IV. Conclusion

Latin America was unable to keep out of the reach of the international financial crisis even though it had no direct link to its beginnings. Actively participating in the financial globalization process with programmes for liberalization and opening up implemented in the mid-80s, the countries of this region have undoubtedly taken advantage of the opportunities made available by this process. Particularly, private agents have benefited from the enlarged access to international financial flows thus increasing production capacity.

Participation in the game of globalization entails risks. The instability that goes hand in hand with deregulated financial markets increases the volatility of nominal variables and can transform a minor incident into a crisis of global magnitude. It is just this sort of systemic risk that occurred as a result of the Thai bhat crisis. The exogenous shock’s propagation through financial and trade channels ends the first act of the Latin American crisis (Box 2).

The external dimension of the crisis, making foreign financing both costly and scarce while trade balances feel the effects of a dropping demand and world prices, will continue to rage as long as economies are of a fragile structure: heavy burden of the external debt, marked specialization of base products. Structural weaknesses inherited by Latin America from its past insertion modality put it at a high risk level. These structural disadvantages only served to increase market distrust.

Box 2 - The crisis in Latin America

At the same time, because the external dimension of the crisis requires the implementation of restrictive monetary and budget policy, internal macroeconomic or financial frailties are combined with that external sphere. This combination has led to virulent effects in the case of some Latin American countries characterized by unbalanced budgets, explosive internal debts, financial systems convalescing from the 1995 crisis, currency exchange regimes lacking in credibility, and at times, even political uncertainties. Countries considered the weakest of links were seriously destabilized: Colombia, Ecuador, Venezuela, and above all, Brazil. With the crisis in Brazil, the epicenter of the international crisis finally shifted to Latin America. Although at present its financial effects have been curtailed, the impact has had a significantly negative impact on growth, particularly through trade links in MERCOSUR.

As with other crucial issues, the crisis of Latin America has paved the way for new discussions (Box 3).

Box 3 - Lessons learned from Globalization

Without exhaustive reference to numerous reflections and proposals made by the main official authorities and academics, it is obvious that recent debates increasingly refer to institutional and systemic factors. Unlike the Mexican crisis of 1994, the Asian crisis generated ample discussion on the IMF’s role and intervention modalities. The Russian crisis, whose potent contagion power has been surprising, increased the speed with which means were sought out to prevent and battle international financial instability in the event of such a scenario. The proposal for a « new international financial architecture  » should be constructed particularly on the basis of strengthened monitoring of institutions involved in international financial flows with the application of accounting rules and regulations, of enhanced prudential control mechanisms that govern national financial systems and greater transparency of the financial situation of States and private operators. However, to the extent that the advances made by this new international financial architecture are modest, the matter of a currency regime that is increasingly adapted to a highly volatile environment linked to the free movement of capital, is proposed in fact at the level of each nation or for each regional group, independently of the debate under way on the international rules of the game.

The Brazilian crisis has therefore sparked serious discussion on currency exchange systems. The proposal for dollarization in Brazil should therefore be interpreted in a context that goes beyond the statement made by the Argentinean authorities when the real began its swift downward descent.

The poor results obtained by fixed, quasi fixed and floating regimes as compared to the benefits that these in theory are meant to achieve support the thesis which a number of analysts sustain for the adoption of a supranational currency in Latin America thus eliminating the risks of currency exchange: this currency could be the dollar providing that issues concerning the issuance of currency (coining), the final lender, and the government structure of the monetary authority are resolved.¹ This proposal is based, among others, on the high dollarization level that already exists many countries of Latin America.²

Other analysts, considering that dollarization probably could not be implemented without first reaching an agreement with the United States, and that it was not convenient because it would giving up their own monetary sovereign entirely, are more inclined towards the idea of implementing, in specific cases, a currency board system like that of Argentina.³ Considering this would mean a fixed currency exchange and restrictions in terms of issuance of currency, this type of regime in effect can be perceived as advantageous from a credibility standpoint. However, the economic and political conditions for its implementation and operation are not met by many of these countries⁴.

At the same time, Chile’s experience, whose currency exchange regime is deemed « intermediate » with an adjustable fluctuation band based on circumstances and a referential rate of currency exchange vis-a-vis a currency basket, demonstrates that a country’s to cope with international financial instability is also determined by other parameters: sturdiness of the banking system, public finance’s health conditions.

As a matter of fact, the debate on currency exchange systems, a principal point of discussion stirred up by the international crisis,⁵ does well in reminding that even the best of regimes is influenced by national conditions. At the same time, nonetheless, this controversy in itself suggests the monetary dimension of the international financial crisis. In this respect, the debate reveals a legitimate concern: the advances made in building a « new international financial architecture » must be complemented with the start-up of a process for the reform of the international monetary system. But this process, that needs to include the definition of institutional and operative criteria for the international last-resort lender has not been able to make its way into the political plane.⁶

NOTES

¹ Hausmann, Gavin, Pages-Serra, Stein, 1999.

² Particularly Argentina, Bolivia, Nicaragua, Peru, Paraguay and Uruguay (see Baliño, Bennett and Borensztein, IMF, 1999.

³ This is, for example, the proposal made by the former Minister of the Economy of Argentina, D. Cavallo, for the case of Brazil (see Cavallo, 1999).

⁴ The currency board in particular supposes having very strict budget discipline, and does not allow or seriously limits monetary authorities from intervening as last resource lenders; hence, this calls for the implementation of specific mechanisms capable of ensuring the stability of the banking system in the framework of a broad set of economic and institutional reforms (Eichengreen, 1999).

⁵ Ocampo, 1999.

⁶ Aglietta, (1998).

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