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The United States and the International Monetary Fund both have signaled new support for Brazil and Uruguay to keep these countries from being dragged down by Argentina’s financial collapse. While this may work for Uruguay, there are no assurances that more funds for Brazil will prevent a forced debt restructuring before the end of 2003 or will help prevent greater difficulties ahead for countries like Venezuela, Colombia and Peru.

Analysis

The International Monetary Fund said Aug. 1 it is prepared to provide emergency aid to Uruguay and Brazil, which it regards as victims of financial contagion resulting from Argentina’s economic crisis. However, fund officials indicated that an agreement with Argentina, which defaulted last December on its $142 billion foreign debt, is still weeks away because President Eduardo Duhalde’s government has not yet complied with all necessary reforms.

The Bush administration has endorsed the IMF’s rush to aid Uruguay and Brazil while continuing to withhold funds for Argentina. Fund officials in Washington say the IMF believes that by helping these countries now, a much greater regional financial crisis -- especially if Brazil were to default on its $305 billion debt -- will be averted.

Argentina’s economy is too far gone for the IMF to give it any more emergency aid until its government enacts all the reforms the fund has demanded. This is unlikely to happen anytime soon due to the weakness of the unpopular Duhalde regime. However, there still may be sufficient time to rescue Uruguay (and especially Brazil) from default and keep the rest of region’s dominoes from toppling, causing a new Latin American debt crisis.

A new regional debt crisis, almost exactly 20 years after the last one, could have devastating consequences for Latin America’s development prospects as well as for U.S. banks, institutional investors and multinational corporations with tens of billions of dollars at risk in the region.

As a result, the Bush administration is supportive of IMF aid for Brazil and Uruguay with the expectation that such action will defuse investor fears of imminent default in those countries. Washington also wants to contain the spread of a larger regional crisis that could result if the markets perceive that the United States is abandoning South America’s largest economies to an uncertain fate.

The U.S. government agreed Aug. 4 to provide Uruguay with a $1.5 billion bridge loan, after a joint statement from IMF, World Bank and Inter-American Development Bank officials said that the three will increase aid to the country by $800 million. Uruguay’s Congress currently is trying to enact legislation to avoid a default on its international debt and block some withdrawals of hard currency from banks.

Uruguay’s economy may be tiny enough for the IMF to avert a default there at relatively little cost, but there are no assurances that lending Brazil another $20 billion as requested -- on top of the $33 billion it already has been granted since 1998 -- will allow that country to avoid a forced debt restructuring process sometime before the end of 2003. Even if it did avoid a default, it’s unlikely that the additional money will help to prevent greater difficulties ahead for countries like Venezuela, Colombia and Peru.

Among South America’s 12 democracies, only Chile has managed so far to avoid the economic, political and social turmoil sweeping the rest of the region today. Every other country is beset by different degrees of economic, political and social unrest that are affecting growth, investment, employment and governance. At a July 27-28 summit of South American presidents held at the coastal city of Guayaquil, Ecuador, many heads of state blamed their region’s troubles mainly on the Bush administration’s failure to open up U.S. markets and comply with other pledges and commitments to Latin America.

These criticisms contain a kernel of truth. U.S. policymakers have been asleep at the wheel in Latin America during the past eight years, ignoring trade expansion, focusing more on the Colombian drug war and generally paying no attention to anything else in the region. Nevertheless, South America’s current crop of economic and political crises were basically homegrown by governments and ruling establishments that created unrealistically high expectations but never completed the liberalizing economic and political reforms they undertook a decade ago.

With the exception of Chile, the rest of South America’s governments have not done enough to modernize their economies, liberalize labor markets or develop robust export industries during the past decade. State-owned enterprises were privatized and import tariffs were slashed, while prices, interest rates and currency rates were freed from government control during the 1990s.

In addition, South America generally is more dependent on foreign capital sources today than it was a decade ago. The rule of law and property rights in most countries remain tenuous at best and little or no political or financial efforts were made to modernize vital institutions like the financial and education systems, the courts and the public sector.

The economic liberalization policies implemented across South America during the 1990s, especially the sale of hundreds of state-owned enterprises, resulted in higher rates for a host of formerly state-owned products and services now delivered to local consumers mainly by private foreign companies. However, the failure of most of the region’s governments to complete the reform programs begun at the end of the 1980s or early 1990s ultimately undermined what always was shaky popular and political support for free-market reforms.

Slightly more than a decade after free-market policies were first applied broadly in the region, poverty is greater today than it was at the end of the 1980s, and regional unemployment has reached its highest levels in 30 years, according to a recent report by the United Nations’ Economic Commission on Latin America and the Caribbean.

In fact, recent polls indicate that in many countries a majority of voters have lost faith in their presidents, political parties and democratic governance. Moreover, these polls also indicate that many Latin Americans believe free-market policies applied over the past decade are mainly responsible for their current socio-economic difficulties.

Adding to South America’s instability over the next few months, several countries have just elected new presidents or will elect new leaders between now and first quarter 2003. Bolivia’s Congress Aug. 4 confirmed Gonzalo Sanchez de Losada, who advocates strongly pro-U.S. policies, as that country’s new president. On Aug. 7 Alvaro Uribe Velez will be sworn in as president of Colombia with a popular mandate to wage war against the Revolutionary Armed Forces of Colombia rebel group. He also reportedly has tacit Bush administration assurances of expanded economic, military and political aid to help battle guerrillas and drug traffickers simultaneously.

In October, voters will elect new presidents in Brazil and Ecuador, where populist candidates opposed to free-market policies are well-positioned to win presidential victories or gain strong Congressional positions that would allow them to influence future policies. Argentina plans to hold general elections on March 30, 2003, while critics of President Alejandro Toledo in Peru are starting to urge early elections there as well.

Washington is giving its support for tossing Uruguay and Brazil an IMF lifeline, and may possibly reach out to Uruguay, Chile and other countries with proposals for bilateral free-trade agreements now that Congress has approved trade promotion authority for U.S. President George W. Bush -- giving him the power to negotiate agreements that Congress cannot amend. But these efforts are unlikely to halt the near- to medium-term trend in many Latin American countries of reduced voter support for free-market policies.

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U.S. MORE RECEPTIVE TO BRAZIL’S PLEAS THAN ARGENTINA’S

Date Added: Tuesday, July 30th, 2002
Contributed by: RCN Administrator