Media Center



November 12, 2008 - Mexico City

I have been asked to speak about the global economic crisis and relations between the United States and Latin America. I thought a lot about how to relate these two topics, and it strikes me that the way to do so is to refer to a paradox that is taking place in the United States and worldwide. The first side of this paradox is the profound grief and anguish with which we are experiencing this economic crisis, a crisis that is global and threatens to become, if it has not already become, a recession much greater than what it had been expected to be. The second paradox is that in the world, especially in the United States, the election of a new President, current senator Barack Obama, is celebrated with great enthusiasm, with great joy, and with unusual hope. The question is: how do you these two faces of the paradox, anxiety about the economy and hope for Obama, come together?

I would like to begin with the crisis. In my opinion, the technical explanations for the crisis are many; some are complicated yet someday there will be a definitive explanation; many books will be written on this subject, but what is clear is that in the origin of this situation—which is in most economic crises, including family economic crises, which affect families, businesses, governments, or countries alike—is that one spends more than one earns, or lives beyond their means. It is clear that the United States, for a long period, spent more than it earned. It was known for some time that American citizen’s had savings in the negatives, meaning that individuals in the United States spent, on average, more than they earned as income.

That is why experts talk about the greatest amount of debt from banks and individuals in all of history. This was called, by former President of the Federal Reserve, Mr. Allan Greenspan, “the irrational exuberance of the markets,” wherein attempts were made to correct the problem with a policy of lowering interest rates, which led to excessive speculation in the real estate market. This affected the entire financial system and the government itself because the United States has had, for a long time, a large fiscal deficit and a similarly important deficit in checking accounts.

What is worrisome is that this situation had begun a long time ago. Economic magazines and journals had dedicated themselves to reporting on the imminent crisis months ago, yet it still appears that no one paid much attention. Everyone was aware that mortgage loans for clients who were not able to make the payments had become a common practice and that packages of these securities were traded time and time again in business and brought with them a spiral of speculation, generating complete uncertainty about the real value of the assets. Risk assessors always appear to be very concerned about the conditions of our countries, and they failed to do their work or did it poorly within their own boundaries, because none of these speculative activities were calculated at the real level of risk, while on the other hand the real estate companies charged and sold mortgage loans, counted their gains in the margin, and mobilized millions of dollars without anyone dealing with this. Today it is clear that financial companies and institutions gained thousands to millions of dollars from this, and that their executives paid themselves grossly large bonuses from these operations, many times unknown to or directly contradicting the will of the shareholders. This happening may have been profitable for some companies, but it was not for the economy as a whole, and in the end, it produced the effect it caused. So as to avoid it, it would have been necessary to put into practice the existing regulations, where the responsible economic authorities—hopefully independent and autonomous from political power—should have sought to protect the well being of the collective. Nevertheless, in a country with an imposed laissez-faire philosophy, as noted by in a famous statement made by President Reagan, “Government is not the solution to our problem; government is the problem,” this situation was not being regulated by any one.

When the imminence of the crisis became apparent, then the regulations were imposed. It was a wild self-regulation, on the other hand, that inevitably led to the fall, and its origin stemmed from the confidence the banks themselves acquired regarding the credit limits of other banks, which lead them to push the limits of the interest rates to unaffordable levels. All had entered the speculative game, where the nature of the debts no longer mattered, and all distrusted of each other. When inter-bank credit was interrupted, liquidity decreased to the point where it froze the financial system. The financial system is often illustrated as analogous to the circulatory system in human beings, where the liquidity [of the blood] maintains all parts of the economic body informed and alive. The liquidity allows producers and merchants to pay their suppliers, and a lack of liquidity stops payment. In turn, if liquidity is needed, the providers cannot afford the necessary inputs to maintain production levels, and so on. Thus, the lack of liquidity generated in the banking system is what led to bankruptcy.

Could this have been avoided? I believe that with adequate regulatory function, at least this could have been foreseen and corrective measures could have been taken to address what was then known; that is, the magnitude of the crisis. To date, we do not know how many derivatives are circulating throughout the world, how many bad debts have not been identified, and the estimates that one hears are involved in this catastrophe are of such levels of dispersion that it is best not to refer to them. The current situation also highlights, in a brutal fashion, the problems caused by a global economic crisis when institutions lack to regulate the parts that make it up. This necessarily affects all economies, and probably with greater force, it affects the more vulnerable countries such as the developing countries. This is how it occurred in the crisis of ’29, when there were countries in Latin America who thought that the crash of ’29 would not affect them; nevertheless, they were hit by it in ’31. In my country, something similar happened; people spent with enthusiasm thinking the crisis would not come, but when it hit, it went so far as to bury the government at the time.

The crisis of ’29 ultimately reached the largest economies of the world, so as to not exclude the likeliness that in a short time the crisis affects all the economies of the world. Some do not agree, but if we believe that this phenomenon of globalization is true, one cannot but imagine that a crisis in an economy of approximately 22 percent of the Global Gross Domestic Product would not affect the countries that do commerce with it, that lend it money, that supply a balance for it, that have there workers there, etc. This is another reason why most probably wanted to look the other way. We have seen it in the stock market, where the economies of the South America have had the same falls as those of Europe and Asia, given circumstances where most thought that for trading with other parts of the world, they would probably have less problems.

The countries that can overcome these problems are those that have managed to maintain adequate balances in its foreign trading and public spending. Those who have spent much time without these controls and who live off of the prosperity, acquiring new loans to cover old debts, will be harder hit. Fortunately, most governments in Latin America have behaved in a balanced and responsible manner. Indeed, today, the region is characterized by much stronger macroeconomic policies than in the past, with stronger currencies despite the lows in recent weeks, and with a debt that is much lower than it had been in years past, in general terms. This cannot be said for all countries, but it can be said for the majority and the largest economies in the region.

At the same time, overall, our countries have maintained a policy of fiscal responsibility, containment of inflationary policies, and compliance with its international obligations. The most forward-seeing countries have created systems of fiscal responsibility, enabling them to overcome hardships to their incomes without excessively damaging public spending. Therefore, the first conclusion we can draw at this point, and certainly worrying about the depth and breadth of the crisis in time, is that our economies can face this more securely than others who had not gone through those processes, specifically speaking of those countries of the northern hemisphere and eastern Europe that have started to suffer serious problems. Nevertheless, we cannot discard that the economies that are in the most vulnerable position, in the end, are caught by the crisis and will have to face severe problems of recession and unemployment.

It is true; measures are being taken that favor those countries that have sought to maintain good economic management. The International Monetary Fund has opened a special line of credit for countries that can demonstrate this effort and that are experiencing liquidity problems. Something similar happened recently with the U.S. Federal Reserve, which opened a line of credit for Brazil and Mexico for 30 billion dollars, being that these countries maintain the larges volume of commerce with the United States.

We can be sure to expect difficult situations in the future, and we must always start by accepting two ideas, in general, because the majority of specialists repeat them. First, that the crisis will become a recession that will not be confined to the financial realm, but rather that it will encompass the entire world economy, and that the situation will most likely last longer than initially believed. A recession, not in “V” form as economists have stated and that ends quickly, but rather a recession in “U” form. This suggests the need for more prudent financial management, giving priority to actions that generate investment, wealth, and particularly, that generate employment, so as to avoid the crisis from affecting the poorest and heightening the social and political tensions within countries.

In the medium term, the only way to confront this situation is for all of us to come to the understanding that the economic realities of our time must be confronted with visions and instruments of our time; that there cannot be a global economy without global regulation mechanisms, and this will not only require decisions from within our countries, but rather, it will require intense action and coordination between all the developed, developing, and emerging countries. I hope that the G-20 meeting next weekend in Washington is a prelude to this attitude. We must understand that the theories used to date—the notion that markets can self-regulate—were destroyed at the same time the crisis began. It is probable that the symbol for this will be the President of the Security Still Commission, one of the great promoters of self-regulation who, upon his appearance before the United States senate, stated: “I must acknowledge upon beginning this exposition that the system of self-regulation that we so defend has turned out to be a complete failure; therefore, the program is cancelled.” Of course, this was stated on the same day that the last of the investment banks had collapsed; therefore, they also did not have someone to regulate. Not only was it cancelled because self-regulation had collapsed but because there were no more investment banks to self-regulate.

It is essential to take in these experiences in a positive way and to attempt to organize the world economy in a different manner. It is clear that none of the experiences of the XX century were able to identify an economic system that would surpass capitalism as resource allocator and distributor of goods, and this is a fact that today is impossible to contest. But, also, we must accept that the recent experiences have taught us that capitalism must also be regulated by some authority that democratically represents the interests of the community. In 1927 John Keynnes spoke of topics that were perhaps too important to be left to the free movement of the market forces, such as the amount that a country would save as a whole, how much a country would invest in public works, and how much it would to distribute to its citizens.

Democratic authority must exist within the current system to prevent excesses, to correct errors, and to prevent the abuse and injustice that these systems are prone to and which leads to crises that end up affecting entire companies to their detriment, as well as the world order. At this point in time in the world, democracy, consensus, agreements, and compromise play an increasingly important role, and I also hope that within each of our countries we come to understand that it is necessary to broaden national dialogue in the search for consensus when implementing measures to safeguard the common good.

I hope we are all able to recognize the importance of market actions in our countries and the need to develop it without hindrance or limitations, but complementary to the need to regulate its operation through authorities that democratically represent the national consensus on these matters. The same must occur in the international arena, and I hope that it begins in the following days. It is a much more difficult task because it involves clearly distinct forces and of great interests, of a system that was accustomed to those emerging and developing countries. For much time, some of the countries in our region
were seriously reproached for evincing savings of 15percent, stating that the International Monetary Fund could not accept such a low savings rate, that they would not grow, that they would go into debt unnecessarily; nevertheless, of the debt of developed countries and of their level of savings, no one seemed worried. In this sense, I believe it is necessary to head to the voice of warning, given that if we must restructure the international financial system, this restructuring must take into consideration both the developed and developing countries.

This leads to the second issue mentioned at the beginning, because what has happened in the United States is unparalleled. A main aspect about the U.S. election is the amount of people who voted for the first time; people who had never voted before and did not plan on voting. What's impressive is not just the amount of votes won by Senator Obama in the final election, but also in the number of people who voted for him or for Senator Clinton in the primary election; the degree of mobilization he provoked; the enthusiasm he generated, and the hope that he produced in the world. I do not know if any of you have had the opportunity to see one of the surveys conducted by the Latin barometer on how Latin Americans assessed the U.S. election, but when asked the question “for whom would you vote?” Barack Obama obtained 90percent of the votes in some countries. This has generated an enthusiasm so great that it is acceptable to say that the new President of the United States will encounter an unprecedented dose of goodwill from the world.

This leads us to a discussion about this new administration and what you can expect from it, the hope for change it brings the people of his country and the world, and the hope that it has brought youth back into politics-something which I would love to see happen in my own country; that young people sought and registered to vote for the first time as they did in the United States. All this leads us to consider our relationship with the United States, because when we speak about our future relations, it is important that we come from the premise that, for some years, the United States has remained rather distant and indifferent; some analysts even say “far from Latin America.” But, what is the specific complaint? They state: “we have made free trade agreements,” “we have cooperated in the war against drugs.” And yes, this is true, but this has mainly involved unilateral policies, regarding North American decisions given what they believe must be done, without there being an effective dialogue between us. We know the agenda, we know which topics are pending with the United States. If you give me the opportunity to name a few, aside from the crisis which is definitely a problem to discuss between the United States and Latin America, at a first-glance we have immigration, commerce, crime, energy, and global warming issues, only to name a few. It is not that we do not have an agenda; its not that the problems faced by the United States are “A” and those of Latin America are “B”: no, they are the same problems, but focused and dealt with in distinct manners and without an effective dialogue among us. Don’t we deserve this dialogue? Yes, probably more than anyone; many people forget that when we talk about commerce and a global economy, this country, Mexico, buys a lot more U.S. assets than China; that Brazil purchases more U.S. assets than India; that Argentina and Chile purchase more U.S. assets than Russia or the whole of Eastern Europe.

Many people forget that much of the energy supply of the United States, particularly the oil supply, comes from American countries such as Canada, Mexico, or Venezuela, and that Trinidad and Tobago is the largest external gas supplier to the United States. Let us also not forget that the phenomenon of illegal immigration is primarily Latin American. We have causes for discussion, and I believe that the main issue we must pose in this regard is the need for this dialogue, an end to unilateralism, and its replacement with multilateralism and international cooperation. There is no impediment to carry out in Latin America what has been done with Europe when discussing issues at the NATO level or within other entities, because here we have the organizations of the inter-American system organizations that enable us to do so.

I hope that happens, and it is necessary that the new administration avoid some issues that we have become accustomed to experiencing. For some reason, one out of every two Presidents of the United States considers it necessary to reach a new democratic and political agreement. In Latin America there is democracy; in all countries voting is a regular-occurrence, Latin America and the Caribbean are the second largest democratic regions alongside Europe that do not have such problems. We have other specific problems to solve. Beyond the fact that the United States may not like many of the democracies that exist in Latin America, the point is that pressing for democratization agenda ignores the other problems. The world’s situation, moreover, has deteriorated; we are not in a Cold War period, but there are conflicts between superpowers, there are difficulties and crises in other regions of the world, and I think it would be wrong to import these crises unto Latin America.

This is not only a U.S problem; there are also others tempted to bring fleets from other countries to this continent and to try to import conflicts that do not exist, but I do believe that those who seek to apply those same conflicts to our region that exist in other places. North Americans generally identify their priorities with each crisis, and that is why when some articles discuss the priorities of the new administration, we read about Afghanistan, Iraq, and Korea. These crises have something in common: they are extremely far removed from us—the closest being ten thousand miles away—and hopefully it continues as such. I hope we concern ourselves instead with issues that really should worry us, such as trade relation issues that are still pending. A great sign is the adoption of trade agreements, the end to any notion of a surrender of trade agreements, but rather, a concerted effort to approve those agreements that are pending and to move forward, thereby creating harmony as best is possible.

On the issue of immigrants, for example, yesterday there was a parade in Washington for a solution to the immigration issue, which paradoxically can be addressed under a better climate after the crisis, given that few new migrants are coming to the United States and some are returning. There was never an excess of immigrants in the United States; it does not seem to be an issue for alarm given what is occurring in regard to deportations in the United States, but it is time to discuss a migration policy amongst all sectors. Problems regarding crime we experience in Latin America are severe because the wave of crime is going in two directions: drugs go north and weapons going south, and conflicts are only heightening with time. It is also necessary to have a policy on cooperation there in regards to drug trafficking and organized crime, human trafficking, kidnapping and violence, and the other various problems we have in the region.

The energy problem is also an issue to be resolved, which is linked to global warming, another issue that is greatly affecting us and is particularly affecting the Caribbean countries that suffer severely from the effects of global warming.

In sum, I conclude by saying that I have high hopes for the new U.S. administration, hopes that I share with the rest of the world: we are all watching and waiting for this change in attitude. We do not know what to ask, but we do believe that the days of unilateralism should be remain in the past, to be replaced with times of effective dialogue; and second, we believe that we have a real agenda of problems that concern us. If we solve these problems we have in common, then of course there will be space for democratic agendas and a number of other issues, thereby always remaining certain that we are acting in concert for the interests of all.

I hope that in the nexus between this crisis that overwhelms us and this new administration that paradoxically gives us hope, a better political climate arises for effective multilateral cooperation and a better understanding than that which we have had thus far.