A Lost Half-Decade in Latin America

by Jose Antonio Ocampo

With economic activity falling by close to 1 percent in 2002, Latin America will complete a lost half-decade in terms of economic growth. Per capita output for this year will be 2 percent less than in 1997. Although the crisis in Argentina explains part of this result, slow growth is a widespread phenomenon. In the past five years, half the region's countries have experienced a decline in per capita output and all the countries that enjoyed throughout the 1990s (Chile and the Dominican Republic, in particular) have experienced a marked slowdown.

The causes of such a widespread trend can only be found in a common source, the international economy. Among the possible explanations, one clearly stands out: the behaviour of international capital markets. The recovery of economic growth from 1990 to 1997 was associated with the return of private capital flows, whose flight had generated the "lost decade" of the 1980s. Capital flows once again fell off sharply, though less dramatically than in the 1980s, as a result of the 1997 Asian crisis. In particular, since 1998, interest payments have exceeded net financial inflows, and net resource transfers have thus been negative. This phenomenon was offset for some years by large amounts of foreign direct investment, but this is no longer the case. In 2002, direct investment flows stand at half the maximum level reached in 1999.

Financial crisis in Argentina. © Lehtikuva/EPA Photo AFPI/Daniel Garcia/dc/rix
Financial crisis in Argentina. © Lehtikuva/EPA Photo AFPI/Daniel Garcia/dc/rix

​The volatility of financial markets has been devastating for the developing world, and for Latin America in particular. Inherent to their functioning are periods during which risk is alternately under- and overestimated - that is, periods of "irrational exuberance" (as the Chairman of the Federal Reserve, Alan Greenspan, has called them) followed by "irrational panic". For some countries - including Brazil and Uruguay - debt levels that until recently were considered manageable have suddenly been interpreted as unsustainable, leading to excessively high country risk premiums and net financial capital outflows. This panic behaviour is a serious matter of concern because, as the financier George Soros has pointed out, the market can sometimes impose its own expectations, even when they are irrational.

Given these serious market failures, a profound reform of the international financial system is urgently required. In recent years, this reform process has been desperately slow, and has suffered some major setbacks as well. The delay in the International Monetary Fund's support for Argentina in 2002 is a manifestation of this regression. It has generated hypersensitivity to events in Latin America on the part of financial markets. This can be explained, no doubt, by the importance of Argentina as a destination of capital flows throughout the 1990s. There have obviously been some exceptions, but investors have been cautious even with respect to countries that continue to have access to capital markets on reasonable terms, a nd none of t hese countries has experienced rapid growth. Through several channels - capital flows, trade linkages, tourism flows, reduced remittances from foreign workers residing in Argentina and losses by Latin American firms that invested in that country - the Argentine crisis has spread to other countries in the region. The idea that it was possible to isolate that country's crisis without generating "contagion" has collapsed like a house of cards.


Faced with the current tension between the recovery of the real economy in the United States   and   financial uncertainty, the hope is that the first of these processes will prevail, generating a recovery of economic growth in 2003. But recovery from the current circumstances is not enough. An offensive on the part of the developing world in general is required, pushing towards an international economic order that provides more guarantees against financial turbulence, real openness to trade in the industrialized world, faster technological transfers and international agreements on migration.

In Latin America, the lessons learned over the past decade of intensive reforms should be the basis for a reorientation of development strategies. The achievements of the reform period, particularly price stability and dynamic export growth, should be maintained. However, it should also be recognized that the expectation that economic liberalization would generate rapid growth in the region has not materialized. Indeed, growth rates since 1990 have been half of what Latin America achieved during the period of State-led industrialization from the mid-1940s through the 1970s. Growth volatility has also been high and income distribution has worsened in several countries.


International reform should thus be accompanied by the launching of renewed national development strategies based on three primary elements: counter-cyclical macro- economic polices aimed at reducing the intensity of the business cycle and, particularly, the vulnerability of the region's economies to external financial cycles; active productive development strategies suited to today's open economies, which would strive to improve their international competitiveness and offer more opportunities to small firms and microenterprises; and more ambitious social development policies that would help to ensure that the benefits of growth reach the entire population. An ambitious political leadership committed to a deep regional integration process should also be part of the solution. This mix between global reform, strong open regionalism and more active national development policies is the essence of the ECLAC proposals put forward in recent years, the latest of which appear in its report "Globalization and Development", available at:

Professor Jose Antonio Ocampo delivered a public lecture on this topic in Helsinki on 19 October 2001.

Jose Antonio Ocampo is the Executive Secretary, United Nations Economic Commission for Latin America and the Caribbean (ECLAC). He is a contributor to the WIDER project on Capital Flows to Developing Countries since the Asian Crisis: How to Manage their Volatility? , co-directed by Professors Ricardo Ffrench-Davis and Stephany Griffith-Jones.