Financial crisis: a pattern recovering

In South America, crises have been repeated over and over again and it seems that we are facing a new cycle of crisis. Banking crises, external debt crises, balance of payments crises, i.e. financial crises, have been common in most countries. The following types of crises are related to capital income associated with international financial cycles: From 1873, Great Depression (30s), 80s and 1997, not to mention the current Great Recession.

However, it was between 1980 and 1990 that the worst record in the history of the country occurred. The GDP of this group of countries rose from 121% to 98% of the world average of GDP. Compared to the level of GDP per capita in developed countries, Latin America rose from 34 per cent to 26 per cent. Another possible similar period may be between 1998 and 2003, although the impact was lower.

The crisis of the 1980s affected 18 countries in the region. Compared to the Great Depression, there were many international institutions, but this did not serve any purpose, as the mission of these international institutions was to force these countries to pay the debt and to implement the economic policies that favored the recession.

Background to the debt crisis

To leave behind the crisis of the 1930s, they followed a state-led industrialization model. The neoliberals criticized this model, because it was based on the lack of economic discipline and high tariffs, because it was a model that required great state participation, while the Left criticized that the model did not overcome external dependence and did not serve to break old social structures.

If we analyze the neoliberal criticisms, the lack of macroeconomic discipline was less widespread: Argentina and Brazil were the ones with the least marcoeconomic discipline; if we talk about inflation, the return to normal rates was achieved very quickly. Public spending increased in that period (1950-1980), doubling the state's share of GDP from 12% to 22%. However, this weight gain was financed by taxes, maintaining the government deficit between 1 and 2 per cent. External imbalances were common throughout the world: the most important problem occurred between 1974 and 1980, as growth slowed, but these external imbalances did not. By way of example, they compared Brazil with “Asian tigers”. The triggering phenomenon of the crisis was the ease of access to external financing, which was very difficult to achieve since the time of the Great Depression.

Preparing for the crisis

In the 1970s, led by large banks, forms of international financing were facilitated, linking the interest rates of these loans to interbank markets. Oligopolistic competition between large banks led to a large amount of money, with the aim of maintaining market share. The other side of the coin was the generalization of the external and fiscal deficit, which happened in almost all countries. So banks risked more to make more money.

On the other hand, a neoliberal trend of fashion was generalized: the liberalization of financial markets, initially at the state level. The countries of Latin America pioneered this. Moreover, the tools to prevent capital flight were scarce, since, according to theory, the financial market must be self-regulated. At the time of the crisis, capital flight wreaked havoc in domestic economies.

In short, more than the industrialization model, the weakness of the financial systems and the external deficit of the different States facilitated the crisis, that is, the origin of the problems came from the macro-economy, not from the state-driven industrialization model.

The turning point occurred at the end of 1979, when the U.S. Federal Reserve raised interest rates to curb domestic inflation. This started a domino effect.

The crisis comes

As interest rates increased, several Latin American countries were unable to pay their debts. To this must be added the fall in the prices of raw materials, the basis of many economies. These two factors were maintained for 25 years, although this is not much mentioned. Historically, such long-term high international interest rates were never maintained, nor were negative exchange relationships established.

As economist Carlos Díaz-Alejandro pointed out, what was possible to control the recession was transformed into a serious development crisis, by implementing a reform of the international financial standards and economic policies that favored the recession. The Neoliberal Agenda (Washington Consensus), which has subsequently been implemented by the International Monetary Fund and the World Bank in several countries, as well as in the European Union, was implemented.

Answers

In the face of the crisis, the most common responses have been two: stimulating demand and destroying productive forces. In Latin America, they promoted this second, through adjustment policies. What are their bases? Adjustment, wages and crises in the world economy can be classified into four sections.

The first is based on adjustment against employment (and workers). This influences the distribution of income, reducing the participation of workers and leaving out economic development. Secondly, despite recovering the level of profitability, we have not reached the previous rate of accumulation, leaving the savings capacity to a few and reducing the chances of productive investment. Thirdly, and as a consequence of the above, there is increased pressure to include within this logic areas outside the logic of benefits through privatizations or looting of natural resources. And fourthly, the importance of finance increases, increasing the pressure for deregulation, promoting speculative bubbles.

This has been experienced during the Lost Decade in Latin America; also in the countries in which such policies have been implemented. With this model, the generations to come live worse than the previous ones and, furthermore, question the capitalist model itself, boosting its vulnerability, questioning its viability. Experts repeat the crisis in Latin America, but the key is to implement neoliberal policies that are always or really effective for workers and peoples.

This news was posted by El Salto and we brought it to ARGIA thanks to the CC-by-sa license.