country, which would break with agreements of the monetary union. The modification of the ecb's organic law specifies that stabilization is the main function of the ecb to abandon the monetary vision and reconsider development as a better insertion and integration of less developed economies within the Eurozone. For this, fiscal policy is a priority. Another alternative is an ecb with similar functions to the United States Federal Reserve. A bank with monetary, fiscal and financial sovereignty is an alternative means of overcoming the crisis.

As in Latin America, the deepening of the crisis has placed governments in power dominated by neoclassical thinking, but as the crisis deepens, social manifestation gains strength in democratic governments, all of which combines to form part of a social vision. One can only wait and see which conundrums and surprises present themselves over the next few months in a world where financialization and globalization prevail with force.

In this edition of Problemas del Desarrollo [Development Issues] the author Jaime Ornela re-opens the debate on the definition and issues surrounding development in his article "Back to Development." This is a necessary undertaking to open up new paths in the advent of neoliberalism and to overcome problems in the Latin American region, the most unequal region in the world. In their article, "Argentina's Business Leadership and its Role in Economic Development," Juan E. Santarcangelo and Guido Perrone explain how, since the collapse of the convertibility regime, the country has registered growth rates permitting the generation of nearly four million jobs. The progress that these major Argentine companies have made over the last few years is very important. The Argentine government, for its part, has redesigned economic and financial policy to go hand in hand with economic growth and development.

In their article "Stock Markets and their Relationship with the Real Economy in Latin America," Samuel Brugger and Edgar Ortiz examine, from an econometric view, using seven models, the relationship between econometric returns for Argentina, Brazil, Chile and Mexico from 1993 to 2005. In their paper "Crisis and Economic Recovery: the Role of Fiscal Policy" the authors Mortiz Cruz and Javier Lapa analyse five countries whose financial crises are recent: Mexico in 1994, South Korea in 1997, Russia in 1998, Brazil in 1998 and Argentina in 2001. This analysis is important in demonstrating how fiscal policy was crucial in crisis recovery. The management of economic policy through fiscal policy is examined as an instrument of economic development.

This journal could not fail to include examples of emerging countries whose lessons for the rest of Latin America are very important. In their paper "Threats and Opportunities for Brazil's Trade with China" Fernando Mansor and Marcelo Dias illustrate how China has become Brazil's main trading partner. The authors show how products manufactured in China are displacing products exported by Brazil to third country markets, principally in the Latin American region.

In his article "Inter-State Tourism Development between Puerto Vallarta and Bahía de Banderas: Mexico," Marco A. Merchand highlights the importance of regional analysis. By consolidating capital of the coastal region, both communities achieve a market economy and urban planning policy compatible with and complementing each other. With the aid of foreign investment, the State has consolidated tourist centers generating "virtuous circles of economic development."

In the section Commentary and Debate, Kostas Vergopoulos' article explores "The New Financial Power."

The following reviews are then presented. Firstly, Esther Iglesias describes Roger Orellana's work Atlas: Climate Change Scenario on the Yucatán Peninsula. Ana Laura Rodríguez then reviews Rodolfo Iván González' book, The 1930s Crisis and its Impact on Latin America. Susana Nudelsman's book Latin America in the Era of Globalization is reviewed by Héctor González. Gerado Reyes Guzmán provides a commentary on the book by Nouriel Roubini and Stephen Mihm, Crisis Economics. A Crash Course in the Future of Finance. Finally, Sergio Cámara reviews Costas Lapavista's and Carlos Morena's work The Financialization Crisis, a topic of particular relevance in current debate.

Alicia Girón
Journal Editor
UNAM, November 2011

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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