By Tony Phillips (Brazzil)
Latin America has some of the world’s largest countries, in terms of land area, but the continent has no large global economy: and only two medium-sized economies, Brazil and Mexico. The region also lacks a local hard currency as a basis for international, and especially intra-regional, trade.
Many of the commodities that South American countries export are not traded in the currency of the originating country. So, if Chile imports oil from Argentina or Argentina copper from Chile, they pay in U.S. dollars. A regional currency facilitates trade and the creation of financial service hubs.
Europe developed its financial services and its regional development bank around the Pound Sterling, the Mark, the French Franc, and its economic stability now depends largely on the Euro. The U.S. Dollar filled this role in North America, and Asia uses the Yen (and increasingly the Yuan). (1) The lack of a continental currency leads to unstable national currencies and also financial dependence, in this case on the U.S. dollar.
Three Latin American democracies are dollarized (Ecuador, Panama, and El Salvador). While the Bank of the South will not replace the use of the dollar, even in development projects, it could be a step in the right direction in terms of locally-sourced development infrastructure. It is also a step toward a South American regional currency.
The Bolivarian Alternative for the Peoples of Our America (ALBA in Spanish) (2) countries have proposed beginning with a Sucre, (3) a transactional currency introduced at the latest ALBA-TCP (TCP – Peoples Trade Agreement) conference in Cumaná, Venezuela. ALBA itself was created as a “Bolivarian” alternative for Latin American commerce to oppose the Free Trade Area of the Americas (FTAA). Ecuador recently agreed to join ALBA.
Latin America is rich in real terms, however its financial infrastructure is primitive. This means that many national and international transactions pass unnecessarily via northern financial centers, sometimes requiring two hard currency conversions from buyer currency to dollar to seller currency.
Even transactions within a country can be in external currencies; buying an apartment in Buenos Aires, for example, involves a transaction in dollars. For a time this was also the case in Brazil. However, increased self-reliance, the strength of the Brazilian Real, and banking regulation have gradually replaced the dollar with the Brazilian Real in most Brazilian financial transactions.
One recent step forward has been a bilateral Central Bank agreement between Brazil and Argentina, allowing trade to occur between these two countries in local currencies. However, this Central Bank to Central Bank facility is not backed by basic financial services in São Paulo or Buenos Aires, such as currency hedges to protect the transaction in the case of a sharp currency move between the Brazilian Real and the Argentine Peso.
With the global financial crisis, currency moves are becoming more volatile. The result is that traders pay extra to buy and sell futures on the U.S. dollar, which offers them the currency security they need to plan ahead and fix the price of a future transaction, so use of this new facility accounts for less than 20% of transactions between Brazil and Argentina.
A History of Instability
Latin America has experienced economic instability for centuries. Some economic historians believe this to be the result of bad habits inherited from colonial times. During the Spanish and Portuguese empires, export policies were policed by viceroys for the benefit of their Iberian kings (and corrupt local customs officials). With military conquest came exploitation of human and natural resources for export markets abroad.
Iberian royalty cared little about the working conditions in their silver mines or large estancias. (4) It never even occurred to them to pay for the silver and gold coins smelted there for use in Madrid or Lisbon which funded Europe’s development. In effect they were a donation of Latin American resources to Europe. New World plunder financed the development of Old World empires.
With independence came change and some improvement in the chain of international production. Recent decades, however, have seen another consolidation in the control of exploitation, production, transport, and marketing of South American resources, introducing new economic forces, a process known as the transnationalization of these economies.
The chain of production has shifted to the hands of private transnational corporations. Examples include U.S. transnational Cargill’s activities in grains and oils (especially soybeans) in Paraguay, Argentina, Bolivia, and Brazil; or banking giants such as Citibank and HSBC; or Spanish transnationals such as Telefonica, Banco Santander, BBVA, and Repsol.
Today none of South America’s commodity exports are denominated in their own currencies and most of the financial system is held and controlled by developed country-based transnational companies. This leaves national currencies and financial systems weak and vulnerable, what some have called a “neo-colonial” order that undermines regional development.
This results in flows of capital (5) from South America to the headquarters of the transnationals which operate there leaving the countries permanently short of hard currency. This causes so-called stop-and-go economic instability cycles: (stop) crisis in the balance of payments and then (go) after devaluation of currency. Stop-and-go makes development planning impossible.
Latin America’s economic problems are compounded by foreign debt and the growth of dollar-denominated commodity exports. This has a cyclical destructive pattern in Latin America from the shortage of savings in local currencies. Who wants to save for a rainy day when their currency is constantly losing value, if not by internal inflation, then by forced devaluation relative to other currencies?
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