I was lucky to be able to see a lecture at the LSE by the newly minted head of Argentina's national bank after the first President Kirchner came into power. This was, as many know after a series of failed Presidents in a record amount of time and a massive financial collapse of Argentina's economy. He was an impressive speaker, and basically said he was the new guy, he was sorry about what happened with the old guy, and that fiscal responsibility, proper market regulations, and slow and progressive growth was the only way to cure burst economic bubbles and ultra liquid financial markets.
In an op-ed by Paul Krugman of IHT.com he seeks out to compare the recent financial sub prime mortgage crisis to failed economies of Latin America pre-2001. While the United States definitely has come into financial crisis because of immoral lending practices, the foundations of the US economy are still strong and has a history of reforming market practices through economic policy and legal enforcement.
While many industries in the US are strong, the comparison between Latin America and the US is like comparing Bananas to Big Macs. In Latin America the crisis of Mexico, Brazil and Argentina were often not just connected to one product market or one industry, but was a result of hyper investment in newly promoted ventures in those countries, a response to state run industries being sold off while they still could produce a profit for in debt governments, and investment regulations which did not regulate hyper liquid investments which could leave the economy with one click of a mouse. While the US also has a massive amount of debt, perhaps one third of it via China, payment of debt was never and is not currently regulated by outside forces such as the World Bank and IMF. Outside debt lending obligations often put many Latin American countries into situations where debt payments pushed more of their population into poverty. At crisis levels of around 30-40% under the poverty line on average in the region, the effect on a country like Argentina is one of a Great Depression, not merely a Great Recession.
In Latin America the economic crisis often resulted in complete systems and economies collapsing due to market bubbles bursting in the Developed world. While the US dollar is down against many currencies, it also allows for US made good to become more attractive to local consumers and leaves foreign imports at a competitive disadvantage. There is also the fact that many trading partners of the US kept their currencies artificially low in order to sell more to the US. The current accusation is that China is currently doing this, and not more than three years ago it was known that Canada's 64 cents US to one Canadian dollar was so low to help exporters to the US even though the value was likely 74 cents at the time. While Latin American countries such as Mexico, Chile and Brazil are now seen as surviving the current global economic storm, the US will also do so as they all currently have decent regulations and good economic fundamentals.
The issue with the US sub prime mortgage market and the new complexities of the banking system in recent years will effect the US greatly, but mostly it is a massive shot against the world banking markets and that industry. This has come about due to regulations which are not in time with the current markets, but also is a result of immoral, irresponsible and illegal business practices taking place in that industry which create overvalued products and economic bubbles. What the United States has in its favour however is the willingness and ability to prosecute those in any industry who seeks to hurt US markets and the economy with illegal business practices. While not always prosecuted in Latin America or worldwide, corruption and illegalities in commerce in the US is becoming more difficult as competition authorities and regulators crack down on actions which hurt the US and world economy. With actions against Enron, Microsoft, Conrad Black and others, the US economy has the ability to never enter a Peso Crisis or another Depression as their fundamentals will often adjust with haste to address any minor crisis in the US Economy. This does not mean the US will do well, but it does show that it can avoid hyper-inflation and market crashes which has plagued Latin America since the 1960s. Let us hope this becomes the case in most of Latin America as well.
