CAMBRIDGE: The international financial crisis continues, with South America feeling the brunt of the storm. Deep economic emergencies have hit Brazil, Peru, Colombia, Ecuador, and Venezuela. Brazil's crisis will cause a recession in neighboring Argentina. Even Chile, the outstanding performer of the region, will have very slow growth in 1999. South America's unfolding crisis points out, once again, three major problems in today's international financial system: pegged exchange rates, volatile international capital movements, and the International Monetary Fund itself.

South America was bound to experience some pain in the wake of East Asia's financial crisis of 1997-8. Most South American countries are heavy commodity exporters, and the Asian crisis drove down world market prices for a wide range of commodities, including oil, copper, and agricultural products. Ecuador, Colombia, and Venezuela are hard hit by falling oil prices. Chile has been hit by the remarkable decline in copper prices, with prices falling from around $1.30 per pound to the current $0.61 per pound. Brazil suffers from declining agricultural prices, though it benefits from falling oil prices.

Pain was compounded in three ways. First, much of the region pegged its exchange rates to the U.S. dollar. After the start of the Asian crisis, and with the fall in commodities prices, markets began to anticipate currency devaluations in the region. In a flexible exchange rate system, currencies would have gradually depreciated, as happened in some other commodity exporting countries (such as Canada, Australia, and New Zealand). Instead, many Latin American countries tried to defend the exchange rates by raising interest rates sharply. This was a mistake: high interest rates helped to push their economies into deep recession.

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