19th June 2012
On Bloomberg yesterday morning, the Chilean Prime Minister is quoted as saying that Chile and other Latin American countries must avoid the economic mistakes of Europe, in particular the region's costly welfare policies. He said: "We don't want to put at risk everything we've done up to now. Take a look at European countries, that's the path that we do not want to follow."
"People want to get immediate results in every field," Pinera said, citing demands for free health care and university education. "But we cannot transform Chile into a welfare state; we are not rich enough for that." He added, with a nod to Eurozone politicians; "sometimes presidents have to say no."
Through the crisis, supporters of emerging markets have suggested that these countries learned their economic lessons through the Asian and Latin American crises of the 1990s. They realise the perils of over-leverage, the perils of borrowing in a 'foreign' currency (in their case, the US dollar). In this respect, it is argued, they were ahead of developed markets.
Although Iceland is not an emerging market, it is a smaller country whose actions during the credit crisis now stand in sharp contrast to those of more 'sophisticated' economies. Allister Health in today's City AM, suggested that its response to the banking crisis should give Western policymakers pause for thought.
"Iceland famously did everything the IMF or the global economic establishment thinks you should never do: it allowed banks to go bust, it defaulted on its debt, it reneged on international deals and so on, putting taxpayers first. It fell out severely with the UK government, among others. Yet its economy has bounced back, its people have found work again and the country is on the mend."
Certainly its economic statistics are enviable. As Heath points out; "Its economy expanded by 2.4 per cent quarter on quarter in the first three months of the year, its fastest pace since its meltdown, boosted by exports, tourism and consumption. Annual economic growth was 4.5 per cent, the highest since the first quarter of 2008. Unemployment has tumbled to 5.6 per cent in May from 6.5 per cent in April, figures out yesterday revealed. That is to be compared to 24.3 per cent in Spain and 21.9 per cent in Greece, where a shocking 52.8 per cent of under-24s are on the dole. Iceland is now able to borrow on the global markets, paying around 5.8 per cent."
Equally, there are other countries who have not followed the economic path prescribed by Western economists with some success. Bolivia has achieved a turnaround in its economy, largely in defiance of the 'Washington consensus'.
"During 2011, the country's economy grew at 5.3%, above the Latin American average. It is not an isolated event. The economy has been constantly expanding since 2007, averaging 4.5% a year. These economic and social successes have been attained following an alternative route to neoliberalism. Evo Morales's government did the opposite of what the Washington Consensus recommends: it nationalised hydrocarbons, electricity, telecommunications and mining; renegotiated the presence of direct foreign investment in the country; implemented an expansive fiscal policy and closed borders to the free importation of economically strategic products. The state took 34% of the economy under its control."
Of course, this is hugely controversial. Christine Kircher's Argentine government was widely derided when it tried to re-nationalise internationally-owned companies. Clearly, the Bolivian government is advocating much the opposite of the Chilean government.
However, it does suggest a more widespread questioning of the validity of developed market economic models. They have, in many cases, been proved wanting. It may also be that the credit crisis has shown the difficulty of a 'one size fits all' approach to economic management. Either way, developed market economists may find the next generation of emerging market governments less receptive to their ideas.
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