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The crisis contains a political risk for Latin America
October 14, 2008
It finally happened. The moment has come to start shivering. The economic debacle that departing from Wall Street affected the whole world has become so intensive that the question is no longer if it will impact on Latin American economies, but rather in which way that will happen.
By Raúl Ferro

It finally happened. The moment has come to start shivering. The economic debacle that departing from Wall Street affected the whole world has become so intensive that the question is no longer if it will impact on Latin American economies, but rather in which way that will happen.

At the beginning of October, the uncertainty was still too high to predict anything. Investors, businessmen, authorities and the general public maintained, when this article was written, a nervous attitude of "let's wait and see".

The aggravation of the crisis, however, didn't change an important element of all previous analyses: The majority of the region's countries are in a much better position than in the past to withstand this hurricane. Some are better than others. Paradoxically, those that followed the most prudent economic policies, meaning those most aligned with the general sense of market economy, are the ones presenting most strength. Those less orthodox, even though they show also good macroeconomic numbers, can be more vulnerable because of their proclivity to maintain high levels of public expenditure and control on the economy which in the long run generate imbalance and strong distortions.

But the crisis also contains a political risk for Latin America: That free market and capitalism as a system will loose prestige. Several leaders of the region have commented the crisis as a proof that the system is no good. Some, like the president of Argentina, Cristina Fernández, announcing the collapse of the first world. Others, like the former president of Chile, Ricardo Lagos, recalling the idea of the privatization of profits and the socialization of  losses. Casino capitalism is the new trendy term that threatens to be applied to any form of market economy.

It is true that the current crisis is a consequence of the grotesque excesses committed by the financial industry, aggravated by the errors of the economic policies of the president George W. Bush. But the problem isn't the system per se. It's the deficient regulation of the financial markets. In the last eight years there has been an excessive increase of ideology in the economic management. That's why the government of the United States turned a deaf ear on the signals of the market. This mistake to give more weight to the ideology than to the economic reality is also one of the principal reasons behind the rejection by republican representatives of the bailout proposed by their own president.

Besides, it's good to recall that the market economy is the one that has brought greatest welfare and prosperity to the society. It's enough to see the advances in economic growth and poverty reduction achieved by those Latin American countries that adopted it in the last 20 years. Maybe this is difficult to understand for someone who has seen how his pension fund has lost 15% or 20% of its value in a few weeks. But the historical evidence shows that the market as a system - not as an ideology - is the one that establishes the most solid basics for development. And if something doesn't work well, one doesn't have to be afraid of regulating it either. We are not talking about that type of regulations that give absolute decision power to bureaucrats. We are talking about practical regulations, not ideological ones,  that help to prevent and correct eventual excesses that could happen in an open economy.

In times in which emotions have more weight than reasoning it is important that the leaders of the region concentrate on the rational analysis of the problems hitting the world and that they don't let themselves be tempted by an easy and opportunistic discourse. The worst that could happen to Latin America would be an involution in the election of market economy as a frame for its economic and social development.

Raúl Ferro is the Contents Development Director of Business News Americas and columnist of the CADAL's Podcast "Apertura Latinoamericana".