We are in the midst of a change of epoch. Multilateralism as we knew it has ceased to function in the international sphere, and the world economy is moving within a new social and political order that is being built bilaterally, plurilaterally and regionally. We know that it’s a change of epoch because theories that were useful to explain the past do not help us to predict the future. The so-called market economy which held sway until 1930 returned in the 1980’s with its royal decree that the law of the strongest reigns and that Power will abuse all that it can as far social and political actors will allow. Particularly in international finance.

What has occurred in Latin America since the beginning of the debt crisis

In the past quarter century, state assets were transferred to foreign capital, “self-regulated” private monopolies were permitted and above all, everything relating to Labour was left unprotected in favour of everything having to do with Capital, all in the name of external debt. National banks were privatized, nationalized and reprivatized; both public banking and national banking disappeared. The labour market was made “flexible” and unions were denounced as wage monopolies. Altogether this results in the immense concentration of income within every country and around the world in general.

The determining factor today is financial or the way in which wealth is transferred from one place to another and from one sphere to another. Global poverty currently is also, in part, the fruit of policies which concentrate wealth. Better prices for agricultural products, better wages and adequate unions would facilitate a better distribution of income as a result of related production processes. Sectoral policies oriented toward added value production and employment would lead toward sustained growth and improved incomes for the population. But this is neither what international financial institutions [IFI] nor Latin American elites want, nor what the political class wants in many countries.

Without doubt through external debt wealth has been transferred from South to North and that mechanisms of renegotiation of this debt were oriented toward this end. In 1981 Latin America changed course from having been converging toward the richest economies to becoming more distant. In 1981, the income gap between Latin America and the United States was 6 times per capita income, while by 2004 it had become 9.5 times. Chile is the only exception which has moved in the opposite direction. If the debt crisis and transfer of capital in the 80s marked a change from convergence to divergence, the structural reforms of the 90s accentuated it. This is not a theoretical failure; rather it was the goal of the so-called neoliberal policies of globalization.

The role of IFIs: an overview

In the United States’ in 1981, the unilateral interest rate hike that resulted from a fiscal policy of expansion and a monetary policy of contraction, led to the balance of payments crisis in the developing world. The cost of credit obtained at variable interest rates rose from approximately zero in real terms after inflation in the mid 70s to 8% as a result of US domestic policies. Such decisions are always made without taking a look in the rear-view mirror and considering the impact such policies might have on the many countries that use substantial amounts of credit. It’s worth remembering what John Perkins says when he talks about being sent in the 70s by the US government to sell over-blown projects to governments of developing countries so that they would take out credit for useless public works critical for the US economy.

Those responsible for the economic crisis of the 80s have remained hidden behind complicated explanations of the causes within the development model and of the corruption and inefficiency that characterize African and Latin American political systems.  All this could have been plausible if it had not occurred simultaneously throughout the world, and with the exception of the superavits in Asia and Europe, all the rest suffered from the effects of this handling of macroeconomics .

The role of the International Monetary Fund (IMF) followed by the World Bank (WB) and the Inter-American Development Bank (IDB) from the 70’s onward was to organize the world to enable the transfer of wealth from one place to another. From dismantling productive structures, making employment precarious, to privatizing social security, as well as health and education, the law of one price fits all served to take apart what had been achieved since the republics of Latin America were founded. At first it was said that exports would generate economic growth, however this proved not to be the case except for Chile and maybe Peru; export was also expected to produce employment, which did not occur; it was said that wages would improve, but the increase never took place, and finally that retirement conditions would improve, which in Chile, where the idea was shaped, has shown to be false. Not to talk of what happened to the quality of education, nor shall we discuss the number of emigrants who left because of the lack of future prospects in their own countries.

If the rules were the same across the board and there was a level playing field, resources would not have been transferred from one place to another. But the international financial architecture was designed so that there would be two rules, one for the rich and another for the rest. In brief, at the macroeconomic level, the G7 is where policies amongst the seven richest economies are coordinated. The rules for the remaining 180 are created by the IMF. The two sets of rules which have been abused and which, perhaps out of exhaustion, finally became obvious in Thailand. What Latin America had been saying since the 70s, Joseph Stiglitz said in the year 1999. And given that he speaks and writes in English, they listened to him.  He is, apart from being part of the establishment, not suspected as a threat towards US hegemony.

Shortly after, the Argentinean crisis occurred, as a natural outcome of  the IMF’s outrageous recommendation to maintain the convertibility of the dollar, which had existed since 1991, after having experienced the crisis in Brazil in 1998. This recommendation simply served as a push factor for thousands of millions of dollars to leave Argentina, and in return the country was struck by a debt crisis as a result of trying to cover the lost funds.

This was all due to the banking crisis that suffocated Latin America, as an effect of the deregulation of the capital market and bank privatization. “I did not know there existed a relationship between bank and government”, commented a Mexican World Bank official.  We do not know whether WB officials are well-informed on development economics, but they are surely not aware of history and neither do they read the newspapers in the countries where they reside. The Mexican Minister of Economy was a former high official in a Mexican bank, and before that, undersecretary of finance.  That was the period when the design and rescue of the Mexican banking system took place, which is the most expensive and possibly the most corrupt in all of Latin American. These situations occur with frequency in many countries. And the international officials recommending these policies, walk the streets and are still employed, many receiving higher wages -as we now know- than the Secretary of State of the US.  If the problem was mere theoretical failure, it could be debated, but that is not the case. In the name of the (perfect) market and globalization (one price fits all), the official economic theory pursues the goal of passing on wealth from the poor to the rich without state control. Or from another angle, the goal is impoverishment of all those incapable of defending their rights from market abuse, who pass on wealth to all those who can.  This means universal prices on all goods, but not for wages.  Nor for monopolies, etc.

IMF and the US

The massive US deficit of USD 750 billion serves as the best example and equals one third of all Latin American annual production.  This figure is financed by developing countries’ international reserves, including China\'s, which have maintained the dollar in treasury bonds provided by the US.  As poor countries we are funding a rich country\'s reckless spending for a criminal war, aimed at keeping its economy afloat.  What is the IMF’s response?  Well, that it is good to know that someone is financing it (Article IV Report, 2006), although it will not be forever, and they go on to salute free trade leadership. They conveniently "forgot" about US subsidies on exports, as well as tariff and non tariff barriers on import of industrial goods.  Clearly the IMF is not so much a multilateral organisation, as a US treasury agency.

The IMF says:

• The ease with which the US has financed its current accounts deficit is astonishing,with unprecedented figures; however, this situation is unlikely to last indefinitely.
• Leadership by the United States remains key to global trade liberalization

Fiscal balance is not even mentioned, because the bosses fail to see it as an issue.  On the other hand , the US blames China for its fiscal and balance of payments problems, because of their fixed exchange rate.  Actually, Venezuela and Mexico also operate with a fixed exchange rate, however, this is not the problem, rather their immense deficits.  ¿Adjustment policies in the US?  Don\'t even think about it; a multilateral adjustment is what they have in mind.  In other words, the rest of the world has to adjust, so that the gap between the US and the rest will grow even wider.

The effect of the collapse of the dollar

The devaluation of the dollar, derived from its fiscal and external deficit, has had an adverse impact on international price references, which are usually measured in dollars.  In 1971 this phenomenon was not noticed, but it is now obvious that if the dollar falls by 20% in value in relation to the rest of the world, it is necessary to adjust dollar measurements by 20% to establish real terms.  For example, the copper price, booming in dollars, is relatively stable in euros.  The New York Stock Exchange rate, on the rise, is relatively stable measured in euros, soles, reales, various pesos or bolivianos.  Measurements in euros or South American currencies, except for the Bolivar – anchored to the dollar – give a different global perspective from the boom seen in dollars.  Mexico and Central America are anchored to the dollar, so do not experience this effect and continue operating with reference to the dollar.  We are witnessing the fall of the dollar standard, as we saw the fall of the gold dollar standard 1971 and the fall of the gold standard in 1930.

Is there a new reserve currency?  Not really, but there is the possibility of using several reserve currencies which combine currencies in countries within established regions of Asia, South America, Africa and the Middle East…

The new tendency toward a regional financial order

The abuse of the current financial architecture by a few large economies and its increasing uselessness and disrepute, first led members of the European Union to organize themselves into a financial region with a complete set of institutions: a stabilization fund, common trade accounts, and a development bank. Faced with Asian frustration at the end of the 90s when the IMF had to send its people back to Washington to avoid their doing more damage, first the Japanese government followed by other Asian administrations proposed a regional monetary fund. This is known as the Chiang Mai Accord and it includes 17 countries: the 14 members of the Association of South-East Asian Nations (ASEAN) as well as China, Japan and South Korea; in other words, all Asian countries except India. They have a fund for issuing bonds to reduce their cost because lower common guarantees also reduce the margins over the basic rate of interest for the government issuing the bonds. So far the European Union hasn’t needed this, but with the integration of Eastern Europe it might become useful.

In Latin America two things have happened: first, in the mid 90s, the external bond market in dollars began to be moved into the internal market, whether in dollars or in national currency. National currency helps to reduce the risk in exchange although at the cost of shorter terms and slightly higher interest rates. The resources, for the most part, come from private social security funds which were introduced in the 90s and which have nowhere to go.

Second, in South America, the Bank of the South, an initiative put forward by the government of Venezuela, took on its own momentum and moved on from being isolated, like the Asian monetary fund when it was first launched by Japan, to become a complete financial initiative. The so-called Quito Initiative includes a monetary stabilization fund built around the Latin American Reserve Fund (FLAR), a development bank (the Bank of the South) and common accounts to stabilize economic relations amongst its members. Unlike the European Union and ASEAN where 75% of their total trade takes place within the region and the remaining 25% outside the region, in the Union of South American Nations (UNASUR) members trade very little amongst themselves, predicted to become less and less in the long term. UNASUR’s political integration schemes should include stronger trade integration processes. If the export of ethanol does not derail energy integration in the South, this will become the model for trade integration to be realized.

Common accounts which are used to issue bonds in order to re-circulate surplus within Latin America is an idea which addresses concerns about financing the North rather than ourselves. A bond fund would provide a platform from which to create a South American bond market. But the problem is two-fold: we have a dollarized economy and an additional economy which is anchored to the dollar. Would they be able to their monetary basis without undermining the financial structure of their national budgets?

The devaluation of the dollar between 2002 and 2006 has been on a rate from 20% to 30% depending on the country. There has been less devaluation in those countries with fixed exchange rate due to fiscal reasons. This has not occurred in Mexico and Central America because of their extensive financial relationship with their neighbour in the North.

Finally

A new regional financial architecture is possible so long as the tensions between leading South American economies don’t pull it apart. The only way to avoid a leadership competition which would destroy the initiative is to give a small country which is not amongst the leaders the role of settle and administering the project. Everything points towards Ecuador in this matter.

In Latin America debt is growing in national currency and total debt is also growing while exports in dollars decline. Today, greater stabilization within the region is more important than ever given that new creditors will mostly be pensioners within these countries, which is something that governments should learn from the experience in Argentina.

The problems within the US economy threaten all of us and the poorest above all who will find their hopes for a decent life even more frustrated if the US stock-market collapses and the dollar is still being used as the reserve currency.

Everything points toward the need for us to come together in the search for an international system, not simply more just, but also more equitable and democratic; which is more pertinent to the population and which is responsive to them as part of the democratization of globalization and its institutions. A framework far from dividing up the world between Europe and the United States, within which global institutions respond to their interests rather than the development of the global economy, such as in the case of Wolfowitz and the appointment of Zoellick to the World Bank, or of Rato to the IMF.

The solution to Latin American stagnation, to massive emigration and to the loss of hope is to start thinking about how we want our future to be and to imagine what kind of institutions we want that will allow us to arrive there. (Translation: Donald Lee)

- Oscar Ugarteche, a Peruvian economist, works at the Institute for Economic Research of UNAM, Mexico, and is a member of the Latin American Network on Debt, Development and Rights (Latindadd). He is also the President of ALAI.

(This article is included in the July issue of América Latina en Movimiento, No. 422, focused on the theme “Deuda: cambios en la arquitectura financiera”, now in circulation: http://alainet.org/publica/alai422w.pdf)

Note:  The previous abbreviate version of this translation has been replaced with this complete version, as of August 7 2007.