First, and most fundamental, is that in the international recession private investment will sharply decline or collapse. This is the most important mechanism that will drive the economy deep into recession. Therefore the most fundamental aspect of confronting the economic crisis is that a programme of state investment must be undertaken in order to maintain the overall level of investment in the economy. Such state investment programmes should have both an immediate counter-cyclical objective of preventing a decline in demand in the economy, that is a directly Keynesian aspect, and a strategic one of improving the efficiency of the economy. For this reason, in many cases, the most fruitful forms of investment are in infrastructure.
Second, the core of the present international economic crisis is within the financial system. In most countries in the world, including in the US, a programme of nationalisation of banks and financial institutions is therefore being carried out - Citigroup, AIG, Fannie Mae and Freddie Mac, Royal Bank of Scotland, Northern Rock, Bradford and Bingley etc.
Third, due to the financial crisis, private funding to large enterprises will be squeezed - as seen in the bail out of the US and other countries car industries. Governments are intervening to either take large shareholdings in, or fully nationalise, such companies in return for the financial assistance necessary to sustain them during the downturn.
Fourth, due to the financial crisis, private banks will drastically reduce or cease to lend to small and medium enterprises. Therefore new mechanisms, frequently bypassing private banks, must be developed in order to sustain lending to small and medium businesses.
Fifth, due to the financial crisis, mortgage lending for housing will severely contract or dry up - in the UK, for example, new mortgage lending has fallen by 80 per cent and a similar process is taking place in the US. This in turn will create a crisis in the house building industry. New mechanisms of lending for housing must be created and strong state intervention in the housing construction industry must be undertaken.
Sixth, while such programmes of state investment are geared up it is vital to prevent a decline in demand in the economy by maintaining the living standards and purchasing powers of the population. This should be done, in order to protect the strained position of companies´ finances during the recession, without placing extra wage costs on enterprises - this may be achieved by measures such as reduction in sales tax or increase in state benefits.
Seventh, despite these measures unemployment, particularly due the situation in the private sector, will rise. Measures of job creation and protection of the unemployed must be reinforced or put in place.
Eighth, the international recession has already led to a decline in commodity prices, including oil, which will create decreases in revenues to state budgets. However under conditions of recession all countries are expanding their budget deficits in a Keynesian fashion and therefore there must not be equivalent cuts in state spending to any decline in revenue.
It is evident from this list of key measures to deal with the international economic crisis that the policies of the Venezuelan opposition would be catastrophic, and are completely out of line with those being pursued in all other countries, as the opposition seeks to weaken, rather than strengthen, the role of the state in the economy. In all countries in the world a great expansion of the role of the state in the economy is taking place in order to confront the international financial crisis. The policies of the Venezuelan opposition would, therefore, greatly worsen the problems of Venezuela in meeting current international economic problems.
Within the overall context outlined above a very important place is occupied by the question of international trade. One of the most important factors leading to the deep economic depression after 1929 was the collapse of international trade. A decline in world trade would also further severely depress the price of commodity exports, including oil, which would greatly increase the budgetary problems of Venezuela.
Venezuela, and Latin America as a whole, therefore have a great interest in maintaining international trade during this international economic crisis. This article, therefore, examines overall parameters and objective possibilities of Latin America's trade - a second article will look at the specific features of Venezuela's trade within that context.
Taking first exports, the key weakness of Latin America is reliance on trade with the US. The dimensions of this problem are shown in Figure 1.
In 2007, the last year for which figures are available, 63.6 per cent of exports from Latin America and the Caribbean went to industrialised countries with 44.3 per cent going to the US. This represents some diversification of exports away from the US and industrialised countries during the last decade - the peak year for the share of industrialised countries in exports from Latin America and the Caribbean was 74.2 per cent in 1999 and the peak share of the United States in Latin American and Caribbean exports was in 2000 at 57.2 per cent.
Figure 1
To take data shown in Figure 2, in 2007 37.2 per cent of Latin America and the Caribbean exports were to developing countries - in other words exports to all developing countries were less than those to the US.
Latin American and Caribbean exports to the European Union and Japan are falling and show no sign of increase.
These figures have important implications. A trend of diversification of Latin America and the Caribbean's exports away from the US and the industrialised countries is taking place. This is strategically crucial, must be maintained, and is in line with the overall trend in the world economy of the increased weight of developing countries in world trade. Nevertheless this trend is one operating over a prolonged period of years, a decade or more, and it cannot be made sufficiently rapid to deal with an economic crisis that has already begun and which will pick up momentum in a matter of a few months.
The consequence of the reliance of Latin America and the Caribbean on exports to the US is very serious and will have strongly negative consequences in the current international recession. The origin of the present financial crisis is in the US and its economy is already moving sharply into recession. This means that imports into the US will fall sharply -a trend that will be made worse if a decline in the exchange rate of the dollar takes place. The working assumption in Latin America and the Caribbean must be that the volume of imports by the US will fall in absolute terms and this, combined with the decline in the price of commodities that has already taken places, means that income received by countries in Latin America and the Caribbean from their exports to the US will fall sharply.
Trade diversification to regions that are likely to suffer less severe recessions than the US, notably Asia, and expansion of trade within Latin America and the Caribbean is therefore important. But it cannot be put in place rapidly enough, or on a sufficient scale in the time frame available, to offset the negative consequences of the downturn of the business cycle. This means that the largest focus for Latin American countries must be the expansion of domestic demand by the measures outlined at the beginning of this article. The overall framework must, therefore, be domestic recovery programmes supplement by measures to diversify trade away from the US and towards areas of higher economic growth.
Turning to the situation of possibilities for increasing Latin America and the Caribbean's exports to developing countries, which will be growing more rapidly than the US in the coming period, the key trends are shown in Figure 2.
There has been a significant increase in the exports of Latin America and the Caribbean to developing countries in the last period - after a period of depression in the mid-1990s. The share of Latin America and the Caribbean's exports going to developing countries rose from 22.8 per cent in 1999 to 32.7 per cent in 2007.
Within that framework half of the increase, 5.3 per cent, was due to increased exports to developing Asian countries - which increased from 3.6 per cent of Latin America and the Caribbean's exports to 8.9 per cent. Latin America and the Caribbean, however, still represented the largest market for their own exports with 19.1 per cent of exports in 2007 - an increase from 16.6 per cent in 1999. This 2.5 per cent increase in share is, however, less than that for Asia. Exports to the Middle East and Africa are low and with no substantial tendency to increase.
Figure 2
The combined total for exports by Latin America and Caribbean states to other countries in the region and to developing Asia is however now very significant. It accounts for 28 per cent of Latin American and Caribbean exports - far exceeding those to either the European Union or Japan.
Exports to Latin America and developing Asian countries are now almost two thirds, 63 per cent, of Latin American and Caribbean exports to the US. Furthermore, exports to Latin America and the Caribbean and developing Asian countries were rising while those to the US were falling sharply - see Figure 3.
In 2000 exports to the US accounted for 57.2 per cent of Latin American and Caribbean exports compared to 21.9 per cent for the combined total for exports to other countries in Latin America and the Caribbean and to developing Asia - that is, exports to the US were 161 per cent higher than those to Latin America and the Caribbean and developing Asia combined. By 2007 exports to the US were only 58 per cent higher than those to Latin America and developing Asia.
The implications of such numbers are clear. If the alternative to Latin American and Caribbean exports to the US is conceived of as only being Latin American and Caribbean integration this is too small to counterbalance the US. If, however, the framework is conceived of as Latin America and the Caribbean together with developing Asian countries then this total is rapidly catching up with exports to the US.
It follows from this that the top priority in Latin America and the Caribbean's export trade in the international financial crisis must be within Latin America and the Caribbean and in relation to developing Asian countries.
Figure 3
Turning to Latin America and the Caribbean's imports the situation is far more favourable that with exports. Imports from developing countries have already substantially overtaken those from the US - see Figure 4.
In 2007 imports from the US accounted for 33.1 per cent of Latin America and the Caribbean's imports whereas imports from developing countries accounted for 44.5 per cent. Furthermore imports to Latin America and the Caribbean from the European Union, as well as from the US, were falling sharply - while those to Japan and Canada were low with no tendency to increase. In short Latin America and the Caribbean's import trade from developing countries is much more dynamic than that with the industrialised countries, including the US.
This trend is strongly entrenched. As may be seen from Figure 4 diversification of Latin American and Caribbean imports away from the industrialised countries and from the US has been underway for a considerable period.
Considering the industrialised countries as a whole, the peak year for the share of Latin America and the Caribbean's imports from these countries was in 1991 at 74.3 per cent - by 2007 this had declined to 54.4 per cent. For imports from the US the peak year was 1999 at 49.2 per cent - by 2007 this had declined to 33.1 per cent. By 2007 developing countries accounted for 44.5 per cent of total imports by Latin America and the Caribbean compared to only 33.1 per cent from the US.
Figure 4
This trend in imports is important not only in itself but because it can be used as a framework to develop bilateral Latin American and Caribbean relations, including for exports, with those areas or countries that are becoming increasingly important trading partners.
Considering imports from developing countries in more detail the most dramatic expansion is again in imports from developing Asian countries. This is shown in Figures 5 and 6.
The share of imports to Latin America and the Caribbean from developing Asian countries has risen dramatically from 2.1 per cent in 1980 to 18.5 per cent in 2007 - see Figure 5. The share of imports from other countries in the region to Latin America and the Caribbean has also recently risen significantly - increasing from 15.3 per cent in 1999 to 21.6 per cent in 2007.
Imports from the Middle East and Africa remain low and with no tendency to increase.
Figure 5
Taking these trends together the combined share of Latin America and the Caribbean's imports accounted for by other Latin American and Caribbean countries and by developing Asian states already significant exceeds imports from the US.
In 2007 the share of Latin American and the Caribbean's imports coming from the US was 33.1 per cent whereas the share coming from other Latin American and Caribbean countries and from developing Asian states was 40.0 per cent.
Figure 6
Within that overall framework the most important single developing country market is China. China has already overtaken the US and Germany to become the world's largest exporter of goods. It is the world's third largest importer of goods, behind the US and Germany, with a more rapid increase of imports than either of these. Within the next twenty years it is projected that China will overtake the US to become the largest economy in the world.
The trend of Chinese imports into Latin America and the Caribbean, compared to the US, is shown in Figure 7.
Figure 7
What conclusions follow from these trends for Latin America and the Caribbean as they face the international economic crisis?
First, the process already underway in several Latin American countries to lessen dependence on exports to the US is entirely necessary. There will be a sharp contraction in US demand for imports during the coming recession, due to both US economic downturn and possible declines in the exchange rate of the dollar, and the more Latin America and the Caribbean succeed in diversifying their exports away from the US the more successfully they will be able to meet the international economic crisis.
Second, however, the scale of the shift involved in diversifying exports is very great. It will not be possible in the time available before confronting the consequences of the international economic crisis, which has already commenced and will develop in the immediate coming months and years, either to lessen the share of exports to the US, or to develop other export markets, sufficiently rapidly to provide large enough alternative international markets to compensate for the crisis in the US. Therefore the core of the anti-crisis economic programmes in Latin America and the Caribbean must be measures to boost domestic economic recovery - supplemented by measures diversifying exports away from the US. As in all countries confronting the economic crisis, the core of these programmes must be an expansion of activity by the state in the economy - in particular expansion of state investment to counter the sharp decline in private investment that will take place.
Third, regarding trade, strategically the process of economic integration in Latin America and the Caribbean is extremely important. But this market is not large enough, by itself, to constitute an alternative trade market to that provided by the US. The combination of Latin America and the developing countries in Asia is, however, sufficient to compensate fully for the US. Therefore, alongside the measures to strengthen Latin American and Caribbean economic integration must go policies to strongly increase the economic relations between Latin America and the Caribbean and the developing Asian economies - in particular China.
No comments:
Post a Comment