Weak leadership, economic crises and political polarization: What the International Community can learn from Latin American Regime Crises

Posted on | augustus 10, 2011 | No Comments

The volatility of the stock markets, the worry about Greece that flew over to the USA, Italy, Belgium and Spain are no coincidence, they are part of a broader trending, of economic mayhem and international uncertainty. The USA, Belgium, Italy and to a lesser extent Spain devote a disproportionate time on meandering through the doll drums of political inertia, polarization; Personal crises, power struggle and infighting determine the European and American political Arena in a time that screams for strong leadership apt overarching domestic dissatisfaction and negativity over stagnant and lagging economy.

Many nations in South America on the other hand experienced economic downturns, government inaction and failure to come up with proper measures to tackle slacking economy. Many of said societies became subjected to what I qualify as unrealistic austerity measures imposed by international monetary organizations such as the IMF and the World Bank, measures that in fact worsened the already bruised and battered economy. The upside of these crises was that many societies emerged out of mayhem and tribulation as time progressed, regimes changed, taking on the economic crises using different tactic to get out of the maelstrom, strengthening democracy in due process.

The difference between the current crises and the Latin American debt crises was the fact that the first mentioned should be qualified as a transcontinental crisis that manifests itself at domestic level. Puzzling is the existing discord that seems to exist on both ends of the pond on how to find common ground to solve this crisis

  • The first discord is cultural, between the Anglo Saxons (Americans and English) and between Continental Europe (EU);
  • The second discord is between China and the emerging powers and the NATO-countries;
  • The third discord is the lack of solidarity and infighting in the EU and between the Democratic and GOP parties in the USA.

The existing discord between all players is for the greater part attributable to the manner in which information is processed at both international and domestic level. The manner in which information is processed and analyzed by the various actors, determines the gravity of the crisis and henceforth its termination.

In contrast, the crisis in Latin America, despites its global impact, specifically in the early 1980s, its waves did not reach the shores of either the European or North American continent. This paradoxical position has its bearing in the place of Latin America in the global economic order during that specific historical period, a place in the periphery of the international order, with limited leverage and influence.

The Latin American Debt Crises of the 1980 and the Baker Plan
The Latin American Debt crises commenced after nations such as Venezuela, Argentina and Mexico, among others, defaulted on the interests of their massive loans after the 1978 oil-crisis, and the subsequent plummeting of oil crisis, after nearly two decades of rise. The aforementioned nations that had borrowed against future revenues were already boasting negative economic growth, and had compensated such with massive loans from the USA, IMF and the World Bank.

The USA, after the Iran hostage crisis reached its plateau, Korea, Vietnam, the influx of Japan, indicating what Huntington followed by Gilpin et al. call imperial overstretch, reacted vigilantly. Aided by the IMF and the WB, the Reagan administration imposed a series of impertinent and unattainable austerity programs on countries such as Mexico, Venezuela and Argentina. The measures, implicating a series of neo-liberal policies of privatization and cuts in the public sector, revealed the weakness of institutions and political leadership, as well the extent of corruption.

The Baker Plan, and its successor, the Brady Plan, offered only the smallest way out, as restructuring only occurred at economic levels: The Brady Plan does not differ from the current day ECB bail-out plan: In exchange for commercial bank loans, countries were issued bonds for the principal sum (initial loan) and for the unpaid interest. These tradable loans helped the lending institutions to spread the risk between them and the commercial banks, while opening up new opportunities for trading. The plan in fact yanked the economic system out of its rut, it helped recover some of the outstanding funds, and reduce the risk of commercial banks to fall down. The plan was developed in the first place to protect the commercial banks, to reduce the risk and offer them a way out of these collapsing economies.

The IMF and the WB continued to determine the terms of repayment as many debtors had little option than to purchase what were called U.S. Treasury 30-year zero-coupon bonds. The mandatory requirement of using foreign currency reserves to refinance existing loans that left little money in the treasury to, for example, finance plans to create jobs or to develop programs to tackle poverty.

The Baker/ Brady plan in a way integrated many middle income nations (Nigeria, Morocco, Argentina, Mexico) into the international monetary system, incentivizing the declining competiveness of the USA, as well as reconfirming its hegemonic position within the international community.

The debt crisis of the 1980s demonstrated the imperfection of political systems that exist by the grace of co-optation and consensus (Venezuela); the fallacy of authoritarian regimes to develop sustainable economic programs (Argentina, Mexico); the extent of corruption and nepotism. The 1980s crisis also disclosed the fragility of the international economic system, a system part linked together by commodities and raw materials, intercontinental and intra-continental trade.

The 1980s debt crisis involved 15 middle powers, typically ruled by authoritarian –dictatorial – regimes or regimes that were deemed weak. The international outcry and disapproval over the amount of debt, accrued by these so called ‘banana republics’ fed into general opinion of the international community that their interests should be protected. The rescue plan was substantial, in the sense that it specifically protected the commercial lending institutions with outstanding loans, curbing their losses at the expense of the weakest in society. The impact of the austerity measures on the general public imposed by the so called lenders of the last resort, IMF and the WorldBank, was massive. In Venezuela, the raising of oil prices and the subsequent rise in the prices of public transportation brought on a massive public uprising called the Caracazo. Government responded with equally massive force, killing more than 100 citizens in the onslaughts that followed. The Caracazo transformed the political landscape of Venezuela indeterminate, opening up its ranks for disloyal forces and charismatic strong leadership, a fact that made Venezuelan political parties obsolete. In Argentina the crisis of the 1980s, the fact that economic recovery stagnated, set the stage for an unprecedented economic crisis that captivated and paralyzed the nation for the greater part of the 1990s. The same can be said about Mexico, the Peso crisis, and ensuing bail-out plan devised by the Clinton Administration to safe NAFTA. The exception is Uruguay, a nation that despite its economic woes, managed to consolidate democracy, by strengthening its political and civil arenas.

Contrasts between the Past and Today’s Crises
Despite the breath of risk, the economic crises in Latin America remained relatively confined to the American continent. The magnitude and breath of the current economic crisis is more widespread, more invasive, and more complex. The parallel between both crises is that the onset of the crisis was lending and loans were confounded in expectations, possible developments in the future. The global economic meltdown of 2008 started in the USA, where banks issued a massive amount of sub-prime loans that served as the basis for some bogus pyramid scheme for the banking industry. The Bush Administration gave unbridled powers to the Banking sector, while turning a blind eye to the fact that many loans were given to people who could simply not pay their loans. But the housing bubble was built on a rickety structure of packaged bad loans that were traded on some shady market. At the heart of the crises stood Lehman Brothers, with its triple A status a seemingly solid institution that all of a sudden came crashing down. The decision by the Bush Administration not to bail Lehman out, proved to be egregiously faulty, because it set the stage for a massive banking crisis. What prompted the Bush Administration to make such an erroneous mistake? What prompted the decision to let Lehman fall, other than perhaps underestimation of its gravity, its extent and its effect on the American economy?

Interesting to note is the fact that the myopic view of the Bush Administration stemmed from complete and utter lack of political and economic antenna, the fact that a ripple in the economic system of the USA, would ensue a tidal wave across the pond. The autumn of 2008, and 2009 are years marked by massive bail-outs of banking and lending institutions in the USA and Europe, to prevent collapse of the international financial system. Interesting is that on both sides of the pond governments reacted differently; continental Europe came with drastic measures to get control over its banking systems, ensuring that a subprime-type crisis could not come to haunt the European economies. Within the framework of the ECB, governments started to prop up their economies, protecting their industries and their interests.

The new president Barack Obama came into power, expected to tackle this massive downturn. But many programs, such as cash for clunker program, to boost the sales of new (American) cars or the moratorium on foreclosures had limited effect on the economy. The massive overhaul plan, to subsidize work programs in the different states, got lost in the doll drum of massive budget cuts, ranging from the closing of entire schools, to cut back on library hours, to limiting the number of meetings of the state’s assemblies.

Many of the proposed cut-backs hurt as well as eroded democracy in the USA, as these cut-backs downsized bureaucracies deemed crucial in the recovery process. This information did not reach the other side of the Atlantic Ocean, as conservative forces in for example the Netherlands began to parrot the opinions of the ultra-conservative Tea Party Movement, that government should be downsized. Other crucial information that did not reach European shores was the message of Mr Obama that the USA had reached its limit, being the world police, keeping international anarchy to its barest minimum. But Europe seems to blind and deaf, and continues to look at the USA for answers, instead of deepening the European Union, to tackle the economic crisis unified instead of insular.

But European nations are being bogged down by weak leadership, by Silvio Berlusconi, whose antics and wanton behavior has reached epic proportions. Or the failure of Belgium political leaders to set their differences aside, to engineer a coalition apt overarching social, cultural and language divides. In the Netherlands, a right wing minority government is taken for ransom by its abiding ally, Geert Wilders.

In all the aforementioned societies, national debate should revolve around the debt, the fact that it was tax-payers money used to bail out the banks, how to deal with soaring unemployment that specifically affects youth and youngsters are leaving. The issue is that the public debate should concentrate on the fact that the banking crises was the doing of Wall Street, EIG, ING ,Fortis Bank and Bank of America. Political leaders however sidestep this debate, concentrating on budget deficits, on bail-out plans for Greece and Ireland, on Islam…on creating harsher punishment to quell the public call for strong and decisive leadership.

The main contrasting element between both crises is the fact that the last crises encompasses a three continents, Europe, North America and Asia (China); while the 1980s crisis affected a specific category of nations. Lack of information as well as other cultural and political differences also play into this crisis; Calling the Greeks lazy and wanton, or expecting Mr. Obama to continue to take on the role of world leader are geared to influence public opinion, to play politics before an election. Latin America stood at a threshold in the late 1980s, the crises brought on transformation of the political, bureaucratic and civil arena.

The decision by President Nestor Kirchner of Argentina to stop paying interest, and instead focus on the recovery of the domestic economy could also occur in the case of Greece, Ireland and Spain. The difference is that Mr. Kirchner had substantial political and public support to pull the plug on the lenders of the last resort. Question is if the current crisis can forge a similar change in the political arena.

AUTHOR: Natascha Adama
URL: http://natascha23.blogspot.com
E-MAIL: nataliapestova23 [@] yahoo.com


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