By Steven Pearlstein
Washington Post Foreign Service
TORONTO, Sept. 2—It's getting closer.
What started out a year ago as a financial market crisis in far-off Asia
turned into a full-blown economic downturn in the economies of Canada and
Latin America, raising the risk that the global contagion could eventually
spread to the United States through its closest neighbors and most important
Over the last month, currencies and stock prices have fallen sharply while
rising interest rates have slammed the brakes on economic growth. And with
consumer and investor confidence evaporating by the day and
unemployment rates beginning to rise, voters are beginning to balk at pushing
ahead with market-oriented economic reforms.
"I don't think the U.S. economy can go unscathed if its major trading
partners in the region are falling apart," said Carlos Samur, the Chilean-born
chief economist at Petro-Canada, a large oil and gas producer. "Within the
framework of NAFTA, we are becoming such an integrated economic
system that places like Mexico and Canada are as important to the U.S.
economy as California and Texas. I'm not sure Americans are generally
aware of this."
Some Americans may be unaware, but people can't help but get the
message these days in the hemisphere's other countries, which together buy
40 percent of U.S. exports.
In Mexico, stock prices are down 40 percent since mid-July, and the peso
down 13 percent against the dollar. So unsettled is the financial situation that
Mexico City auto dealerships this week stopped making car loans -- in a
country that had been the fastest-growing market for the American Big
In Venezuela, meanwhile, the fallout from the decline in the price of crude
oil, the country's key export, has suddenly emptied government coffers and
brought the economy to a standstill. The crisis has already driven bank
lending rates above 70 percent, cost 12,000 auto workers their jobs and just
this week triggered a strike by many of the country's physicians. Fearing
economic slowdown and an eventual devaluation of the Venezuelan bolivar,
now pegged uncomfortably to the dollar, General Motors recently delayed
plans to build a new $100 million painting plant.
Remarkably, it was only eight months ago that the Venezuelan economy was
growing at an annual rate of more than 6 percent. Analysts now say they
believe it is shrinking at the annual rate of 1 to 2 percent.
"In my 30 years in Latin America, this is the first time I've seen a country
from boom to bust without some warning in between," said Donald McBride,
president of Madosa, a Venezuelan appliance manufacturing company. In
Madosa's case, the path from boom to bust has meant that sales have fallen
by half and nearly a third of 2,100 employees have had to be laid off.
Things are better -- but not much better -- in Brazil, Latin America's
economy. In just the last month, Brazil's stock market lost all the gains it
made in the previous two years, when it had outperformed every exchange
except the one in Moscow. More than $10 billion flowed out of the country
during the month, as investors -- some foreigners but Brazilians as well --
sought the safety of other markets and currencies.
At his office in Sao Paolo this week, Segio Haberfeld, chairman of Dixie
Toga S.A., a large packaging concern, said he had decided to put much of
his company's free cash into dollars. Although the Brazilian government was
able to tame the country's infamous hyperinflation by roughly pegging the
value of its currency, the real, to that of the dollar, the price of that peg has
been to drive interest rates so high that it threatens to throw Brazil into a
deep recession. That's why Haberfeld, like many in Brazil, fears the
government eventually will have no choice but to bow to market pressures
and allow a devaluation.
"We don't necessarily predict a devaluation, but, as a company, we have
to protect against it," Haberfeld said. "You've got to spot a crisis before it
drains your company -- and Brazilian companies have learned this the hard
way through the years."
It is that kind of defensive withdrawal by businesses and investors that
threatens to become a self-fulfilling prophecy in Brazil and turn Latin
American into the next trouble spot on the world economy.
"As we see it, there is no way that Brazil, Mexico and Venezuela can now
avoid facing a substantial and painful slowdown," said John Lipsky, chief
global economist at Chase Manhattan Bank. "And that can't but help to have
an impact on the United States."
It is because of secondary impacts from the Asian crisis that Lipsky and
Chase colleagues now predict that the U.S. economy will not grow in the
second half of 1998.
Lipsky and other economists say that the primary channel by which the
Asian crisis has crossed the Pacific has been commodity prices. With Asian
economies contracting, world demand for basic raw materials plummeted
even as supplies were still on an upward growth curve. The result has been
a steep drop in world prices: 14 percent for gold, 26 percent for copper, 33
percent for oil, 41 percent for top-grade construction timber, 56 percent for
To varying degrees, all the major countries of Latin America rely on
commodity exports: Venezuela and Mexico on oil, Chile on minerals,
Argentina on wheat. But the fall in commodity prices has also delivered a
triple-whammy to Canada, whose commodities account for 40 percent of all
The most direct impact of the commodity price decline has been a quick
percent drop over the summer in the value of the Canadian dollar, known
affectionately as "the loonie," after the bird that graces one side of the
Meanwhile, prices have fallen 30 percent on the Toronto stock exchange,
where the major stock indexes are dominated by large oil, timber and mining
companies whose profits were squeezed by falling commodity prices. As in
other countries, the stock slide was accelerated by the fall in the loonie as
some investors, Canadian and foreign, moved their money out of Canadian
stocks and into American stocks and bonds.
The third blow came just last week when, in an effort to bolster the loonie
and restore the confidence of international investors, the Bank of Canada
raised interest rates a full percentage point. Within days, most forecasters
had lowered their estimates of economic growth for the United States'
largest trading partner from 3 percent to 2 percent.
Even before the rate hike, much of resource-rich western Canada was
already taking it on the chin. Brian White, the top market analyst for the
Canadian Wheat Board -- the exclusive marketer for all western Canadian
wheat -- said most farmers will turn in a money-losing year in 1998 despite
the second-best crop in history. A typical Manitoba wheat farmer, White
calculates, will receive only $55 per ton of wheat after paying shipping costs,
while spending $120 to produce it.
"To tell you the truth, things are looking pretty dismal out here," he
noting that thousands of farms are closing down, farmland is selling at deep
discounts and the sale of farm equipment -- much of it made in the United
States -- is off by 30 percent.
Farther west, in Vancouver, MacMillan Bloedel Ltd., a major timber and
forest products producer, says the falloff in its exports to Japan has
prompted it to reduce capital spending for the second time this year while
laying off 2,600 workers and spinning off subsidiaries employing 2,400
While all this doesn't approach the near crisis conditions now facing
countries in Latin America, it has had a noticeable impact on the attitudes in
the more densely populated eastern provinces, where consumer confidence
-- a leading indicator of future spending -- fell 17 percent over the summer,
according to a poll released last week by the Toronto Globe and Mail. The
Globe and other newspapers are full of stories about what Canadians will do
about their cherished Florida vacation this winter if the loonie and the stock
market don't rebound.
In Latin America, the stakes are much higher, particularly for political
leaders caught in midstream as they try to wean their countries from state
ownership and control of the economy and secure the support of
An unscientific survey in Mexico City this week finds that voters tend
blame government corruption -- not economic woes in Asia or Russia or
falling commodity prices -- for that country's economic predicament. "Our
only hope is a change in the political system," said Rogelio Garcia, who
shines shoes outside Mexico's stock market, the Bolsa.
In Venezuela, meanwhile, recent polls show that radical populist candidate
Hugo Chavez holds a commanding lead in the campaign for president in
December's election. Chavez has already raised the possibility of suspending
some of the country's debt payments and dismantling many of the country's
recent economic reforms.
Correspondents John Ward Anderson in Mexico City, Serge F. Kovaleski in
Miami and Anthony Faiola in Sao Paolo contributed to this report.