US financial regulators are making the same mistakes as their Latin American equivalents in the debt crisis of the early 1980s, according to Andrés Velasco, Chile’s finance minister, in today’s Financial Times.
Public guarantees for private financial activities had to be coupled with strong regulation, he said, while regulators and credit ratings agencies should have been more vigilant about the risks associated with new financial instruments.
“You learn the hard way,” Mr Velasco told the Financial Times. “This is a more modern and a much bigger version of what we have seen in emerging markets over the last couple of decades.”
Chile has now built up a massive surplus – to protect it from future debt crises, and as a bulwark against the turbulence of the unregulated global financial system. But Chile, like most poor countries, is dependent on what has long been described as ‘the engine of the global economy’ – the United States – which is responsible for 30% of global GDP. Now that the US consumer, shopped-out and burdened with debt, faces the prospect of her company going bankrupt and being made redundant – she is even less likely to want to purchase copper from Chile. Secondly, producers are responding to the recent spike in commodity prices by doing what they did in the 1980s – rushing to grow, produce and supply more. This, combined with the US recession, will cause further falls in prices. As we write, commodity prices, and with it stock markets are slumping in Latin America – a continent where the Washington Consensus encouraged heavy dependence on exports to the US.
So this Credit Crunch has severe consequences for the global economy – and for the poorest people of the world. It is for that reason that those who are concerned about prospects for the poor, should lift their eyes beyond Africa, Asia and Latin America – and focus on the activities of the rich.