E C O N O M Y

Havana. February 18, 2005

Latin America sustaining the
US budget deficit

BY RAISA PAGES—Granma International staff writer—

INSTEAD of serving to protect the population the current economic model of the Latin America and the Caribbean is forcing them to emigrate.

For experts meeting at the 7th International Conference on Globalization and the Problems of Development in Havana, the region’s principal export line is that of persons and large-scale emigration to the developed nations.

With the neoliberal reforms of the 1990s exports grew in Latin America, but not on the basis of the development of national industries.

The current model has seen a reduction in employment, increased emigration and a lack of growth overall in its Gross Domestic Product (GDP).

This is a notable paradox because a growth in exports should signify a higher GDP and, with a few exceptions, this is not occurring. Mexican expert Arturo Huerta reasoned that the internal Latin America markets are still being restricted. Governments are adopting policies of cutting back on inflation and public spending and not extending the infrastructure of works to the benefit of the population

Demand and wages are being contracted in defense of external interests, noted Huerta, a professor at the Autonomous University of Mexico.

He analyzed what happens with nations dependent on the export of their mining products. Gold has been rising in price since 2001, associated with insecurity on the US stock market, of the dollar and the behavior of the economy.

Thus gold is presently extremely profitable, because foreign investors in gold mines do not pay taxes on profits or aggregate value and thus the governments of countries with reserves of this important natural resource receive no contribution to their GDP.

As gold extraction requires high technology. Investment in the sector does not increase employment. By not paying taxes, foreign investments give nothing to the country owning that natural resource. Thus gold exports increase but the GDP does not.

Remittances entering the countries of the region have grown and now represent the second largest entry of capital in global form. However, one cannot say that these remittances have a positive impact, because it should be the function of national economies to improve the populations’ living standards.

Jaime Stay, a professor at Mexico’s Puebla University, believes that there is a very close relationship between the flight of capital, external debt and the functioning of the US economy.

The US economy acts like a black hole by attracting large volumes of capital from the rest of the world. Capital enters the Latin American region in the form of loans or bank credits and simultaneously produces the flight of that capital toward the developed nations, essentially the United States.

The exit of capital can assume many forms. One of them is related to the corruption involved in a large part Latin American governmental dealings. There are daily examples of how corruption has come down to setting up bank accounts elsewhere, such as in tax havens.

Capital flight is accompanied by another phenomenon, which is not strictly the flight of capital abroad, but appears in the so-called net transfer of resources. It is a serious problem, because the net income from capital is less than the net payment that has to be made for that income at a previous point.

Jaime Stay exposed the fact that the exit of profits without interest payments reaches a higher total than that of capital income.

This phenomenon, which was apparent in Latin America during the external debt crisis of the 1980s, has reappeared with absolute totals larger than those of that decade. The exit of profits has grown steadily year after year up until 2004.

“We have a net transfer of capital from the underdeveloped countries, which cannot confront the gravest problems impeding their development, to nations of advanced capital – starting with the US economy,” Stay affirmed.

It is a perverse transfer. The less developed countries are constantly contributing to the developed ones, in an unjust relationship that might well date back to colonial times. It is ethically unjustifiable when we are supposedly living in a world in which opportunities for everyone should be extended.

Claudio Katz, a professor at Buenos Aires University, noted that the monetary, credit and social policy of every country in the region is subordinated to what the International Monetary Fund imposes on them in order to meet their external debts.

He described how in the Argentine case, the way in which the external debt is being discussed at the moment is going to bring problems, although the government is conducting itself with more dignity and a taking up a more confrontational position with the IMF.

Katz believes that the Argentine government initiated negotiations on its debt erroneously, by acknowledging that it exists, when it is known that it is a fraudulent debt and very much in question.

The Buenos Aires professor warned against reassuming the system of repaying the external debt in the form of bonds, given that, in the long term, this generates a fiscal surplus for decades in order to be able to price new bonds emitted. Having a fiscal surplus, he added, means reducing social spending on education and housing.

“Apparently we are easing a problem without foreseeing that huge snowball that is indebtedness,” Katz explained.

Brazilian professor Theolonio dos Santos, from the Fluminense University of Rio de Janeiro, similarly analyzed the problem of the flight of capital from Latin America to the developed countries, again essentially to the United States.

He gave this example: a Latin American country is given a $100-million loan at an interest rate of 45%. That means that for every $100 given, $45 has to be returned in interest. The government of that country needs to increase its bank reserves to make itself attractive to the World Bank and the International Monetary Fund.

Then what happens? The $100 million it was given in credit – with the 45% interest – is placed in a US bank where it is only taxed at an annual interest rate of 5%. In the course of time, the Latin America nation is ruined because all the capital that enters has to be directed to paying debts and commissions.

Although it seems irrational, that is what has occurred with the Latin American economies. In Brazil, Theolonio noted, $46 billion entered the country in the form of high-interest loans. Afterwards, that money was deposited as a reserve in the United States at only 4-5% interest.

If a Brazilian housewife asks to borrow money and has to pay 48% interest on it, and then deposits that money in another account (equal to the reserve in US banks) at only 5% interest, she will be ruined. If you own a property be prepared to lose it because all the money will go on paying interest and commissions.

The inability of governments to manage their own resources is one of the consequences of the model imposed on Latin America.

The independence of state central banks and the thinking that there must be huge resources in those central banks so as to maintain that reserve is placing nations in very difficult positions.

Professor Dos Santos stated that the Central Bank of Brazil has raised the interest rate that the state has to pay it and with that policy is spectacularly increasing the public debt. In order to pay those high rates of interest, governments have to spend less. It is an absurd situation that translates into an absence of public works.

It is argued that bank interest rates have to be high to prevent growing demand and avoid inflation, which are viewed as the main enemy.

In the name of preventing inflation, they are compromising public resources. Brazil is the most serious case in the region, the professor noted. “My country is paying $750 billion just on servicing its internal debt, not to mention its external debt, another payment whose interest rate is taken from the world market.

The distribution of profits in Brazil remains within the financial system to the detriment of the business sector and traders who have to pay extortionate interest.

For Arturo Huerta: “We do not have a monetary policy or a fiscal policy. We have recourse to privatizations and the politicians are incapable of saying that we have to break with these models.”

Katz stressed that the most incredible aspect of privatization is that 10 years of the process have gone by and there is no study of what has already happened.

“With privatizations they wanted to send us this message: the state is ridding itself of deficient public enterprises and has money that can be invested in education and health. However, what has in fact happened is that we have a colossal public debt and are unable to invest in social programs. Argentina, a country that has traditionally had a 6% unemployment rate, now has one of 16-20%. Privatizations have led to 44% of its population falling into poverty and 35% of its children suffering from malnutrition.

Katz confirmed that the flight of capital from Argentina almost equals that of its external debt.

With privatizations the peoples have begun to realize that they have no benefits, as is the case in Bolivia with water and gas.

Huerta observed that Mexican sold off its banking system and went into crisis. In order to rescue it, the country had to spend out more than $100 billion, the cost of which is being paid by the people. A government that loses its central bank and its strategic economic sectors has no future whatsoever. Sovereign control of the national economy has to be respected.

A country that is unable to generate its own currency cannot have economic sovereignty. Latin American money is controlled by international finance capital, which wants the currency of the country in which it invests to be stable, thus forcing the imposition of high bank interest rates on the state in question.

The region has to recover control of its monetary policy in order to subsequently adopt a fiscal policy that is an incentive to economic growth, Huerta noted.

Unfortunately, no political party in the region is proposing the rescue of monetary control in its program.

Oscar Ugarteche, professor at the Catholic Pontificate University of Peru, stated that while the Latin American countries have high international reserves in US banks, his nation is registering an immense budgetary deficit in the order of 5% of its GDP.

However, now we have the Bolivarian Alternative for the Americas, a redefined economic model that promotes integration on the basis of a genuine policy of regional development.