Re: Why has the free market left South Americans poor
- From: "Zerge" <zerge@xxxxxxxxxxx>
- Date: 16 Dec 2005 12:10:03 -0800
COHENMARVIN wrote:
> Latin America is embracing radical leftist economics. I wonder if this
> is because the free market has not solved the problem of extreme
> poverty among many of its inhabitants. On the other hand, socialist
> policies like those advocated by Evo Morales of Bolivia, or Hugo Chavez
> of Venezuela, have never worked. They've been tried in Africa, they've
> been tried in Asia, and they make things worse. I read that in
> Venezuela, there is actually more poverty under Chavez then there was
> before he took power.
> Still, has the free market failed? And if so, is that the reason this
> is happening?
I can only speak for Mexico, being a Mexican economist.
Mexico used protectionist policies from the 1950s to the 1970s, under
the thesis that this protection from foreign competition would allow
young industries within the country to mature, and that it would
attract foreign investment to those protected markets. The model worked
very well; the country grew on average 8% per year during that period.
Things started to go sour in the mid 70s during the stagflation caused
by the oil crisis. Growth stalled, inflation rised. The Mexican
government got into debt to apply keynesian policies to promote growth,
with the idea of paying the debt with future oil export revenues
(Mexican oil is state owned). The plan might have worked, except that
oil prices collapsed, so the Mexican government wound up with a huge
debt and little money for its budget (in those days 75% of the federal
budget came from oil sales). Also, in those days the peso was fixed to
the dollar. This was necessary to balance imports and exports. But when
the economy started to go sour, foreign investment in the form of
dollars started to leave the country. Eventually the gov ran out of
dollars reserves to maintain the peso fixed to the dollar, and a huge
devaluation ensued. This was the Foreign Debt Crisis of 1982, the worse
in Mexico's history to that date.
In the 1980s, under the tutelage of the FMI, Mexico started to open its
markets to free trade. All that worked very well all the way up to
1994; Mexico grew a lot, and everybody was very optimistic about
Mexico's future. President Salinas even made Time magazine Man of the
Year for his free market reforms and NAFTA.
But there was a tiny fracture in the system. The peso was STILL fixed
to the dollar. When the borders where opened to all sorts of imports,
they flooded the country. To buy imports Mexicans needed dollars, so
they would exchange their pesos for dollars to buy American stuff. This
caused a depreciation pressure over the peso, but the Mexican
government would "defend" the value of the peso using its dollar
reserves. There where plenty of reserves, since there was a lot of
investments in dollars in the Mexican stock market and banks. That
dependency on fast-moving investments was a yellow light on the board
that Mexican economists should have seen, but didn't. Then the
political problems started: in 1994, the Zapatistas rose against the
government, without much military impact, but with huge political one;
that same year, the presidential candidate Colosio was assasinated.
This shook the confidence of international investors, who slowly but
surely started to pull their dollar investments out of the Mexican
economy. In no time it became a panic. The government used up all its
reserves to maintain the peso-dollar parity, but eventually they ran
out of reserves, and the peso had a massive devaluation, causing the
biggest economic crisis Mexico had seen. This was the 1994 Peso Crisis.
So, Mexico had two major crises within a 12 year period, crises as bad
for the country as the Great Depression was for the United States.
Since then, the Central Bank has become autonomous from the government,
and the peso is free floating. This has given Mexico a truly enviable
macroeconomic stability. The inflation is even lower than the US right
now. The country is not growing faster than 3% a year, but things are
stable.
To blame free trade for Mexico's problems is like blaming the car for
the driver's lack of skills after a crash. Make no mistake about it;
what caused the crises was the politicians' lack of skill in economic
matters; they tried to make the country grow when they should have been
cautious; they tried to force the growth of the country using oil
revenue; they opened the borders too fast, too soon, and should've
floated the peso before opening them.
That's Mexico's story. As for the rest of Latin America, I haven't had
a clue.
> I wouldn't mind if these countries wrecked their own economies with
> Socialism - if thats the choice of their people. But the hard line
> socialist countries like Cuba often export their ideology with violence
> to the rest of us - as when Cuba engaged in military campaigns in
> Africa or harbored Russian nuclear missiles.
>
> -- Marvin
Again, I don't know about the rest, but I can assure you, Mexico is NOT
going to become "extreme left" or "socialist" as you claim. There is
indeed a pendulum effect, but the swing won't go beyond center-left,
coming from center-right. Nothing more. This only means a little more
emphasis on social programs, a little less emphasis on signing the yet
another free trade agreement. This does NOT mean the country is going
commie and closing its borders to free trade. That's a simplistic view
of how the world works.
.
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