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Economic Crisis

The word 'crisis' has Greek origins and refers to an important moment in which the future is determined. Even though the word 'crisis' is used today with various meanings (economic crisis, political crisis, environmental crisis, food crisis, etc.), this article does not aim to overstretch the term, but rather to focus on the economic dimension of crises.

The widely-spread neoclassical economic theory begins with the assumption that capitalist economies are stable in principle and that in turn crises always come from outside (due to natural disasters, political upheavals, etc.). In this sense it is different in principle both to political economy approaches and from Keynesian theories. These assume that a crisis in capitalist economic systems is nothing unusual, but that capitalism can always be stabilized temporarily (cf. Screptani / Zamagni 2005). This theoretical perspective even goes so far as to claim that not the crises, but rather the phases of economic stability require particular explanation. Differentiated perspectives for the explanation of economic stability and crisis are provided in the tradition of political economy by the regulation theory, which distinguishes between large and small crises. Small crises are cyclical crises which can be solved within the relevant institutions. Large crises or structural crises, however, require a substantial reconstruction of institutional structures in order to re-establish capitalist production in a new setting (cf. Boyer et al. 2002).

The global economic crisis of the 1930s which originated in the USA is understood as a large crisis. During the course of the New Deal and World War II, a stable model of development based predominantly on redistribution towards salaries and middle and lower income groups was established in the USA. This model of development was later termed 'Fordism'.

As a result of the global economic crisis of the 1930s, with the consequence of drastic reduction of the worldwide demand for export goods from Latin America, substantial reorientations of the economic model emerged on the subcontinent. Instead of the model based on the export of raw materials an economic system resulted based on domestic orientation and rising salaries as well as a partial establishment and expansion of peripheral statehood. This model, termed 'import substitution industrialization' ('ISI'), led to the decades with the highest rates of growth in history for Latin America, but reached its internal limits in the 1960s and 1970s. In order to further grow dynamically, a more drastic downward redistribution would have been needed (through higher salaries or an expansion of the peripheral social state). Due to the opposition from the ruling elites, this was, however, not possible. During the course of the intensification of this fight for distribution, the military intervened in favor or the rulers in many cases – often through active support from the USA. The attempted reorientation of the development model, which at its core included a liberalization of the financial sector, led to rapidly increasing external debt, and in the context of the debt crisis in the early 1980s to a new, larger crisis. This put the International Monetary Fund (IMF), which pushed an export orientation through within the scope of structural adjustment programs, on the agenda. Thus, it was supposed to make it possible for all nations to be able to meet the responsibilities of increased debt (due to higher interest rates in the USA and an increase in value of the US dollar) (cf. Becker et al. 2010). Through these measures, a serious financial crisis was able to be avoided in the USA, the most important creditor country. This policy led, however, to a drastic negative growth in the economic output per capita in Latin America. The crisis was thus similarly severe as that of the 1930s (cf. Maddison 2003). While Latin America recovered during the 1990s, the Tequila crisis of 1994 followed by financial crises in Brazil and later in Argentina led to further severe financial crises. Only during the 21st century could Latin America recover economically, especially due to rising prices of raw materials. Moreover, the nations tried to achieve strengthened economic independence again through repayment of debts to the IMF. This provided the basis for reversing in part the extreme liberalization of the financial sector and at the same time to once again focus the economy on the domestic market more strongly through redistribution, especially in Brazil and Venezuela. It was not least due to these measures, alongside the sustained boom in commodity prices, that Latin America was affected relatively little by the most recent crisis so far (cf. CEPAL 2010).

While until recently the USA had managed to prevent severe crises through by passing on the burden of adjustment to Latin America in the 1980s, this was no longer possible during the most recent crisis. Whereas in the USA the average real wages had been practically stagnating for a number of decades, the growth was mainly maintained through both internal and external indebtedness, which was easily possible for the USA through the US dollar (cf. Duménil/Lévy 2004). The high private debts and the rising state debts became a structural problem through the outbreak of the crisis, one which will likely lead to a longer phase of stagnation. A new beginning in terms of a new version of the New Deal of the 1930s, which involved quite a substantial top-down redistribution, seems economically necessary, even though its potential for enforceability cannot yet be predicted politically.

Today, we are witnesses to an unusual development. The USA is experiencing a large crisis; broad areas of Latin America, however, are not. This is a contrast to the fact that Latin America has been stricken by crises more or less regularly since at latest the 1970s, and survived a large crisis in the 1980s, whereas the USA only entered into a large crises in 2007. The large crisis in the USA is likely to have substantial consequences for Latin America. While Mexico mainly comes under pressure due to stagnating exports to the USA, for South America it is mainly a threatening decrease in raw material prices given global stagnation which could again lead to critical developments. To what extent this could lead to a substantial redistribution and to the establishment of domestically oriented models for development in Latin America based on the example of the ISI phase is, however, open and depends considerably on political dynamics in Latin America.

Johannes Jäger

Please cite as:
Jäger, Johannes. 2012. “Economic Crisis.” InterAmerican Wiki: Terms - Concepts - Critical Perspectives./einrichtungen/cias/wiki/c/crisis.xml.

Bibliography

Becker, Joachim / Jäger, Johannes / Leubolt, Bernhard / Weissenbacher, Rudy. 2010. "Peripheral Financialization and Vulnerability to Crisis: A Regulationist Perspective." In: Competition & Change 14 (3-4), pp. 225-247.

Boyer, Robert / Saillard, Yves (Ed.). 2002. Régulation Theory. The State of the Art. London: Routledge.

CEPAL. 2010. Panorama de la inserción internacional de América Latina y el Caribe. Crisis originada en el centro y recuperación impulsada por las economías emergentes. Santiago de Chile: CEPAL.

Duménil, Gerard / Lévy, Dominique. 2004. Capital Resurgent. Roots of the neoliberal Revolution. Camridge, MA: Harvard University Press.

Maddison, Angus. 2003. The World Economy: Historical Statistics. Paris: OECD.

Screpanti, Ernesto / Zamagni, Stefano. 2005. On Outline of the History of Economic Thought. Oxford: Oxford University Press, 2nd ed