The Economic Crisis and Mercosur

For the last five years, the countries of the Mercosur economic bloc have been riding a wave of economic growth mostly thanks to high commodity prices. During the boom, some countries of the bloc began efforts to reduce their dependence on U.S. financial markets with those windfall profits. Those initial efforts were good but insufficient. Still, the Mercosur countries have options available to help them weather the storm—if they move fast.

November 26, 2008

Less than a week after the collapse of Lehman Brothers and Merrill Lynch, Brazil’s President Luiz Inácio Lula da Silva scoffed when asked if U.S. financial troubles would affect Brazil. “What crisis?” responded President Lula. “Go ask Bush about that.” In the wake of the Bush administration’s $250 billion equity investment in private banks—the largest government intervention in the U.S. banking system since the Great Depression—Venezuelan President Hugo Chávez quipped, “Bush is to the left of me now.”

Venezuela and Brazil, both members of the Mercosur trading bloc, have made efforts over the past decade to reduce their countries’ dependence on U.S. financial markets; but in the last few weeks, the U.S. fiscal crisis has had far more significance for Latin American economies than its initial comedic value.

The Mercosur—the Common Market of the South—is South America’s largest trading bloc and its member states, Brazil, Venezuela, Argentina, Paraguay, and Uruguay, have all experienced greater financial stability since 2003. Many economists attribute this half-decade boom to high global commodity prices, since all the countries in the Mercosur are export economies—Venezuela, of course, produces and exports oil, while the other countries are dependent on agricultural exports.

As the financial crisis began, the Mercosur seemed to offer a protective, if symbolic, shell to weather the storm from up north. Then, on October 21, the Argentine government announced that it would nationalize the country’s private pension system, which, with close to $30 billion in assets, was the largest investor in the country’s capital markets. President Cristina Fernández de Kirchner said that the change was intended to protect people's pensions from market fluctuations, but the immediate affect was the exact opposite. In the following days, the Buenos Aires stock exchange fell more than 20 percent and many investors sold their Argentine bonds.

The next day, on October 22, the Brazilian government startled investors when it announced that the two biggest state-owned banks, Banco do Brasil and Caixa Econômica Federal, would be allowed to purchase stakes in struggling private firms. Two weeks later, Itaú and Unibanco, two of Brazil’s largest banks, announced that they were merging, indicative of reduced credit lines in a country that, just months ago, was experiencing record credit growth.

For Venezuela, the recent slump in oil prices, which have dropped nearly 60 percent in less than five months, from $140 per barrel in July to $60 per barrel in November, has left the economy groping for lost revenue. President Chávez has already had to scale back his spending. In late October, the President cancelled a promise to build an oil refinery in Nicaragua. Last week, plans to construct two new oil plants, a project co-sponsored by Pequiven, the state petrochemical corporation, and Braskem, a Brazilian company, were postponed because of squeezed credit lines.

Paraguay’s cash crop—the soybean—is similarly facing a sudden drop in prices, plunging more than 40 percent since July. Similarly, in Uruguay, low commodity prices will no doubt stunt the growth of its economy, particularly if the Brazilian market curbs its consumption of Uruguayan imports.

Even though institutions like Mercosur were never designed to immunize its members from the fluctuations of global commodity prices, the past month has revealed the extent of the region’s dependency on external economic factors. However, Mark Weisbrot, co-director of the Washington D.C.-based Center for Economic and Policy Research, argues that the economies of countries like Brazil and Argentina are not particularly tied to US markets: "Exports from Brazil and Argentina to the United States, for example, are less than one percent of those countries' economies," argues Weisbrot. He believes that South American economies can withstand the U.S. financial storm by making greater investments in local infrastructure, taking a cue from how China handled the Asian economic crisis a decade ago.

The Mercosur trade block will convene on December 15 in Bahía, Brazil, to discuss proposals and strategies in the wake of a financial crisis that has undoubtedly arrived to South America, though its unclear to what extent.

Jessica Weisberg is a NACLA Research Associate.

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