Developing countries in the face of the storm

Glauco Arbix

In the 1980s, a debt crisis shook Latin America and Africa. Another one then hit Asia, Russia and again Latin America at the end of the 90s. Many countries had their trajectories momentarily interrupted, even though they were able to recover rapidly in tune with the global economy. In the current recession, it is developed countries that are in the eye of the storm. Nevertheless, the impact on emerging countries will also be strong. Both for those that grew rapidly and benefited from a global environment marked by liquidity, low interest rates, a weak dollar and the rise of commodity prices; as well as for the more fragile countries, who will be, once again, the big losers. The developing world cannot stand idle and hope that the crisis will leave them unscathed. In addressing these challenges, both developed and developing countries must prioritise the following steps:

Move beyond temporary and localised measures
These are not propitious times for small measures. Latin American companies and public  finances have already been affected by the crisis in a very real manner, either through the reduction of revenue or by changes to the influx of foreign capital. On top of this, the magnitude of the crisis is likely to increase, given that the drop in the price of commodities has only just started. For this reason, the announcement of measures for temporary or localised mitigation, although well intentioned, will inevitably increase the insecurity of economic actors and society as a whole.

Restore confidence in the market and private investment
In a climate of growing uncertainty about capital flows, every effort to keep or recover investment is key. The deceleration of the economy has already frozen out a great number of private companies’ projects and opened up a cycle of dismissals. Public investments are certainly part of the solution. Yet, fundamental to this is the rehabilitation of confidence in private investment and the market mechanism.

Seek effective intergovernmental coordination
The global crisis calls for a coordinated international response. At the national level the adoption of expansionist monetary policies, new credit incentives, interest rate cuts and fiscal stimulus are all welcome first steps. This must be built upon by developing rapid and coordinated responses at an intergovernmental level. Yet whilst many countries are moving in the right direction, others are slow to react. The crisis will punish such sluggishness; therefore swift action must be taken at the highest possible level. In Latin America, engagement is hesitant at both the national and international level. This reveals indecision between policymakers, and even underestimation of the scope of the crisis. Our autarkic legacy detracts us further from coming up with adequate responses. In this situation, it is helpful to remember that those who look at one single country run the risk of seeing none.

Strengthen international mechanisms for supervision of financial markets
In Latin America, it is already possible to create mechanisms for debate about and the coordination of anti-cyclical policies. This proposal can be extended to the G20 and involve institutions within the UN system; thus paving the way for the establishment of an organisation to monitor and control financial risk. This would be an important step towards creating a World Financial Organisation (as proposed by Barry Eichengreen), using the World Trade Organisation (WTO) as a model. This organisation would fix rules, standards and obligations for its members; it would be responsible for the supervision and regulation of financial markets; and it would provide a dispute settlement mechanism.

Promote greater inclusiveness in international financial institutions
For developing countries, it will be crucial to reform the existing rules of the international financial system. This reform must ensure greater inclusiveness so that new proceedings, rules, instruments, obligations and rights are not determined wholly by the interests of the strongest. Active participation in overcoming the current international “disorder” is the first big test of maturity for developing countries.

Resist protectionist tendencies
Developing countries will have to look beyond their borders and resist protectionist tendencies, which will be particularly strong in the more developed countries. In Latin America, pressures of this kind may lead to a return to mercantilism. Mercosur must either assume its vocation as an economic bloc or give way to a new project; it cannot modernise with the continued presence of trade barriers between its member states. It also runs the risk of hampering the search for a new international insertion strategy for the region. Protectionism hinders, and even stops, the flow of knowledge and innovation, a basic condition for the competitiveness of private companies and the economy at large.

Act now
The earlier governments coordinate their efforts for the recovery of their economies, the sooner the recession will end and the quicker will be the return to the previous economic upward trend.

Glauco Arbix is professor of sociology at the University of São Paulo, Brazil