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Matias Vernengo

Economics is an essential part of foreign policy. One cannot think of the Cold War without the Marshall Plan that allowed reconstruction in Western Europe and containment of the Soviet Union in Western Europe. In Latin America one cannot dissociate the Cuban Revolution and the subsequent Alliance for Progress, which basically provided credit for allies in the region, pushed by Kennedy to contain Communism in the region. Geopolitics is, however, often ignored by economists, and political scientists tend to use only mainstream economics when discussing political economy issues.

In the case of US-Latin American affairs, the inability to understand the political elements of the economic process, and the incapacity to comprehend the deep causes of underdevelopment in the region explain, in part, the problematic relationship of the Obama administration with the left of center governments in the region. The Obama administration has compounded old mistakes and aggravated the mistrust from progressives in Latin America (for an early discussion of the topic go here; subscription required). John Kerry, the Secretary of the State, has referred recently to Latin America as the American “backyard,” and the Obama administration has not recognized the democratically elected government of Nicolás Maduro in Venezuela.

On the Venezuelan election, as noted by Mark Weisbrot, not only the left of center governments recognized Maduro’s victory, but almost everybody. In Weisbrot’s words, the “Obama administration was completely isolated in the world.” These political actions go hand in hand with the perpetuation of economic policies pushing free trade in the region. The last free trade agreement, the US-Colombia Trade Promotion Agreement (for more go here), was finalized recently.

It is the failure of these economic policies that have created the conditions for a political change in Latin America. The left of center governments came to power after the glaring failure of the Washington Consensus policies in the 1990s. While it is true that the fast growth since 2003 was possible, to some extent, as a result of the favorable terms of trade, and the higher prices of commodities, it is also true that the governments of the region, particularly those controlled by left or progressive administrations, were able to either take direct control of or increase taxes on natural resources, and increase social transfers and spending on welfare.

According to UNCTAD (2012, p. 126), in Latin America, “public spending on subsidies and other current transfers increased significantly, though in some cases from relatively low levels. The increases ranged between 50 per cent and more than 200 per cent.” As a result social conditions improved, and inequality, one of the most persistent problems in Latin America, decreased significantly.

It would also be a mistake to think that growth has been uniquely the result of positive terms of trade, since a few countries, like Argentina, have had more modest terms of trade gains, and still have grown considerably more than the average. The return of counter-cyclical policies, as José Antonio Ocampo has called the phenomenon (here; subscription required), was also essential in explaining the fast recovery from the 2008 Global Financial Crisis. Here it is important to note, as the research by Esteban Pérez from the Economic Commission for Latin America and the Caribbean shows, that the region tends to grow less than East Asia, for example, because restrictive policies tend to hurt and dampen the economic booms. In other words, premature and exaggerated austerity, very much like the one in the US, might explain the recent slowdown in some countries in the region.

Yet, in spite of all the improvements in the last decade, with significant growth in industrial output in some countries, the region remains fundamentally an exporter of commodities and of maquila based manufactured goods, and in several cases heavily dependent on remittances from immigrants. The US should move from the surreptitious plan of integration based on dollarization and free trade [by the way, the US has Free Trade Agreements with all the countries in the Pacific coast from Canada to Chile, with the exception of Ecuador, that is dollarized], which would be a more stringent and wrongheaded plan that the one that is behind the failures of the euro, and follow the ideas of Obama the candidate, who promised in 2008 to revise the terms of the North American Free Trade Agreement (NAFTA).

Putting the interests of workers, in the US and in Latin America, ahead of corporations should be a priority of any progressive administration. And that would not only require a change in the economic perspective, but also a more decided support for the left of center governments in the region. Not only this would be mutually beneficial, but it would also allow starting to clean the US record in the region, which has been, from the coup against Árbenz and Allende, to the most recent one against Chávez, extremely poor.

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