Share this story
Close X
Switch to Desktop Site

Assessing the Consequences of the Peso Crisis

Poverty efforts will probably be put on hold; skepticism toward market reforms is likely

IT will take some time to fully measure the consequences of Mexico's three-month old peso crisis -- for Mexico itself, for the rest of Latin America and the Caribbean, and for US-Latin American relations. Yet it is important to assess what harm has been done so far and what the longer-term effects might be -- as a first step toward containing and remedying the damage.

The Mexican economy will suffer the worst, but economic growth (not very high to begin with in most places) is slowing throughout Latin America. Foreign capital flows are declining, domestic investors remain cautious, and governments are seeking to protect rather than stimulate their economies. The slowdown, coupled with a tightening of expenditures in most countries, will be felt far into the future as vital investments in infrastructure and production are postponed.

About these ads

Antipoverty efforts, which were finally getting attention after years of neglect, are likely once again to be put on hold in Latin America. The number of poor and the hardships they face will increase as growth rates dip beneath 3 percent, the minimum necessary to make any serious inroads into poverty; jobs begin to disappear; and government expenditures shrink again. Aside from modest initiatives to protect the most vulnerable and efforts to avoid sharp cutbacks in primary education and public health, there is not much governments can do until economic growth accelerates.

When almost everyone's income is stagnant or declining, it's hard to mobilize either the resources or political support to fight poverty and inequality. Deficit spending to pay for social programs is a bad idea because it can spark inflation and undermine longer-term growth -- with the poor suffering the most.

On another front, we are sure to see increased skepticism in the region about the market-oriented economic reform programs adopted by Mexico and most other Latin American countries. Some doubt could help improve economic policy and management in the region, but a wholesale rejection of reform will spell disaster wherever it occurs.

It is easy to foresee the emergence of political leaders ready to denounce privatization, openings to foreign investment, deregulation, and balanced budgets -- and argue for a return to state-led, inward-directed economic strategies. The ultimate appeal of these arguments is uncertain. Their political success will depend on many factors. How long and hard will Mexico's crisis be? Will other major countries, like Argentina or Brazil, avoid a similar calamity? And how widely understood will the real causes of Mexico's troubles -- overborrowing, overspending, and undue risk-taking by political and economic managers -- be?

Finally, the Mexican crisis presents a new obstacle to the expansion of NAFTA, the building of hemispheric free-trade agreements, and the strengthening of US-Latin American cooperation generally, all of which got a significant boost at the Miami Summit last December, only days before the peso devaluation. The Mexican crisis -- political and economic -- has, at least for now, considerably undercut the argument that Latin America had finally turned the corner and become an area of special opportunity for US investors ad exporters. Once again the region seems to be a source of problems for the US -- of instability, corruption, and conflict (particularly when we factor in the Peru-Ecuador war).

The crisis also revealed that the NAFTA debate is far from over in the United States. The fierce opposition in the US to the Mexican rescue package raised serious doubts about whether the US is ready for genuine partnership with its Latin American neighbors. At the least, it suggests that US supporters of closer economic and political links with Latin America will face a struggle each step of the way.

There is no easy way to get things back on track. President Clinton's decision to proceed with a rescue package for Mexico demonstrated political courage and good policy sense. The support of the Republican and Democratic leadership in Congress was also heartening, even as congressional support overall was lacking. Had the US turned its back on Mexico, the prospects for hemispheric cooperation of any sort would have dimmed considerably. The future now depends less on Washington than on economic and political events in Mexico and the other countries of Latin America -- and on a measure of good luck.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.