[DEBATE] : (Fwd) Pessimistic Petras on L.America

[Patrick Bond]

Latin American’s ‘New Left’ In Crises
As the ‘Free Market’ Collapses
James Petras
October 2008

Latin America is entering a period of profound economic recession, 
financial crises, collapsing stock market quotations, prices, deep 
devaluation of its currencies, growing unemployment, declining revenues 
and the prospect of a prolonged socio-economic recession. The economic 
breakdown, which is still unfolding, affects the entire political 
spectrum, extending from the far-right Uribe regime in Colombia to the 
social-liberal Chilean and Brazilian governments of Bachelet and Lula da 
Silva to the ‘center-left’ regimes of Evo Morales in Bolivia and Rafael 
Correa in Ecuador and even to the leftist government of Hugo Chavez.
It is not surprising to see that rightist regimes , embracing 
neo-liberal doctrines and deeply enmeshed in free trade agreements with 
the US, following its path to economic collapse. The deepening crisis 
has affected, with equal or greater force, the so-called ‘center-left’ 
regimes of Brazil, Ecuador, Argentina, Bolivia and Nicaragua.
The uniformity of the collapse of Latin American economies raises 
important questions about the changes and claims of independence, 
decoupling and post-liberal models, which many regime leaders, 
ideologues and progressive US-European Latin American writers made over 
the past several years.
The collapse of what some writers have referred to as Latin America’s 
‘pink tide’ and other more exuberant publicists referred to as the new 
‘revolutionary regimes’ (and other more prudent analysts called the 
‘post-neo-liberal’ democracies) raises serious questions about the 
emergence of a new dynamic heterodox model no longer subordinated to the US.
The simultaneous economic crises in Latin America and US/Europe call 
into question the degree of structural changes that were implemented by 
the center-left Latin American regimes. More specifically, the breakdown 
focuses attention on the continuities in financial systems, trade 
patterns, productive structure and free trade policies with their 
predecessor neo-liberal regimes. The claims of ‘de-coupling’ put forth 
by the pundits of the center-left have been proven to be without substance.
Faced with the collapse of the center-left economies, their former 
ideological cheerleaders have alternated between a deafening silence and 
avoidance of any structural explanations, and/or to simply project 
‘blame’ on the ‘casino capitalism’ of the US. The latter posture begs 
the question of the center-left regimes’ domestic policies which opened 
their economies and made them excessively vulnerable to Wall Street 
speculation. Up to the recent collapse, the intellectual defenders of 
the ‘center-left’ had little to say about the Wall Street linkages, 
busying themselves with the temporary high growth rates, which they 
attributed to the ‘new heterodox model’.
The problem avoidance and external finger pointing adopted by the 
ideologues of the ‘New Latin American Left’ reflects a fundamental 
misunderstanding or ignorance of what was really going on within these 
countries. They substituted emotional gratification at rhetoric 
flourishes and symbolic changes and privileged invitations to private 
soirees with the ‘center-left’ presidents over hard analyses of 
substantive policies and structural continuities. Disentangling 
illusions from reality is the first step to coming to terms with the 
existing collapse affecting the region and the disastrous consequences 
for the great majority of wage, salaried and informal workers and peasants.
The ‘New Latin American Left’ (According to Its Publicists)
Despite the extensive and, in some cases, profound differences in social 
structure, levels of economic development and sheer wealth among Latin 
America’s ‘center-left’ regimes – their publicists, advocates and 
adversaries claimed they were breaking with neo-liberalism and pursuing 
a vastly different socio-economic model, a break with the past, a 
heterodox economic strategy which combined ‘market’ and ‘state’ in 
pursuit of what some claimed was ‘Twenty-First Century Socialism’.
This line of argument defined the ‘novelty’ of the new center-left by 
identifying twelve areas of ‘transformation’ or change. The ‘new 
center-left’ ideologues argued that, in contrast to the previous 
neo-liberal regimes (NLR), the center-left regimes (CLR):
1. Adopted a new more socially responsive economic model that pursued 
‘mass inclusion’, cultural diversity and social justice;
2. Put an end to ‘free market neo-liberalism’ and replaced it with a 
‘state-market model’;
3. Began a process of ‘social transformation’ (Argentina), a ‘democratic 
and cultural revolution’ (Bolivia), ‘twenty-first century socialism’ 
(Ecuador), and a process of long-term high growth based on fiscal 
responsibility and social justice (Brazil);
4. Ended discrimination and exploitation of the indigenous people 
(Brazil and Ecuador) and empowered the Indian communities (Bolivia);
5. Moved to replace dependence on the Western markets and ended Wall 
Street domination through the pursuit of regional integration;
6. Developed regional political and economic organizations like ALBA, 
UNASUR and PETROCARIBE, which marked the construction of a new 
independent alternative regional economic architecture;
7. Promoted a new kind of participatory democracy in which the popular 
classes had a bigger direct say in the formulation of government policy;
8. Developed diversified markets, especially with Asia (China 
particularly), Europe and the Middle East based on greater economic 
independence, effectively ‘decoupling’ from the US economy and ending US 
‘hegemony’;
9. Accumulated vast foreign reserves (tens of billions) based on 
promotion of an agro-mineral export strategy, thus creating long-term 
insurance against future downward movements in the prices and demand for 
export commodities;
10. Amassed large-scale budget surpluses through fiscal discipline and 
avoidance of ‘populist’ spending on large social and infrastructure 
programs;
11. Pursued policies favoring greater social equality of opportunity, 
pro-labor income policies, easy credit, increased consumer imports and 
increased spending on food programs for pensioners, children and the poor;
12. Formed public-private partnerships between the state and foreign 
multinationals replacing foreign domination by equal partners and 
increasing benefits to the home country.
According to the promoters of the ‘center-left’ regimes, the ‘proof’ of 
the progressive, sustainable and dynamic character of these regimes was 
demonstrated by the period between 2005-2007 where high growth, high 
income, budget and trade surpluses and repeated electoral victories were 
the norm.
End of an Illusion: 2008 The Year of Reckoning
The success claimed by the center-left regimes (CLR) and their 
apologists were based on an entirely false set of assumptions and 
temporary and volatile set of structural relations with regard to trade, 
investment and financial linkages. When the onset of the financial 
collapse and economic recession first struck the US and Europe, the 
first response of the CLR was to deny that the crisis would affect their 
economies. For example, President Lula da Silva of Brazil at first 
blamed the ‘casino capitalism’ of the US and claimed that the Brazilian 
economy under his rule was healthy, protected by large reserves and 
would be hardly affected. As the effects of the financial breakdown and 
economic recession in Europe and Wall Street deepened and spread to 
Latin America, the CLR regimes and their intellectual defenders adopted 
a different posture. On the one hand they sought to deflect all the 
blame to the US financial system and thus avoid facing the structural 
weaknesses of their economic policies. On the other hand some writers 
looked to some of the recent regional organizations, like Bancosur and 
ALBA, as alternative sources for salvation or as mechanisms to 
ameliorate the effects of the crisis. Neither the CLR nor their 
intellectual defenders have demonstrated any willingness to confront the 
structural weaknesses and vulnerabilities of their socio-economic 
strategies over the past half decade. More specifically the CLR and 
their defenders refused to admit that the claims of ‘change’, and 
construction of 21st Century Socialism were in fact built on illusory 
assumptions.
The spread of the crisis from the US-Europe to Latin America is a result 
of the CLR’s continuities of the neo-liberal policies, the maintenance 
of the same ruling economic classes and the pursuit of economic 
strategies dependent on inflows of speculative capital, debt financing 
and the agro-mineral export elites.
Despite the rhetoric of ‘21st Century Socialism’ (Chavez in Venezuela, 
Morales in Bolivia, Correa in Ecuador and Ortega in Nicaragua), 
‘independent model’ (Lula Da Silva in Brazil), and the ‘social-liberal’ 
model (Bachelet in Chile and Vazquez in Uruguay), the above-mentioned 
regimes retained and even deepened the principle structural features and 
policies of the neo-liberal model. They remained highly dependent on the 
global market: in fact they all accentuated its worst features by 
emphasizing primary goods exports (agro-mining commodities) to take 
advantage of the temporary spike in prices. As a result they vastly 
increased their vulnerability to external shocks. With the onset of the 
world recession in 2008, the collapse of demand put an end to the big 
trade surpluses and provoked a big slide in all the related economic 
factors: Foreign reserves plummeted. Government revenues based on export 
taxes declined precipitously. Local currency was devalued as both 
foreign and domestic investors fled to what they perceived as stronger 
currencies and safe havens.
All of the CLR based their development strategies on a strategic 
partnership between the nationalist capitalist class, the state and 
foreign investors contrary to the populist-nationalist imagery of 
Western intellectuals. At the very onset of the financial collapse, 
foreign capital began its massive flight outwards and upwards driving 
down the stock markets in Brazil and Argentina by over 50% and forcing a 
de facto devaluation as local savers and investors converted local 
currency into dollars, euros and yen. With the onset of the recession in 
the real economies of the EU and the US, national capitalists and 
financial elites responded by reducing investment in the productive 
sectors anticipating a sharp decline in demand for their primary 
commodity exports. This provoked a multiplier effect in satellite and 
related domestic manufacturing and service industries.
The double exposure to financial shocks and world recession was a direct 
result of the one-sided export market policies pursued by the CLR. The 
leaders of the CLR paid lip service to ‘regional integration’ (ALBA, 
MERCOSUR, UNASUR), even setting up an entire administrative structure 
and initially investing marginal resources to the effort. The regional 
rhetoric was dwarfed by the ongoing and growing ‘integration’ in the 
world market, which remained the motor force of their growth. Given 
their deep involvement in the primary commodity boom, the regimes 
maximized the importance of markets outside of the Latin American 
region. With the downturn, even the regional integration scheme 
(MERCOSUR) faces disintegration as Argentina turns protectionist.
The temporary trade and budget surpluses were used to further deepen the 
primary sector expansion (expanding infrastructure to and from 
productive sites to shipping centers on the coast), increase the wealth 
of the agro-mineral elites, and encourage a huge influx of speculative 
investors who inflated stock valuations (doubling and tripling prices in 
the course of two and three years: Price/earnings ratios reached bubble 
proportions.
The reactionary/retrograde model of the CLR, built on the 
‘primarization’ of the economy and the boom in speculative investment, 
was ignored by almost all Western intellectuals who were dazzled by and 
chose to focus on marginal ‘populist’ measures: Lula’s $30 dollar (45 
Reales) monthly food basket for 10 million poor families (who became 
part of his electoral client machine in the Northeast); Kirchner’s 
promotion of human rights and 150 Peso ($50 USD) monthly unemployment 
benefit; Evo Morrales cultural indigenismo and ‘joint ventures’ with the 
international oil and gas companies (falsely dubbed ‘nationalization’) 
and Rafael Correa’s declarations in favor of 21st Century Socialism and 
increased social spending.
The ideologues of the CLR failed to analyze the fact that these marginal 
increases in social spending took place within a socio-economic and 
political framework, which retained all the structural features of a 
neo-liberal economy. With the collapse of overseas primary commodity 
prices, the first reductions in government programs are directed at…the 
poverty programs that provided a fig leaf to the rapacious 
speculator-agro-mineral driven economic model. The entire ‘left 
spectrum’ ignored the fact that the balance of payments and budget 
surpluses, which funded social reforms, were dependent on the inflow of 
‘hot money’. The latter, by its nature, enters easily and flees rapidly, 
particularly in response to any adversity in their ‘home market’, not to 
mention in the face of a worldwide financial crash. Thus the already 
meager social measures adopted by the CLR were fragile to begin with, 
highly dependent on the volatile behavior of highly speculative capital 
and world markets.
The claim of the CLR that Latin America was de-coupling from the US 
market, through greater ties with Asia (China, Korea, Japan and India) 
and developing into a world power (as part of the BRIC bloc – Brazil, 
Russia, India and China) has been demonstrated to be false. Brazil’s 
agro-mineral exports to Asia were highly dependent on world prices 
determined by demand from the US, EU as well as many other regions and 
countries. The deep world recession and credit collapse has profoundly 
affected Asia’s exports to the US and EU, which, in turn, has led to a 
decline of Latin America’s primary exports to Asia. None of the Asian 
countries can maintain their commodity imports from Latin America 
because they are not able to substitute domestic demand. The class 
polarities and class rigidities in China limit mass consumption.
Latin America did not ‘de-couple’ – it was part of a global chain, which 
tied it to the vagaries of the US and EU economies. The attempts by 
Brazil’s President Lula to blame Brazil’s crises on US ‘casino 
capitalism’ in order to deflect criticism from his policies of deep 
structural dependency on primary commodity exports and hot money is 
besides the point: The Brazilian regime’s policies opened the door wide 
to the full adverse effects of the downfall of US speculative capital.
None of the CLR deviated from the neo-liberal ‘export model’ nor did 
they make any effort to dynamize the domestic market or mass consumption 
via redistributive policies. Industrialization was subordinated to 
commodity exports. Urban incomes between capital/labor favored profits 
over wages. Interest and royalties remained highly skewed in favor of 
capital thus weakening domestic demand. Support of the agro-export elite 
and the rejection of agrarian reform, undermined the domestic purchasing 
power of millions of landless and subsistence peasants, rural laborers 
and small farmers. Tax subsidies and incentives, not progressive 
taxation, eliminated the possibility of rebuilding social services 
(public health, education, pension and social security programs), which 
could have expanded domestic production and investment. The CLR did not 
invest in a production grid linking complementary internal regions and 
economic sectors. The CLR’s investments linked local domestic sites to 
ports connected to overseas markets.
The CLR strategies weakened their domestic markets relative to the big 
push toward exports thus avoiding structural changes. This emphasis on 
social payments was contingent on the performance of the agro-mineral 
export sector of the big bourgeoisie. Even their ‘social transfers’ have 
proved to be unsustainable. Without the meager poverty programs there is 
little to distinguish the CLR from their traditional neo-liberal 
predecessors.
During the boom in commodity prices several CLR regimes, namely Brazil 
and Argentina, diverted billions of dollars in earnings to early 
pay-offs of their debts to the IMF and other official lenders, claiming 
this ‘freed’ them to pursue ‘independent policies’. In fact the IMF was 
very happy to re-capitalize their treasury while the levels of poverty 
continued at alarming levels and public facilities, like housing, 
transport, schools and hospitals deteriorated. While some aspects of 
foreign external debt declined, others, mainly private foreign debt in 
dollars and Euros, skyrocketed, encouraged by the CLR. Given the 
regimes’ high domestic interest rates, foreign overseas borrowing by 
domestic businesses rose precipitously and foreign speculators, lenders 
and overseas subsidiaries of US and EU banks loosened lending standards. 
With the financial crash in the US and EU, foreign flows of capital 
dried up and short-term notes were called. Foreign inflows turned into 
massive outflows, driving down the value of the currency. The Brazilian 
and Argentine stock markets fell by over 50% in less than 5 months 
(June-October 2008) and the credit crunch began to squeeze investment.
The crash in commodity prices, deeply affected state revenues as prices 
for copper declined by 60% (from $9,000 USD a ton in June 2008 to $3,900 
USD in October 2008 and oil fell from $147 USD a barrel to $64 USD 
during the same period). What is worse, the decrease in the CLR’s 
foreign debt was matched by a vast increase in domestic debt – that is 
borrowing from foreign banks’ subsidiaries and local financial groups. 
The latter lent to the regimes by borrowing from overseas banks and thus 
the entire credit/finance chain continued to depend on private financial 
institutions in the US and Europe. Rather than reflect a break with the 
financial dependence of the past neo-liberal regimes, the CLR reproduced 
it via local intermediaries. Combined with the collapse of commodity 
prices, the financial crisis revealed the abject integration and 
subordination of the CLR to the empire-centered marketplace. The 
sustained fall in stock prices and the massive flight from local 
currencies to dollars revealed the entire precariousness and profoundly 
‘liberal’ nature of the CLR economic policies.
The CLR regimes diverted the major part of their windfall profits to 
building up their foreign reserves to attract foreign loans, credit and 
investors and to cushion the effects of a downturn in the economy rather 
than in large-scale investments in human resources and the domestic 
market. As a result, the foreign reserves provide a temporary lifesaver 
in the face of the decline in revenues from export earnings. 
Nonetheless, the regimes are using the foreign reserves to keep afloat 
the private banking system and to pacify panic-stricken investors 
seeking to convert local currency into dollars and euros. As the 
reserves are depleted, the CLR are resorting to class-selective 
reactionary fiscal policies. Once again the negative impact of the 
financial panic reveals another negative (‘liberal’) component of the 
CLR strategy: its dependence on an unregulated stock market highly 
susceptible to any downturns in the valuations of commodities and 
commodity prices.
The CLR economic policies and the major private economic actors were 
deeply enmeshed in the world of speculation just as any ‘neo-liberal’ 
regime would be. The total absence of any popular movement oversight of 
the CLR policies was a result of their total exclusion from all 
governmental positions making economic decision (Central Bank, Ministers 
of Economy, Finance, Commerce, Industry, Agriculture and Mining). The 
claims of participatory democracy were revealed to be a total farce. 
Moreover, the CLR (with the partial exception of Venezuela) granted 
‘autonomy’ to the Central Banks, eliminating Congressional oversight and 
facilitating closer ties between Central Banks and the private financial 
elite.
Conclusion
As the capitalist financial system crashes throughout most of the world 
and a global recession spreads from the imperial countries to Latin 
America, the leading center-left regimes are not immune to the double 
shocks. Because they opted for a primary commodity export model they are 
especially exposed and vulnerable to the rapid fall in world demand and 
prices. While it is true that conservative fiscal policies allowed them 
to build up their foreign reserves, thus providing them with a partial 
and temporary cushion to weather the first wave of capital flight and to 
finance dollar-denominated debt, it should be remembered that the other 
side of the ‘prudent fiscal policies’ was the neglect of the social 
problems and economic diversification. Poverty reduction, through 
investment in productive employment, agrarian reform for landless 
peasants and the development of the internal market, in the medium run, 
could have lessened the impact of the crisis in the North.
The attempts by Lula, Evo Morales and political leaders to pin the blame 
entirely on the crises in the imperial countries, ring hollow after 
years of their hobnobbing with the economic elite in Davos and focusing 
exclusively on trade and investment agreements with MNC, ‘hot money’ 
from Wall Street and betting on agro-mineral exports. The spread of the 
crisis in Latin America, from early 2008 onward, is playing itself out 
gradually. The high level reserves, the relatively high prices (despite 
the 70% decline from record prices), the temporary return of partial 
liquidity and the slight loosening of credit in world markets as a 
result of over $1.5 Trillion USD injection of public funds by the US and 
EU has slowed the fall into an inevitable recession. What is crucial 
however is not where Latin America’s CLR stand at any given moment in 
time, but the direction they are moving and the inherent negative 
structural features, which are driving the economies toward a deep 
recession. As the reserves dwindle and as the agro-mineral elites 
disinvest in the face of declining prices, a serious negative multiplier 
effect sets in, battering satellite industries and driving dependent 
sectors into bankruptcy. Equally important, the economic recession is 
leading to deep and widespread state spending cuts. Given the fiscal 
conservatism built into the personnel of the key economic ministries and 
central banks, it is highly improbable that the CLR will reverse course 
and run fiscal deficits, increase large-scale, long-term public 
investments, restructure their economies and re-configure the social 
basis of public policy.
By the end of 2009, Latin America’s CLR will feel the full brunt of the 
world economic recession, precisely when its depleted foreign reserves 
will have further discouraged overseas and local capital investment. No 
long able to rely on its principle ‘economic motor force’, the 
agro-mineral elite to finance imports and lacking overseas investment 
and credits for its exporters and banks, Latin America’s CLRs will be 
confronted with powerful pressures from below. Workers and employees 
losing their jobs, local banks facing bankruptcy, manufacturers closing 
plants and indebted consumers and mortgage holders with few assets to 
sustain demand and living standards will be on the streets clamoring for 
state intervention: From the left and from the right.
Faced with the collapse of the ‘heterodox model’ of neo-liberal 
‘primarization’ of the economy with ‘modest social transfers’, two 
options are possible for the CLRs: One would involve large-scale 
bailouts in order to save dominant financial-agro-mineral elites. The 
regime could try to impose the costs on the backs of the workers, urban 
poor, peasants and public employees through social cutbacks, firing of 
public employees, wage reductions and large-scale reductions in public 
investments. The second option would involve a revival of import 
substitution strategy including public investments in industry 
accompanying the nationalization of bankrupt banks and strategic 
economic sectors and large-scale shift in state policy from financing 
the bankrupt agro-exporters to co-operatives, family farms producing for 
the domestic market.
The first option would, by necessity, require greater state repression, 
in the face of social resistance to cuts in living standards and would 
probably lead to the demise of the CLR regimes. The more reactionary 
right is in the ‘wings’ ready to seize power and confront the burgeoning 
social movements reacting to the crises.
The second option would require a major shift in the internal class 
composition of the CLR regimes, a rupture with existing political allies 
and large-scale social mobilization of the ‘popular classes’.
The second option would depend on a fragile coalition of local business 
groups, manufacturers, debtors, trade unions, left parties and peasant 
movements – the emergence of a ‘nationalist-populist’ coalition (NPC) 
prepared to jettison the agro-mineral export model, to shelve overseas 
debt obligations and to pursue deficit financed economic recovery.
However, under the stress of a prolonged world credit squeeze and 
recession, the linkages between big and small capital with labor and 
subsistence farmers and peasants may dissolve and lead to demands that 
go beyond ‘Keynesian’ capitalism to the socialization of the economy. 
The latter option will be favored by the prolonged and deepening nature 
of the world recession, the further decline in foreign trade, the drying 
up of private credit, the decline of living standards and the profound 
and widespread discrediting of capitalism clearly associated in the 
public mind with speculative excesses, financial collapse, lost savings 
and the bankruptcy of private firms.
A final caveat: Though the world recession and financial collapse 
reveals that the center-left regimes were neither popular, nationalist, 
nor a break with neo-liberalism, this does not mean a near term turn to 
the left – for the simple reason that the CLR severely undermined 
independent class mobilizations. Renewed ‘statism’ of the right or left 
variants and obligatory import substitution policies may temporarily 
moderate the worst impacts of the world crisis. However, the failure of 
Keynesianism could lead to fascistic repressive ‘restorationist regimes’ 
or to a radical/socialist solution. In this crisis all political options 
are ‘open’ given the ‘fragmentation’ caused by CR regimes and the 
‘shock’ of the depth of the crisis. Future political economic outcomes 
are not governed by any speculative notions of ‘grand historical waves’. 
Political outcomes are contingent on the class struggle and the struggle 
for state power. The current unpredictable outcome of social struggle is 
a result of the lack of preparation by any left-social movements to take 
the lead over the wreckage of a world capitalist breakdown.