The book then examines the various scenarios from a Latin American perspective, arguing that different countries follow diverse paths in adapting to the crisis - with significantly different outcomes. Their common challenge is how to achieve economic growth with social inclusion.
About the Author
Juan E. Corradi received his PhD in sociology at Brandeis University in 1974. He is currently Professor of Sociology at New York University and Visiting Professor at the Institute of Advanced Studies in Lucca, Italy.
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South of the Crisis
A Latin American Perspective on the Late Capitalist World
By Juan E. Corradi
Wimbledon Publishing CompanyCopyright © 2010 Juan Corradi
All rights reserved.
IMPENDING STORMS: FISCAL INTEMPERANCE AND MORAL DILEMMAS
At the beginning of the new century the volatility of the dollar betrayed the structural weakness of the American economy, an economy based on indebted consumption and enormous military spending. In my native Argentina I spoke to many citizens through whose eyes I could see the first signs of a potential geopolitical restructuring and the incipient emergence of new blocs. Those Argentines were always interested in the broader world as well as in my experiences on the ocean as an offshore sailor.
It wasn't easy explaining to them how tropical cyclones take shape and grow — the kind of storms called hurricanes when they batter the Atlantic and typhoons when unleashed in the Pacific. However, I tried my best, since I found they served a perfect analogy. A hurricane takes shape gradually at first, but then strikes with catastrophic results. Moist air from warm waters rises to phenomenal heights (from the atmosphere to the troposphere, grazing the stratosphere). The navigator's barometer registers a tremendous drop in atmospheric pressure. The mass of air rises in a revolving fashion. In the Northern Hemisphere, this revolution is counter -clockwise. Upon reaching the highest strata the air mass, instead of running into a reverse air flow that would brake its circulation, runs into another current flowing in the same direction that imparts amazing velocity to this high cloud spiral — speeds in excess of 74 miles per hour. This mass of spinning air moves like a crazy merry-go-round around a small, calm center or eye. The huge whirlwind, with a diameter hundreds of miles wide, moves over the ocean, following the warm water currents it feeds on. It destroys everything in its path: large and small boats, shacks and hotels, villages and plantations, lives and dreams. Only two things can stop it: the large continental masses where hurricanes generally make landfall after sweeping islands and coastlines, or the colder high-latitude waters where they cool down and lose power. The atmosphere recovers its equilibrium when the tremendous energy stored in the tropics is discharged in the planet's temperate zones. The sole thing a sailor can do in these cases is stay home, if possible, for the duration of hurricane season, or ride it out offshore, trusting that prudent measures will outweigh the violence of nature.
At that point, it was easier for me to explain the stormy forces at work in the international monetary markets. When North American consumers buy huge quantities of Asian products (the majority of global production has moved from other countries to China and other Asian sites), hundreds of billions of dollars from these sales accumulate in the coffers of Asian governments who, in turn, recycle this money through the North American financial system and, in this way, influence the interest rates and economic activity of the world's leading superpower. At this point in my explanation, I made a drawing as an illustration (Figure 1) so my listeners could visualize the global economic flow.
I explained that bonds are a type of IOU. If the debtor gets in a jam, and stops paying, the cessation of payment is called default. Default leads to a huge crisis, since monetary flows break down and the trust on which transactions are based is violated. An alternative is to renegotiate the terms of repayment. Another alternative is to pay with devalued currency, which is a more delicate way of paying back less than what you owe (if the country has the privilege of going into debt with its own money, and this money is reserve currency).
Argentines, with surprising speed, were able to boil down my explanation in terms of their own experience. "Look," one of them said, "when a country spends more than it earns, and takes out loans to keep on spending, sooner or later it runs the risk of going broke. It's at the mercy of its foreign creditors who impose their own conditions." She added, "The country then is full of poor, angry people. And they have every right to be angry — if their savings have gone up in smoke and they only have a few worthless pesos in their pockets, and they have unpayable debts on top of that."
Some of my interlocutors had been lucky. Others not. In 2001 the sovereign default of Argentina snuck up on them with devastating force. The luckier ones had their savings in cash dollars in a safe. Others were caught with their savings in formerly convertible pesos that suddenly lost three-fourths of their value. Some avoided being corralled and having their captive dollars forcefully converted into worthless local currency at the unfavorable "official" rate. They felt safer since they could gradually change their green bills into pesos on the black market and, in this way, hold out in the hope of better times. However, they read in the papers that the dollar was also losing its value against other currencies.
I confirmed their diagnosis and added an even harsher prognosis of my own: The dollar would keep losing value, although it was hard to say whether this descent would be gradual or abrupt or just when it would come to an end. I advised them to move part of their savings from dollars to other currencies and to put that money into European and other securities with a prudent term. But economic forecasting is a lot like weather forecasting: we know that there is a risk of bad weather, but we can't be sure whether the clouds taking shape on the horizon portend a passing storm or a tropical cyclone. I went back to my sailing yarn: It's best to stay in the shelter of a good port, observe the situation, and wait.
That said, I made it clear that this time we weren't dealing with an isolated storm on the periphery but a global imbalance that would affect the entire planet. Through the purchase of securities and bonds, China, Japan, and other Asian countries lend money to the United States in order to ensure the maintenance of a high level of consumption and, in turn, the absorption of the huge productive surplus from Asia. The low interest rates in the United States enable citizens, through commercial, personal, and mortgage credit, to indebt themselves by consuming. Until 2002, the time of my conversations, this imbalanced flow was sustained without too many glitches, with low inflation and cheap money. But, inevitably, two simultaneous phenomena occur at the poles of the system, as Figure 1 indicates. On one side, the Asian economies develop, and a huge productive surplus builds up in the Pacific sector. On the other side of the ocean, public and private indebtedness increase and bubbles of fictitious capital form, for instance, the rise in real estate values, mainly mortgaged properties.
This upward spiral is dangerous, just like the initial phase of a cyclone's growth. The imbalance generates pressure on the dollar that prompts its devaluation. The Asian countries resist revaluing their currencies since that would lead to an increase in the prices of their products, and consequently, a reduction in their exports as well as a significant cut in the value of their securities held in dollars. With good reason, they advise that the United States reduce its fiscal deficit; in other words, that the government of the world's superpower spend less. But taking US international policy into consideration and, in particular, its enormous military spending, that common sense solution becomes problematic. War is costly — even more costly when you don't sacrifice consumption. The great North American geopolitical dilemma can be summed up in a few words: indebted consumption + a war left out of the approved budget and without increased taxes to pay for it = the crisis of the dollar. That is inevitable in the long run.
The geopolitical corollary was clear and not very promising. In the West the great Atlantic alliance that materialized after World War II was breaking up. But this Atlantic disturbance whose first rumblings had been heard, though serious, did not carry with it the potentially devastating force of a typhoon in the Pacific. This other storm could strike if Japan and China decided to convert their reserves to other currencies, and move their investments to other markets. But between now and then, there would be many ups and downs in currencies.
The foregoing speculations took place in 2001, in a peripheral nation undergoing a sovereign default of unprecedented proportions but one that nobody thought at the time could occur in the developed countries of the North.
The US economic crisis started with the insolvency of the most modest home mortgage holders in one corner of the economy, then spread very fast throughout the financial sector, causing a further decline of an already weakened dollar and in short order uncertainty in all global markets.
When a minor cause produces major effects, that very disproportion is a symptom that the great underlying structures are weaker than we had believed. In the US there was no more talk of a "soft landing" — it was in a full emergency landing. Economic difficulties affected quite elevated sectors of society. The New York stock market indices declined precipitously. The dollar lost its value day-by-day. The mortgage crisis turned into a collective panic. And on top of all this, according to the opinion of economists Joseph Stiglitz and Winda Bilmes, the disastrous war in Iraq reached an estimated total spending of $3 trillion.
Washington no longer heard the Republican siren song promising domestic prosperity without sacrifice and foreign-policy arrogance without counsel. The various speculative bubbles burst one-by-one in the developed world. In the countries to the South nobody knew if this would also be the fate of the so-called commodities — metals, hydrocarbons, meat, and grain — boom. When the bubbles burst, a more moderate reality could be seen, although its symptoms were concealed by the uninterrupted chitchat of the media.
Behind the glitter of credit consumption stood 37 million people, out of 300 million, in dire poverty (many of them children). If we add the 60 million whose families live on an annual income ranging from $20,000 to $40,000, the picture that emerges is not a flattering one. In the richest country on earth, almost one third of the population lives on the edge. Their jobs are precarious and can easily be lost. They have trouble meeting their financial obligations and paying their bills. The result is a palpable fear — of others, of disasters, of illness, of unemployment, and also of the government. At the bottom of the social pyramid, resentment prepares the ground for demagoguery.
The fear that springs from the bottom of society has reached the middle sectors — those whose annual income ranges from $50,000 to $100,000. They are the proverbial American middle class: the emblem of a way of life, and of a whole civilization. Today they are subject to what I like to call a strong social compression that, in turn, leads to intergenerational descent. The much-touted American dream seems to be at wit's end. Stagnation has produced a profound crisis of identity for America — something both economists and sociologists are bound to investigate for years to come. The structural problems of reduced mobility and greater inequality were partially hidden by the availability of cheap debt — a cushion that the crisis has removed. As a result, anger is growing and is becoming increasingly political. Michael Spence, a Nobel Prize-winning economist who has led a four-year study into the future of global growth, had this to say, "The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine."
Fifty years ago middle-class Americans could rely on satisfactory and stable jobs, on prospects of significant salary improvements, and on the hope for an even better future for their children. They could count on a nice house in the suburbs, one or two family cars, a mortgage amortized over 30 years, and a free-from-anguish retirement at the end of the road. In general, only one adult in the family (of an average four-member family) would work. Nowadays those jobs that make such lifestyle possible have become scarce.
To cope with the shortage of good secure jobs, the middle class was forced to use other strategies. In the average family, instead of only one adult being employed, now there are two working members. Wives and mothers went back to work. The cloud had a silver lining: this need for another income was seen as an advance in gender equality, by freeing women from their traditional family roles. Yet, the harsh economic reality was that now to keep the same standard of living two jobs were needed where before one was enough. Men and women also started to work longer hours and to have shorter holidays. In some cases they had to handle several jobs at a time. They all had to march faster in order to remain in place. The image that comes to mind is that of a whole social class on a treadmill. Economists, however, hailed those changes once they verified an increase in productivity.
Finally, individuals and families resorted to personal and mortgage credit to keep the standard of living they were used to. Rather than saving they ran further into debt. The American dream was being bought on multiple installments. All these factors together make up the social compression of the middle class. This compression leads them to fear that their children will not enjoy a more comfortable life or a better future, otherwise referred to as intergenerational descent. It signals pessimism in a social class that was traditionally devoted to the idea of progress in every domain.
Furthermore, in the portion of society we may call the leading sector, the power elite or the dominant class, an impressive change of habits has occurred over the years. They direct more thought to private goals, including the accumulation of wealth, at the expense of concern for the public good or for society as an interdependent system. There has been a loss of a sense of a social contract. In tune with this mindset, public policies have facilitated a great upward transfer of wealth, through a systematic decrease in the tax burden imposed on the wealthiest sectors, and a huge national indebtedness.
Ultimately all major collective problems — the contamination of the environment, the ageing of infrastructure, the retirement system, public health, and debt servicing — have been deferred, passed from the present to the future, from those living today to those who will live tomorrow. It is not just a matter of policy, but it is a moral dilemma as well. Policies that concentrate wealth and defer problems to the future go against a basic principle of human development — an ethical standard that means something more than living one's own life to the fullest (in itself a highly commendable aim); that means making sure that those who come after us on the road of life will live as well as, or better than, us. From an economic point of view, this goal has a name: sustainability. From a moral point of view: intergenerational solidarity. They are two strands of the same rope that has been strained to the breaking point.
For Latin Americans, who were never too strong in economic matters, material development seldom held pride of place in the concert of values. In the North, under the influence of the Protestant ethic, economic activity had a different ethical meaning — not as subordinate value but as a value in itself. But in both contexts, North and South, economic categories were linked — albeit in different ways — to moral concepts. With the passage of time, this linkage was forgotten. Adam Smith, modern economy's founder, did not teach economic science in his native Scotland. He lectured in moral philosophy. He did not believe his best work to be The Wealth of Nations, which made him famous, but a treaty he titled The Theory of Moral Sentiments. Following Smith's classic views, we can say that "investing" means "giving something to the future." By contrast, running into debt implies "taking something away from the future." We can see a moral dilemma cropping up right away from this basic economic conceptual opposition. The current crisis is not just a technical breakdown; it is a crisis of profligacy — as in the expression "moral hazard." National debt is, after all, a collective swindle of the future to live in the here and now. Borrowing to consume is stealing one's later prospects and also those of one's descendants.
Excerpted from South of the Crisis by Juan E. Corradi. Copyright © 2010 Juan Corradi. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents
Dedication; Acknowledgements; Preface; Introduction; Impending Storms: Fiscal Intemperance and Moral Dilemmas; Troubles at the center; The Response; A Paucity of Thought and Action; The New World in a Changed World; Other Capitalisms: What Latin Americans Can Learn from Those who Do It Well; Rethinking Latin American Dependency; Latin America in the World of Late Capitalism; A Garden of Forking Paths; The Challenge of Inclusion
What People are Saying About This
'A much-needed assessment of the crisis from the Latin American perspective. Juan Corradi provides a structural view of late capitalism and the necessary conditions for recovery and growth… Food-for-thought for those interested in the future of this region.' —Alejandro Rausch, Consultant for Private Sector Development, Poverty, HD and MDGs Cluster, United Nations Development Program Regional Bureau for Latin America and the Caribbean
'‘South of the Crisis’ is not your usual academic treatise. This exploration of the effects of the 2007–09 financial crisis on the emerging market economies mixes rational insights with just and compassionate policy prescriptions. With an emphasis on Latin America, Juan Corradi unveils the variable effects of advanced capitalism on the developing countries, as well as the political opportunities for more equitable reform that the crisis itself has offered up.' —Carol Wise, Associate Professor, University of Southern California, School of International Relations