Assessing the Consequences of the Peso Crisis Poverty Efforts Will Probably Be Put on Hold; Skepticism toward Market Reforms Is Likely

Article excerpt

IT will take some time to fully measure the consequences of Mexico's three-month old peso crisis -- for Mexico itself, for the rest of Latin America and the Caribbean, and for US-Latin American relations. Yet it is important to assess what harm has been done so far and what the longer-term effects might be -- as a first step toward containing and remedying the damage.

The Mexican economy will suffer the worst, but economic growth (not very high to begin with in most places) is slowing throughout Latin America. Foreign capital flows are declining, domestic investors remain cautious, and governments are seeking to protect rather than stimulate their economies. The slowdown, coupled with a tightening of expenditures in most countries, will be felt far into the future as vital investments in infrastructure and production are postponed.

Antipoverty efforts, which were finally getting attention after years of neglect, are likely once again to be put on hold in Latin America. The number of poor and the hardships they face will increase as growth rates dip beneath 3 percent, the minimum necessary to make any serious inroads into poverty; jobs begin to disappear; and government expenditures shrink again. Aside from modest initiatives to protect the most vulnerable and efforts to avoid sharp cutbacks in primary education and public health, there is not much governments can do until economic growth accelerates.

When almost everyone's income is stagnant or declining, it's hard to mobilize either the resources or political support to fight poverty and inequality. Deficit spending to pay for social programs is a bad idea because it can spark inflation and undermine longer-term growth -- with the poor suffering the most.

On another front, we are sure to see increased skepticism in the region about the market-oriented economic reform programs adopted by Mexico and most other Latin American countries. Some doubt could help improve economic policy and management in the region, but a wholesale rejection of reform will spell disaster wherever it occurs.

It is easy to foresee the emergence of political leaders ready to denounce privatization, openings to foreign investment, deregulation, and balanced budgets -- and argue for a return to state-led, inward-directed economic strategies. …


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