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I think I've always wanted to be a writer and now that I am pursing another dream of mine I feel as if everything is coming to place, as if there were economies of scale and positive externalities from following your dreams.

"The difficulty lies not so much in developing new ideas as in escaping from old ones" (J.M. Keynes). So I hope this blog will help me in my quest to escape the "old" ideas by allowing me to share my thoughts and receive comments from my readers.

Friday, October 15, 2010

The “Exit Option” and the lack of Mandela-style Leadership in Latin America

A few months ago I watched the movie Invictus. It was my first approach to the life and legacy of Nelson Mandela. I was so impressed that I went on to read more about him.  I learnt he was part of the African elite before the British arrived. In fact he was educated to be an advisor for the regent of his community. When the British arrived he saw his prospects for an easy life destroyed and as a lawyer he went on to work for a white solicitors' firm. Later on he started to fight against the injustice of the regime and was put in jail for twenty seven years.

What strikes me the most about him is his intelligence to put at the center of his government the integration between blacks and whites. Despite the injustice against him, he lead a participatory an inclusive government. He understood that South Africa was made of blacks and whites and the only way to achieve peace and prosperity was to try to integrate both societies.

This type of leadership is significantly different from that of Latin America in the XX and XXI centuries. Instead of integration, politics have been based on social and economic polarization and politicians have used inequality and class differences as an electoral weapon. As a result, the economic policies of the last four decades haven’t achieved a fair representation of the different economic and social sectors. Thus, alienating different groups and ways of life. We can even argue that political polarization might be one of the mechanisms in which economic and social disparities feed themselves producing a vicious cycle that ends up being very difficult to escape.

In the Mandela example- as in many other successful revolutionary movements- the leader comes from a sort of middle class. He is well educated and understands the struggle and incentives of the different sectors of the population. This gives him the ability to understand the real harm posed by social disintegration and the limitations of top-down  policies.

Thinking about this… I can’t help but wonder: Has inequality foster the sector and class-specific politics that we are seeing now in Latin America? Can a Hugo Chavez succeed in a more equalitarian society? And more important, why is Latin America lacking of leaders that are willing to reconcile the different realities created by inequality? Does Democracy have a role in this?

One of my hypothesis regarding the “increasing returns of inequality” (i.e. the power of inequality to perpetuate itself) is that once the gap between the social classes reach a certain threshold the differences justify a “class pride”, an inter-class sentiment that ends up with the upper-class completely disenfranchised from the low class’ reality, often resulting in violent reactions against the upper class. Moreover, when a social group feels that its voice will never be heard, it abandons the “Voice Option” to take the “Exit Option” (Albert O. Hirschman, 1970). 

For instance, in Latin America during the 80’s and early 90’s some groups were still trying to use the “voice option” - a good example of this is the Chiapas Guerrilla. However, by the mid 90’s the excluded sectors opted for the “Exit Option” reflected in: the massive migration to the US; the increase in kidnapping crimes (one of the most cruel ways to show that the lower class feels entitled to get something out of the upper class); and, in the proliferation of informal and criminal activities mainly drug trafficking.

Two questions remain: Is it too late to convince Latin America that the Voice option is still a viable one? Can a Mandela style leadership break the vicious cycle of inequality and create a more integrated society? I would like to think the social disintegration in our countries is not at the extremist level of that of the Apartheid …Who knows we might still have just enough time left.

Tuesday, October 12, 2010

Inequality, Neoliberalists and Why Mexico Shouldn´t be Afraid of Participating in the Currency War

The Mexican economic crisis of 1994-95 has been considered the first financial crisis of the XXI Century because it was the first one caused by the speculative nature of the International Financial Market. Today developing countries find themselves again in a similar scenario. International capitals are flooding the emerging markets in search of high returns that can't be found now in the indebted and slow growing developed economies.

Developing countries are one more time in a crossroad. Should they keep believing in the financial market and its invisible hand? Should they maintain inflation as their main monetary objective? Can they successfully hold the value of their currencies by intervening the market? Should they use capital controls instead?

Augusto de la Torre, World Bank's Chief Economist for LatAm., has suggested that governments in the region should fight the inflation pressures from the appreciation of their currencies by reducing expenditure (Bloomberg Oct.11, 2010). But, can countries with high percentage of population living in extreme poverty afford a reduction in expenditure? Can Governments - like the Mexican one- fighting a war against drug trafficking reduce public expenditure? Are there any other options?

While different countries are responding to the situation in different ways and using different instruments, is striking to see how the East Asian economies are willing to intervene the currency market and implement capital controls - India, China, Thailand, South Korea, Japan all have expressed their willingness to intervene the market to protect their currency from harmful "speculative" appreciation – while, on the other hand LatAm. economies (except Brazil) are once again keen on maintaining orthodox policies and letting the market do the rest.

In a liberalized economy with a high percentage of foreign ownership of banks, the reduction in the policy space is challenging in itself.  In this scenario, governments should be willing to use any economic policies that have proved to be successful in maintaining financial and economic stability. This makes me wonder….Why some Latin American  economists are scared of the use of government intervention?  Carsten´s “clarification” in the recent IMF G-20 meeting that the increase in Mexican International Reserves was merely a result of economic fundamentals and Mexico was not going to participate in a “currency war” supports my point.

Maybe I need to remember that the politicians that are leading our economies today are part of the “Debt crises generation”. The majority of them did their PHDs in the US studying under the market fundamentalist wave of the time. Many of them were the initiators of the “remaking” of the Mexican Economy (Lustig, 1998), and saw the macroeconomic stabilization of the last two decades as a personal triumph.  But, what about the deterioration of the income distribution? What about the exclusion of some economic sectors and ways of life? What about the violence and the high social and economic cost of the economic and social disintegration of the last 3 decades?

Maybe it is time to explore the policy options beyond the ones contained in the Washington consensus - that many of our leaders learnt by heart in the 90´s.