The Observatory on Latin America of the New School convened a two day conference November 2-3, 2009 in New York on the impact of the global economic crisis in Latin America, and the conclusions that can be drawn from the efforts of Latin American governments to mitigate the worst effects. Participants included present and former government officials from Latin America, representatives of the World Bank and the United Nations, leading academics, and NGO leaders.
The main conclusions from the conference were that the impacts of the crisis have varied considerably between countries, from contained impacts in Argentina, Brazil, and Chile, to more severe consequences in Mexico, depending on the character of government policies and measures. Governments which had pursued counter-cyclical and heterodox policies had managed to shield their economies from the worst effects of the crisis. The crisis had first affected the Latin American region through a drastic reduction in world trade and a squeeze on credit. This significantly reduced employment and incomes, pushing millions of people below the poverty line, while at the same time creating a crisis in public finance. The impacts are felt particularly in the urban areas of the region, rural populations dependent on production and export of commodities, and by the poorest people, including those in the informal sector.
Participants agreed that the global economic crisis offers an important opportunity to assess the utility of different approaches to governance and macro-economic management. The collapse of the Soviet bloc in 1989 and the years thereafter saw one group of countries experience economic failure and the triumphant claim of victory of capitalism and the West by others. In contrast, the current global crisis allows the assessment of country performance across all countries in the face of a common set of global financial and economic changes, channels of contagion and impact, and a series of financial, economic, social, and in the last analysis, political consequences across countries.
Within these broader debates, special attention should be given to the recent experience of Latin American countries that adopted “heterodox” economic policies. National elections over the period 2002-2009, involving three quarters of the Latin American electorate, have installed progressive governments, some of which have adopted a set of economic policies which have deliberately shifted away from the Washington Consensus policies of the 1990s. Prior to the onset of the global crisis in the second half of 2008, these governments enjoyed a five year period of historic levels of economic growth, with averages over 5 percent, and made significant progress in reducing poverty and inequality. The routes to these achievements have varied considerably, from strong social policy in Chile, to active employment policy, social expenditures, and public investment in Argentina, to fiscal policy measures in Uruguay.
Evidence now shows that these policies and measures have helped many Latin American countries considerably outperform the United States and most European countries in mitigating the impact of the crisis and in restarting their economies toward growth. This is well-demonstrated by the steep V curve representing recovery in Brazil versus the L curve of the United States and Europe. Some, but not all, Latin American economic managers seem to have learned from the negative results of policies which focused heavily on managing the fiscal deficit, deregulating markets, and leaving monetary policy to the pressures of the global economy. They have found alternative measures which have protected themselves from some exogenous changes and have been able to restore growth. Those who have not, such as the Calderon Government in Mexico, are suffering the most in the region from the global crisis, and the contracting U.S. economy has had a particularly strong impact.
The heterodox policies adopted in Latin America include counter-cyclical measures such as aggressively building reserves in Argentina, Brazil, and Chile, despite external advice from the IMF, the Paris Club, and private banks. An example is the four pillars of President Néstor Kirchner´s post-2001 crisis strategy in Argentina, which includes: privileging domestic needs over international obligations (including delaying debt repayments until urgent social needs at home have been addressed), strengthening the state, adopting pro-poor social expenditures including cash transfers to the poor, the elderly, and children, and allocating public expenditures for infrastructure. Similar approaches on a larger scale have been pursued by President Lula in Brazil, including tax incentives for investment, an active use of credit from the BNDES, and transfers to the poor. All of these policies contrasted sharply to the international advice from Washington which focused on management of the fiscal deficit.
Participants agreed that reducing the impact of the crisis, however, is only one objective. The real challenge is to reduce poverty and inequality as a precondition for both sustainable democracy and improved social and economic welfare. It is therefore necessary to examine how heterodox policies have responded to these challenges. It was agreed that record-setting levels of economic growth are a necessary, but insufficient, condition for significant reductions of poverty and inequality in the region. The conference also noted the importance of collective international action to reform global institutions and the regulation of the global economy and global finance.
The Conference participants were welcomed by Tim Marshall, Provost of the New School, and Michael Cohen, Director of the Observatory on Latin America and Director of the Graduate Program in International Affairs at the New School.
Recovery or Deepening Crisis for the Poor?
The first session included two presentations, the first by James Adams, Vice-President of the World Bank for East Asia and the Pacific, who spoke about the leading role of China in spurring world recovery, and the importance of the Chinese experience with its stimulus package. In the second presentation, Professor Deepak Nayyar, from the New School and Delhi, emphasized the impact of the crisis on the poorest countries and poorest people in the developing world. He noted that prior emphasis given by the international financial institutions to management of the fiscal deficit needed to give way to a broader understanding of the need for economic growth, capital creation, and the active role of the state in regulating markets and supporting the social sectors. He concluded by insisting on the need for reform of the global financial architecture and strong inter-governmental collective action.
Discussants included Floyd Norris, Chief Financial Writer for The New York Times, who noted the absence of discussion of currencies and monetary policy. He expressed concern about “financial protectionism”. Sakiko Fukuda-Parr, Professor of International Affairs at the New School and former Director of the UNDP´s Human Development Reports, spoke about the impact of the crisis on the poor and the absence of special concern for the poor in the various stimulus packages that had been adopted. James Adams noted the lack of adequate data on the impacts on people in the poorest countries. Deepak Nayyar reiterated the need for more emphasis on domestic policies, rather than such a focus by governments on international perceptions of country performance.
Latin America: More than a Trade Crisis?
In the second session, José Antonio Ocampo, former Under-Secretary-General of the United Nations for Economic and Social Affairs and now a Professor of Economics at Columbia University, described the global crisis in Latin America as a trade crisis, induced by dropping trade volumes and prices of commodities, including copper and agricultural crops like soya. He focused heavily on the international dimensions of the crisis, and argued that the Latin American countries need to consider how to increase the domestic share of their economies, rather than be so vulnerable to external volatility. He cited countries such as Argentina, Brazil, and Colombia as countries more likely to succeed in this transformation. A lively discussion followed in which various country examples were cited.
Argentina, Brazil, and Mexico: The Diversity of Impact and Response
The third session was devoted to three country presentations:
Martin Abeles, former Secretary of Economic Policy of Argentina, spoke about the country´s recovery from the crisis of 2001, its high growth rates from 2003 to 2008, and its relative success in not experiencing a financial crisis or high unemployment. He mentioned the political difficulties resulting from the government?s efforts to maintain competitiveness, while also seeking revenue from highly profitable agricultural exports, to redistribute towards the poorest.
Nelson Barbosa, current Secretary of Economic Policy of Brazil, spoke of the countrys success in generating a rapid recovery from the first shock of the crisis by a combination of public spending, providing credit for consumption and investment, support for housing, and targeted payments to vulnerable groups. He also noted President Lula´s personal role in urging Brazilians not to let the economy contract by reducing consumption. In reality Brazil had achieved a very steep V curve in its recovery.
Juan Carlos Moreno Brid, from the UN Economic Commission on Latin America and the Caribbean, presented disturbing data on the heavy impact of the crisis on Mexico, with declining trade and remittances seriously affecting investment and savings, resulting in high unemployment and a major public crisis at the state and local level in Mexico. The Mexican example was clearly the most dramatically negative impact at a country level in the Latin American region.
The City: the Unrecognized Site of Impact and Recovery
In the opening session of the second day, Michael Cohen presented a paper on the role of cities in the crisis, noting that cities were major sites of impact of the crisis as well as sites for stimulating demand and recovery. However, based on an analysis of the stimulus packages adopted by the Latin American countries as well as those in the United States and a sample of other countries, he concluded that the remedies recommended by the G-20 and most governments had ignored the urban component. The U.S. plan, for example, seems to have allocated substantial resources to rural America rather than focus on cities and towns. This lack of targeting might help to explain the generally disappointing performance of such measures.
Agreeing with the conclusions of this paper, William Milberg, Professor of Economics at the New School, noted that it would be helpful to place the role of government stimulus packages and Keynesian measures into the historical framework provided by historian/philosopher Karl Polanyi who had written about the pendulum swings from state to market and back again. The session chair, Lisa Servon, Dean of the Milano School for Management and Urban Policy at the New School, noted the political dimension of the destination of funds as well as the channels used in the U.S. Martha Chen, Professor at the Kennedy School at Harvard, commented that the poor had not been considered in the design of stimulus packages. Margarita Gutman, Professor at the University of Buenos Aires and the New School, observed that there is a lack of attention by economists to the linkages between space and the economy. She suggested that it would be a useful follow up to this paper to try to systematically identify these linkages and, using experience from government and testing theory, see how the linkages, indicators, and multipliers actually work in practice.
The Crisis before the Crisis
The second session, chaired by Margarita Gutman, focused on a presentation by Martha Chen on the impact of the crisis on informal workers. She reported on a global study of a network of researchers in ten countries, including Chile, Mexico, and Perú, which examined the impact on waste pickers, home-based workers, day laborers, and other informal employment. The data demonstrated a strong contraction in the demand for these goods and services, notably including materials for waste recycling, a significant drop in prices for these goods and services, and a corresponding decline in incomes for some of the poorest people in developing countries. This has had a disproportionately large impact on women as well.
This presentation was followed by an active discussion initiated by Alberto Croce, President of Fundacion SES (Sustentabilidad, Educacion, y Solidaridad) from Argentina. Croce praised the study´s impact on the poor and emphasized the importance of asking how the crisis has affected the region and civil society, how does it specifically affect the poor, how has this happened in Latin America, and what has been done by civil society in response? He noted that these questions had been largely ignored by the G-20. Alberto Minujín, Fellow of OLA, mentioned the importance of disaggregating economic trends and impacts by gender and by age groups, specifically children. He also spoke about the middle class becoming poor, noting the importance of policies to address specific impacts. Martha Chen noted that both commentators had emphasized the fact that there had been a crisis before the crisis and that it is important to study these prior vulnerabilities and the real employment opportunities provided by the informal sector as well.
How to Regulate the Financial Sector
The next session, chaired by Teresa Ghilarducci, Director of the Schwartz Center for Economic Policy Analysis at the New School, focused on the role of the financial sector at the global and regional level, with a presentation by Stephany Griffiths-Jones, an economist from Chile working at the Initiative for Policy Dialogue at Columbia University. She strongly emphasized the need to rethink the role of the financial sector and asked about the type of financial sector we want. The financial sector seems to be intrinsically flawed and overly sensitive to global changes, and it has not responded to the needs of people. She spoke about the need for financial regulation and the potential of public banks, She concluded by arguing that regulations have to be comprehensive, global and national, as well as cyclical, and thus provide an additional policy instrument.
This presentation led to a discussion about these recommendations with Robert Buckley, Managing Director of the Rockefeller Foundation. Buckley disagreed with the speaker and questioned the experience with public banks and the heavy and misguided role of regulation in many countries. Nelson Barbosa from Brazil argued that his country has had a very positive experience with public banks. Andrew Arato, Professor Sociology at the New School, remarked that the lessons of experience in Europe, and particularly Eastern Europe, had to be more fully understood in this discussion.
The End of Small Government
The next session, chaired by Professor Andrew Arato, involved a presentation by Jeff Madrick, Director of Research at the Schwartz Center for Economic Policy Analysis and author of the recently acclaimed book, The Case for Big Government. Madrick addressed the issue of the role of the state through a discussion of the historical evolution of government in the United States and the pro-active role of government in the economic and social development of the country. He strongly criticized the ideological position developed by Milton Friedman, which has been adopted by both Republicans and Democrats, who accepted the historically incorrect thesis that the country was better off with less government and lower taxes. This talk led to an extended discussion on the need for an active government in both assuring that new crises were not precipitated by insufficient regulation and in helping the economy recover from the existing crisis.
Conclusion: Principles and Norms for Economic Management
The final session was a roundtable discussion chaired by Sakiko Fukuda-Parr and involved Deepak Nayyar, Martín Abeles, and Nelson Barbosa. Deepak Nayyar reflected on the norms and institutions at the international level and focused on the logic of international collective action, democratic structures of governance, and the need for new rules to manage the world economy. He argued that the foci of efforts on economic management is misplaced because they are means, not ends, asserting that economic growth and social progress should be the objectives. Public action should be focused on achieving these objectives, and ends should shape norms, not the other way around. The need for international collective action is more necessary than ever before, but there is little evidence that this is happening. To do so requires rethinking national sovereignty. Nayyar used the example of macro-economic management and explained how globalization of the world economy has forced the need for collective action to address what he called “global macro-economics”. This requires both representation of the developing countries and their presence in decision-making, but now most of what is done is either by the market, or by the G 1, the United States. There is a need for an institutional mechanism.
Nayyar addressed the issue of democratic governance by arguing that the developing countries need to be included and not excluded in representation by the few large developed countries. He noted that representation is not just unequal, but it is also incomplete, including civil society or people. Decision-making is even less democratic and the peoples of poor countries need to be given a voice.
He concluded by examining the rules of the game in the international economy, which are largely set by the rich countries, observing that developing countries must be given the time and space to develop their capacity to work with and to affect the nature of the rules. Rights and obligations should not be symmetrical, but should favor countries which are economically weaker.
Martin Abeles complemented Nayyar´s presentation by going back to guidelines which would make macro-economics work for development in Latin America. He described a study undertaken by the Argentine government which concluded that unemployment did not correlate well with poverty, but employment did correlate with poverty, suggesting that poverty is also a production problem. Abeles elaborated on three policy issues: management of aggregate demand, management of credit for production purposes, and creation of policy space to deal with downturns. He concluded with the need to understand macro-prices and the avoidance of “Dutch disease”, the syndrome by which economies with a preponderance of natural resources tend to develop distorted prices.
Nelson Barbosa concluded the session by considering economic policies from a political perspective. He started by discussing principles and argued that heterodoxy requires being able to adjust policies.
The first principle involves the role of the state and the need for the state to produce and maintain macro-economic stability, but it can be done in various ways. He quoted John Williamson´s recent statement that “the era of small government is over”. These functions include: the state must regulate and supervise the market, including consumer protection and consumer rights; reducing inequality, which is especially important for Latin America and developing countries more generally; the state must provide public services such as health and education (despite the debates in the United States); and lastly, the state must promote development. The market tends to concentrate wealth and not to promote democratic development.
The second issue is the promotion of development, while allowing asymmetrical policies because countries start from different points. Developing countries will need to use industrial policies and these will conflict with free trade. This means more reliance on exchange rate management. This issue is already part of the international global system, as suggested by the agreements between the US and China -the G2- in management of their exchange rates.
Another global challenge is global warming, which will require global coordination. It´s a problem of relative prices which can be adjusted, but now, there is a major conflict between rich and poor countries. This could lead to “green protectionism”.
Demographic change is another major issue. The world is aging, bringing new political problems such as pressures on budgets and policies towards migration.
Finally, political thinking must change. We have unifying principles as progressives, with many solutions to solving problems. This leads to the issue of political choice. We cant go back to earlier solutions. There is a need for catch phrases like “no one is left behind”. We need to increase the power of government in the market because markets produce inequality and volatility.
Sakiko Fukuda-Parr ended the session by noting the complexity of international coordination. She noted that the Millennium Development Goals include reduction of poverty, but not inequality.
Michael Cohen concluded the conference by noting the diversity of individual country circumstances. He argued that the crisis is considerably beyond being solely a trade crisis, and that there is a need to look at both the micro and macro-economic levels. He referred to the earlier work of Hollis Chenery, who had argued in the 1970s, that development strategies had to be evaluated in terms of country differences. This led to a concluding observation that differences needed to be recognized both between and within countries. The latter focus also requires recognizing democracy as a critical dimension of economic management.