The Islamic Post Blog


World Crisis Stalls ‘Free Trade’ Economy by Khalida
December 1, 2008, 12:38 am
Filed under: December Volume 1 - 2008 | Tags:

By Abdul Qadir A. Ghani
Islamic Post Staff Writer

As the American stock market points slide rapidly, global exchanges are largely following suit, Latin America being no exception.
However, from the entire region, Mexico is taking the biggest blow. Due to the 1994 North American Free Trade Agreement (Nafta), the Mexican economy is closely interlinked with that of the rest of the northern continent, but especially that of the United States.
Mexico exports 90 percent of its goods to the United States.
Interpress Service News reported “unemployment is up” in Mexico while “companies have put their plans on ice, the government has stopped putting out tenders, remittances from migrants are down, and exports have shrunk.”
“I understand the government has to keep calm and show optimism, but let us not be naïve. Mexico is heavily dependent on the U.S. economy, more so than any other Latin American country,” Ángel Vega, a university professor and business consultant, told IPS.
“Mexico will certainly not face a crisis like the 1994-1995 debacle [when the Mexican banking system suffered a collapse], but times are difficult, and will carry on that way as long as the problems continue in the United States,” said Mr. Vega.
As nervous investors began pulling money out of emerging markets, consumers in the entire region have felt the pain in the form of rising prices of food and other commodities.
Subsequent increases in the cost of living in Caribbean Community (Caricom) countries in particular, has become acute.
The ripple effects in the region as a whole have caused political and business leaders to re-examine their economic standing, while some countries, according to the International Herald Tribune, have built up stabilization funds to aid them against the Wall Street turmoil.
Resentment.
Over the past decade, there has been growing resentment for U.S. economic policies in the region, which has resulted in a mass effort to reduce dependence on the U.S. economy, as well as from global lending institutions like the World Bank and International Monetary Fund. As elaborated in the book Confessions of an Economic Hitman, foreign investment is largely to blame for policies that have excluded South American nations from profiting from their own national resources, thus contributing to an aftermath of poverty, civil strife, and international debt.
Ecuador, for example, had benefitted from an influx of U.S. dollars since its government stopped using local currency in 2000, in an effort to halt inflation. The “dollarization” that took place is said to have opened the door to greater business and investment opportunities, thereby fostering stability to Ecuador’s economy. However, VOA news reported that the dollar economy means Ecuador’s Central Bank has few tools to protect itself from a widening crisis. Pablo Davalos, economist at the Catholic University of Ecuador says whatever problems exist in the U.S. economy affect Ecuador directly.
Argentine President Cristina Fernández said, “We are seeing how that first world –once portrayed as the goal that we had to reach– is bursting like a bubble.” She continued, “South America was told that the market solves everything, but now we have the strongest state intervention since the point when the U.S. told us that the state was not necessary.”
Venezuelan President Hugo Chavez told Brazilian reporters that “The world will never be the same after this crisis…..A new world has to emerge, and it’s a multi-polar world.”
However, a new world may still be a lofty ideal for the region, which is still dependent upon foreigners due to long-standing trade agreements.
Ricardo Sanguino, the director of the finance committee in Venezuela’s national assembly stated, “The crisis affects us because we’re not a completely closed economy, but the impact won’t be disastrous.”
While oil prices dropped to $55 a barrel at print time, as a result of decreased consumption as the crisis wracks its way through the world, the Venezuelan economy did fine when the rate was the same in 2006. With the central bank’s $39 billion in reserves, Venezuelan President Hugo Chavez said he has enough resources and even other assets to ride out the storm. The rating agency, Standard & Poor’s, confirmed recently that, in spite of an inflation buildup, the outlook in Venezuela remains stable.
Yet, Venezuela is a global trader and the fallout of the economic crisis is stretching farther than the Americas. While the U.S. economic crisis has been compared to that of era of the Great Depression in the United States, during the 1930’s, predictions of a global Depression are also in the wind.
“It is not by chance that what began as initiatives by Venezuela, Brazil, Bolivia or Argentina, have been taken up by the vast majority and made concrete in the Union of South American Nations (UNASUR), the Bank of the South, the Great National companies in the energy sphere, and others that are currently serving as a support to member countries,” reported the Cuban news outlet Granma International.
Latin America still entertains hopes for a regional economic trading system of their own, one that would be more impervious to global trends.

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