As I watch Europe’s sovereign debt crisis play out, I get the most depressing feeling of déjà vu. We’ve been through this before. The historically-minded make comparisons to the crisis in the 1930's. Paul Krugman also talks about the Asian financial crisis from the 1990's. But I keep thinking back to the first debt crisis I was old enough to remember -- the Latin American debt crisis of the 1980's. What has that episode been forgotten? The parallels are disturbing.
That crisis had its roots in the 1970’s, when oil prices spiked and Arab countries ended up with way more money than they could absorb. So they put the money in banks and the banks, not knowing what else to do with it, made large loans to Latin American countries. In the 1980’s, the bill came due, and none of the countries could pay.
Crisis is perhaps the wrong word for what ensued, because it implies something urgent and quick. The Latin American debt problems dragged on and on and on. Year after year, they lacked enough income to pay their debts, so the IMF made loans to meet the immediate demand on condition that they undertake “structural reforms.” Structural reforms generally meant balancing the budget on the backs of the poor. The IMF’s outlook was generally that poor people eating was a hideous misallocation of resources and why were these countries squandering resources on their domestic populations when banks were facing shortfalls to their payments.
Prior to the "crisis," Latin American countries had experienced rapid growth, concentrated very heavily at the top with little benefit reaching the middle class and almost none reaching thepoor. Then, suddenly, the loans were cut off and the poor and middle class were informed that all that time they had been living beyond their means and would have to start making sacrifices. Asking sacrifices of the people at the top was ruled out because that would lead to capital flight. In short, the call was for a system in which people at the top received the benefits in good times and people at the bottom bore the burdens in bad times and were greeted with tear gas and billy clubs if they protested. All of this, of course, was hailed as the triumph of freedom and democracy.
Yet despite the obvious parallels with today, when I read Paul Krugman’s The Return of Depression Economics about international financial crises leading up to the present, the omission surprised me. Although he condemns the IMF for its handling of the Asian crisis in the 1990's for insisting that the affected countries squeeeze their domestic economies, he treats this as if it were in some way surprising. Why doesn't he mention that what the IMF did in Asia in the '90's was no different than what it did in Latin America in the '80's? Perhaps he thinks the IMF’s actions in Latin America in the 1980’s were justified to clean up badly mismanaged economies. Certainly, many of those countries tried to make up for the loss of foreign loans by printing money and saw inflation go from double digits to triple digits to quadruple digits, and sometimes even into quintuple digits. That kind of inflation does call for painful measures to stop it. And it is also true that ultimately the conservative forces emerged triumphant from the misery of the ‘80’s, broke the inflationary spirals, balanced their budgets, and restored growth. Maybe Krugman thinks it was all just as well.
Throughout the ‘80’s debt “crisis,” profligate Latin American countries were compared unfavorably to the virtuous Asian countries that grew at a mighty clip without running up a lot of foreign debt. Why couldn’t the Latin Americans imitate the more virtuous Asians? Why did they insist putting the needs of their domestic population ahead of attracting foreign investment? Then, in the late ‘90’s, the Asian crisis hit. Suddenly it turned out that Asian countries weren’t so virtuous after all. Suddenly they started being treated to the same lectures about the need to mend their ways as Latin America. Suddenly, once again, the IMF was asking them to squeeze, squeeze, squeeze and then couldn’t understand why their economies shrunk instead of growing. But the reaction was not altogether the same. Yes, Asian countries were blamed for being corrupt and not “transparent” enough. But people began to suspect that maybe foreign investment was a mixed blessing. Maybe, after all, you could get too much of a good thing. Maybe capital flows were turning into capital stampedes. Maybe some capital controls were in order to keep foreign capital out. And maybe the IMF prescription of squeezing one’s domestic economy as much as possible to please foreign investors might do more harm than good.
Furthermore, although the Latin American debt crisis was considered over, the Asian crisis ended up whipsawing back to Latin America yet again. Brazil, Argentina, and Uruguay all came under pressure and the IMF came back with its old formula of squeezing their domestic economies harder and harder to please foreign creditors. But foreign creditors seemed strangely uninterested in investing in economic devastation. This time the outcome was quite different. The crisis escalated much faster and became more acute. Argentine and Uruguay defaulted on their debts and devalued their currency. Brazil did not default, but found the IMF’s squeeze unbearable and devalued their currency instead. The political outcome was also differet. Brazil, Argentina and Uruguay all elected government of the (moderate) left that put priority on paying of their loans from the IMF to ensure it would not be able to meddle any more. All three have been prospering ever since. (Although if the world economy tanks again, all bets are off).
Other actors also seem to have been more affected by the Asian than the Latin American debt crisis. Asian countries limited their foreign debts, stockpiled foreign currency, and responded to the 2008 crash by fiscal and monetary expansion. And it worked; their economies bounced back quickly. And the IMF appears to have learned something and has been much less insistent that peripheral Europe squeeze their domestic economies than anyone else.
But, alas, everyone else seems intent on playing out the same mistakes that have been made over and over since the 1980’s. So I have to wonder whether we will learn anything from them and, if so, at what cost. Any why no one seems to remember that this drama has been replaying itself, again and again, at least since the 1980’s in Latin America.
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