In the last few years, we have seen a string of economic crises which have brought with them deep political crises across Latin America.

In Argentina following the default of the servicing of the country’s debt, the Argentine Government froze all bank accounts in the country. The Gross Domestic Product of the once rich country plummeted by fifteen percent over two years. Close to sixty percent of the population was living under the poverty line in 2002 and there were cases of malnutrition in the food producing country. In a matter of two weeks, the country saw five presidents until a populist leader came to power with only twenty-two percent of the nation’s support. Protests against international financial institutions and multinational corporations continue as a new agreement of repaying the debt (with an average 35 cents on the dollar being paid out) was worked out in April 2005. The country is by no means out of the financial doghouse.

Likewise, Ecuador has seen its share of financial scandals, political repression, street protests and threats to democratic governance. Since 1996, the country has had nine presidents. In 1997, Ecuador’s Congress replaced President Abdala Bucaram when he was deemed mentally unfit to hold office. He was replaced with Fabian Alarcon, who had served previously as president of the Congress. Alarcon’s successor Jamil Mahuad, a former mayor of Quito, was hounded by accusations of corruption. During Mahuad’s administration, a major Ecuadorian bank, Banco Filambanco went bankrupt as three billion dollars of depositors’ money went missing. Mahuad’s Attorney-General, Mariana Yepez, was accused of slowing down pace of the investigation into the missing funds. A deep economic crisis plagued the Andean nation as the cost of living increased far more than the average wage paid. Investment slowed down and credit was near impossible to obtain by ordinary Ecuadorians. Street protests ensued.

In 2000, a coup led by Lucio Gutierrez, a military leader at the time, forced out Mahuad, and Vice President Gustavo Noboa took over the presidency. Noboa was succeeded in 2003 by Lucio Gutierrez,. The ex-army colonel was not successful then but campaigned a few years later on an anti-corruption theme.

Since taking office in January 2003 after his democratic election, Gutierrez’ administration enjoyed a spike in higher oil prices, which accounts for 40 percent of Ecuador's exports and a quarter of its public-sector revenues. Notwithstanding this economic boon, the government has done little to limit vulnerability to price swings and financial crises that routinely affect the equatorial country’s 13 million inhabitants. In late 2004, Gutierrez sacked 27 of 31 judges on Ecuador’s Supreme Court, attempted to name his own people as replacements and faced increasingly violent public protests. April 2005, Gutierrez was voted out of office by the country’s Congress and replaced with Vice-President Alfredo Palacio. The beleaguered leader was granted asylum in Brazil.

In both Argentina and Ecuador, banking scandals and poor oversight by government regulators, have contributed to continued economic crises. Political upheaval and violence have resulted. There is clearly a connection between a weak banking sector and political instability. Economic reforms have not brought about widespread benefits

The economic benefits of globalization have not been enjoyed throughout Latin American societies.

According to one study:

"In 1900, the Latin American income level was well above that in Asia and stood at 41 percent of the OECD core. In 1950, Latin American gross domestic product (GDP) per capita was 45 percent of the OECD core level and more than three times the Asian average. But by the 1980s Latin America had fallen back to less than one-third the OECD level and was being approached and overtaken by parts of Asia. This twentieth-century relative retardation and slump in living standards is Latin America’s burden of history and remains a central, burning issue in the region’s political, social, and economic landscape."

Instead of providing capital to the needy and hungry in order to make their lives better, cheap credit goes to the friends of the political class who get preferential treatment while the efficient provision of capital is hindered.

"In the case of crony capitalism, owners of companies receive credit and may expand because their size is a political asset (to big to fail). They may misallocate in the country’s capital to be close to those they wish to influence regardless of cost; since the owners receive subsidized credit regardless of the prospective real returns, cronies can persist in business even when their activities are no longer economic; and since they receive subsidized credit, they in effect have soft budget constraints."

In the last several years, we have witnessed further economic hardship as the benefits that were predicted to result from globalization failed to materialize. According to the World Bank and the UN Economic Commission for Latin America and the Caribbean (ECLAC), the region’s GDP has shrunk by approximately 0.8% in 2002. This is the worst economic performance since 1983, a time of massive bond repayment defaults across the region. Inflation has edged up after eight years of steady decline. Mediocre economic performance has caused per capita income in LAC countries to decline significantly since 1998 while poverty has increased. Roughly 44% of Latin Americans are now poorer--up from 40% in 1999, while 20% suffer extreme poverty. Unemployment has risen to more than 9%, higher than the 1980s level. Latin America’s middle class has clearly shrunk.

While economic growth did result in some cases, it came at a large expense for the lower socio-economic classes. The reforms of the mid-1990s failed to reduce poverty, marginalized the already impoverished working classes, and reduced government provided social benefits as part of the austerity measures mandated by the International Monetary Fund and other financial institutions.

The poor has been further marginalized as jobs disappeared and investment in the economy withdrew. With continued urbanization, fragmentation of the family, and informal employment in the gray economy, life has not improved for the majority of Latin Americans in the last decade. The process of privatization saw further corruption as essential public services were sold to the crony capitalist class, impunity for the protected class has been further entrenched, and the cost of most basic services (water, electricity, public transportation, basic food staples) has increased. At the same time, public security has decreased with a rising crime rate, racial and gender discrimination has intensified, and public trust in the law enforcement authorities and confidence in the judicial system have diminished. Is it any wonder that according to a recent poll undertaken by The Economist, Latinbarómetro, a Chilean polling organization, only a bare majority of Latin Americas remain committed to democracy?

The Need for a Strong Banking Sector

One of the major reasons for this disappointing economic history is the lack of capital markets in the region. A 2004 report from the Inter-American Development Bank stated:
"[S]trong capital markets have not developed in Latin American countries, meaning the main source of external financing for firms is bank credit. Given few alternative sources of financing, the development and stability of the banking sector is crucial for achieving stable economic growth. When capital markets are shallow, banks bear most of the burden of searching for safe and profitable investment projects in need of capital, and of supplying them that capital."
Inter-American Development Bank Research Department, The Balance on Banking in Latin America, IDEAS FOR DEVELOPMENT IN THE AMERICAS ("IDEA"), Vol. 5, (Sept-Dec. 2004), at 1.

ACCESO believes that a strong banking sector with firm rules, strong watchdog regulators, and consistent law enforcement, will all lead to more sustainable economic growth and foreign investment. Most importantly, banks must provide credit to new customers, work with the citizenry to invest in their own futures, and educate the general public about the importance of financial propriety, responsibility and the benefits of the marketplace.

ACCESO EdFin (educación Financiera)

It is clear that the people of Latin America need more innovative and appropriate financial education. Whether they are recent immigrants to the United States or living in their homelands, they must learn what kinds of credit are available from financial institutions and how to be good consumers of financial instruments. By creating better credit facilities, there can be more investment. Sustainable economic growth will result with better flow of capital, trust between banks and their customers, and more secure transactions ensured.

Some leading international banks are now moving into Latin America to help create better credit facilities (i.e. they are loaning money out for longer term to higher risk customers). The consumer needs to learn how to best manage this new vehicle for economic growth and invest in their own futures. But banks and financial institutions need to use the language, idiom, and images of the people they are trying to help.

With edFin, citizens from all around the Western Hemisphere will:

- learn how to manage and save money
- learn how to use credit to improve their lives
- learn how to invest in their families
- contribute to the sustainable development of their countries
- realize the right of self-determination

ACCESO’s edFin program is currently in development and will be rolled out in 2005 and 2006 after being piloted in selected sites around Latin America.

It is no secret that customers, and those citizens who have not yet established relationships with financial institutions, do not trust banks. Economic crises, banking scandals, and the freezing of deposits have not helped much. It is time to reverse that trend in order to build a better economy, both micro and macro, in the region.


For more information about edFin, please contact [email protected].