Notes

 “DOLLARISATION” IN LATIN AMERICA
AND THE MERCOSUR CRISIS

 

 

The collapse of the stock exchange in the mid-eighties, which in Latin America hit Mexico, Brazil and Argentina in particular, seemed but a sad memory, yet the recent events which are convulsing the countries of the Rio de la Plata make it clear that the structural problems conductive to financial and political instability are more alive than ever.

In the two-year-period ‘90-’91, significant initiatives were undertaken to address the risks of the two South American giants (Argentina and Brazil) becoming insolvent: the monetary tie with the USA and greater economic integration between the two countries. In 1991 President Menem introduced fixed parity between the Argentine peso and US dollar (ley de convertabilidad) on the suggestion of the then Minister of the Economy Domingo Cavallo (who since the spring of 2001 has been recalled urgently to the government with a broad mandate to re-organize the finances of Argentina); following which, on a joint Argentine-Brazilian initiative, the Common Market of the area (Mercosur) was set up, and immediately joined by Uruguay and Paraguay.

Ten years after the birth of Mercosur and the introduction of the convertibility law, the projects which at that time gave hope and stability to the region have gone into apparently irreversible crisis: Argentina and Brazil dispute each others’ decisions in the financial field; there is a flight of capital from the region; new tariff barriers are being raised; there is galloping inflation; social clashes are becoming more acute and there are general strikes.

It is not easy to follow the succession of internal events and political clashes between the founding countries of Mercosur themselves. It is therefore worth dwelling on the fundamental aspects of the crisis in the integration process, which has affected the area so severely; not forgetting that, less dramatically, the integration process involving the countries of the Central American Common Market and Andean Community is also in crisis.[1]

The Mercosur crisis assumes dramatic proportions because it involves the two largest and most important countries in the American continent after the United States; and the latter is exerting all its influence both directly and indirectly, with political repercussions which could involve the whole world.

 

 

Democracy in Argentina and Paraguay (the list could be much longer) is a recent conquest. These countries need on the one hand to consolidate social peace and development internally,[2] and on the other to play their own role in the more general panorama of international politics. Without doubt the experience of the European Union, fostering peace and development in an area which for centuries knew the horrors of war, has been an example for many Latin-American countries. It is no chance that in official and non-official documents of the Andean Community and of Mercosur, reference is often made to the process of European integration as a model to follow.[3] And yet real-life Latin-American regional attempts to imitate this route struggle to get off the ground, and tend to fall apart.

On several occasions the political leaders of the sub-continent have declared the intention of pursuing every action necessary to support political integration at regional and continental level,[4] but at the same time they have continued, on many occasions, to pursue protectionist policies with regard to neighbouring countries. The most glaring example is the economic war between Argentina and Brazil in the spring/summer of 2001, when Brazil blocked imports of grain and oil from Argentina following the introduction by the Buenos Aires government of new tariffs on imports of electronic and mechanical goods. Brazil’s decision is even more dramatic in view of the serious energy crisis, which has led to electricity rationing throughout the country. In response to these decisions, the government of Paraguay proposed a 5% tariff increase on goods imported from the Mercosur area, and the Uruguayan government acted similarly by introducing a 3% increase on the same goods.[5]

Thus in Latin America we are seeing the effects of contradictory policies which seek to keep the nationalist spirit alive alongside the will to pursue the vision evoked by the fathers of South American independence,[6] of a continent marching towards unity.

The result is that the timid attempts at regional integration are frustrated by periodic financial crises, whose effect on extremely fragile economies is devastating. Despite the land’s colossal resources, the Latin American continent is struggling to escape its traditional poverty, and power is confined to national oligarchies, so that there can be no birth and development of a genuine continental policy.

This is not the place to examine more closely the reasons for these contradictions: we limit ourselves here to observing them, noting however that any past attempts at integration and autonomous development in Latin America have been hindered by the USA.[7] Even in the recent past, the USA has not hesitated to bring down or block at the outset governments too openly favourable to a greater degree of political autonomy.[8] In the last few years, whether because American public opinion has changed its attitude, or because the international context has changed, US policy has become much more amenable and less unscrupulous, leaving the assertion of its power politics and leadership to finance and monetary policy.

Without doubt the experience of the dollarisation of Panama back in 1904 provided the USA with an appealing example. The small Central American country, whose sole source of income was and is the traffic in the canal which regulates the flow of shipping between the Atlantic and the Pacific Oceans, adopted the dollar as national currency on gaining its independence in 1903, at the same time granting the canal itself in concession to the USA.[9] This initiative, which might appear unexceptional and of little account, considering the size and economy of this small country, has instead, over the last decade, assumed great political significance, becoming an example for many Latin American countries in the desperate search for a financial model of reference which would guarantee stability to their own countries and slow down inflation.

In the 80’s, in particular in Chile and Argentina, there thus opened a great debate on how to reorganise and revitalise their by now exhausted respective finances. In these countries, one isolated internationally because of the ferocity of its dictatorial regime, the other still untrustworthy because of strong internal instability, the economists of the Chicago school succeeded in imposing their models based on an extreme faith in the market and free trade. As already noted, the Harvard-trained Domingo Cavallo proposed introducing peso-dollar fixed parity into his country when he was Minister of the Economy. It was thanks to this financial mechanism and to the free circulation of the US currency that Argentina had a period of financial stability which led to cries of an economic miracle. In reality the currency tie with the USA soon proved to be a noose around the neck of the already fragile Argentine economy. Without any structural reform or control of public spending, the Argentine economy has in the last few years experienced a slow and inexorable decline. The revaluation of the dollar led to the collapse of Argentine exports, precipitating a recession which has now lasted five years, with an ever-rising public debt and an unemployment rate verging on 20%.

Despite the failure of dollarisation in Argentina, other countries with strong financial instability, a high inflation rate and at risk of insolvency towards the International Monetary Fund — Ecuador in May 2000, Guatemala and El Salvador in December of the same year[10] — have chosen the same road, which, in the short term, seems to give major guarantees and proves easy to apply.

It is worth pointing out that these countries are fully aware of the fact that nations which opt for dollarisation lose their own monetary sovereignty.[11] This however appears a secondary problem compared to the apparent advantages which can be achieved in a short time. The heart of the matter is that in Latin America there is no political project which gives prospects not only of financial, but also of economic and social stability.

Although there have in the past been declarations by the US Treasury Secretary contrary to the dollarisation of Latin-American countries,[12] in substance these decisions are encouraged, as exemplified by President Clinton’s words welcoming Ecuador’s decision in favour of the dollar.[13]

This strategy finds confirmation in the FTAA project and in the report on dollarisation by the USA Congress Committee of Economic Affairs (Joint Economic Committee), edited in July 1999 by Senator Connie Mack.

Regarding the project linked to the FTAA,[14] Free Trade Area of the Americas, it was launched in the course of the Bush presidency and taken up again with great fanfare by the current President Bush only months after his inauguration. The main advocate of the project is the USA, which anticipates creating a large market free from tariff restrictions by 2005. It would be a free agreement among all the countries of the continent (only Cuba would not participate), without political or institutional ties. During the last meeting of the countries of the continent, which took place in Canada in April 2001, the task was entrusted generically to the Organisation of American States — a body appointed by the governments of the individual member countries, without any political or institutional mandate — of “defending democracy in the continent with the objective of reinforcing and modernising the structures of the member states”.[15] Clearly the country with greatest political ascendancy and the greatest economic resources will play a leading role, and it is no chance that Brazil and Venezuela have received the US project with many reservations. These two countries are considered least likely to support any project favoured by the USA; in particular, in a typically nationalist perspective, they consider that the FTAA would put them in a definitive position of not only economic but also political subordination to the North American power.[16]

These suspicions find foundation in the fact that while advocating the FTAA at continental summits by emphasising the prospect of creating a free market with 800 million inhabitants, the United States continues to cultivate bilateral agreements. In this way the US systematically circumvents the rules (special tariffs, import-export of particular goods, concessionary loans, support at IMF level), signed by several Latin-American countries in the context of agreements at regional level, such as for example Mercosur or the Andean Community, and thus applies the ancient rule “divide et impera” by exploiting the levers of finance and the economy.

As regards Senator Mack’s report, it defines in detail the strategy which the USA should follow to promote the extension of dollarisation on a broader scale for its own political advantage. It should be observed that this report has never been adopted by the US Congress by vote, but nor has it ever been disowned: on the contrary, it has been made widely available throughout Latin America. This is proved by the fact that entire passages and chapters of the report have been used by economists and ministers to support the instigation of dollarisation in their respective countries.[17]

The report itself merits a closer analysis, but here we confine ourselves to noting two points from it. Chapter 6 (discussing which countries are candidates for official dollarisation) expresses the desirability of the entire American continent opting, country by country, for dollarisation; it also contains the extremely significant statement that national sovereignty is losing its traditional status of inviolability as the basis for the definition of a monetary policy. This statement is today used by Latin American economists and economic ministers to maintain that the loss of their monetary sovereignty is a secondary fact compared to the advantages which can be reaped in terms of stability and financial credibility. What is not understood is that the renunciation of monetary sovereignty in favour of a currency of another country, one which moreover is the major world power, means the renunciation of not only monetary, but also political sovereignty.

In Argentina, the President of the Central Bank, Pou, was actually dismissed unceremoniously for having expressed doubts both regarding the plans formulated by the super-Minister of the Economy, which are the expression of an attenuation of relations with Mercosur in favour of a closer collaboration with the USA, and regarding the dollarisation of Argentina.[18]

The other point of interest in the report, for the purposes of our analysis, is found in chapter 4 (on costs and benefits of dollarisation for the United States), which states that with the increase in the number of countries using the dollar, official dollarisation will help to keep the dollar as the first international currency, a position on which the euro is encroaching. This means that dollarisation is to all effects and purposes considered as a strategy appropriate to safeguarding and reinforcing US policy not only in the American continent, but on a world scale. The dollarisation of the American continent should therefore also be seen in the light of the introduction of the euro in Europe.

We must however emphasise the fact that the USA is legitimately, from its own point of view, pursuing a policy which reinforces it and guarantees its role as world power. It is the absence of different points of view, not only on the American continent, which favours the power politics of the USA.

Certainly the absence of an international political role on the part of the European Union aggravates the situation and offers us elements to understand better the crisis which has hit Mercosur.

 

 

Certain aspects of the Mercosur crisis have already been noted which, briefly, can be summed up in the tensions in relations between Argentina and Brazil. There is no doubt that without an agreement between these two countries, any regional process in the area is destined to founder. The political rapprochement between Washington and Buenos Aires and the contemporaneous cooling of relations between Brasilia and Washington are another sign of the worsening of the situation. The support given by the USA to the dollarisation of Argentina and to the restrictive policy called for by super-Minister of the Economy Cavallo, have further contributed to the discord between the Argentine and Brazilian governments. We must note that in the last three years the Brazilian currency has suffered a devaluation against the dollar, by 20% in 2001 alone, inexorably damaging the exports, in dollars, of neighbouring Argentina.

The lack of political and monetary co-ordination therefore make the institutions of Mercosur extremely fragile. In case of necessity, every government in the area responds with the traditional weapons of devaluation or raising tariff barriers. Only in retrospect do governments seek a political settlement with the purpose of keeping alive agreements which in every case have favoured and could further favour not only trade, but also a certain political stability. The question which one must ask however is whether this is enough, or whether it is in fact necessary to make that qualitative leap which would guarantee genuine economic and political stability in the area: a regional political and monetary unification.

In 1997, the National Bank for the Economic Development of Brazil carried out a study which anticipated the birth of a single currency in the Mercosur area for the year 2012,[19] but reactions to this project were not encouraging.

The head of the Central Bank of Paraguay, for example, in May 2000 declared that the single currency of Mercosur “is not an absolute necessity”.[20] Then in September 2000 Daniel Vaz, of the Central Bank of Uruguay, declared — in perfect agreement with the Argentine Minister of the Economy[21] — that “the single currency which Mercosur is seeking is already there in the dollar”.[22] More recently the President of Paraguay declared himself sceptical about the idea of a single currency, while the President of Uruguay declared himself generally prepared to evaluate the idea of a monetary snake on the example of past European experience,[23] maintaining at the same time that the policy of the Argentine Minister Cavallo must be an example for all.

Tension was then increased by the Argentine decision to establish a currency basket, constituted by the dollar and the euro, as reference for the peso (but only when the euro is worth as much as one dollar; in the meantime dollar-peso parity is re-confirmed). Until then (Cavallo’s forecast is for 2003), the Plan de competitividad has introduced a mixed exchange regime, which has seen the introduction with immediate effect of the dollar-euro basket in the hope of giving relief to the Argentine export economy. Thus, with the introduction of the mixed exchange, for every dollar of Argentine goods exported, industrialists receive a reimbursement from the state equal to eight-hundredths of a dollar.[24] In fact it was an undeclared devaluation of 8% against the dollar, despite the dialectical subterfuges of the Argentine government. Even Minister Cavallo’s declarations in favour of the basket of currencies including the euro must be seen as a desperate attempt to find support for his economic policy internally and, externally, to attract European investors prepared to export new capital to Argentina. The principal advocate of the Argentine plan is once more the United States, since the link to the dollar is in any case confirmed (in the short term the basket does not exist inside Argentina). The US also views favourably a small devaluation of the peso-dollar in foreign trade which is directed in particular towards Brazil and Europe.

The situation of Argentina is, however, destined to remain uncertain in the immediate future also, particularly after the summer 2001 decision to reduce salaries and pensions by 13%[25] and the consequent growth in internal tensions.

In the light of these events, many of which have serious political and social consequences, it is evident that the roots of the crisis have not been tackled.

Neither Argentina nor any other country, in Latin America or anywhere in the world, can find a solution at national level. The Mercosur crisis is the consequence of the eclipse of the project of regional integration. There are not enough generic agreements to guarantee lasting economic and political stability for those countries which participate in a process of integration: the moment is coming when these political and economic difficulties must find a continental (or sub-continental) institutional solution.

Against the obvious political influence exercised by the USA, it is more necessary than ever to make a joint Argentine-Brazilian response. The two South American powers should defend their autonomy by announcing that they are working for the creation of their own regional currency to function as a reference point for other countries of the continent. This decision would guarantee not only a monetary autonomy impossible today because the peso is tied to the dollar, but also an otherwise unimaginable political autonomy. It would also be an extraordinary signal to a continent which is slowly renouncing its monetary sovereignty, the first step towards the definitive loss of political sovereignty if and when, together with dollarisation, the project linked to the FTAA is realised. It is in any case obvious that this tendency can be reversed only with the manifestation of a firm Argentine-Brazilian resolve to pursue a project of political union.

 

 

This general context leads to some reflections which directly concern the analysis and federalist action.

First of all, the Mercosur crisis once more highlights how the initiation and development of integration projects require regional leadership. Just as in Europe the motor of the integration process was guaranteed by the joint and co-ordinated action of France and Germany, in the region of the Rio de la Plata such a process must be based on the resumption of dialogue between Argentina and Brazil. Where tensions arise in relations between the leading countries, the risk is that the situation comes to a head, as is happening now, with consequences which endanger not only the integration project, but also the social and economic development of the individual countries of the region. On the other hand, when these regional crises arise, it is inevitable for a superpower to try to “orient” the crises itself, in order to assert its leadership.

Faced with this situation, the responsibilities of the European Union are clear. If on the one hand the USA, the only genuine world power, is pursuing a policy which aims to divide countries trying to exercise their own policy at regional level, the fact remains that today, at international level, there is no valid alternative model of integration. If the project of a federal government of the Union were to be realised in Europe, it would also give effective visibility to the possibility of giving concrete political reality to regional projects born initially to foster economic development. This is the example which is lacking today for those countries which seek to realise regional integration projects.

A final consideration concerns the possible consequences of the birth of the euro as a second strong currency at world level. The dollarisation of the American continent in the future may presage the possibility that some developing countries might make the choice to renounce their own monetary sovereignty in favour of the euro. The question to ask, however, is if this model is the right one to promote the development of countries taking this option. Is it right that a country which is not an integral part of a political union, that of the USA or a future United States of Europe, should choose to renounce its own sovereignty? In reality the only truly evolutionary choice would be the creation of autonomous regional federations, endowed with their own currency, able to promote development and internal peace and to oppose every form of hegemony in favour of a more balanced world order.

 

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