Latin America has endured years of debt crises associated with Toxic past, liberalization of financial markets and unanticipated shocks. No matter how realistic debt relief is, it is always viewed as risky to international financial systems and the debtor countries are coerced to repay higher interests on historical loans without amortizing the principal amounts.
Toxic past and liberalization of financial markets
Colonial masters took control of national resources in their colonies to support their economic growth and supremacy. The financial crisis in Latin America has been linked to the hostile and competitive nature of the relationship between the region and their colonial countries leading to destabilization of the economic block (Pilbeam, 2013). The developed countries had curtailed external financing to the newly formed governments and favored trade models of high-interest rates leaving a legacy of high inflation rates and economic instability in Latin America.
The boom and burst of private external financing lenders led to the crisis in the region. These were syndicated credits through international commercial banks which floated bonds because many countries were unable to cover their balance of payments. The inability to control capital flight lead to the Mexican default of the fiscal and monetary agreements with private lenders to manage the domestic financial crisis. The interbank credit financing ran into risks in 1974 when the Franklin National Bank in the USA made a heavy loss in the exchange market. However, the recycling of petrodollars in the following year was abundant to improve financing to the Latin America region.
The region received the highest debt flows and the largest share of foreign direct investments due to high liquidity in the Eurodollars market and high commodity prices. The South American nations were pushed to adopt financial liberalization and unregulated movement of capital which led to the increased precariousness of the financial systems and the debt crisis in the region. Besides, this crisis is fueled by the existing dissatisfaction between the developing countries and developed economies (Sanguinetti, 2014). For example, oil producing countries demanding fair prices and the developed economies preservative counter quest for lower prices to drive their economies has fueled global financial crisis. The impacts of the colonial regimes and liberalization of the markets Latin American markets immensely contributed to the economic challenges witnessed today.
Unanticipated Shocks
The debt crisis in Latin America is best exemplified by the recent OPEC price shock announcements and the dangers of shifting to alternative sources of energy in the developed regions consuming large amounts of fuel. OPEC projected that these changes would suddenly reduce investments in future oil supplies leading to inflated global oil prices and economic crisis. These unexpected changes in prices greatly contributed to the contraction and reduced the productivity of Latin American economies (Pilbeam, 2013).
According to recent studies, gradual and predictable changes in oil prices has minimal damages to the economy as organizations will have ample time to adjust. Furthermore, the gradual change and predictability of global oil prices would enable authorities in Latin America to eradicate chances of flow of petrodollars that results from soaring high prices of oil in the global market.
The sudden spikes in OPEC oil prices have destroyed growth and productivity in Latin America leaving governments to adjust to suddenly lower revenues. For example, Venezuela has been experiencing balance of payment difficulties while Mexico had to devalue its Mexican Peso and borrow $ 30 billion for economic stimulus and boost liquidity due to the unexpected shocks of global recession (Sanguinetti, 2014). Therefore, governments should be cognizant of petrodollar flows to create policies for sustainable growth and diversification of the economy to cope with the unpredictable changes in oil prices.
Conclusion
The liberalization of the financial markets in Latin America coupled with retrogressive colonial policies resulted in the financial crisis in the region. Other unanticipated shocks in the environment have negative impacts on the growth and productivity of the countries in the region. Other nations such as Venezuela and Bolivia are facing high inflation and cost of leaving due to the unexpected fluctuation of oil prices. This crisis has created a massive exodus of people from Latin America to other countries leading to the current humanitarian crisis in the region.
References
Pilbeam, K. (2013) “The Latin American Debt Crisis,” pp. 370–400. Doi: 10.1007/978-1-137-11637-6_15.
Sanguinetti, P. (2014) “Comments on ‘The Latin American Debt Crisis in Historical Perspective’ by José Antonio Ocampo,” pp. 116–121. Doi: 10.1057/9781137411488_5.
