Nick Smith, August 25, 2002

To add to our international challenges, an economic crisis is engulfing South America. It's hitting hardest not in poor countries like Guatemala or Guyana, but in what were stable democracies like Argentina, Uruguay and Brazil. Economic troubles in these states threaten to spill over into neighboring economies and reverse recent progress in democracy.

In the 90s, the Asian economic meltdown wiped out many export markets for Latin America as well as sources of new investment. Investors began to worry that the debt-burdened economies of Latin America could default, as Russia had. A five-year decline in agricultural prices has cut into these countries' export earnings as it has our own. Now, worldwide economic problems have sent many Latin American countries into depression. The Brazilian real has lost 23% of its value and the Argentine peso has declined 70% in the last six months. Argentina's per capita income has dropped from $8909 in 1999 to just $2500 today.

These countries also have internal political problems. Caudillos (political bosses), cronyism and corruption still often set the boundaries of business practice. Privatization sometimes meant turning state enterprises over to private monopolies rather than allowing fair competition. Trade barriers, bureaucratic procedures and antiquated laws tend to protect privileged elites. In most of these countries, the legal system does not let ordinary people acquire investment capital by getting a mortgage or loan on property they own. In many countries, the drug trade brings in a criminal element that hinders economic reform and development.

In our International Relations Committee, we've discussed the effect of the South American economic problems on our economy. U.S. citizens and corporations have major investments across the region, especially in emerging industrial countries like Brazil and Argentina. One example is CMS Energy's investments in Argentina. The downturn also threatens our positive balance of trade in Latin America by making our exports more expensive. Continuing economic decline in major trading partners could also hinder U.S. economic growth.

Equally serious, the economic crisis is encouraging the rise of demagogues and endangering fragile democracies in some of these countries. As more of the middle class falls into poverty the support for democracy tends to erode. As the United States continues to pursue the war on terror as well as trying to resolve conflicts such as the Palestinian and Kashmiri conflicts, South America also deserve attention. It's important not only to our economy but also to our drug policy and national security. There has been a trend toward extreme political movements and leaders that could signal a return to the authoritarian and military governments of the region's recent past. This would be a significant step backwards that could set back progress by decades.

What should the U.S. do? The recent IMF loan to Brazil, which the U.S. supported, has the potential to stabilize the situation if it is used wisely. The IMF's recent track record, however, is mixed and we must make sure the money is used appropriately. We cannot make political decisions for our neighbors, but we can and must be involved and insist on democratic accountability.

Congressman Nick Smith represents Michigan's 7th District in the U.S. House of Representatives.