Needed: Global Solutions for International Financial Crises

Article excerpt

Nothing will affect the future of Latin America (and the rest of the developing world) more than the movement of international capital. Unprecedented inflows of foreign capital have fueled Latin America's growth in the 1990s, and offer the region its best hope for sustained economic and social advance. But these same flows, when they reverse course and become capital flight, provoke economic crisis.

The hazards of international capital movements became evident to Latin America in 1995 when investors pulled their money from Mexico. The peso quickly lost two-thirds of its value, and ordinary Mexicans saw promised gains from years of austerity evaporate. Mexican stocks plummeted, the economy shrank, and wages took a nosedive. The effects swept through Latin America, with Argentina averting a full breakdown but suffering a sharp contraction in economic activity and skyrocketing unemployment. A $50 billion international rescue package was required to reassure foreign investors that it was safe to return to Mexico with capital the country needed for its recovery.

Now Russia is teetering on the brink - while most of Asia has been plagued by financial crisis for the past year.

Strengthened by earlier reforms and responding mostly with intelligent policy, Brazil and other Latin American governments have managed to stave off the effects of the Asian and Russian turmoil, but the battle isn't over, and high costs have been paid. Brazil's economy is static, and unemployment is rising. Latin America's best performers - Chile and Mexico - are watching their currencies devalue. Stock markets throughout the region have dropped precipitously.

The threat to Latin America goes beyond any immediate economic setbacks. In the past 15 years, the region has made a dramatic turnabout - its economies were restructured and disciplined, and democratic politics became the norm. But confidence in market reforms will not last if they bring economic trauma in their wake. It will become harder and harder to defend free trade, privatization, and balanced budgets if, instead of sustained progress, they lead the region into the same old boom and bust cycles. That the alternatives are certain to produce worse results will not remain a convincing argument for long. Unrelenting economic insecurity, in turn, is a recipe for political turbulence and demagoguery, not for democratic progress.

It's up to each government to adopt measures to secure the benefits of international capital flows and protect against their perils. …