Politics And Economics Of External Debt Crisis: The Latin American Experience [1 ed.] 0367283638, 9780367283636
Since 1981 Latin America has been in the midst of a protracted external debt crisis due, among other reasons, to emergen
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English Pages 482 [497] Year 2019
Contents
List of Tables and Figures
Preface • Miguel S. Wionczek
Introduction• Miguel S. Wionczek and Luciano Tomassini
Part 1: Global and Regional I ssues
1 External Debt of Developing Countries in Late 1983 • Dragoslav Avramovič
2 The World Crisis and the Outlook for Latin America • Vrctor L. Urquidi
3 The International Scene and the Latin American External Debt • Luciano Tomassini
4 External Debt Problems of Latin America • Enrique V. Iglesias
5 Coping with the Creeping Crisis of Debt • Albert Fishlow
6 Latin American Debt: Act Two • Pedro-Pablo Kuczynski
7 Capital Market Financing to Developing Countries • Ariel Buira
8 The World Monetary System, the International Business Cycle, and the External Debt Crisis • José Luis Feito
Part 2: Case Studies
9 Argentina’s Foreign Debt: Its Origi n and Consequences • Marcelo Diamond and Daniel Naszewski
10 Rescheduling Brazil’s Foreign Debt: Recent Developments and Prospects • Paulo Nogueira Batista, Jr.
11 The Mexican External Debt: The Last Decade • Ernesto Zedillo Ponce de León
12 The Renegotiation of Venezuela’s Foreign Debt During 1982 and 1983 • Eduardo Mayobre
13 The External Debt, Financial Liberalization, and Crisis in Chile • Ricardo Ffrench-Davis
14 Peru and Its Private Bankers: Scenes from an Unhappy Marriage • Robert Devlin and Enrique de la Piedra
15 The Role of External Debt Problems in Central America • Jorge González del Valle
16 Where Do We Go from Here? • Miguel S. Wionczek
Acronyms
About the Contributors
Index
About the Book and Editor
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Politics and Economics of External Debt Crisis The Latin American Experience edited by Miguel S. Wionczek in collaboration with Luciano Tomassini
First published 1985 by Westview Press, Inc. Published 2019 by Routledge 52 Vanderbilt Avenue, New York, NY 10017 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 1985 Taylor & Francis All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.
Library of Congress Cataloging in Publication Data Politics and economics of external debt crisis. (Westview special studies on Latin America and the Caribbean) Includes index. 1. Debts, Externa1--Latin America--Addresses, lectures. essays,
2.
lectures.
HJ8514.5.P65
essays,
Latin America--Economic policy--Addresses, 1985
I. Wionczek, Miguel S. 336.3'435'098
ISBN 13: 978-0-367-28363-6 (hbk)
II. Series. 84-15377
Con�n� L i s t o f Table s a n d F igure s Preface , Miguel S. Wionczek Introduc tion ,
Tomassini
Miguel S. .
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Wionczek and Luciano •
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Part 1 Globa l and Reg ional I s su e s 1
Externa l Debt of Developing Countr i e s in Late 1 9 8 3 , Dpagoslav Avpamovio
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The Wor l d Cr i s i s and the Ou tlook for La ti n Ame r i c a , V i ctOF L . UFquidi
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The I nternational Scene and the Lat in Amer ican Externa l Debt , Luciano Tomassini
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Exter nal Debt P r o blems
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EnFique v.
Iglesias
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Amer ica , .
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Coping wi th the Creep ing Cr i s i s o f Debt ,
AlbeFt Fishlow
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Ac t Two ,
La t i n Amer i c an Debt :
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Cap ital Market F i nanc ing to D e veloping Countr i e s , AFiel Buipa •
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The World Monetary Sys tem , the I n terna t iona l Bu s in e s s Cyc l e , and the External Debt Cri s i s , Jose Luis Feito •
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Par t 2 Ca se S tud i e s 9
Argentina ' s Foreign Debt : I t s Or igin and Consequenc e s , MaFcelo Diamond and Daniel Naszewski
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Re sc hedu l ing Bra z i l ' s Fore ign Debt : Rec ent Developmen t s and Pro spe c t s , Paulo Nogueira
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The Mex ican Externa l Debt :
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Ernesto Zedillo Ponae de Le6n
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The Renegotiation o f Vene zuela ' s Foreign Debt Dur ing 1 9 8 2 and 1 9 8 3 , Eduardo Mayobre
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The Externa l Debt , F inanc i a l L ibera l i za t ion , and Cr i s i s in Chi l e , Riaardo Ffrenah-Davis
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The La s t Decade , •
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Scenes from an Peru and I t s Pr ivate Banker s : Unhappy Marr i age , Robert Devlin and Enrique de
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The Ro l e o f Ex terna l Debt Problems in Centra l Ame r i c a , Jorge Gonzalez del Valle
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Where Do We Go from Her e ? , Wionazek
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L i s t o f Acronyms . . . . Abou t the Contr ibu tor s . I ndex . Abou t the Book and E d itor •
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Tables and Figu res Tab l e s 1.1 1.2 1.3 1.4 1.5 1. 6
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Larg e s t debtor countr i e s Externa l debt per capita Externa l debt a s propor tion o f gro s s national produ c t Country group debt- service ratio s : To ta l debt serv i c e and intere s t a s perc enta ge of expor ts . Country debt - s ervice ratio s : I n tere s t and amor t i z ation a s percentage o f expor t s Ra t io s o f to tal debt service to merchand i se expo r t s for s e l ec ted developing countr i e s i n the 1 9 2 0 s and the 1 9 3 0 s •
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La tin Amer ica : To ta l externa l debt Latin Amer i ca : Net f inanc ing ava i lable a f ter payment o f pro f i t s and inter e s t La tin Ameri ca : Ratio o f tota l inter e s t payments t o exports o f good s and serv i c e s •
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Developing-country debt Consumpt ive behav ior o f debtor nations Sourc e s o f de ter ioration i n the current account o f nono i l deve l op ing countr i e s , 197 9-1982 . E l a s ti c i t i e s for deve loping -country expo r t vo lume and terms o f trade wi th r e spe c t t o O E C D income growth and change s in income growth . Al ternate ba lance-of -payments pro j ec t ions for large o i l - impor ter debto r s E s t imating equations for expor t vo lume e l a stic i ty in Tab l e 5 . 4 . E s tima ting equations for terms o f trade i n Tab l e 5 . 4 . •
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E s tima ted debt burden of some ma j o r deve loping countr i e s
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The interna tiona l bu s i ne s s cyc l e and nono i l deve loping countr i e s Aspec ts o f the externa l debt cyc l e in s e l ec ted group s o f deve loping c ountr i e s •
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Argentina : GOP and consump t ion Argentina : Gro s s dome s t i c produc t Argentina : Growth o f foreign debt Argentina : Balance o f payment s for the 1 9 7 6 - 1 9 8 1 period . Argentina : E s timate of loans app l i ed for and rece ived dur ing 1 9 8 3 •
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Chi l e : Annua l d e f i c i t on current account and cap i ta l movements .
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Mex i c o : Some ba s i c i nd i c a to r s o f the Ec heverr i a term . Mex ico : Evo lution o f the foreign publ ic debt du r ing the Echeverria term Mex ico : B a s i c economic indicators dur ing the Lope z Por t i l lo term Mex ico : The evo lution o f the to tal externa l debt dur i ng the Lope z Porti l lo term Mex ico : The f lows o f the exter na l debt dur ing the Lope z Porti l l o term . Mex ico : Current account dur ing the Lope z Porti l lo term . Mexico : Public f inance dur ing the Lope z Por t i l l o term •
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Balance o f payments (ma in i tems), Bra z i l : 1968-1982 Bra z i l : Gro s s interna tional r e serve s o f the monetary author i t i e s (Ba nco Centra l a nd Banco do Bra s i l ) , 1 9 7 6 - 1 9 8 2 Bra z i l : Net interna tional reserves o f the mone tar y au tho r i t i e s , 1 9 7 6 - 1 9 8 2 Bra z i l : Net interna tiona l r e serve s o f the monetary autho r i t i e s (Banco Central and Banco do Bra s i l ) , September 3 0 , 1 9 8 2 Bra z i l : Ne t international r e serve s o f the monetary author i t i e s (Banco Centr a l and Banco do Bra s i l ) , June 3 0 , 1 9 8 3 •
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C h i l e : To ta l external d e b t a n d d e b t with pr ivate f inanc i a l i n s t i tu t ions . Chi l e : Externa l debt , by borrower s . Chi l e : Ar t i c l e l 4 - - Gro s s annual f l ows o f cred i t , by debto r s Rea l exchange rate and wag e s Chi l e : Chi l e : Dome stic and externa l rea l intere s t r a t e s r e f l ec t i ng the ir l ev e l w i t h the conve r s ion o f externa l tran sactions into p e so s •
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Peru : D i s tr i bution o f externa l pub l ic debt by sour c e o f f inance . To ta l externa l debt 1 4 . 2 Peru : I ndex of the c o s t o f bank borrowing , 1 4 . 3 Peru : 1971-1976 S e l e c ted expend i ture a s a percentage 1 4 . 4 Peru : o f GDP 1 4 . 5 Peru : Growth rates o f s e l ec ted economic i nd i c a tor s 1 4 . 6 Peru : Net c ap i ta l i n f l ows and trans f er o f f inanc ia l r e sourc e s Savings/ inv e s tment coe f f ic ients 1 4 . 7 Peru : 1 4 . 8 Peru : Ne t f lows o f med ium- a nd long -term loan capi ta l by type o f creditor . 1 4 . 9 Peru : 1 9 7 8 r e s tructu r i ng o f comme r c i a l bank d e b t 1 4 . 1 0 Latin Amer ica : Provi s ional da ta on terms of debt r e s c hedu l ing : 1982-1983 1 4 . 1 1 Peru : D i s tr ibu tion o f commerc i a l bank loans accord ing to purpo s e , 1 9 7 1 - 1 9 7 6
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Figures 4.1 13 . 1 14 . 1
Evo lution o f London I nterbank Of fer Ra te (LIBOR) , nomina l and r e a l .
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Convent iona l conceptua l fr amework o f the L i ber a l i zation of Cap i ta l Markets
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Preface The immediate or1g1n of thi s vol ume can be traced to a sma l l informal mee t ing o f a g roup o f Latin American economi s t s and po l it i c a l sc ient i s t s held in Mex ico C ity in late Augu s t 1 9 8 3 under the auspices of the Tepo z t l an C lub . After having d i s c u s sed the mo s t recent informat i on on c r i s i s a n d debt i n Lat i n Amer ica and the external d e b t management experienc e s in Arg en t ina , B ra z i l , Ch i l e , Mex ico , Ven e zu el a , and C entral Amer ica , the par t i c i pants came to the f o l l owing conc l u s ions : 1 . Al though the current internat iona l economic c ri s i s presents many of the cha ra c ter i s t i c s of a particul a r ly severe a nd pro l onged rece s s ive pha s e of the economic cyc l e , i t a l so conta ins st ructu r a l factors tha t d i s t i ng u i sh it f rom the c r i s i s o f the 1 9 3 0 s . 2 . Th e current c r i s i s ha s spread to a l l pa r t s o f t h e world , including social i s t economi e s , v i a mul tipl e and c ompl ex channe l s , due to the evolut ion o f an inter dependent world with a h ighl y integrated economy . 3 . The c au s e s o f the acute ex terna l and interna l economic imb a l ance s in L a t in America go back to the 1 9 6 0 s . The a c tu a l depre s s ive and a lmo s t de sperate economic s i tua tion in the 1 9 8 0 s , however , r e f l e c t s a new c ri s i s within a c r i s i s due in part to externa l factors and in part to th e inadequac i e s o r ex t ravaganc e of mo s t Latin Amer ican dome s t i c economi c pol i c i e s . When one l o ok s a t the po l ic i e s f o l l owed in th e p a s t ten years by individua l countr i e s , particularly in f i s c a l , monetary , and trade matter s , one h a s to recogni z e the lack of coherenc e , forethough t , a nd rea l i sm tha t pre dominated in suc c e s s ive stages o f pol icy imp l ementation in the reg i on . 4 . Recen t l y and wi th prodd ing and the b l e s s ing of internat iona l f inanc i a l organ i z a t i on s , many Latin American countrie s , f a c ing external and dome s t i c c r i s e s o f a magn itude never reg i s tered before , took the road o f ad j u s tment of th e ex ternal sector by mea n s of rece s s ive po l icy , wh ich c ompromi s e s l ong- term produ c t i ve ix
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capa c i ty and growth poten t i a l and pu ts to the t e s t the po l it ic a l and soc i a l tol eranc e of th e h igh l y indebted countr i e s . L i tt l e, i f anyth ing , ha s been done in the f ramework of th e extremel y negat ive internat iona l development s to set in mot ion s e l e c t ive chang e s in deve l opment, inve s tment , consumption , and impor t ing pattern s tha t woul d permi t the achievement in the medium term of some sort of b a l ance in the ex terna l sec tor without comprom i s ing the economy ' s g rowth potentia l . 5 . The probab i l i ty of Latin Ame r ican countr i e s overcoming t h e p r e s e n t economic c r i s i s w i l l depend o n th e i r c apa c i ty to undergo a proc e s s o f interna l s t ructural a d j u s tment and on the react iva t ion of the The current wor l d s c ene i s charac ter i z ed wor l d economy . by uncerta inty a s r egards th e po s s ib l e evolution o f the wor l d economy and perp l ex i ty as to how the c r i s i s mu s t be faced i n the indu s tr i a l countr i e s themsel v es . 6 . D e sp i te the overa l l g l oomy c i rcums tanc e s of th e wor l d and the Latin American economi c s c ene , a number of emergency mea sures cou l d be taken to a l l eviate the c r i s i s and , in pa r t ic u l a r , the f inan c i a l d i f f icu l t i e s o f the region born f rom i t s unusua l l y h igh ex terna l indebtedne s s . Al l the s e mea sures might b r ing some po s i t ive r e su l t s provid ing the pol itical wi l l were present in indu s tria l countr i e s , international o f f ic ia l f inanc ia l and development agenc i e s , and the international f i nanc ia l sys tem . Pr e sently , l i ttl e evidenc e o f such po l i t ica l wi l l i s ava i l ab l e . Such emergency mea sure s were iden t i f ied a s the 7. reprog ramming o f debt payments and , a s f a r a s po s s ib l e , the r e f inanc ing o f the accumul ated intere s t s on the deb t i the s t rengthen ing and improvement of th e r o l e o f international f inanc i a l o rgani z ationsi the undertak ing of add i t ional a c t ion d e s igned to inc rea s e the credit ava i lab l e f rom all po s s ib l e sou r c e s - -pub l ic and private-- in order to l ighten the burden o f indebted Latin American count r i e s i and an inc rea se in th e overa l l internat iona l l iqu i d i ty . 8. Such emergency mea sures shou ld be compl emented by oth e r s o f med ium- and l ong-term natur e , includ ing the d e s ign of a more s tab l e medium- term f inanc ing i the incr�a se in the partic ipa t ion of internat iona l f inanc i a l o rgan i z a t ions in externa l development-oriented f inanc ing i the i s su ing of bonds and s imi l a r documents , negotiable in secondary capital marke t s , by a numb er o f indu s t r i a l countr i e s i a n d the creation , with in the I nterna t iona l Monetary Fund ( IMF ) , of spec i a l terms with the a im o f f inanc ing tha t part o f t h e b a l a nc e-of- payments def i c i t s o f the deb tor count r i e s a t t r ibutab l e t o the increa s e i n i ntere s t ra t e s over a nd above tradit iona l l evel s . 9. Additional measures tha t are strong ly adv i s a b l e are t h e revers ion o f protect i on i s t tendenc ies in the indu st r i a l count r ie s , the s e l e c t ive inc rement of direct fore ign inve s tment s in Latin Amer ica , and th e
xi strengthening o f regional and subregional economic integration scheme s in Latin Amer ica , which go throu gh the di s integration s tage becau se o f both extrareg ional and intraregional d i f f icu lt ie s . The sub s tant ive d i scu s s ion s of the Mex ico C ity meeting , who s e ma j or analytical point s and propo sa l s f o r remedia l actions appear a bove , a l so made i t c l ea r t o a l l i t s partic ipants tha t whe rea s the sub j ect o f L a t i n American c r i s i s a n d indebtedn e s s i s pres ently very fa sh ionab l e in the indu s t r i a l countr i e s , mo s t of th e g rowing l i terature on the se ma tters originates in them and reflects the i r c oncern . Very o f ten the que s t ion is phra sed in the f orm of the po s s ib l e c o s t s to indu st r i a l c ount r ie s , a n d e spec i a l l y t o the inter national bank ing community , o f the pre s ent Latin American m i s fortun e s . Moreover , many otherw i s e compe tent experts f rom the northern l a t itude s l ook exc l u s ively a t the economic and f inanc ial a spec t s of the c r i s i s , ra i s ing only marg ina l ly the k ey i s su e of how l ong Latin American soc i e t i e s can l ive w ith the austerity r e su l t ing f rom the p a in f u l ex terna l IMF ta i l ored a d j u s tment prog rams . Very l it t l e i f anything is wr i tten by the s e indu s t r i a l countr i e s ' exper t s about both the p o l i t i c a l a nd soc ial consequence s of a l l the s e me rc i l e s s exerc i s e s f o r the L a t in American r eg ion i t se l f . Moreover , the L a t in Amer ican wr i t ing s on the sub j ec t are ha rdly acc e s s ib l e to tho s e on both s ides o f the North Atlantic becau s e o f th e l anguag e barrier , among other s . Thu s , the purpo s e o f th i s book i s to dimin i sh to some degree th i s dangerous a symmetry o f v iews ava i l ab l e in t h e North tha t d i s torts greatly the r e a l p icture i n wh ich t h e major f a c t o r s a r e n o t only th e i n t e rna t i onal bank ing commu n i ty ' s intere s t s and interna t iona l f inanc ial a genc i e s ' viewpoints but L a t in Amer ican inter e s t s and vi ewpo ints a s we l l . After a l l , the re cyc l in g o f priva tely h e ld fund s of the order o f some U S $ 2 5 0 b i l l ion l ent to Latin America in the 1 9 7 0 s wa s not a cha r i ty or re scue exerc i s e but a big bu sine s s opera tion tha t resul ted i n very s i zab l e prof i t s for l ender s - -wh e th e r of d i s c r iminate o r indi s c r iminate type--year a fter yea r . Wha t k inds of b ene f i t s and pro f it s en sued f rom a l l th i s , not to direct o f f icia l and pr iva te Latin Ame r ican borrower s b ut to Latin Amer ican soc ietie s , s t i l l rema ins to be e s tab l i shed . S ince the l i terature on the s e a spec t s of Latin Ame r ican c r i s i s and indebtedne s s i s , to say the l ea s t , very scant in the l ender coun t r i e s and even with in independent academic c i rc l e s , the a symme try of views is much greater than i t wou l d appea r . A l l but th ree contributo r s t o th i s vol ume a re Latin American s . Moreove r , not only are practica l l y a l l the s e L a t i n Amer ican writers techn i c a l l y competent ob s e rvers o f the reg iona l economic and f inanc ial sc ene , bu t many
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have partic ipated e ithe r d i rectly or ind i rectly in the mos t recent attempt s to renegotiat� the c ru sh ing burden I have a l so been of ex terna l debt at na tional l evel . expo sed f o r some t ime to a l l the s e i s su e s a s sugge sted by two book s , LDC External D eb t a nd the World Economy and Interna tional I ndeb tedn e s s and World Economic S ta gna t ion , pub l i shed in Engl i sh under my editorship in Mex ico C i ty and Ox f o rd in 1 9 7 8 and 1 9 7 9 , respectively . They appeared at the t ime when the Latin Ame r ican c r i s i s a n d debt were s t i l l cons idered b y both the l enders and th e borrowe r s as a minor and pa s s ing i s sue . Wha t migh t seem almo s t amu s ing, b u t i s in fact tragi c , i s tha t the contents o f the s e volume s- -wh i ch stres sed that the s truc ture o f the LDC ex ternal debt wa s not sound ( in th e l a t e 1 9 7 0 s ) , nor wa s the vol ume of borrowing in international pr iva te f inanc ial ma rket s and the cond i t ion s a ttached to i t su sta inab l e for the borrowe r s in longer terms- -were d i smi s sed b y some d i s t ingu i shed reviewe r s in pre s t i gi ou s economic and f inanc ial j ourna l s o f the indu s t r ia l coun tries a s th e expre s s ions o f th e " undu e pe s s imism o f a group of l ike-minded peopl e . " Th e f ir s t pa rt o f th i s book presents e i gh t chapters on t h e Latin Amer ican c r i s i s a n d indebtedn e s s with in the f ramework o f the wor l dwide economic c r i s i s f rom wh ich th e l on g-heral ded recovery i s s t i l l not yet in s i gh t . Mo st of the s e contribut ion s concentrate not only on economic and f inanc ia l i s su e s but on pol itical and s o c i a l a spec t s as wel l . Al l conta in a number o f prescr iptions a s to wha t cou l d or migh t b e done to f ree both the wor l d economy a nd La t in America f rom th e pre sent c ompl ex predicament compa rab l e only , a lb e i t pa rtia l l y , with th e G r e a t Depre s s ion o f th e 1 9 3 0 s . I t i s pa rticula r l y s a t i s fying to me tha t P a r t 1 sta r t s with a contribut ion b y Drago s lav Avramovi c . During h i s l on g intel l ec tua l a n d pro f e s s iona l c a r e e r tha t took h im sub sequently throu gh the Wo rld Bank , the S ec retariat o f the B randt Commi s s ion , and th e UN Conf erenc e on Trade and Devel opment ( UNCTAD ) , he dedicated mo s t o f h i s time and a ttention t o t h e interna tional indebtedn e s s probl ems , a s witne s s ed by h i s two seminal stud i e s D eb t S e rvic ing Capac i ty and P o s twa r Growth in I n te rnational Indebtedn e s s ( 1 9 5 8 ) and Economi c G rowth and External Debt ( 1 9 6 4 ) . ---- Part 2 conta ins seven ca se stud i e s of the proc e s s of external debt ac cumu l a t ion a n d the rarely suc c e s s ful a ttempts at renego t ia t ion in 1 9 8 2 and 1 9 8 3 . The chapters in th i s part deal re spec t ive l y with Argen t ina , B ra z i l , Mex ico , Vene zue l a , Ch i l e , P eru , and C entral America ( d i s cu s sed a s a subregion ) . As reader s wi l l f in d ou t for themselve s , the authors do not nece s s a r i ly form a " l ike-minded grou p " f rom e i ther the th eoretical o r the ideol o gica l v i ewpo int . Some of th em a r e mo r e neoc l a s s ic a l and some more structura l i s t . But , s ince
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a l l are knowl edgeab l e , inte l l ec tua l ly independen t , and c l ea r minded in the i r r e spe c t ive analytical approache s and , i n add i t io n , know the i r " s to r i e s " f rom f i r s t-hand expe r i enc e , s ome sort o f c ompo s i t e p i c ture emerge s f rom the i r f inding s tha t i s not nec e s s a r i l y compl imen ta ry of each of th e ma j or a c to r s in the " indebtedn e s s game . " Th e f a c t tha t mos t a uth o r s of the s even c a s e s tudies dedicate cons iderab l e attention t o dome s t ic pol itical a spec t s o f the indebtedn e s s and i t s re nego t i a t io n s adds additional d imen s ion to th i s second pa rt o f th e book . One l earns f rom i t tha t , contrary to the e s tab l i shed w i sdom, n e i ther the internat iona l f inanc ial a genc i e s , the interna t i onal bank ing community , government o f f ic ia l s o f the borrowing countr ie s , nor even the p riva te borrowe r s are d i spa s s iona te ang e l s . Al l h a ve the i r ideo l og ie s , po l it i c a l a nd economic ob j ec t ive s , and bureauc ratic intere s t s , among other s , wh ich more o f ten than not a re in con f l i c t with tho s e o f the othe r actor s , independent o f whe ther the a c tua l transactions are o f a mul ti l a teral o r b i l ateral natur e . Under th e s e c on d ition s , c r i s i s g e s ta t ion , indebtedn e s s a ccumu l a t ion , a n d externa l a d j u s tment proc e s s e s cannot b e reduc ed to mode l s , equa t ion s , targe t s , and s t a t i s t i c a l s e r i e s ma n ipul a t ions . The intern a t iona l f inanc ial rela t ions have always been , are now , and sha l l be exerc i s e s in power and pol it ic s . Th i s i s perha p s th e mo st important me s sage o f th i s book . Th i s volume c ou l d not have been produc ed withou t the mo s t e f f ic ient cooperation of a g roup of con t r ibu tors d i spersed in the triangu l a r a rea l imited by such d i s tant point s as Santiago , Ch il e ; San F ranc i sco , C a l i fornia ; and G eneva , Swi t z er l and . The manu script wa s prepared with in a record t ime o f four mon th s thank s to the gene rou s l og i s t i c f ac i l i t i e s of E l C ol egio de Mex ico in Mex i c o C i ty with the no l e s s generou s h e l p o f t h e P ro gram for Joint S tudies on La t in Amer ican I n te rna t ional Rel a t io n s ( RIAL ) a t Santia go . Both i n s t i tutions d e s erve s incere thank s f o r th e i r mo s t sympathetic a n d h e l p f u l a t t i tude towa rd the pro j ec t . Mi g u e l S .
Wi o na zek
Mex ico C i ty
I ntroduction Miguel S. Wionczek Luciano Tomassini
A ma j or i ty of experts agree that the wor l d economy i s pa s s in g through i t s wor st c r i s i s s ince the depre s s ion o f the 1 9 3 0 s . Less consensus e x i s t s , however , about the nature and cau s e s of the cr i s i s and therefore about whe the r at a global l eve l a s u s ta ined economic recovery is now underway . The fact that the rece s s ion in the indu s t r i a l i zed count r i e s has been superimpo sed upon pro found structura l tran s forma tions makes the s i tuation a l l the more comp l ex and provok e s a general c l imate o f inte l l ectual confus ion . T h i s confus ion i s even greater in the c a s e of Latin I n e f fect , the international c r i s i s has struck Ame r i c a . the region with s i n gular force because o f the h i gh decree of integration that Latin America has achi eved with the world economy and because the deve l opment strategi e s pursued by many countries in recent years were h igh ly dependent on fore i gn borrowing . Among the p r inc ipal m a n ife s t a t ions of the c r i s i s i n the regio n , the one that stands out is the exp l o s ive growth of the Latin American external debt service and the h i gh soc i a l cost of the ad j u s tment that Latin Ame r i can count r i e s have been mak ing i n order to pay the i r external obl i gations under cond i t ions o f dome s t i c and external c r i s i s . Al though under pres ent c i rcums tanc e s it would be unrea l i stic to expe ct the countr i e s " to ad j u st without pain , " it i s no l e s s certain that the c o s t s of ad j u stment should be better d i s t r ibuted among a l l the part i e s concerned- debtor nation s , lending bank s , indu str ia l i z ed countr ie s , and international f inanc i a l organ i z ation s - - i f s a c r i f ices that cou l d exce e d t h e l imits o f po l i t ic a l tole rance in Latin Ameri c an s o c i e t i e s are to be avo ided . I t i s becau s e of a l l thi s that both debt and ad j u st ment not only con s t i tute two very c l o s e l y l i nked theme s but a l so have economic and po l i tical content . One of the factors that has compl icated the unde r s tanding and the management o f the c r i s i s has been the re serve with wh ich the ma j or ity o f Latin Ame r ican count r i e s have treated the se l ink s be twe en the po l i t i c s and the economi c s of the 1
2 e xternal indebtedne s s . The debt prob l em used to be cons idered a s the a lmos t exc lus ive re spons ibi l i ty o f the monetary autho r i t i e s and pr ivate banks o f the debtor countr i e s , on the one hand , and the foreign creditor banks and the IMF , on the other . Ob s e rving the l ong- l a s t ing lack of acknowledgment o f t h e c l o s e l ink s between t h e economic a n d t h e po l i t ical nature o f the debt prob l em , r e f l ected in the extremely l imited s cope o f the groups that have to date managed the c r i s i s , one come s to the conc l u s ion that l i t t l e progre s s on the externa l debt wi l l be achieved in the region a s l ong a s the entire i s sue i s not put in the broad po l i t i c a l context . S ince the wor s ening o f the c r i s i s in l a t e 1 9 8 2 the f i r s t important step i n th i s direction was made a t the Quito economic conference held i n January 1 9 8 4 , the conference c a l l ed in response to an in i t i a t ive o f the pre s i dent of E cuado r , O svaldo Hurtado . At the Qu i to conference for the f i r s t t ime forma l con s ideration wa s given to the debt prob l em at the po l i t i c a l level . The regional consensus reached there wa s that the externa l debt service pol i c i e s , a s wel l a s the mode s and inten s i ty o f ad j u s tment , mu s t keep in mind propo s a l s formulated by the Latin Ame r i can countri e s thems e lve s , because the who l e exerc i s e wou ld f a i l in the longer run if the need to a s sure economic growth and acceptab l e l iving cond i t ions for the Latin American s o c i e t i e s o f t h e region were for gotten dur ing t h e ad j us tment proce s s . Spec i f ic a l ly , the Quito conference proposed that debt s e rvice not exceed a rea sonab l e proportion of the debtor countr i e s ' expo rt earning s . T h i s sma l l progre s s toward more equ itable treatment of the Latin American debt servic ing and the ad j u stment proc e s s wa s in part the consequence of a wide and dive r s e d i s c u s s ion o f t h e who l e indebtedne s s prob l em that took place in Latin Amer i c a in 1 9 8 2 and 1 9 8 3 , l i f t ing the curta in of sec recy that had surrounded that i s sue trad i t iona l l y . The UN Economic Commi s s ion for Latin America ( ECLA ) and the Latin American Economic Sys tem ( SELA ) contributed to thi s debate but so too did a number o f academic independent research o rgani z a t ions qua l i f ied I n e f fect , to promote a frank debate on the subj ect . the s e academic inst itutions paved the way to a mo re open dia l ogue among governmental and nongovernmental sectors a f fected by the indebtedne s s c r i s i s . I n th i s regard , two i n s t i tutions j o ined forces to organ i z e the conference o f wh ich thi s book i s an indirect resu l t . The P rogram for Joint S tudies on Latin Amer ican I nternat ional Relations ( RIAL ) wi th headquarters in S antiago , Chi l e , an a s soc i a t ion o f Latin Ame r i c an social research center s , promoted dur i ng 1 9 8 3 a s e r i e s o f meet ings in various parts o f the region about the externa l debt prob l ems o f Latin Ame r i ca . The other organi zation wa s the Tepo z t lan Centre , a sma l l Mex ican th ink tank ded i cated to re f l ection and debate abou t fundamental
3 que stions concerning contemporary deve loping soc i e t i e s in Latin Ame r i c a and e l s ewhere . Joint e f forts o f the s e two i n s t i tutions tran s l ated thems e lves i nto a conference that took place in the Tepo z t l a n Centre , More l os , Mex ico, in July 1 9 8 3 . T h i s book repre sents in a way a f o l l ow-up of tha t gathering . The autho r s o f seve r a l o f the chapte r s inc luded in th i s volume partic ipated in the above-ment ioned encounte r , the ma j or conc lus ions of wh ich are reported in the Preface .
Part 1 Global and Regional I ssues
1
External Debt of Developing Countries i n Late 1 983 Dragoslav Avramovic
I n the f a l l o f 1 9 8 3 , forty to f i fty deve lop ing c ountries engaged in debt - r e s chedu l ing negot iation s . The se count r i e s inc luded twe lve of the twenty large s t debtor s , accounting f o r mo re than ha l f o f the to tal debt o f deve loping countr i e s . No immed iate prospects for re l i e f were in s ight . I nt e r e s t rates in real te rms we re a lmo s t a s h i gh a s at the peak o f the internat iona l credit c runch o f mid- 1 9 8 2 , wh ich wa s the immed iate cau s e of the debt c r i s i s , and no improvement had taken place in the average matur ity of the debt . Export commodity pric e s o f deve loping countr i e s had improved f rom the low point of November 1 9 8 2 , but new pressures on s e n s i t ive commodity markets had appeared s ince the summer o f 1 9 8 3 . Cap i t a l ma rket lending to deve loping count r i e s h a d n o t recovered from the near col lapse o f Augu s t 1 9 8 2 . The debt reschedu l ing and eme rgency- f inancing operations arranged at great e f fort during late 1 9 8 2 and early 1 9 8 3 wou ld be running out in most c a s e s dur ing 1 9 8 4 , and new arrange ments had to be made , frequently under mo re d i f f icult c i rcums tan c e s than the f i r s t round . D e f l at ionary pre s sures on the maj or deve loping debtor countries had a l ready taken the i r to l l in reduced real income s and in creased unemployment . Soc i a l and po l i t i c a l ten s ions we re on the increase i n large parts o f the deve lop ing wor l d a s 1 9 8 3 drew t o a c l o se . I n an ear l ie r study of the debt prob l em o f deve lop ing countries I argued that over the l ong run the r i sk of debt f a i lure wa s sma l l , provided the present cr i s i s was succ e s s f u l l y hand l ed . 1 Mo st o f the heavi ly i ndebted count r i e s have proved that they can absorb modern technology , organ i z e e f f ic ient produc t i on , penetrate the internat iona l ma rket at extraordinary speed , and g ive prior ity to meet i ng the i r external f inanc i a l obligations under mo s t c i rcumstanc e s . Thi s argume nt s t i l l s tands . I a l so empha s i zed that over the short and medium term the r i sk of tran s f e r d i f f i cu l t i e s and interruptions in pay ments was acute i n many c a s e s becau se of the adve r s e movements in t h e terms o f trade , a l a rge overhang o f 6
7 short-term debt , exce s s ive inte r e s t rates on the part o f t h e debt , uncerta int i e s concerning future capital market lending , i n su f f i c ient acc e s s to product marke t s , and lapses in dome s t i c f inanc i a l po l i c ie s . T h i s r i sk has now materia l i z ed . I a l s o stated that the extent and duration o f the trans f er prob l em would depend in part on the w i l l i ngne s s of the international community to cope with the present l iquidity c r i s i s and in part on the wi l l ing ne s s o f debtor countries to improve on the i r performance in several critical area s , and it wa s conc luded th at a f a i lure to resolve the short-term prob l em qu ickly and dec i s ive ly might a f fect adve r s e l y the long- run future . The need for a comprehens ive program has now become even more urgent . F a i lure to adopt it wi l l lead to a further sharpening o f the interna l d i f f i c u l t i e s in some ma j or debtor count r i e s because of the pres sure of debt service payments on an al ready weakened structure � it w i l l prol ong the pre s ent chao s in externa l f i nanc i a l f l ows o f many deve lop ing count r i e s a n d ra i se further the uncertai n t i e s concerning stab i l ity o f ma j or parts o f the internat i ona l f inanc i a l system � and it could harm the future c apac i ty to pay of a number o f deve loping coun t r i e s , as a continuing l ow l evel o f inve s tment wou ld adve r s e l y a f f e c t the i r compet i t ive capa city in the internation al market . AMOUNT5 AND P ROPORT ION5 The aggregate exte rna l d i sbur sed pub l i c and private debt o f a l l ma tur i t i e s owed by deve loping countr i e s wa s o f the order of U 5 $ 7 5 0 - 8 0 0 b i l l ion at the end of 1 9 8 2 . The long- and med i um-t e rm p o r t i o n wa s e s t ima t e d at about U S $ 6 0 0 b i l l ion . 2 The short-term debt , of a matur ity under one year , wa s e s t imated at U5 $ 1 5 0 - 1 60 b i l l ion . 3 Th i s latte r amount may we l l be an under s tatement : In mo st recent l iqu idity c r i s e s the actual amounts o f short term debts turned out to be higher than the e s t ima te s . About 7 0 percent o f the aggregate debt and an even h i gher proportion o f debt service are accounted for by twenty countr i e s . The individu a l country f igures are set fo rth in Tab l e 1 . 1 . The largest debtors in absolute amount s - -Bra z i l , Mex i c o , Argentina , 50uth Korea , and Vene zue l a , togethe r accounting for U 5 $ 2 9 0 b i l l ion or almo s t two- f i fths o f deve loping-country total debt- - do n o t invariably ca rry the largest debt per capita or a s a proportion o f gro s s national product ( GNP ) . Debt per capita i s highe s t i n I s rael ( U 5 $ 5 , 4 3 7 ) , f o l l owed at a cons iderab l e d i s tance by Vene z u e l a ( U S $ 2 , 1 3 9 ) , Ch i l e ( US $ 1 , 5 9 4 ) , and Portuga l ( U5 $ 1 , 4 2 4 ) . Argent i na , Mex ico , and South Korea are farther down . Bra z i l i s in the midd l e of the l i s t ( U 5 $ 7 7 1 ) , and I ndone s i a , Paki stan , and I ndia a r e at the end , with the l a tter at U5 $ 2 9 per capita . As a proportion
8 Table 1 . 1
Larges t Debtor Countries do l l ars )
( debt in bi l l ions of U . S .
Aggregate Di sbursed Debt ( long- , medium- , and short-term) End 1 9 81 Mid- 1 9 8 3 Brazil Mex i c o Argentina South Korea Venezuela I s rael India Indone s i a Ph i l ippines Yugos lavia Algeria Chi l e Turkey Egypt Portuga l Nigeria Peru Morocco Colombia Pak i stan
93 . 0 85 . 0 40 . 0 39 . 0 33 . 0 21 . 5 20 . 0 20. 0 20 . 0 20. 0 18 . 0 18 . 0 16 . 2 16 . 0 14 . 0 13 . 0 11 . 6 11 . 0 10 . 0 9.0
70 . 0 72 . 0 35 . 7 32 . 8 18. 9 18 . 0
15 . 8 20 . 0 17 . 8 15 . 0 15 . 5 15 . 0 10 . 0 9.7
8.8
Long- and Medium-Term Debt Disbursed Debt Service Debt End Paid in 1982 1981 65 . 6 54 . 4 20 . 0 20 . 8 14. 9
18 . 5 15 . 2 4.9 4.8 7.8
19 . 4 18 . 2 9.5 16 . 8 17 . 0 12 . 3 14 . 1 14 . 0
1.7 3.4 2.1 4.7 4.8 3.3 1.9 2.4
6.0 7.3 8.0 6.0 8.8
1.9 1.9 1.9 1.1
Organizati on for Economic Cooperation and Deve lopment, Source : Genera l Survex 1 9 8 2 ( Pari s , Externa l Debt of Deve lo� ing Countri es : December 1 9 8 2 ) ; pre s s reports .
o f GNP , debt i s again la rge s t i n I s rael ( 1 0 5 . 0 percent ) , f o l l owed by Ch i l e ( 6 2 . 3 percent ) and Morocco ( 6 1 . 2 per cen t ) . South Korea , P e ru , Egypt , and Portugal f o l l ow . The med i an va lue i s s l i ghtly above 5 0 percent , with Mex ico marg i na l l y above ( 5 3 . 1 ) and B ra z i l ( 3 4 . 7 ) , Yug o s l avia ( 3 1 . 8 ) , and particu larly India ( 1 1 . 3 ) sub s tant i a l ly down . Tabl e s 1 . 2 and 1 . 3 in the chapter append ix provide detai l s . Change s f rom the earl i e r s tudy a re margina l . � The newly indu stri a l i z ing count r i e s carry mo s t of th e debt , but they are not t h e only deb to r s . The l ow income count r i e s ( under U S $ 6 0 0 capita ) owe US $ 1 1 0 b i l l i on or 1 8 percent o f the total deve l oping- country medium- and long -te rm debt ( at the end of 1 9 8 2 ) . The proportion of th e i r export s absorbed by s ervi c e on th i s debt ( debt serv i c e rat i o ) amounted to 23 percent in 1 9 8 2 , barely lower than for the newl y indu s t r ia l i z ing count r i e s and hi gher than th e 19 percent average for the deve loping countrie s , inc luding th e Organ i z ation o f Petro l eum Export ing C ount r i e s ( OPEC ) , a s a 9roup ( s ee Tab l e 1 . 4 i n chapter appendix ) . I n add i t ion , 1t i s in th e l ow- income
9 countr i e s where mo st o f the payments arrears are encountered : Twenty o f the th i rty-three count r i e s spec i f i c a l ly ident i f i ed a s hav ing a r r e a r s a t t h e e n d o f 1 9 8 2 were at or be low US $ 6 0 0 per c a p i t a income . 5 The r i s e in debt and debt service r e f l ected in part the great i n f l at i on o f the last decade . It wa s accom panied by a sharp increase in the nominal and real value o f output and exports i n mos t c a s e s . Debt and debt service rose even f a s te r , however . As a resul t , the debt serv i c e ratio ro s e by s ome 50 percent between the early 1 9 7 0 s and the early 1 9 8 0 s ( Tabl e s 1 . 4 and 1 . 5 in the chapter appendix ) . I t s average level in 1 9 8 1 - 8 2 o f 2 0 - 2 5 percent o n medium- and l ong- term debt wa s not out o f l ine with the ratios recorded for Canada , Au stra l ia , Argent i na , and the Union of S outh A f r i c a - - the tradit ional succe s s fu l borrowe r s - - in t h e e a r l y 1 9 0 0 s and t h e 1 9 2 0 s . 6 T h e ratio s were much higher , however , when the repayments of short term debt are inc luded : I n f ive c a se s , aggregate debt s ervi c e exceeded the total va lue o f debtor-country exports in 1 9 8 2 . ' The continuing r o l l over of short-term debt and long-term capital i n f l ow without interruption are cruc i a l for the mai ntenance o f debt service in such a s i tuation : The breakdown in the s e and the col lapse o f world trade led to ma s s ive defau l t s in t h e 1 9 3 0 s , at an even l ower l eve l o f debt- serv i c e ratios than at pres ent ( Table 1 . 6 in chapter appendix ) . 8 DEBT-SERV I C I NG TERMS It is not the absolute amounts of the debt , but the unfavorable terms of s e rvi c i ng for matur i ty and intere s t that now po se the mo s t formidab le prob l ems in mo s t c a s e s . F i r s t , periods o f repayment are too short . At the amort i z at ion ( repayment ) rate o f 1 9 8 2 , the aggregate med ium- and long-term debt o f deve l oping count r i e s wou l d be retired i n s even a n d a ha l f year s . 9 Th i s i s sho rter than the l i f e o f mo s t deve lopment pro j ects . Dur ing the l a s t f ew yea r s , according to competent ob server s , there occurred a remarkab l e shorten ing o f debt matur i t i e s in a number o f countr i e s , r e s u l t ing appa rently f rom the re placement o f maturing medium- term bank credit by shorter term 10an s . I O Furthermore , short-term credit wa s with P r ior to 1 9 8 1 , short-term drawn in a number of c a s e s . debt wa s a lmo st automa t i c a l ly ro l led over , a s i t f inanced I n the debt cri s i s of 1 9 8 1 - 8 2 mo stly current trade . th i s prac t i c e stopped , and a number o f deve loping coun t r i e s expe r ienced a sudden need to repay ma s s ive amounts out o f dwind l ing o r nonex i s tent exchange res erve s . Particu l a r l y a f fected wer e interbank credit l i ne s , but ordinary trade credits were not spared . 1 1 Wha t wa s happen ing in recent yea r s may be c a l led debt reorgan i z ation in reve r s e : Longer- term debts we re partly c onverted i nto short-term , and some of the short-term
10 debt s were c a shed in . Second , real interest rates are at a l evel that an average debtor wi l l f i nd hard to sustain . More than US $ 3 0 0 b i l l ion of the debt of deve loping count r i e s is now owed to bank s . 1 2 Mo s t of it is contracted at f l oa t ing inter e s t rates and is denominated in u.s. dol l ar s . The s e rate s , c onsist ing o f the ba s e rate ( mo s t l y London I nter Bank O f f er Rate- - L IBOR- - and some t imes u.s. pr ime ) and the marg in to r e f l e c t " country r i sk , " were runn ing at 1 2 per cent on the average i n October 1 9 8 3 . The U . S . p r i c e s are now increa s ing at 3 - 4 percent per year , giv ing a real rate o f intere s t o f 8 - 9 percent . The real rate fac ing the deve loping -c ountry borrowe r s is even h ighe r , as the i r export commod i ty p r i c e s have s topped increas ing on the average and the i r p r i c e s of export manufactures are probably f a l l i ng . For the s e count r i e s the nominal intere s t rate o f 12 percent can be cons idered at l e a s t equal to t h e real rate . 1 3 At th i s r a t e th e debt burden w i l l be r i s ing with a lmo st mathema t ica l certainty for mo st debtor countri e s . T h e y wi l l b e compe l led to borrow at 12 percent interest j u st to pay intere s t ; and debt wi l l increase f a s ter than rea l output , r e su l t ing i n a r i s ing proportion o f nationa l income be ing absorbed by debt s ervi c e abroad . The hop e s of l ate 1 9 8 2 and early 1 9 8 3 that interest rates wou ld f a l l toward the i r long-run real l eve l o f 2 percent did not ma teri a l i z e . I n 1 9 8 2 , s e rvice on aggregate medium- and long-term debt of deve loping countr i e s ( amort i z at ion and intere s t ) amounted t o US $ 1 2 5 b i l l ion o r 2 1 percent o f th i s c l a s s o f S ervice on short -term debt principal ( US $ 6 0 0 b i l l ion ) . debt i s not known , but it mu s t have been sub stant i a l . For 1 9 8 3 , service on a l l debt o f the twe lve l a rge s t debto r s w a s e s t imated a t the stagger ing sum o f US $ 1 9 0 b i l l ion , o r 4 4 percent o f the i r aggregate debt princ ipa l . l � S even o f th e s e twe lve debtors , inc luding four o f the top f ive , requ e s ted pos tponement o f payments on a part o f the debt o r emergency f inanc ing . PRODUCTIVITY OF LOANS A v i ew ha s been expr e s s ed by the GATT ( General Agreement on Tar i f f s and Trade ) Secretariat that current debt - s e rv i c i ng d i f f icu l t i e s r e f l e c t unproduc t ive use o f funds rather than unfavorab l e exte rna l events a n d d i f f i cu l t debt- servic ing terms : " A d i f f i culty f o r the f i nanc i al sys tem is po sed by the fact that a s ignif ic ant , though not pre c i s e ly determinab l e , proportion of the add i t iona l i ndebtedne s s incurred in the 1 9 7 0 s repre sents what i s b e s t c a l led ' deadwe ight debt ' -- that is debt to wh ich there corre spond no add i t ional production f ac i l i t i e s f rom wh ich t o s ervi c e i t . " l s The World B ank h a s d i sagreed with th i s d i agno s i s and argued that on the who l e the deve loping count r i e s u s ed
11 borrowed funds product ive ly . 1 6 E s sent i a l ly the s ame argument has been made by the Bank of England . 1 7 Wi l l i am C l ine o f the Wa shington-based I n s t i tute for I nternat ional E conomic s in a recent s tudy found that " it wou ld b e i n- . accurate t o conc lude that the bul k o f the debt contracted h a s f a i l ed to go into produ ctive inve s tment s � the evidence tends to indicate that mo st borrowing was produc tively used . illS I n the ear l i e r study I argued tha t the economic resu l t s a ch i eved by the newly indu s t r ia l i z ing cou n t r i e s - t h e ma j or debto r s - -have in mo s t c a s e s met t h e long- run debt- servic ing-capa c i ty requ irement s . The latter have been de f i ned as a cont inu ing growth in per c apita pro duc t ion and the underlying proce s s o f rapid accumu l a tion o f product ive cap ita l , so th at the inc idenc e o f debt service f a l l s on a part of the inc rement in per capita income and a l l ows the dome s t i c consumption and inve s tment to r i s e p a r i pa s su with the growth o f debt s ervic e . Spec i f ic a l ly , I argued that over the preceding two decade s : •
1.
2.
3.
The rate s o f growth o f g ro s s produc t , in the a ggregate and per capita , had been impres s ive and s u sta ined � the a ggregate had surpa s s ed the growth rates recorded in the indu s t r ia l i z ed count r i e s by a substant i a l margin , and the per cap i ta income growth , after a moderate lag in the 1 9 6 0 s , had exceeded that o f the indu s tria l i z ed countri e s i n the 1 9 7 0 s . A n important except ion had been the l ow per capita growth rate i n the i ndu st r i a l i z ing countr i e s o f S ou th A s i a a n d particu l a r l y i n A f r i c a south o f t h e S ahara . For deve lop ing count r i e s a s a wh ol e , the aggregate growth rate in the 1 9 6 0 - 1 9 8 0 period averaged 5 . 8 p e r ce nt a nd t h e per ca pit a rate 3 . 5 percent per annum . The growth achi evement had been a resu l t of the capa c i ty to absorb modern techno l o gy and to o r ga n i z e e f f ic iently l ow- cost produc tion , a f ter an initial period o f infancy . The share o f manuf actur ing i n gros s dome s t i c product ( GDP ) i n Latin Ame r ica , southern Europe , southern A s i a , the Middle E a s t , and northern Africa averaged some 2 3 p e r ce nt in t h e late 1 9 7 0 s compared t o 1 9 percent i n 1 9 6 0 � i t was approach ing th e share that obtained i n the deve loped count r i e s ( 2 7 percent ) . A number of deve l op i ng countri e s had ceased to be the per iphery of the world economy and had become indu s t r i a l centers in the i r own right . Ac c e l e rated indu s t r i a l i z a t ion l ed to diver s i f i cation o f the export s t ruc ture o f the newly indu str i a l i z i ng countri e s . Manu factures in 1 9 8 3 accounted for s l i ghtly more tha n one-ha l f o f the
12
4.
5.
6.
total expo rts of e a s tern and southern As ia and southern Europe , compared to l e s s than 3 0 per cent twenty year s before . The Latin Ame rican prog re s s had been l e s s rapid unti l a f ew years ago , but the r e had been a ma j or upsurge in the late 1 9 7 0 s , led by B ra z i l ian automo t ive export s . The deve loping countries ' overa l l exports of manu factures had conti nued to grow in th e 1 9 7 0 s , a s they had i n the 1 9 6 0s , a t an average annu a l r a t e o f 1 2 percent ( in con s t ant 1 9 7 8 price s ) , compared to 8 . 5 percent for total wo r l d trade in manu f actures in the 1 9 7 0 s . I t mu st be added , howeve r , tha t va s t areas o f deve loping countrie s , including the newly indu s t ri a l i z ing one s , rema in ma j o r commodity supp l i e r s to the wo rld ma rke t s a n d continue to be expo sed to vic i s s itudes of demand and p r i c e s . Th i s i s particu larly th e c a s e with Latin Amer ica , the As sociation of Southeast As ian Na tions ( ASEAN) , and pa rts o f th e I ndian subcontinent . Inve s tment had been increas ing f a s ter than aggregate production , indicat ing a r i s ing share o f the p lowback into future capa c i ty to produc e . As a r e su l t , the rate o f inve s tment a s a pro portion of GOP in deve loping count r i e s had showed an upward le ap f rom 19 percent to 26 percent between 1 9 6 0 and 1 9 8 0 ; it wa s above the level in the indu s t r i ali z ing c ountr i e s by the l ate 1 9 7 0 s , i n the r eckoning o f the Wor l d B ank . Na tional saving s rates had r i s e n on the average by a thi rd . W ith i n th i s , an enormou s upwa rd s h i f t had occurred in eastern As i a , f rom under 1 0 percent o f income in 1 9 6 0 to a lmo st 24 per cent in 1 9 7 7 . A remarkab le increa se had a l s o occurred in southern As ia , f rom 1 2 . 5 percent t o 1 7 . 6 percent of income . I n L a t i n Ame r i c a and southern Europe , na t iona l savings had only kept pace w i th income , at leve l s averaging about 2 0 percent . Fo r a succ e s s fu l outcome of a growth proc e s s f inanced partly b y fore ign borrowing , it i s cruc i a l that the gap between inve stment and saving s , i n i t i a l l y la rge , starts c l o s ing a s g rowth proceeds , t o be u l timately replaced b y a su rp l u s tha t w i l l be u sed to retire the debt i f I f the gap starts f a l l ing as a nece s s a ry . propo rtion o f income , the debt wi l l cea se to grow at a certain po in t , and the ent ire borrow i ng proc e s s wi l l be s e l f - l iqu idat ing . The ava i l ab l e data sugg e s ted that despite the r i s e in the p r i c e o f imported o i l , the gap in the current account as a proportion of GOP had f a l len i n both eas tern and southern As ia between 1 9 7 0 and 1 9 7 7 . I t had increased moderately in
13 Latin Amer ica and more sharply in southern Europe . For deve loping count r i e s as a who l e , i t had dec l ined . 1 9 Despite the above evidenc e , the GATT Secretariat h a s a point concerning wa steful u s e o f f o r e ig n loans . For one th i ng , a part o f cap i ta l i n f l ow wa s o f f set by capital expor ts in some countr i e s ; i t wa s u sed for purcha s e s o f mil itary supp l i e s in o the r s ; a n d there wa s inappropriate u s e o f pub l i c funds for private bene f i t in a n unknown number of c a s e s . P r ivate capital outf l ow f rom Mex ico ha s been var i ou s ly e s t imated at US $ 1 7 - 3 9 b i l l ion , Vene zue l a U S $ 6 - l 8 b i l l ion , Argent ina U S $ 8 - l l b i l l ion , and B ra z i l U S $ 1 2 b i l l ion ( 1 9 8 2 a l one ) . 2 0 M i l i tary purch a s e s and f e e s i n Argentina have been quoted at U S $ l O b i l l ion . 2 1 S econd , free- trade pol i c ie s , coupled with f r o z en exchange rate s , led to a ma s s ive increa s e in impor t s f i nanced by foreign borrowing , without a corre sponding increa se in dome s t i c capital formation . I n s tead of resu l ting i n improved re source a l location c l a imed for them , such pol ic i e s led to exc e s s ive foreign compet i t ive pre s sure on dome s t i c produc t ion , increased unempl oyment , and l arge externa l deb t . Thi s happened i n Ch i l e . Ma j or c ommerc i a l bank s have not been anx iou s to s e l l the i r loans t o ma j or deve loping debtor countr ies . Ther e i s a l imited s econdary New York ma rke t in synd icated loans to L atin American governments . Th e s e l l e r s are sma l l u.s. regional bank s and the European bank s . I n early 1 9 8 3 th e d i scounted paper inc l uded B ra z i l ia n and Vene zuelan loan s , and the d i scount s ranged between 5 per cent and 1 2 . 5 percent o f face value . I t was stated tha t the b igger banks a r e relucta nt t o s e l l becau s e they do not want to take wr ite- o f f s . 2 2 Another exp l anatio n , o f fered t o m e by a prominent London inve s tment bank , wa s that l arge commerc i a l bank s wanted to stay in ma j or deve loping debtor countr i e s in v iew of the ir f avo rab l e long - run growth prospects even though the banks were reluctant to increa s e the i r current exposure . The Japane s e bank s , required by the government to set a s ide a spe c i a l r e s e rve aga i n s t l o s s e s on the i r doubtful foreign loan s , made only nominal prov i s ions with respect to the i r ma j or borrowe r s . I t wa s uno f f i c i a l ly reported that the bank s set a s ide funds equ a l to around 50 percent of the max imum a l l owed i n the cases of loans to P o l a nd , Vietnam , Cuba , and Z a ire ; 2 5 percent in the c a s e s of Bol ivia , Hondura s , C o s ta Rica , Romania , S enegal , and Sudan ; 1 0 percent i n the c a s e s of Yugo s l avia and L iber i a ; and only 5 percent in the c a s e of loans to Mexico , Argentina , B r a z i l , and Vene zue l a . 2 3
14 EXTERNAL FORCES 1 9 8 1 - 1 9 8 2 Dur i n g 1 9 8 1 and 1 9 8 2 the deve loping count r i e s were exposed to three shock s o f ma j or proportions and in rapid succe s s ion . They were the ma in cause of debt- servicing troub l e s i n mo s t ma j or debtor countri e s . F i r s t , commodity prices fe l l sharply a s the wor l d rec e s s ion became deeper and more wide spread and a s the upswing i n interest rates forced sales f rom commod i ty i nventor i e s , the cost o f c a r r y i n g them having become incre a s ingly proh ib i tive . Export commodi ty p r ice s other than o i l in 1 9 8 2 we re on the average 3 0 percent down f rom the average of 1 9 8 0 . The pre s i dent of the Wor l d Bank e s t imated that between 1 9 8 0 and 1 9 8 2 the annu a l export revenue o f developing coun t r i e s dropped US $ 4 0 b i l l ion , as a re sul t o f f a l l ing prices o f non fuel commod i t i e s and stagnation of other catego r i e s of developing- country export s . 2 � S econd , the upward sh i f t in the internat iona l rate o f intere s t not only meant a sharply increa sed cost o f new borrowing b u t a l so l ed to a r evaluat ion o f charge s on the ex i s t ing debt contracted at f loating intere st rates ( see the section on " D ebt-Servicing Terms " ) . F rom 1 9 7 8 t o 1 9 8 1 , L I BOR doubled , and according t o the managing d i rector o f the I nternationa l Monetary Fund ( IMF ) , inte r e s t payments by the nono i l deve loping countries on the i r long- t e rm fore i gn debt a lone ro s e by some US $ 2 3 b i l l ion . Furthermore , the average maturity shortened . The pres ident o f the Wor l d Bank e s t ima ted that the annu a l debt s ervice for med ium- a n d long- term d e b t went up US $ 3 7 b i l l ion between 1 9 8 0 and 1 9 8 2 . 2 5 According to the Organ i z a t i on f o r Economi c Cooperation and Deve l op ment ( OECD ) , the increa se amounted to US $ 3 3 b i l l ion for non-OPEC count r i e s and US $ l l b i l l ion for OPEC , or a total o f US $ 4 4 b i l l ion between 1 9 8 0 and 1 9 8 2 . 2 6 A continu i n g appreciat ion o f t h e U . S . do l la r has b e e n an add i t iona l e l ement hardening the terms of debt servicing. Th i rd , in Augus t 1 9 8 2 international capital market lending to deve loping count r i e s , mo stly synd ic ated bank lending, nearly co l l apsed . In the period S eptember December 1 9 8 2 , th i s l ending wa s running at US $ 1 9 b i l l ion annua l ly; c ompared to U S $ 5 1 b i l l ion in 1 9 8 1 , a shortfal l o f U S $ 3 2 b i l l ion . For o i l - importing countr i e s a l one , th i s short f a l l amounted to U S $ 3 0 b i l l ion . 2 7 The aggregate adve r s e swing for non-OPEC deve l oping count r i e s , resul ting f rom fal l ing export revenue , r i s ing debt- servi c ing c o s t s , and the f a l l in capital market borrowing, amounted to about US $ 1 7 0 b i l l ion over the two years 1 9 8 1 and 1 9 8 2 . 2 8 The s i tua t ion in 1 9 7 9 and 1 9 8 0 was a l re ady qu i te d i f f icu l t for tho s e count r i e s , a s th ey had j u s t su sta ined the second o i l -price increa s e . Al though the o i l - importing countries were carrying the brunt o f the adve r s i ty , the o i l - exporting countries di d not e scape i t . The vol ume fell sharply f o l lowing the 1 9 7 9 price increa s e , the rec e s s ion , and the chaot ic .
15 market ing condit ion s , l e ading t o a la rge reduc tion o f export and f i s c a l revenu e . The exports o f OPEC countr i e s in 1 9 8 2 amounted to U S $ 21 3 b i l l ion , compared to U S $ 2 9 5 b i l l ion i n 1 9 8 0 , a dec l ine o f US $ 8 2 b i l l ion o r 2 8 percent . The cumu l a t ive decline over the two-year p eriod 1 9 8 1 - 1 9 8 2 amounted to U S $ 1 0 5 b i l l ion . 2 9 The few surplu s - o i l countri e s recouped a p a r t o f the i r revenue decl ine through h ighe r earnings of intere s t on the ir foreign bank depo s i t s and s im i l a r a s s e t s abroad . F o r t h e ma j or i ty of o i l exporting count r i e s ther e wa s n o such remedy , and they went through a deflationary exper i ence s imilar to that o f many o i l - importing devel oping count r i e s •
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EXTERNAL FORCES 1 9 8 3 Expo rt commod i ty price s o f nonoi l devel oping coun t r i e s improved dur i ng 1 9 8 3 as e conomic activity p icked up in the united State s , with the a s soc iated inc rea se in the u . S . demand for inventori e s . The price o f o i l stabi l i z ed , a f t e r much e f fort , through a col l ec t ive act ion of OPEC and non-OPEC exporters , commonly concerned about the potent i a l l y d i s a s trou s f inanc i a l e f fe c t of a continuing s l ide in the o i l commodity market . 3D The In c ommod i ty s itua t i on rema ined uncerta i n , howeve r . S eptember 1 9 8 3 the d o lla r price index of export commodi t i e s o f deve lop ing count r i e s other than oil wa s 16 per cent higher than i t s bottom l evel o f November 1 9 8 2 , but s ti l l 2 2 percent l ower th an the precri s i s average o f 1 9 8 0 . P r i c e s of meta l s , wh ich had led the price recovery in early 1 9 8 3 , started weakening aga i n after the summer o f 1 9 8 3 , pe rhap s presaging a new s l owdown in the indu s trial i zed count r i e s . 3 1 Nominal intere s t rates were l ower than the i r peaks recorded f rom t ime to t ime in 1 9 8 01 9 8 2 , but they rema ined high in rea l terms . Net bank lendi ng to nono i l deve lop ing countries in the f ir s t h a l f o f 1 9 8 3 wa s reported at US $ 5 . 8 bi l l ion , that i s , at a n annual r a t e h a l f o f that in 1 9 8 2 a n d one-quarter o f the In summary , the internationa l prec r i s i s l eve l o f 1 9 8 1 . 3 2 s i tuat ion at the end o f 1 9 8 3 wa s somewhat e a s i e r than in 1 9 8 2 , ma inly due to a partia l recovery in commod ity pr i ce s ; but in th e mea ntime the interna l s i tu ation in a number of debtor countries had become wor s e a s d e f l a t ion ary programs. took the i r to l l . EMERGENCY ACT ION IN 1 9 8 2 AND 1 9 8 3 A s e r i e s o f international mea sures was undertaken , swi f t under the c i r cumstanc e s , to cope with the mos t c r i t i c a l country s i tuation s . The se mea sure s , usua l l y initiated b y t h e U . S . government and orch e s trated b y the IMF , included a s s i stance by central bank s of some key credi tor count r i e s and some of the i r o f fic i a l agenc ie s ,
16 " involuntary " l e nding b y c reditor conunercial bank s , bridg ing a s s i s tance o f the B a s e l -ba sed Bank for I nter national S ettlements ( B I S ) , and drawing s on the IMF . The arrangement s were short term , and the amounts pro v ided were tigh t . The s i tuat ion wa s shored up in d i f ferent degrees for the t ime be ing , but further actions are virtu a l l y inevitab l e . The bank ers ' views on the continu ing grav i ty o f the prob l em l eave l ittle room for doubt : The internationa l debt s i tuation i s far mo re seriou s than ant i c ipated a year ago . S o lu t ions were found for the ma j or debtor countri e s , but th ey are strictly short-term . If we are lucky , the packag e s that were put together for 1 9 8 3 wi l l actua l ly hold unt i l the end o f the year , but th i s i s not certain . Moreover , the arrangement s that wil l have to be agreed on for 1 9 8 4 for many debtor countr i e s w i l l be d i f f icu l t to arrive at . I t i s going to be extremely d i f f icu l t to make the add i t iona l net funds ava i lable wh ich will be neces sary every year to keep the deve lop ing count r i e s going . s s •
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Al though only two o f the recent r e s t ructuring agreements for l e s s e r deve loped country debt have actua l l y been s igned , it is a l ready c l ear that a second round o f negotiations i s inevitab l e . Ther e are several l e s son s to be l earned f rom the s e recent e f f o r t s before determining what t o d o next . F i rst , debt probl ems wi l l take much longer to work out than wa s thought o r i gina l ly . S econd , f ea r i s now mount ing that a growing number o f countr i e s w i l l be unab l e to c o p e with the i r po s t - r e s chedu l ing obl igation s . S ome countr i e s are al ready having troub l e keeping the i r interest payments current , and are unl ike ly to meet the i r payment schedu l e s once the grace per iod h a s e l apsed . Thi rd , present re s chedu l ing mechan i sms are ine f f ic ient . Creditor s and key LDC po l i cymakers have been so tied up in ma rathon s e s s ions to patch up current reschedu l ing s that they have b e e n unabl e to addre s s any of the long-term i s sue s . Fourth , it has become c l ear tha t the debt problem c annot be so lved in i s o lation from other probl ems . Any solution mu st addres s a much wider range of economic and mone tary i s su e s than i s currently be ing cons idered , a nd packag e s mu s t be p a c e d to an a c t u a l inc rea se in wor ld trade , rather th an s imply based on th e a s s umption that an increa s e wi l l oc cur . The " re scue package s " h a s t i ly put together by We stern governmen t s , internat iona l organ i z ations and conunerc i a l bank s in the first months of 1 9 8 3 ,
17 cannot u l t imat e ly reduce the vu lnerab i l i ty o f the internat ional f i nanc i a l system so long as new money is u sed merely to pay intere s t . In order for growth to be re sumed and for conf idence in int e rnationa l bank ing to recove r , ad hoc ba i l -outs mus t give way to l ong-term po l ic ie s geared to a su sta ined recovery . S it The f l aw in the current strategy i s tha t there i s not enough d i rect emph a s i s o n LOC growth . We are a l l talk ing a bout growth , but ther e i s too much r i sk that current po l ic i e s won ' t be su f f i c ient . Without fa ster growth , we are buy ing not on ly economic and f i nanc ia l chaos , in my view , but de f ac to defau l t s on the order not yet s een . S 5 C a r l o s Al z amora and Enr ique I gl e s i a s have stre s s ed that the " rescue scheme s " have o f fered few prospects for economic growth a s the add i t iona l resou rc e s commi tted by the bank s , the IMF , and others have not been su f f ic i ent for payment o f inter e st . Coup led with other unfavorab l e factor s , p rima r i l y expo rt c r i s i s , th i s h a s led to dome s t i c d i f f i cu l t i e s that have a p t l y been ca l l ed " interna t iona l i z a t ion " o f the wor ld rec e s s ion . Dome stic intere s t rate s in th e d e btor countries have skyrocketed to leve l s in rea l terms that do not seem c redibl e : in some cases 3 0 4 0 percent per year . The dome s t i c f inanc ial c ri s i s i s now increa s i ngly seen a s a more intractabl e prob l em than I n fact , both the inab i l i ty to pay foreign creditors . 3 6 are interre l ated as resource dra in to pay debt service i s accompanied by dome s t i c rec e s s ion that l eads to u nderut i l i z a t ion of c apac ity and unempl oyment o f labor : S er iou s The def l at ionary pol i cy c ompounds the i r e f fe c t . weakening o f the f inanc e s and ab i l ity to grow of many enterpr i se s in deve lop ing count r ie s ha s occurred : H i gh cos t o f borrowi ng, dec l i ne s in s a l e s du e to both the dome s t i c and the interna tional rec e s s i on s , and de valuations that have r a i s ed enormou s l y the cost of debt s ervi cing have caused corporate d i s t re s s on a wide geo graph i c a l ba s i s - -Argent ina , B ra z i l , Ch i l e , E cuador , Korea , Mexico , Ph i l ippine s , Turkey . Lag in new inve st ment and replacement l eads to ob s o l e s cence that w i l l a f f ec t t h e capac ity t o compete in the international " Br a z i l ian bu s ine s smen be l ieve that , i f th e market : squ e e z e goe s on much loni e r , the b e s t of the country ' s indu stry w i l l col lapse . " 7 Uncerta i nty a s to where the de f l a t ionary pre s sure on the deve l oping debtor countries wi l l u l t imately lead has recently been expr e s s ed by th e governor of the C entral Bank of the Federa l Republ ic o f Germany , an i n s t i tu t ion not known for f inanc i a l laxity : with remarkab l e f l exib i l ity and in a striking a ct o f interna t ional cooperation a number of centra l
18 banks , the IMF and the large comme r c i a l banks averted the wo r s t in Augu s t l a s t year . S ince then we have been in a period o f permanent c ri s i s management . I am not b y any means u s ing thi s term i n a de rogatory sense . We need c r i s i s management in o rder t o ga in t ime t o correct faulty developments on a durab l e ba s i s ; but we shou ld not succumb to the i l lu s ion that c r i s i s management i t s e l f is the s o l ution . An outs tanding role in the proc e s s of c r i s i s manage ment is pl ayed by the I nterna t iona l Monetary Fund . I t has imp o sed tough cond i t ions on the countries conce rned . The i r po l i t i c a l and s o c i a l consequenc e s are n o t comp le t e ly fores eeabl e , at l e a s t n o t f o r me . I can a l s o under s t and that the que stion i s increas ingly being asked whether the IMF ' s phi l o sophy i s at a l l app l i cab l e to the probl ems of the count r i e s with wh ich we are now conce rned . As we a l l know , the ph i l o sophy o f the IMF wa s deve l oped in 1 9 4 4 in B retton Woods for qu i t e d i f ferent c a s e s , name ly for overcoming temporary bal ance- o f - payments d i s equi l ibria on the pa rt of deve l oped countr i e s , whe reas today ' s a cute cases invo lve ma inly long- term structura l prob l ems o f deve loping countr i e s . Current-account d e f i c i t s are , o f cour se , completely normal for rapidly deve loping countries such a s B ra z i l or Argent ina . I t i s only by thi s means that they are ab le to import real re sourc e s . This is why it is an un s a t i s factory state of a f f a i r s that in the train of the ad j u s tment proc e s s impo rts of capital good s , and hence the future growth potential of the s e economi e s , a l s o have to be r e st r i cted . The exceptiona l l y heavy debt - s erv ice burden , whi ch in many c a s e s is higher than export receipt s , l eads to the und e s irab l e r e s u l t that a tran s f e r of real resources takes place in the oppo s i te d i rection to the one that i s nec e s s ary . 3 8 INTERDEPENDENCE The depr e s s ion in ma j or debtor countries has had adve r s e trade e f f e c t s on the out s ide world and may have adve r s e e f fects on the international f inanc ia l system . Cance l l ation and po stponement o f a number o f ma j o r inve s tment pro j ects in Bra z i l , Mexico , I ndone s i a , N iger i a , P h i l ippine s , Venezue l a , Yugo s l avia , and Egypt , a s we l l a s in other countr i e s o f the Midd l e E a s t , have a f fected the suppl i e r s in both the more advanced deve lop ing countr i e s and the deve l oped countr i e s . As capital -goods exports dominate the European s a l e s , the latter have suf fered : Exports to Mexi co f rom the F edera l Repub l ic of
19 Germany i n the f i r s t e ight months o f 1 9 8 3 f e l l by 5 7 perc ent , t o Vene zue l a by 4 8 percent , and to Bra z i l by 2 7 percent , compared to the f i r s t e i ght months of 1 9 8 2 . 3 9 B r i t i s h exports to Argentina in the same period f e l l by 9 1 percent , to Mex ico by 5 1 percent , to Ven e z u e l a by 4 7 percent , and to Chi l e by 2 2 perc ent . � o I n the c a s e of the United S t a te s , a wide rang e of manu factured and agr i c u l tural exports was a f f ected . Total exports to non OPEC countrie s fe l l by 4 6 percent between the f i r s t ha l f o f 1 9 8 1 and the f i rs t h a l f o f 1 9 8 3 , and exports t o Mex ico by 5 2 percent . " The depre s s ion in th e non-OPEC deve l op i ng count r i e s has had a much greater adver s e e f f ect on our [ U . S . ] exports than the appre c i a t ion o f the do l la r . " � l Another v i c t im of the debtor s ' depre s s ion has been the trade among deve lop ing countr i e s : The import capa c i ty o f tho s e a f f ected by the c r i s i s has f a l len sharply whi l e the capa c i ty o f deve loping- country exporters to provide export credit has been dra stica l ly cur t a i l e d in l ight o f the i r own a c u t e shortage o f convertible foreign exchange . Bra z i l ' s expo rts to the rest o f Latin Ame r i c a dropped f rom US $ 5 . 5 b i l l ion in 1 9 8 1 t o an e s t imated US $ 1 . 7 b i l l ion in 1 9 8 3 , and a Yugo s l av o i l exploration enterpr i s e had to withdraw f rom pro j ects in four coun trie s . � 2 The reduction i n the intratrade and inve s tment o f deve loping count r i e s came at a t ime when it wa s mo st needed to o f f se t in p a r t t h e consequenc e s o f s l ow growth in the re s t of the world economy and to contr ibute to i t s recovery . Loans to deve l o p ing countries are a sma l l proportion o f total bank loan s , but they are a large proportion o f I n periods of payments d i f f iculty , the bank c ap i t a l . attention inevitably s h i f t s to the latter : It is bank capital that u l t imately s e rves to meet depo s itor s ' c l a ims if the loans the bank has extended f a i l . At the end o f 1 9 8 1 , t h e u . s . banks h a d ou t s tanding l o a n s in developing and East European countr i e s o f about US $ l O O b i l l ion ; thi s compared wi th tota l capital of the th i rty large s t U . S . banks o f U S $ 4 0 b i l l ion . T h e hundred larg e s t non U . S . bank s had an e s t imated total o f out s tanding loans in the two areas of US $ 2 0 0 b i l l ion ; against th i s they had total c ap i t a l o f US $ 1 2 0 bi l l ion . � 3 The expo sure of banks on the average wa s 2 0 0 percent of capita l . Mo st o f the U . s . bank s ' expo sure is in deve loping countr i e s ; mo s t of the E a s t European debt is owed to non-U . S . bank s . � � Loans to Mex ico in mid- 1 9 8 2 amounted to US $ 6 4 . 4 b i l l ion , of wh ich US $ 2 4 . 4 b i l l ion wa s owed to U . S . bank s . As a proportion o f capital the loans ranged , for ten ma j or U . S . bank s , from 4 0 . 0 percent to 6 6 . 7 percent . � � I t wa s with respect to one o f the se that " about noon on 1 9 Augu s t 1 9 8 2 rumour s swept through Wal l Street that a ma j or U . S . bank wa s going to fa i l . Bank stocks plunged . According to the rumou r s Mex ico was about to defaul t on its fore ign debt , and th i s would undermine the unnamed bank . Could th i s be the beginning of a panic and
20 chain-reaction col lapse ? " � 6 Rumors about Mex ican expo sure were enough to make Manufacturers Hanover , the f i f th- l arge s t u.s. bank in terms o f capital , support the prices of i t s own bond i s sues on F r iday , Augu st 2 0 , 1 9 8 2 . � 7 By that t ime action wa s a l ready we l l under way by the � u.s. Trea sury to i n j ect funds into Mex ico . 8 I n the c a s e o f B ra z i l , wh ich owe s to u.s. banks about U S $ 2 2 b i l l i on , expo sure to c ap i t a l for ma j or banks range s f rom 4 3 . 9 to 7 7 . 7 percent . � 9 Share p r i c e s of a number o f the s e f e l l sharply in New York on October 2 1 , 1 9 8 3 , apparently a s a result o f renewed apprehen s ion that continuing d i f f ic u l t i e s in Bra z i l - IMF negoti ations , sharpened by the con f l ict over the IMF i n s i s tence on a reduction o f B ra z i l i an wage s , wou ld make it impo s s ib l e to reach agreement on a new " package " o f f i nanc ia l and pol icy mea sures by a schedu l ed date in November . 5 0 A week later i t wa s reported that commerc i a l banks were exerting heavy pres sure on the IMF to be more understand i ng o f the po l i ti c al d i f f icul t i e s f a cing the Bra z i l i an government in the imp l ementation o f its wage po l i cy , and i t wa s f e l t that B ra z i l should be g iven more credit f o r the au sterity mea sure s it had a l ready undertaken . 5 1 C l ine ha s examined the po s s ib le ef fect on the u.s. f i nanc i a l system o f serious debt d i f f icu l t i e s and po s s ib l e action b y the debto r s : For We stern bank s , repudi ation of a substantial portion o f loans to deve loping count r ies and Eas tern Europe wou ld be c r ippl ing . Even wide spread morator i a could have a severe impact on the banks As a hypothe tical i l l u s tration , cons ider what would happen i f Argentina , Mex ico , and Bra z i l were to mi s s one year ' s payment on pr inc ipal and intere s t , and were to do so in a su f f i c i ently aggre s s ive way that i"t seemed appropri ate to wr ite o f f fully the payments mi s sed . The complete l o s s o f one year ' s payments due f rom the s e th ree countries wou ld cause l o s s e s equal to 2 8 percent o f the cap i t a l o f the nine large st u.s. bank s even after t a k in g in t o ac count o f o f f setting prof i t s on other l o a n s . . . . The s e three count r i e s owe U S $ 3 1 . 3 b i l l ion to the n i n e large s t bank s , who s e cap i t a l broadly def ined i s only US $ 2 9 bil l ion . F o r 1 9 8 3 , debt service due ( be fore recent restructuring s ) on th i s amount wa s US $ 1 3 . 7 b i l l ion . P rof i t s of the se banks in 1 9 8 2 amounted to US $ 5 . 5 b i l l ion before taxe s . Thus a l o s s of US $ 1 3 . 7 b i l l ion would cause total l o s s e s o f US $ 8 . 2 b i l l ion o r 28 percent o f capita l , and without o f f sett ing items generating taxe s , the se l o s s e s would have to be fully absorbed out o f capital . Al though the resulting cut in capital wou ld not cau s e insolvency , it wou ld mean that the banks would have to begin to reduce the i r •
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21 total loans sharply in order to reestab l i sh the 5 percent ratio of capital to loans required by regul ator s . The Wal l S treet Journa l , June 1 0 and 2 0 , 1 9 8 3 , po inted out that a l though the capital requ irement for large bank s has not been r i gid , i t i s becoming more so a s regu l ators re spond to increas ing congre s s iona l pres sure . A new formal requi r ement o f 5 percent capital backing for l a rge bank s wa s adopted in mid- 1 9 8 3 . There wou l d thu s be a multiple reduction in loans . Potent i a l ly the n i ne large s t bank s wou ld have to cut the i r l o a n s out stand i ng b y approx imately US $ 1 6 0 b i l l ion a s a result o f a l o s s o f US $ 8 b i l l ion o f the i r capital f rom o n e year ' s l o s s o f principal and interest f rom Argent ina , B r a z i l , and Mex ico under cond i t io n s where the s e l o s s e s had to be wr itten o f f . Both because o f loan cutback s and because of the sharp increase in r i sk premium , the intere s t rate could b e expected t o r i s e , caus ing rec e s s ionary pre s sure . Even i f the Federal Reserve loos ened the capital backing of loans tempor a r ily , the poten ti a l wou l d ex i s t for economic shock wave s through reduced credit ava i l ab i l i ty to Ame r i can bu s i ne s s and con sumer s and , a s a resul t , increased unemp loyment . To a c on s i derable extent , the s equence o f events that would f o l l ow ma j or bank l o s s e s because of country l o s s e s rema i n s un charted waters To the extent that central bank s made loans to the a f f ected pr ivate bank s in an attempt to rep la c e a t l e a s t par t i a l l y the repayments that o therwi se wou ld have been rece ived from count r i e s f a i l ing to make payment s , there could be inf lat ionary c o n s equenc e s Despite the fac t that the Federa l Re serve could re spond in a c r i s i s , there wou ld be enormous economic r i sk s f rom a l arge - s c a l e bank ing c r i s i s . If a wider f ront o f country de f au l t s were to occur , many ma j or bank s could become insolvent . For the n i ne l arge s t bank s th i s re su lt wou ld occur i f j u s t B ra z i l , Mexico and Argent ina repudiated the i r debt , or i f a l l deve l oping and East European count r i e s expe r ienced s u f f i c i ent d i f f iculty that one-third o f the i r debt had to be written o f f . Norma l l y bank inso lvenc i e s are dea l t with by merge r , with a l a r ge r , sound bank absorbing the bankrupt conc ern . But in the s ituation j u s t d e s c r ibed , merger wou l d b e highly unl ikely . There wou l d be no bank s l arger than the f a i l ing banks to absorb them . I n the pa st merger has tended to guarantee the depo s i t s o f a l l depo s i tor s . In a bankruptcy of the ma j or bank s , however , i t i s l ikely that only depo s i t s covered by the Federal Depo s i tors ' I n suranc e C orporation wou ld be guaranteed [ in the United S tate s ] , a maximum o f $ 1 0 0 , 0 0 0 per .
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22 account . For the u . s . bank ing system , depo s i t in surance cove r s only 7 3 percent o f total depo s i t value . A truly ma s s ive f a i lure o f extern a l debt cou ld bring down many ma j or bank s . Regard l e s s o f the emergency pub l i c measures that might be mounted in re spon se , the potent i a l economic consequenc e s cou ld be deva stating . 5 2 •
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Another e l ement that r a i s e s the r i sk of chain re a c t i on among f i nanc i a l i n s t i tutions is sub s tant i a l interdependence o f bank s . I nterbank depo s i t s account f or a lmo s t 4 0 percent o f t o t a l Euromarket depo s i t s � in the A s i an do l l ar ma rke t , the p roportion is 5 5 percent . Domino- style e f fects under the se c i rcums tance s are almo s t inevitabl e . The r i s k s inherent in the sit uation are r e f l e c ted in low price s o f bank sh a r e s despite h i gh bank pro f i t s , in some c a s e s very h i gh . As a mul t i p l e o f pro f i t s , the share p r i c e s of ma j or u . s . bank s with a heavy fore ign expo sure amounted to 5 : 1 in late October 1 9 8 3 . By compa r i son , the average price- earnings ratio for a l l companies l i sted o n the New York S tock Exchange wa s 1 4 : 1 . 5 3 Almo s t a l l ma j o r bank share s , i t wa s reported , were trad ing sub stant i a l ly below book value , in s ome c a s e s at around ha l f . 5 � What bank shareho lders we re gett ing i n d ividends they were partly l o s ing in market valuation o f cap i t a l : An unsat i s factory s i tua t ion re f l ect ing market d i sbe l i e f in the durab i l ity o f pro f i t s der ived no t f rom prosperous borrowe rs but f rom a squee z e on the i r s tagnating or f a l l ing income s . THE FUTURE Three s e t s o f propo s a l s have been made to deal with The f i r s t sugg e s t s a continuation o f the debt prob l em . present practice s . The second ca l l s for read j u s tment o f debt terms through a takeover b y a pub l ic agency o f debt s at a d i s c ount . The th ird propo s a l c a l l s for an extended mora torium . Continuation o f present pract ice s i s the current o f f i c i a l doc trine of mo st credito r countr i e s . The i r imp l i c a t ions , with some modi f ication s , were worked o u t by C l ine in what he c a l led " a conta inment strategy . ,, 5 5 The strategy wa s based on the a s sumption that OECD growth wou ld recover to 3 percent per yea r , tha t the debtor count r i e s would have a lowe r growth rate than in the past ( 2 . 5 percent in 1 9 8 3 , 3 . 5 percent in 1 9 8 4 , and 4 . 5 per cent i n 1 9 8 5 and 1 9 8 6 ) , and that the base real interest rate ( London I nter-Bank Offer Rate--L IBOR) would f a l l f rom 1 1 percent i n 1 9 8 2 t o 5 percent in 1 9 8 3 , 4 percent in 1 9 8 4 , and 3 percent in 1 9 8 5 and 1 9 8 6 . Behind the s e as sumptions wa s a be l ie f that t h e reduct ion i n the deve loping countr i e s ' current account de f i c i t that ha s
23 a l ready taken place due t o shortage o f f inance and that has ma inly a f fected impor t s can be susta ined without ma j or po l itic al upheava l s and that the e x i s ting " re s cue pack age s " are func t i on ing we l l . 5 6 C l ine proposed expan s ion of Wor ld B ank l end ing , expanded export c redi t s , and the approval o f the IMF quota increa se i the l atter is c ruc i a l for succe s s o f t h e s trategy . P r ivate bank s shou ld con t i nue new l ending at mode s t rates to countries in ad j ust ment . I n extreme c a s e s new approaches may be needed such a s the res chedul ing o f intere st and the use o f z erocoupon bonds ( bonds i s sued at a deep d i scount on wh ich no s e rvice i s paid unt i l matur i ty ) . C l ine ' s model shows the current account de f ic i t and particularly the debt-burden indicators f a l l ing over t ime i but for o i l- importing countr ie s the mode l imp l i e s a net resource out f l ow on a r i s ing s c a l e , with inte r e s t payments exceeding cap i t a l i n f l ow a n d t h e debt s t i l l r i s ing . T h e analys i s has the mer i t of showing rea l i s t i c a l ly the present po s it ion . It caused sharp reactions : that i t s ma in concern i s the we l l being o f bank s , that i t . w i l l stretch t o the break ing point the po l i t ic a l and soc i a l fabric o f debtor count r i e s , and that i t is based on too many thing s going r ight at the s ame t ime ins tead of providing for a lender of l a s t resort . 5 7 Many propo s a l s have been made for a takeover o f the existing debt s by a new agency on terms that would in vo lve a reduct ion of the pr inc ipa l or intere st or both . 5 8 None o f them seems to have been thorough ly cons idered by creditor- country gove rnment s , for three reason s : They would invo lve the e s tab l i shme nt of a new agency c a l l ing for budgetary resource S i they would invo lve l o s s e s for the bank s i and debtor countr ie s ' barga ining power has not been behind them . Throughout the debt cri s i s , debtor countries have been careful to preserve the i r good relations with the banks . A ma j o r , probably dec i s ive , reason has been the need to pres erve acce s s to bank c red it . It has been more expen s ive , but it had proven , unt i l the debt c r i s i s , more e a s i l y ava i l ab l e and more freely u sabl e than credit extended b ¥ governments or internationa l l ending ag enc i e s . 5 A solution to the debt prob l em wou l d have to be found tha t achieves the ob j ective of fac i l i tating sub s tant i a l ly the debt- serv i c i ng burden and yet stays within two con s traints . The s e are that it preserve s acce s s to bank credit and that it invo lve s l i tt l e , i f any , budgetary outlays o f deve l oped countr i e s . One o f the ba s e s for the solution wi l l need to be an unde r s tanding between the debtor countr i e s and the banks that it is in the i r mutual intere s t to pos tpone amo r t i z a t ion payments for s everal yea r s , say three to f ive , whi l e preserving intact the debt principa l . Such a po s tpone ment wou ld not a f f e c t the pro f i t po s i tion o f the banks or the va lue o f the i r a s sets . On the other hand , i f the
24 breathing space provided by the pos tponement o f amor ti z ation i s properly u s ed f o r expan s ion and moderni z ation o f the production s tructure o f the borrowe r s , the i r debt- servic ing capa c i ty wi l l improve , a n d th i s u l t imately represents the b e s t guaranty o f debt repayment . 6 0 Two coro l l a r i e s f o l l ow . F i r st , the banks need to be s a t i s f ied that product ive inve s tment wi l l tak e p l a c e . S econd , paymen t o f debt - re s chedu l ing f e e s and extra interest charg e s c e a s e s to be j u s ti f ied : They are intended to compensate the creditor for increased r i sk , and th e r i s k w i l l have f a l l en . 6 1 For a r e s chedu l ing propo s a l to be s er i ou s l y cons idered i t wou l d be ne c e s sary to ident i fy the a f fected countr ie s , cre d i to r s , amounts , c l a s s e s o f debt , the e f f ec ts on the debto r s and the creditors , the need for publ ic support to bank s s u f f ering f rom i l l iqu idit ¥ � and th e ro l e o f international f inanc i a l inst itutions . S ome organ i za t ion o f deve lop ing count r i e s need s to do th i s work i a New York banker has sugges ted that th e centra l bank s o f deve loping countr i e s may e s tabl i sh a suitab l e body that would , among o ther th ings , organ i z e and manage debt- reschedul ing exerc i s e s . 6 3 Such a body cou l d be a coun terpart of the I n s t i tute of I nterna tional F inance , recently e s tabl i s hed by ma j or creditor bank s . One o f the aims of the i n s t i tute i s the prov i s ion o f " a convenient forum through which individua l country borrow e r s can pre sent to lende r s information concerning the i r borrowing needs . " T h e r e i s no rea son why t h e borrowers cou l d not do th i s c o l l ectively and why borrowing needs cou l d not include po stponement o f amort i z ation . An under s tanding wou ld a l so need to be reached concerning moda l i t i e s o f revi s ion o f the arrangement and cond i t ions under wh ich amort i z ation payments wou ld be r esumed before the exp i ration o f the po s tponement . S c a l ing down the rate o f inter e s t i s cruc i a l not only for the count r ie s in debt - s ervic ing d i f f i cultie s , but for a l l deve lop ing countr i e s that bo rrow abroad : Not only wi l l the i r future debt- s e rvic ing burden be very l a rge at present rate s , bu t the range o f inve s tment pro j ects that can be undertaken has nar rowed down , thu s dampen i ng the rate o f inve s tment , growth , and the a s soc iated debt- servi c ing capac ity . Furthermo re , the i s sue of intere st rates is c r i t i c a l for the developed countries a s we l l : A s l ong a s the pres ent rate s l a s t i t i s d i f f i cu l t to expect a reviva l o f pr ivate inve stment , and government budgets operating under an enormou s burden o f intere st payment s ( and armament spend ing ) are not in a po s i t ion to accommodate a s a t i s factory l evel o f pub l ic inve stment . 6 � I ndividua l country actions to reduce the rate of interest are constra ined under pres ent cond i t ions of international f i nanc i a l integration , a s specu l a t ive capital movements wou ld tend to defeat such individua l e f fort s . An i nterna tional solution to the prob l em mus t b e sought . Both the theoretical ba s i s and the prac tical moda l it i e s o f any such internationa l arrangement wou l d
25 have to be worked out , but i t i s d i f f ic u l t to see how wi thout s uch an e f fort the present unsat i s f ac tory s i tuat ion can be re so lved . For the count r i e s experienc ing debt serv i c i ng d i f f i cu lt ie s , an interna t i ona l ly arranged genera l reduc t ion o f interest rates wou ld re l i eve the burden wh i l e s imu l taneou s l y p re s erving the i r a c c e s s to internationa l credi t . As stated in the 1 9 8 3 annua l report o f the U . S . Counc i l o f Economic Advi sers : The prob l ems o f the developing countries are not insolub l e . If growth in the wor l d economy re sume s and real interest rate s fa l l to h i s to r i c a l leve l s , t h e debt burden o f even the mo s t heav i l y indebted c ount r i e s wi l l become much mo re manageab l e . Mex ico and Bra z i l , among the mo st heav i ly indebted countr i e s , both have debts we l l be l ow ha l f the i r GNP s . At a h i stor i c a l ly typ i c a l rea l intere st rate o f 2 percent , the real burden of debt service wou ld f a l l to l e s s than 1 percent o f GNP - - a f u l l y manageable leve l in a growing economy . 6 5 The troub l e i s that the pres ent rates are over f ive t ime s the h i stor i c a l rate . As an interim solution , wh i l e debt reschedu l i ng and interna t iona l intere s t- rate po l ic i e s are worked out , I have been propo s i ng , s inc e before the Cancun meet ing in 1 9 8 1 , a large i n j ection o f Spec i a l D rawing Right s ( SDRs ) through a spec i a l i s sue , conf ined to developing coun tries . The e f fect o f the spec i a l i s sue would be to gain time in wh ich the ex i s t ing debt s and other obl igations can be reorgani z ed and suitab l e dome s t i c po l ic ie s o f ad j u s tment adopted , without go ing f i r s t through a ma s s ive de f l at ion wh i ch i s otherw i s e in prospect . SDR a l l ocat ion i s norma l l y without cond i t i on s . I n th i s case , in view of the needed s i z e [ US $ 5 5 b i l l io n ] , it i s sugge sted tha t the country a l location of the spec i a l i s sue be accompanied by cond i t iona l ity and mon i tor ing in wh ich the deve lop ing countr i e s wou ld p l ay a ma j or r o le . Only the develop ing count r i e s among themselves can succ e s s fu l l y grapp l e with central i s sues o f performanc e , such a s capital f l i ght , inappropri ate use o f pub l i c funds and unproduct ive expenditures . A procedure which wou ld give them a great dea l o f author i ty wou l d contribute to improvement in North- South re l at ions in which conditiona l i ty and it s admi n i s tration have proven to be among the mo s t di f f icult i s sue s ; and i t wou ld provide a n exper ience in partic ipatory management wh ich , i f succe s s fu l , could o f f er va luab l e l e s sons for .
.
•
26 future ref orm o f international i n s t i tut ions . The e f f e c t s on the internat iona l monetary sys tem of a l arge i s sue of SORs may be of ma j or impor tance . It would r a i s e the ir share in aggregate r e s e rve a s s et s to a respectable level at whic h , with suitab l e mod i f i cations a t a later stage to widen the i r marketab i l i t y , the i r l a rger supp l y wou l d in a sense create the demand for them . The national r e se rve currency standard has proven to have had an i n f l a t ionary b i a s . It has con f erred doubtful advantages on reserve currency countr i e s , f ir s t th e U . K . and then the U . S . , a s the short-run payments gains have been f o l l owed by long- run l o s s e s in compet i tive strength and u l t imately de f l at iona ry pres sure s . Exchange rate instab i l ity in the world is incre a s ing , and the worl d system now operates wi thout a f ixed point o f ref erence . A growing role o f inter national currency under appropriate interna t iona l control i s a nece s s ar y cond i tion for economi c I t wou ld a l s o f a c i l itate g rowth with s tabi l i ty . interna t ional monetary cooperation bad ly needed to s top the downward s l ide on wh ich we now f ind our s e l ve s . spotty and f requent r e s chedu l ing e f forts now under way i n many c a s e s are not an a l t ernat ive to de c i s ive act ion : they wi l l e s sent i a l l y only con t inue the agony , in add it ion to being very costly in terms o f e f fort , charg e s and f e e s , and in ab i l ity to p lan beyond the next month . 6 6 A continued absence o f international action wi l l inevitabl y ra i s e the prospect o f unil ateral morator i a for an extended period . A " sovereign moratorium " ha s Speak been propo sed by the oppo s i t ion party in B ra z i l . ing abou t the need for a morator ium l a s ting at l e a s t three y e a r s a n d cover i ng b o t h amorti z at ion a n d inte rest , C e l so Furtado , former mini s t e r o f p l anning of Bra z i l , s tated that B ra z i l cannot continue to pay with the hung e r o f its c i t i z ens . 6 7
27 APPEND I X Table 1 . 2
External Debt Per Capita ( in u . s . do l l ars ) Aggregate Di sbur sed Debt Mid- 1 98 3 ( bi l l ions )
Popul ation Mid- 1 9 8 l ( thousand s )
P e r Capita Debt
I srael
21. 5
3 , 954
5 , 437
Venezue l a Chi le Portugal Argentina Mexico South Korea
33 . 0 18. 0 14 . 0 40 . 0 85 . 0 39 . 0
15, 423 11 , 292 9 , 826 28, 174 7 1 , 215 3 8 , 880
2 , 139 1 , 5 94 1 , 424 1 , 419 1 , 193 1 , 00 3
Alger i a Yugos l avi a Braz i l Peru Morocco
18 . 0 20 . 0 93 . 0 11 . 6 11. 0
19 , 6 0 2 2 2 , 516 1 2 0 , 507 17 , 031 2 0 , 891
918 888 771 681 526
Phi l ippines Colombia Egypt Turkey Nigeria Indone s i a Pak i s tan
20 . 0 10 . 0 16 . 0 16. 2 13 . 0 20 . 0 9.0
49 , 558 26, 425 4 3 , 290 45 , 529 8 7 , 603 149 , 451 84 , 5 0 1
403 378 369 355 148 133 107
India
20 . 0
690 , 1 8 3
29
The per c apita debt figures are s l ightly overs tated , as the Note : aggregate debt data re fer to mid- 1 9 8 3 and the population data to The ove rstatement is smal l , e spec i a l ly a s in many cases mid- 1 98 1 . debt data are incomplete . External debt tota l s used in the computation are from Popu lation data are from 1 9 8 3 World Bank Atlas : Gro s s Nationa l Produc t , Population , and Growth Rates , Washington , D.C. Source :
�1 . 1 .
28 Table 1 . 3
External Debt as Proportion of Gro s s National Product Aggregate Di sbursed Debt Mid- 1 9 8 3 as % of GNP 1 9 8 1
I s rael
GNP ( U . S . dol lars ) ( b i l l ions ) (per capita)
105 . 0
20 . 42
5 , 160
Chi le Morocco South Korea Peru Egypt Portugal Argentina Mexico Phi l ippines Venezue l a '
62 . 3 61 . 2 59 . 1 58 . 1 56 . 8 56 . 5 55 . 4
2 8 . 89 1 7 . 96 6 6 . 09 19 . 98 2 8 . 16 24 . 75 72. 12
2 , 560 860 1 , 700 1 , 170 650 2 , 520 2 , 560
53 . 1 51 . 2 50 . 7
1 60 . 2 3 39 . 01 65 . 08
2 , 250 790 4 , 220
Algeria Braz i l Yugo s l avia Pak i stan Co lombia Indone s i a Turkey
42 . 8 34 . 7 31 . 8 30 . 2 27 . 5 25 . 4 23 . 1
4 2 . 01 2 67 . 7 3 62 . 93 2 9 . 80 36 . 39 78 . 7 5 70 . 2 1
2 , 140 2 , 220 2 , 7 90 350 1 , 380 530 1 , 540
Nigeria India
17 . 1 11 . 3
76 . 17 1 7 6 . 66
870 260
Note : The GNP proportion figures are s lightly overs tated , as the aggregate debt data refer to mid- 1 9 8 3 and the GNP data to 1 9 8 1 . The overs tatement is sma l l , e spe c i a l l y as in many cases debt data are incomplete , and GNP has been s tagnating s ince 19 8 1 . Source :
Aggregate di sbursed debt from Tab le 1 . 2 .
GNP data are
from 1 9 8 3 World Bank Atlas : Gros s Nation a l Product , Popu l ation , and Growth Rate s , Washington , D . C .
29 Table 1 . 4 Country Group Debt- Service Ratio s : Total Debt Service a (DS) and Intere s t ( INT ) a s Percentage of Exports Income Group
1970/ 7 1
Low-income countries
DS !NT
Midd 1eincome c ountries
b
1973
1974
197 5
1977
1979
1 9 80
1981
12 4
14 4
13 4
16 2
14 4
14 6
17 6
19 7
2 3c 9d
DS INT
16 5
12 3
10 3
10 3
12 3
14 4
12 6
14 7
16 8
New ly industrializing c ountries
DS INT
15 5
13 5
12 5
15 6
18 6
21 8
18 9
21 11
24 13
Tota l non-OPEC
DS INT
15 5
13 5
12 5
15 6
18 6
21 8
18 9
21 11
24 13
OPEC c ountri e s
DS INT
6 2
8 2
4 1
4 2
7 2
8 3
7 2
10 3
14 4
Total deve loping countries
DS INT
13 4
11 3
8 3
10 4
12 4
14 5
12 5
15 7
19 9
a
1982
service on medium- and long-term debt , publ i c , pub l i c ly guaranteed , and private ; service on short- term debt i s not inc luded . Exports inc lude goods and services and net private trans fers . b pre l iminary estimates c Also 2 3 percent for the least deve loped countrie s d 8 percent for the least developed countrie s Organization for Economic Cooperati on and Devel opment , Source : External Debt o f Deve 102in� Countri es : General survex 1 9 8 2 ( Pari s , December 1 9 8 2 ) , table 1 3 .
b
30
�
Table 1 . 5 Country Debt- ervice Rat io s : as Percentage o f Exports Country
19 7 1/ 7 2
Mexico Brazil Ch i l e Peru Ivory Coas t Vene zue la Algeria
b
1975
1976
34 51 20
37 37 34
23 10 6 9
28 9
50 43 32 27 9
5 17 7
5 20 10
30 12 22
30 16 19
16 15 10 9 12
Morocco
10
Argentina Ph i l ippine s Egypt
Yugos lavi a Greece Turkey Thai land Korea ( South )
26 9 31 20 12 12 11 19
Portugal Indones i a Pak i stan India China (Taiwan ) Nigeri a
6 10 19 22 5 3
Intere s t and Amortization
1977
1978
1979
1980
c
1981
63
59
68
41
47 31
55 45
32 11 11 21 13
32 17 15 29 22
60 32 26 23 17 31 26
57 34 36 36 26 30 28
28 23 22 15 13 16 15 11
18 20 19
15 15 12 8 10
20 13 24 17 15 12 13 10
25 18 20 16 16 14 14 14
27 24 20 20 18 17 17 16
6 10 18 14
8 11 17 12
9 13 17 11
8 15
13 11 11 9
5 3
5 4
5 4
10 15 12 10 5 4
15 12 10 10 6 4
14 11 6 6
18 14 18 15 15
6 4
c
60 58 45 42 39 37 36 35
a
Service on medium- and long- term debt , public , publ i c ly guaranteed , Exports and private ; servi ce on short-term debt is not included . include goods and services and net private transfers , inc luding reported workers remittances . b Average c pre 1 iminary e s t imates Organization for Economi c Cooperation and Deve lopment , Source : External Debt o f Deve 1 02in2 Countrie s ( Pari s , October 19 8 1 ) , tab l e 1 1 .
31 Tab le 1 . 6 Rat ios of Total Debt Servic e to Merchandise Exports for Selected Deve loping Countrie s in the 1 9 2 0 s and the 1 9 3 0 s ( Percentages ) Argentina
Bolivia
Braz i l
Chi le
1926 1927 1928 1929
10 . 0 7.9 8.9 10 . 4
7.3 6.1 8.5 7.8
13 . 2 14 . 4 14 . 6 16 . 5
5.5 8.7 9.5 9. 2
1930 b 1931 b 193 2 b 1933
18 . 2 22 . 5 27 . 6
13 . 5 24 . 5 50 . 0
23 . 5 28 . 4 41 . 0
18 . 0
30. 2
38 . 5
45 . 1
a
32. 9 102 . 6 81. 9
Colombia
a
Cuba
Peru
2.7 4.4 8. 1 11 . 9
3.1 2.7 3.3 3.6
2.6 3.2 6.0 7.4
14 . 0 15 . 6 21 . 8 29 . 6
6.1 13 . 4 18 . 1 22 . 4
9.5 16 . 3 21. 4
Uruguay 7.6 9.2 8.5 9.5 a
21 . 7
9.7 22 . 4 36 . 3 31 . 3
probab1y underestimated
b
schedu1 e d debt service as a proportion o f exports . Bolivia , Peru , Chi le , Braz i l , and Uruguay s topped payments during 1 9 3 1 1 Colombia dur ing 19 3 2 1 Argentina and Cuba partially in 1 93 3 .
�: Dragos l av Avramovi c , Debt Servic ing Capac ity and Postwar Growth in Internationa l Indebtedness ( Baltimore : John s Hopkins University Pres s , 1 9 5 8 ) , pp . 1 9 3 - 194 .
32 NOTES 1 . Dragos lav Avramovic , " The Debt P rob l em o f Develop ing Countr i e s at End- 1 9 8 2 , " Au s s enwir t s cha f t , S chwe i z er i s che Z e i t s ch r i f t fur I nternationa l e Wirtsch a f t s b e z i ehungen , S t . Ga l l en , March 1 9 8 3 . 2 . Organi z a tion for Economi c Cooperat ion and Deve lopment ( OECD ) , External Debt o f Devel oping Coun tries : General S urvey 1 9 8 2 , p ar i s , December 1 9 8 2 . 3 . E s t imat e s b y t h e F ederal Reserve B a n k o f New York a s reported in the Wa l l S treet Journa l , November 5 , 1 9 8 2 , and Journal de Geneve , November 6 , 1 9 8 2 ; and by th e World Bank in Wor ld Devel opment Report 1 9 8 3 , p . 1 6 . 4 . Avramovic , " The D ebt P roblem o f D eveloping Countrie s , " p . 6 7 . 5. I n ternationa l Monetary Fund ( IMF ) , Exchange Arrangements and Re striction s , Annual Report 1 9 8 3 , p . 3 7 . 6 . David F inch , " I nve s tment S ervice o f the Under deve loped Countrie s , " I n ternational Monetary Fund S t a f f Papers , S eptember 1 9 5 1 . 7 . Argent ina 1 7 9 percent o f export s , Mex ico 1 2 9 per cent , Ecuador 1 2 2 percent , B ra z i l 1 2 2 percent , and C h i l e 1 1 6 percent ( Morgan Guaranty Tru s t Company of New York , World F inanc i a l Market s , New York , October 1 9 8 2 ) . 8 . Peterhe inz Werhahn , Kap i t a l export und S chuldentran s f er im Konj unktu r-Verlauf , Jena , 1 9 3 7 . 9 . Amorti z ation in 1 9 8 2 amounted to US $ 7 0 mi l l ion , and the debt outs tanding at the end o f 1 9 8 1 amounted to U S $ 5 3 0 mi l l ion ( OECD , External Debt of Deve loping Coun trie s ) . 1 0 . A z i z a l i F . Mohammed , " Latin Ame r ican Debt--A Wor l d C r i s i s ? " North-Sou th Roundtab l e , Apr i l 1 9 8 3 ; Pedro -Pab l o Kus zyns k i , " Latin Ameri can Debt , " Foreign A f f a i r s , v o l . 6 1 , no . 2 ( Winter 1 9 8 2 - 1 9 8 3 ) . The i r f indings refer to th e Latin American countr ie s , but they a l s o apply to some other deve l oping count r i es and to E a s tern Eu rope . 1 1 . C a r l o s A l z amora Traverso and Enr ique V . I g l e s ia s , " Ba s e s for a Latin Ame r i can Re spon s e to the I n te rnationa l Economic Cr i s i s , " Uni ted Nations , Economic and S o c i a l Coun c i l , Doc . E/CEPAL/G . 1 2 4 6 , May 1 6 , 1 9 8 3 , pp . 3 1 - 3 2 . 1 2 . Ac cording to Paul A . Vo l cke r , cha i rman of the Federal Re s e rve Board , the debt to bank s of non-OPEC countries amounts to US $ 2 8 5 b i l l ion ( B I S [ Bank for I nternat iona l S e t t l ement s ] P re s s Revi� October 2 8 , 1 9 8 3 ) . The debt to banks o f OPEC countr i e s probably exceeds U S $ 5 0 b i l l ion . 13 . No index o f prices o f export manu f ac tur es o f deve loping countries i s ava i l ab l e . However , export prices of South Korea f e l l sharply through mi d-1 9 8 3 , and they probab ly r e f l e c t the general trend . 1 4 . George s Corm , " Menaces sur I e Sys teme F i nanc ier I nterna tional , " Le Monde D i p l omatique , March 1 9 8 3 . ---
33 1 5 . Genera l Agr�ement on Ta r i f f s and Trade ( GATT ) , I nternational T rade 1 9 8 1 / 8 2 , Geneva , 1 9 8 2 , p . 1 9 . 1 6 . Wor ld Bank , World D ebt Tab l e s 1 9 8 2 - 8 3 Edit ion , February 1 9 8 3 , p . ix . S tatement by Lord R ichardson , governor o f the 17 . Bank of England , of Apr i l 1 2 , 1 9 8 3 ( B I S P r e s s Review , Apr i l 2 1 , 1 9 8 3 ) . 1 8 . Wi l l i am R . C l ine , " I nterna tional Debt and the S tab i l i ty of the Wor l d Economy , " P o l i cy Ana ly s e s in I nternational Economi c s , no . 4 , S eptember 1 9 8 3 , p . 2 9 . 1 9 . These f ind ings are ma inly ba sed on : Wor l d B ank , Wor l d T ab l e s , The S econd Edition , 1 9 8 0 ; Wor l d Bank , Annu a l Report 1 9 8 2 ; and United Nations Conference on Trade and D eve lopment ( UNCTAD ) , Trade and Deve l opment Report 1 9 8 2 . 2 0 . F inanc ial T ime s , January 1 2 , 1 9 8 3 ; I nter-P re s s S ervic e , October 1 5 , 1 9 8 2 , quo t ing an IMF e s t imat e ; The Economi s t , Apr i l 3 0 , 1 9 8 3 ; C l ine , " I nternationa l Debt , " p . 2 7 ; P edro-Pab l o Kuczynski a s reported in I nternational Hera l d Tribune , November 5 , 1 9 8 3 . 2 1 . F i nanc ia l T imes , O ctober 2 8 , 1 9 8 3 . 22 . S tatement by Martin S chubert , ch a i rman of Eurinam I nterna tional , New York ( F inanc i a l T ime s , Ma y 1 3 , 1983 ) . 2 3 . Wa l l Street Journa l , June 8 , 1 9 8 3 . The requ i red s et -as ide re serve is equ ival ent to between 1 percent and 5 percent of the ou ts tand ing loans to " prob l em " debtor na tions , held by th e banks . 24 . S tatement at the GATT mini ster i a l meet ing in Geneva on November 2 4 , 1 9 8 2 . 25 . Statement at th e E co le supe r ieure in C ergy Ponto i s e , F ranc e , on November 2 6 , 1 9 8 2 . 2 6 . OECD , External Debt of Deve l oping Countrie s . A pa rt o f th e increase should b e attr ibuted to a norma l r i s e in debt , bu t the l atter wa s d i s torted due to capita l i z a t ion o f intere s t at r i s ing rate s . 2 7 . For 1 9 8 2 a s a who l e , bank l ending to nono i l developing countr i e s amounted t o U S $ 2 5 b i l l ion , compared to US $ 5 1 b i l l ion in 1 9 8 1 ( Richard Wi l l iams , Peter Ke l le r , John L ip sky , and Dona l d Math i e son , I nternational Capita l Market s : Deve lopment and Prospect s , 1 9 8 3 , IMF Occas ional Paper 2 3 , July 1 9 8 3 , p . 4 6 ) . 2 8 . C l ine , " I nternational Debt , " e s t imat e s the swing at US $ 1 4 0 b i l l ion , exclu s ive o f shortfa l l in bank l ending ( p . 2 5 ) . H i s e s t imates and mine are thu s almo s t ident ica l . 29 . IMF , I nternational F inanc ial Stati s t i c s , Octob er 1 9 8 3 . 3 0 . The interactions between the f i nanc i a l and commod ity marke t s have recently attracted attention . S e e C arl o s F . D i a z -A l e j andro , I nterna t iona l F inanc i a l a n d Goods Markets in 1 9 8 2 - 8 3 a n d Beyond , March 1 9 8 3 ( manu s cript) 3 1 . UNCTAD , Month ly C ommodity Price Bu l l etin , October 1 9 8 3 . •
34 3 2 . B I S report a s quoted in F inanc ial T ime s , Oc tober 1 9 , 1 9 8 3 , and I nternational Hera l d T r ibune , Oc tober 1 9 , 1 9 8 3 . 3 3 . A prominent Swi s s banker , in a private communicat ion o f July 2 0 , 1 9 8 3 . 34 . Chr i s t ine B . B indert , " Ta l k s Po int to T roubl e s down the Road , " I nterna t ional Banker , Ju ly 2 7, 1 9 8 3 , and " Debt : B eyond the Qu i ck F ix , " Thi rd Wor l d Qua rterly , vol . 5 , no . 4 ( Oc tober 1 9 8 3 ) , p . 8 2 8 . B indert i s a v i c e pre s i dent of an inve stment bank ing f irm in New York . 35. J e f f rey E . Garten , " S overeign D ebt : Next Steps , " I nternational Monetary Conf erenc e , B ru s se l s , May 1 8 , 1 9 8 3 . Garten i s f rom Lehman B rothe r s Kuhn Loeb I nc . , N ew York . 36. " Debtor s ' Depre s s ion , " The Economi s t , Augu st 6 , 1983 . 37 . Ibid . 3 8 . Addre s s by Karl Otto PBh l o f Oc tober 1 9 , 1 9 8 3 , B I S P re s s Rev i ew o f Oc tob e r 3 1 , 1 9 8 3 . 39 . Ibid . 4 0 . F inancial T ime s , November 2 , 1 9 8 3 . 4 1 . Edwa rd L . Bernste i n , B rook ings I n s titution , a s reported in I nternational Herald T ribune , November 5 , 1983 . 4 2 . F inanc i a l T ime s , November 2 , 1 9 8 3 . 4 3 . Data on out stand ing loans are f rom Common C r i s i s North South : T h e B randt C ommi s s ion 1 9 8 3 , p . 4 8 1 data on bank cap it a l , F i nanc i a l T ime s , Octob er 1 5 , 1 9 8 2 . 4 4 . At the end o f 1 9 8 1 , E a s t European deb t s to u . S . bank s amounted to US $ 7 . 3 b i l l ion and to non-U . S . bank s US $ 5 3 . 1 b i l l i on ( C ommon C r i s i s ) . 4 5 . C l ine , " I nterna t i onal Debt . " A wider rang e , f rom 3 8 . 7 to 7 7 . 6 percent , i s shown for the end o f september 1 9 8 2 in F inanc i a l T ime s , December 9 , 1 9 8 2 . 46 . John Odel l , " The IMF Meet ing : B ank ing for Rich and Poor , " I n terna t i on a l Herald Tr ibune , Oc tob er 1 6 , 1 9 8 2 . 4 7 . F i nanc i a l T ime s , Augu st 2 3 , 1 9 8 2 . " S tanl ey Wil son , Ame rica ' s LDC T roub l e shooter , " 48 . I n s t i tut ional I nve s tor , March 1 9 8 3 . 4 9 . C l ine , " I nterna t ional Debt . " 5 0 . Journa l de Gen e ve , Oc tober 2 2 , 1 9 8 3 1 I nternational Herald Tr ibune , October 2 2 , 1 9 8 3 . 5 1 . F inan c i a l T ime s , Octob e r 2 8 , 1 9 8 3 . 5 2 . C l ine , " I nternationa l Debt , " pp . 3 6 - 4 0 . 5 3 . L eonard S i lk , " Bank s Face Pub l ic-Re l a tions P rob l em in S e ek ing Support for The ir Rescue , " I nter national Herald Tr ibune , October 2 2 , 1 9 8 3 . 5 4 . F inanc i a l T ime s , November 1 , 1 9 8 3 . 5 5 . Wil l iam C l ine , " A Conta i nment S trategy That Shou l d Work , " F inanc i a l T ime s , October 1 2 , 1 9 8 3 . The deta i l s are g iven in C l ine , " I nternational D ebt . " 5 6 . C l ine , " I nternational Debt , " p . 4 3 . 5 7 . Letters to F inanc i a l T ime s by S tephany Gr i f f ith Jon e s an d Mich a e l L ipton , Oc tob er 1 8 , 1 9 8 3 , and b y S tephen McC l e l l an d , Oc tober 2 0 , 1 9 8 3 .
35 5 8 . Rev iews o f the p ropo sa l s are conta ined in B indert , " Debt : Beyond the Qu ick F ix , " and C l ine , " I nterna t ional D ebt . " 59 . The B randt Commi s s ion Papers , chapter on D eb t , Geneva, 1 9 8 1 , p . 1 2 2 . 60. I am grateful to P ro f e s sor I vo Fabinc , Unive r s i ty o f L j ub l j ana , Yugo s lavia , for thi s point . 6 1 . The r e f inanc ing terms o f B ra z i l ' s l at est debt re schedu l i ng , agreed in princ iple in October 1 9 8 3 , have p rovided for reduc tion o f f e e s and interes t charg e s in recogn i t ion of th i s princ ip l e , and the s ame is expected for the next Mex ican re f inanc ing ( F inanc i a l T ime s , November 4 , 1 9 8 3 ) . 62. I t i s reported tha t the Wor l d B ank i s s tudy ing the po s s ib i l i ty o f e s tab l i sh ing a new a f f i l iate with a paid-up capital of U S $ 0 . 5 1 - 1 . 0 b i l l ion and the gearing ra t io o f 1 0 : 1 ( compared to the c ommerc ial b ank s ' 2 0 : 1 ) , wh ich wou l d thu s be able to mob i l i z e up to U S $ 1 0 b i l l ion . The pa id-up capital wou ld c ome f rom the bank ' s amp l e c a sh re s erve s , a n d l o a n s cou ld be made t o the count r i e s i n d e b t d i f f icu l t i e s ( Journa l de Geneve , O ctober 1 4 , 1 9 8 3 ; T r ibune de Gen e ve , Oc tober 1 7 , 1 9 8 3 ; F inanc i a l T ime s , S eptember 3 0 , 1 9 8 3 ) . 6 3 . George J . Vo j ta , " Appropriate Intermediate Ob j ect ives f o r the I nternationa l F inan c ia l System , " North S ou th Roundtab l e , I stanbu l , Augu st 1 9 8 3 . Vo j ta i s f rom S o l omon Brother s , New York . 64 . I n the Un ited State s , intere s t on the nat iona l debt amounted to U S $ 1 2 9 b i l l i on in the f i sc a l year 1 9 8 3 . Th i s wa s 6 6 percent of the budget def i c i t of the f ederal government o f U S $ 1 9 5 b i l l ion . 6 5 . The annu a l report of the Counc i l o f Economic Advi s er s , F eb ru a ry 2 , 1 9 8 3 . 6 6 . Avramovic , " Th e D eb t P rob l em o f D evel oping Countrie s , " pp . 7 7 , 7 9 , 8 0 , 8 1 . 67. Le Monde , November 2 , 1 9 8 3 .
2
The World Crisis and the Outlook for Lati n America Vrctor L. Urquidi
I t i s c ommon knowl edge tha t du r ing the 1 9 7 0 s , wh ich were con s i derab ly dynamic years , Latin Amer ica ' s GOP rose at an annu al ra te of 5 to 6 percent , f o l l owing the trend o f previou s yea r s . H oweve r , during th i s same per iod a number of change s began to tak e p l ac e that have not been taken f u l l y into account in much of the current d i s cu s s i on . F i r st , import sUb s t i tution wa s broadened and inten s i f ied : It encomp a s sed heavy indu s try on a sca l e larger than be fore , a n d gaps in the indu s tria l structure began to b e f i l led wi th exten s ive produ c t ion o f inter mediate goods . Import sub s t i tu t ion in Latin America h a s b e e n both acc idental a n d del iberate and th erefore h a s never b e e n adequately pl anned . I t wa s introdu c ed through a numbe r of governmenta l i n i t iatives a imed at mod i fy ing indu s trial s t ructure , as in the c a s e of Bra z i l , Mex ico , I t wa s a l s o gen and , to a l e s ser ex tent , Vene zu e l a . erated spontaneou s l y a s a cons equence o f protec tion i sm and reinforced by deva luat ion , tari f f s , import and exchange contro l s , and oth e r mea sur e s des igned to c reate a protec ted ma rket fo r the manu facture of con sume r good s ( hou sehold du rab l e s and mo tor veh i c l e s ) and later on o the r produc ts . However , a number o f area s rema ined unaccounted for , particu la r ly that o f chemi c a l s and othe r intermediate produc t s . The s e areas were part i a l l y covered du ring the 1 9 7 0 s . At the same t ime th e indu s trial s truc ture b egan to chang e in order to supp ly international marke t s . Th e inc rea se in manu f actured expor t s undertaken by s everal La tin American countr ie s , including a number o f the sma l l er nations , wa s out s tand ing . Th i s wa s due partly to th e diver s i ty o f internat ional demand , to compe t i t ive advantage s , and to a determined e f fort on the part o f countries wi th export capab i l i ty . An ea r l i e r ver s ion of th i s paper wa s g iven a t a conf erence in Avi l e s , Oviedo , Spa i n , organ i z ed in Augu st 1 9 8 3 by the Ibero-American Coopera t ion I n s t itute o f tha t country . 36
37 The f a c t tha t many Latin Amer ican countries were obl iged to impo rt petrol eum products at the h igh er 1 9 7 0 s pric e s obv iou s l y ob l iged them t o inten s i fy the i r e f forts to export manu fa ctu r e s . Th i s meant tha t a trans i t ion became neces sary f rom a h igh ly protected manu fac tu r ing i ndu s try o f doub t fu l produ c t ivity and c ompet i t iven e s s to one competit ive in the interna t iona l market in order to s e l l to the indu s t r ia l i z ed count r i e s and to c ompete with the latter in oth e r Latin American and Th i rd Wor l d countr i e s . Th i s required e i th e r sUb s tant i a l technologi c a l innova tion and adaptation or cons iderab l e e f forts to promote trade as wel l as to negotiate at the internat iona l agenc ies in o rder to take advantage of mode s t chang e s occurring in th e t rade pol i c i e s o f the indu s trial i z ed c ountr i e s , such a s the general pref erenc e sch eme s . I n th e ea rly 1 9 7 0 s a sub stantial improvement in th e terms o f trade took place , particu l arly--though not exc lus ive ly--on account of o i l . Oil is u sua l ly cons idered separately f rom other commod i t ie s , bu t its price did r i s e f o r t h e o i l - export ing L a t i n American countrie s . For examp l e , the impact on Mex ico o f th i s improvement in the terms of trade wa s rea l ly extraordinary . There were good periods for other commod i t i e s , a l though towa rd the end of the decade th ey began to dec l ine . It shou ld b e rec a l l ed , o n the o th er hand , tha t for o i l - importing Latin American countrie s th e overa l l favorab l e change in the terms o f trade wa s l e s s obviou s a n d that towa rd th e end of the decade i t wa s ac tua l ly negat ive . Th e o i l shock of 1 9 7 3 - 7 4 and particu larly that o f 1 9 7 9 - 8 0 h a d both po s i t ive a n d negat ive e f f ec t s on Latin America . Th e ma j or adver s e e f fect wa s f e l t by B ra z i l , becau s e for a l ong t ime the Bra z i l ian economy had been completely adapted to the use o f relatively cheap impo rted oil and becau s e manu f actured exports were on the r i s e . B ra z i l wa s forced to ab sorb the o i l shock a s i f it were a rich country with a h igh l evel o f technol ogy and great indu s t r i a l c apac ity with i n the DECO , and th i s expl a ins l a rg e l y why the B ra z i l ian mira c l e came to an end and why th i s e c onomy c ou l d not continue to g row a t the same ra te as b e fore , particu l arly in the indu s t r i a l sector . B ra z i l had to adopt a pol icy inco rporat ing the real inte rna tiona l oil prices into i t s e conomy . The sma l le r count r i e s in Centra l Amer ica , some Caribbean i s lands , and a number o f other countr i e s we re ob l iged to do th e same , a l though under d i f f e rent c i rcums tanc e s and in d i f f e rent ways . A l l were a f fected adve r s el y . In the c a s e of C o s ta Rica , fo r exampl e , th e s i tuation wa s acute despite the narrow economic st ru c ture and indu st r i a l I n the c a s e o f Bra z i l , a s imu lat ion s tudy capac ity . tha t I am f ami l i ar with sh ows tha t the need to import expens ive oil is one o f th e ma in determin ing factors tha t wi l l prevent B ra z i l ' s future growth a t the pa st rate , unl e s s new o i l i s d i scovered or unl e s s one o f th e pos s ib l e a l ternat ive s suggested in Bra z i l - -wh ich do not
38 appear t o have matured yet-- come s true . 1 As to th e p o s i t ive a sp e c t s o f the two o i l shock s , th ere were f ive net o i l - expo rt ing c ountr i e s : Mex ic o , Vene zuela , Ecuado r , Trin idad , and Bo l ivia . With th e r i s e in export pric e s , the s e c oun t r i e s obta ined unexpected and hug e add i t i ona l f oreign-ex change receipts . Th i s wa s the b a s i s f or a vast expan s i on o f the pub l ic sec tor , o f pub l ic a n d pr iva te indu s try , a n d of the o i l indu stry i t s e l f . The e f f ec t on the economy wa s wide spread in Mex ico and Vene zue l a , where the state-owned o i l indu s t r i e s prov ided f i sc a l resou r c e s t h a t o th e rw i s e wou l d not have b een ava i l ab l e . By a " po s i t ive " e f f ec t i s meant tha t exerted on t h e r e a l economy and on the pro spec t s for export s in genera l . Undoubtedl y , howeve r , in the case o f Mex ico th e nega tive aspects o f the sudden great inf l ow o f foreign cu rrency and o f th e spending psychology g enerated by the oil ( or any other boom exper ienced in Mex ico ' s h i story) shou l d a l s o b e cons idered ; in th e 1 9 5 0 s , for ins tance , Mex ico had begun a dynamic spending proc e s s with revenue from c otton export s , a s i t h a d done i n the d i s tant past with revenue f rom mining and so forth . I t shou l d b e mentioned , wh en deal ing with the e f f e c t s of th e o i l shock , t h a t s evera l c ountr i e s that w e r e ab l e to supp ly the ir own needs t o a g r e a t extent ( such a s Argentina , Co lomb ia , and P e ru ) f ound themselves i n an intermediate po s i t ion wi thou t an acute prob l em o f fore ign payments but not wi thout the need to incorporate much h igh er rea l p r i c e s i nto the i r ec onomy or to sub s i d i z e th e s e wh i l e they adapted t o th e new economic s ituation . ( Mex ico in fact-- and Vene zuela to an even greater deg ree- ma inta ined exc e s s ive sub s id i e s on dome stic oil pr ic e s , with th e resu l t that the f inanc ial po s it ion of the state oil c ompa n i e s wa s weakened and all notion o f conservation and economic u se o f fuel wa s d i s r ega rded . ) The c r i s i s in Latin Ame rica ' s agricu l tura l sector , wh ich a ro se a s a r e su l t o f many d i f f erent factor s , wa s another important a spect o f th e tra n s i t ion o f the 1 9 7 0 s . S evera l o f the contributing factor s were agrarian , tha t i s , rel ated to t h e system o f l a n d tenu r e . Others arose f rom dome stic pol icy r e la t ing to r e l a t ive pr ic e s , by wh ich agr icu l ture wa s " pun ished " in f avo r of indu s tr i a l deve lopmen t . Howeve r , the f eedback f rom th i s po l icy a f fec ted ag ricu l tu ra l output adversely becau s e farmers were ob l iged to pu rch a s e equ ipment ( such as tractor s ) and other inpu t s f rom protected indu s tr i e s - - a consequenc e Gene ra l ly o f import sUb s t itution- -at very h igh pric e s . speak ing , the need to c reate adequate incentives to s t imu l a t e agricu l tural ou tput wa s neg l ec t ed ( of cour s e , th i s i s not th e c a s e i n every c ountry nor i n certain favored z one s ) . Food-de f i c i t count r i e s ( th e r e were several in Latin America b e fore the 1 9 7 0 s , to wh ich a large country , Mex ico , wa s added ) found themselves in the very d i f f icu l t po s i tion o f hav ing to import foodstu f f s a t the t ime o f
39 th e f ood- price " sh ock " o f 1 9 7 4 . At th i s t ime the inter na tional pric e o f c erea l s ro se , as a consequ enc e of ma s s ive buying of U . S . output by th e Soviet un ion and sub s equent pol ic ies des igned to keep th e price of f arm produ c t s h igh . There were a f ew factor s to be con s idered in th i s proc e s s , one o f wh ich wa s that the impo rtat ion o f foodstu f f s did not rep l a ce rura l income , even though it did supply a c ountry with th e s e product s . On the oth e r hand , th e e f f ec t on the balance o f payment s for s ome c ountr i e s wa s s evere . The food de f ic it can b e interpreted a s t h e resu l t o f t h e la c k o f pol ic i e s de s igned to encourage agricu l tu r e , comb ined with changes in con sumpt ion pa tterns , o rgan i z ational prob l ems , and the urban- ru ra l i nc ome d i f f erentia l . Fu rthe rmore , the e f f ec t in u rban cente r s o f mode rn i z a t ion in food systems mu s t be taken into account : P roc e s sed foods , adve r t i s ing , and a h ighly e la s t i c ma rket for h igh-qu a l i ty foodstu f f s a l l created the need t o import inputs that had pre viou s ly not been imported , in order to produ c e an ima l prote i n foods increa s i ng l y in demand by the urban popu l ation . During the 1 9 7 0 s , on th e other hand , " La t in American economic d i s integra t ion" b eg an to occu r . I n the l a s t f ew years w e have n o t o n l y witne s sed th e c r i s i s but the v i rtua l c o l lapse of the who l e s truc tu re of common and integrated ma rke t s . We have seen the pa s s ing away and the discreet bur i a l of the Latin American Free T rade As soc iat ion ( LAFTA ) , wh ich has now been replaced by the Latin American I ntegration A s soc iation ( LAIA) , wh i ch may be l ab e l ed " a feeb l e - trade a s soc iation . " Profound c r i s e s have a l so a r i sen in t h e Andean Pac t , wh ich a t o n e t ime wa s o f f e red as a very advanc ed and inten s ive integra t ion sch eme . The C entral American Common Ma rket eventu a l ly c o l l apsed not only becau se o f the po l it i c a l unrest in the area bu t a l so as a re su l t o f a s e r i e s of other previou s l y ex i s t i ng c i rcumstanc e s . Mo reover , t h e C a r ibbean C ommon Mark et i s weak and h a s almo s t c e a s ed to function . Very l i tt l e rema i n s for two fundamenta l rea son s : first , becau se th e ec onomic a l ly stronger countr i e s neve r took regional and sub regional integration very seriou s ly ( even Mex ic o , wh ich had been very enthu s ia s t ic to start with , ended up by l o s i ng interes t ) ; second , because the manu f a c tu r e s o f seve r a l of the la rger count r i e s were absorbed by the international ma rket . Having e s tab l i shed th i s re l at ionsh ip , it wa s much easier to export out s ide La tin America than it wa s to mak e the tremendou s e f fort of trading with the r e s t o f Latin America , a proc e s s tha t , apart f rom much red tape , meant pa s s ing through the L ima c lear inghou s e and be ing f aced with ten s ion and interna l res i s tenc e . Th i s i s not the r igh t p la ce to go into an analys i s o f the integra t ion prob l ems o f Latin America , but it i s important to point out that there h a s been d i s integrat ion and a neg l e c t o f coopera tion po s s ib i l i t i e s among t h e L a t i n American countri e s , a l though the forma l
40 scheme s were ma inta ined . Another s ig n i f ic ant a spect o f the 1 9 7 0 s wa s th at very c on f l ic t ing short-term pol i c i e s were introduced in response to the inf l a tionary proce s s . On one hand , the d imens ions o f the prob l em grew . I t wa s not th e same to cope with a rate o f i n f lation o f 1 0 percent a s with one of 50 percent o r mor e , or wi th an even h igher rate compared to one o f , say , 3 0 percent in previou s yea r s . Th i s s i tuat ion wa s aggravat ed by spe c i a l or d i f f icu l t externa l c ircumstanc e s in many countr ie s . F o r examp l e , in the c a s e of Mex ico and Ven e zu e l a , the r el a t ionsh ip o f increased real expenditure (both inve s tment a n d con sumption ) to the i n f l a tionary proc e s s wa s not fu l ly S everal o f the e l ementa ry a spec t s o f K eyne s ian rea l i zed . economic analy s i s were f orgotten . The heterogeneou s nature of each nation ' s economy , tha t i s to say , scarc i t ie s , lack o f produ c t ive capa c i ty in many a rea s , exc e s s capa c i ty in o the r s , and s egmented l abor market s , wa s not recog n i z ed e i ther . Added to thi s , government s were inc apab l e o f contro l l ing pub l ic - sector de f i c i t s a n d o f undertaking appropriate tax po l ic i e s for the imp l ementat ion o f an ant i i n f l a t iona ry po l icy . I n some countri e s where th e rate of i n f l a t ion wa s part icu l a r ly h igh ( B ra z i l , Argentina , and Ch i le ) , an acute c r i s i s in short - term p o l i cy arose , a l though the attempted solutions to the prob l em were d i f f erent . B ra z i l decided upon indexation , wh ich wa s doomed to f a i lu re and co l lap s e in the med ium term , even with th e minideva lu a t io n s introdu ced in o rder to a id I n Argent ina and Ch i l e , monetari st po l ic ie s and export s . exceedingly open economi e s , with overva luat ion o f national cu rrency in re l a t ion to the do l l ar and European currenc i e s , ended in f a i lure , as they t ended to repre s s the real economy a n d make reviva l o f g rowth impo s s ib l e . Mex ico and Ven e zu e la , under exc e s s ive growth rates of real expend iture ( in inve s tment a s we l l a s in con sump ti on ) , al so made the mis take o f ma intain ing over va lued cu rrenc i e s , wh ich led to such g igan t i c current account b a l ance - o f - payment s d e f i c i t s tha t th ey had to resort to ind i s c r iminate extern a l f inan c i ng , much of i t In th e l ight o f the we l l -known fact o f short term . Argent ina ' s s tagnant economy , a s wel l a s tha t of Ch i l e ( even though f o r a short per iod i t showed a c ertain amount of growth ) , i t is obviou s th at the appropr iate ba lance between sho rt- term and devel opment po l ic ie s wa s not ach i eved . Yet another extraordinary phenomenon o f the 1 9 7 0 s the sudden easy a c c e s s to internat ional i s worth not ing : bank loan s , part icu l arly f rom countr i e s o f the North , bypa s s i ng the mu l t i l a teral f inanc i a l agenc ie s . At f ir s t th ere wa s a c on s iderab l e f l ow o f med ium- t erm c r ed i t , with appropriate periods of grace and reason ab l e intere s t rate s , f o r spec i f i c indu s t r i a l p ro j ects a n d f o r c reat ing infras tru c ture . Towa rd 1 9 7 9 and 1 9 8 0 , a r i s e in inter national real intere s t rates o c curred tha t c o inc ided with
41 further balance-of -payment s prob l ems o f dome s t i c or1g1n . At th e same t ime a c c e s s to short-term f ore ign bank c redi t , cons idered b y many t o have b een rendered too easy , wa s taken advantage o f in j u di c i ou s l y and wa s a c tua l l y en couraged by foreign b ank s on the ba s i s of the i r amp l e l iqu idity . Th i s l e d to a s i tuation tha t b y 1 9 8 2 had become superc r i t i ca 1 , as the bank s wou l d not o r cou l d not renew the great e r part o f the shorter- term ma tu r i t i e s . To the c r itic a l f i nanc i a l factors mu s t be added the continued po l i t ical instab i l i ty of many Latin American countri e s , o r a t l e a s t the ex i stenc e o f a cons iderab l e number o f ca s e s o f repre s s ion in which the probab i l i ty o f change tak ing p l a c e sooner or later wa s h igh . The l e a s t that c ou l d r e su l t under the s e c i rcums tanc e s wa s r e s traint in dome s t ic private inve s tment , irre spec tive o f wha t th e pub l ic sector did to promote g rowth . The obviou s contra s t is Mex ico with i t s pol i t i c a l stab i l ity a nd regu l a r s ix-year chang e s in government . There were in f a c t t ime s when th e pr iva te sec tor wa s inh ib ited , but with th e o i l boom and the euphoria that ensued in 1 9 7 7 1 9 8 1 , the private sec tor a l so pa rticipated to exce s s in the expa n s ion o f the economy and , l ike the government , did not a s s e s s the overa l l economic pro spect s su f f i c iently . The private s ector in Mex ico a l so had a c c e s s to foreign c redit as never before and c ommitted the very same mi s tak e s a s regard s the ind i s c r iminate u s e o f short-term c redi t . 2 With in th i s who l e panorama there i s a wide range o f I t i s hardly nec e s sary to empha s i z e the s itua t ion s . spec i a l character i s t ic s ( wh ich go a l ong way back ) of B ra z i l , Mex ic o , Venezue l a , and oth e r countri e s . The c a s e s of Argent ina , Ch i l e , and P e ru and the pa th e t i c c a s e s o f the C entra l American reg ion e a c h h a v e d i s tinct ive feature s . S tudies undertaken by t h e U N Economic Commi s s i on for Latin America ( ECLA ) tend to over genera l i z e . For examp l e , in recent stud i e s ( th o s e tha t wer e u sed a s t h e background fo r important meet ing s in 1 9 8 3 ) and in the report s igned by th e ex ecutive secre taries o f ECLA and o f the Latin American Economic Sys tem ( SELA ) a t the requ e s t o f the pres ident o f Ecuado r , s th i s exc e s s ive genera l i za tion i s evident . For rea son s tha t may b e ea s i ly exp l a ined , the po s i t ion o f each c ountry--or at l e a s t each ma j or coun try- - i s s e l dom examined individua l l y or is examined very super f i c ia l ly . The tendency to treat Latin America g l oba l ly re su l t s in overl ook ing some o f the mo s t important events tha t are In the s ta t i s t i c s supp l i ed by oc curr ing in the reg ion . ECLA on " La t in America , " at t ime s one i s not sure o f th e coverage o f f igur e s becau s e occ a s iona l l y two or th ree countr i e s are omi tted or some c oun try or other may have been omi tted f o r the purp o se o f th e anal y s i s . O f c our s e , it may be a s sumed tha t the pos ition o f s ix or seven o f t h e ma j or c ountr i e s , becau s e o f the i r comb ined GDP , is indicative o f t h e overa l l p i c tu r e , but there are
42 s ignif icant d i f f erenc e s among them a l so . DEVELOPMENT STRATEG IES FOR LAT IN AMERICA Let u s now c on s ider some o f th e st ra teg ic e l ements in the pro spec t s for Latin Ame r ic a . Th e f i r s t i s r e l a t ed to the nature of indu s trial i za t ion in Latin Amer ica , wh i ch ha s not been ana l y z ed or Th i s appl i e s to th e mo s t important eva luated a dequately . c ountry c a s e s , a s we l l as to the g eneral character i s t i c s a n d impl icat ions o f industrial i z a t ion undertaken within th e c ontext o f an import- sub s t i tu t ion po l icy , ind i s c r imina te protec t i on i s t mea sure s , > and absence or in suf f i c iency o f p lann ing . At the same t ime , the dome st ic market wa s l e ft o p e n to tran snationa l corpora t ions , wh ich b rough t with them new technol ogy and wh ich produc ed goods that were important for the countri e s , such as tractors and e l ectric motor s , but also saturated th e local ma rke t with a vast range o f con Sumer good s - - du rab l e s and other s - for wh ich th e techno logy u sed h a s a t t ime s b e e n exc e s s ive in rela tion to th e b a s ic needs of Latin America . A good examp l e of th i s is the f ourteen- speed b l ender made ava i l ab l e t o th e middl e- c l a s s hou sewi f e , when th ere a r e l ow income f ami l ie s s t i l l u s ing the tradit iona l me thods of gr inding and mix ing who s e needs would b e s a t i s f ied with a s i ng l e- speed b l ender o f the k ind ava i l ab l e twenty yea r s ago . Th i s kind o f exc e s s ive " techn i f i c a t i o n " o f consumpt i on de s igned f o r h ighly developed soc i e t i e s and introdu c ed into Latin America ha s been a wa ste o f re sourc e s , encouraged by commerc i a l advert i s ing and televis ion . Th e divers ion o f resou rc e s to the se a r eas redu c e s the amounts ava i l ab l e to fu l f i l l b a sic needs . For the mo st economic a l ly important Latin Amer ican countries at l ea s t , overprotected indu s tria l i z ation g ives rise to the prob l em o f how to achieve th e capacity nec e s sary to compete on th e internat iona l ma rket , a s sum ing th e a im o f exporting manu factur e s to th e h ighly indu st r ia l i zed countr i e s and to other pa r t s of th e wor l d . Due to th e empl oyment c reated , th i s wou l d b e a va l uab l e suppl ement to th e export o f b a s i c produc t s . Th i s i s a prob l em that shou l d be ana ly z ed furth e r , a s i t s solut ion wi l l be e s sential to deve lopment stra tegy from now on . A second a spect o f indu stria l i z a t ion i s th e rea l c o s t o f energy . In c ount r i e s endowed with abundant natu ra l resourc e s o f th i s k ind , the pace of indu s t r i a l i z a t i on h a s b e e n ma inta ined p a r t l y th rough sub s id i e s for energy con sumption by indu s t ry in severa l d i f f erent way s : for examp l e , by o f f e r ing natu r a l g a s and d i e s e l a lmo s t wi thou t c o s t ( Mex i co ) , apply ing sub s i d i e s to the co st o f el ectric i ty ( severa l c oun t r i e s ) , a n d c reat ing very f avorab l e transport conditions by sub s id i z ing g a s o l ine . Th e s e factors have been b en e f i c i a l to indu stry , trade , and servic e s . N everthe l e s s , the s e sub s idies can no l onger
43 b e f i nanced . Th e o i l and e l ec tric i ty indu s t r ie s , and gove rnment s th emselve s , have had to back down and e l imi nate a l arg e proportion o f the sub s id i e s . Even so , in Mex ico in mid- 1 9 8 3 , for examp l e , th e real price o f o i l produ c t s wa s barely one- f i f th o f the internat ional pric e . Th i s s i tu a tion c annot cont inue for any l ength o f t ime becau s e it encourage s n e i ther the economic u se of ene rgy nor th e introduc tion of chang e s in indu s trial equ ipment to sUb s t i tu te f o r that based on the use o f cheap ene rgy . S ooner or l a ter even tho s e countries with abundant hydro carbon re se rve s wi l l have to incorporate the real ( opportun ity ) cost o f energy into the i r devel opment proc e s s . I ndu st r ia l i za t ion in Latin America h a s a l so b e en ba s ed on ea s i ly ob ta inab l e foreign technol ogy , at l e a s t a s far a s t h e ma j or modern indu s t r i a l branch e s a re con cerned . Th i s technology h a s been introdu c ed a nd incorporated in the inve s tment of transnational corpora t i on s o r has been acqu ired th rough l ic en s ing agreement s and contra c t s for the u se o f foreign indu strial techno logy . A certain amount o f control doe s in fact ex i s t , and eva l u a tions have been made of the c o s t of c ontrac t s . Restrict i on s have been e stab l i sh e d in some in stanc e s and a certain amount o f l e eway has been a ch i eved in the restrictions impo sed by the contra c t s themselves . How ever , technol ogy sub s t i tu t ion ha s been only s l ight becau s e suf f ic ient overa l l e f forts have n o t been made t o devel op or adapt techno logy l oc a l ly through pub l i c - s ector re search inst itu t e s and l aborato r i e s or by means o f innovat ive research w i th i n enterpr i s e s thems e lves . Need l e s s to say , there are exception s in Latin Ame r i ca , and any one o f u s c ou l d mention some spec i f i c c a s e o f e l aborat ion o f techno logy o r o f adaptat ion of fore ign technology for loca l u se . S everal Latin Ame r ican c ount r i e s a l so export techno logy . However , the techno l o g i c a l foundations o f Latin America i t s e l f are s t i l l very weak . Wha t h appen s i s tha t f or e ign techn o logy i s s imply b rought into the countr i e s irre spective o f i t s c o s t and o f th e h a rmfu l e f fect that th i s may eventu a l l y have on local s c i ent i f i c and techn i c al deve lopmen t . La t in American indu s tria l i z a t ion i s a l s o cha racter i z ed by th e l a ck of attention paid to med ium and sma l l indu stry . The greater part o f indu s tr i a l devel opment ha s c onc entrated on the l a rg e indu s tria l c omp l ex e s , both p r ivate and pub l i c . P e rhap s with the exc eption o f Argent ina , subcontra c t ing t o sma l l bu s ine s s , a s i s done pa rt icu larly in J apan and Europ e , hardly ex i st s in La t in America . Sma l l indu s try i s badly n eg l ected f rom the point of view o f techno logy , organ i za t ion , f inanc ing , and the train ing o f labo r . Th i s s ec to r i s a l so poorly organ i z ed a s a whol e . However , i t c ou l d become a good source o f empl oyment , part l y c ountera c t ing the l abor- saving trend s o f b ig indu stry with i t s imported technol ogy .
44 I n cons ider ing devel opment stra tegy , we mu s t return to th e agr i cu l tural sector and to the rela tionship o f the ru ra l to th e u rban indu s t r i a l economy . There a re , o f c ou r s e , c a s e s o f very pro sperou s f a rming a nd o f very ref ined traditiona l agr icu l tu r e , l ike the g rowing o f cof f ee in C entral America and Co lombia . However , a s stated earl ier , there i s n o a s surance o f inc ent ives for the f a rming sec tor as a who l e . Th i s doe s not mean nece s sa r i l y advocat ing suppor t for priva t e farming a s opposed t o systems of communa l land tenure and ag rarian I t s impl y mean s tha t th ere mu s t b e inc ent ive s reform . to encourage improved farming , th e produc tion o f neces sary food s tu f f s , and the generation of adequate ma rketing , c r ed i t , and so on , for there i s pl enty o f idl e l and and there are a l so out standing examp l e s o f increa sed outpu t a n d yields . I n the ma j or ity o f L a t i n American countri e s , however , f a rming perfo rms badly . Perha p s B ra z i l h a s the po s s ib i l ity o f expo rting f a rm produ c t s and together with Argentina might help to solve the prob l em of Latin America ' s food d e f ic i t , a l though unti l now the re ha s been insu f f i c ient evidenc e to support th i s idea . The th i rd factor in the development strategy tha t I wou l d l ik e to under l ine , which i s r e l a ted to the o ther two , i s the prob l em o f income d i s t r ibution and the pattern o f publ ic expenditure in the face o f socia l pre s su r e that h a s had con s iderab l e inf luence o n both . No matter how the d i st r ibut i on o f income i s mea sured , in almo s t a l l Latin American countries it i s extreme ly uneven . Cons equent ly , thi s s i tuation doe s not ensure the crea t i on o f the l arge dome st i c market that ha s been the ba s i s o f indu s trial devel opment in the ma j or advanced countr i e s . I n equa l i ty ha s its origin in the unequ a l di stribution o f property , d i f ferenc e s in produ c t iv i ty and education , and many other factor s , be they soc ia l , po l i t i c a l , or whatever . As l ong a s inequa l i ty exi s t s , there c anno t be an adequate dome s t i c ma rket . Moreover , the s tructure o f pub l ic expend i ture i s unfortuna tely not mak ing the creation of a l a rge ru ral ma rket any e a s i e r . Why ? Because pub l i c expend iture in Latin America i s organ i z ed on t h e ba s i s o f pre s sure f rom certain groups o r v es ted intere s t s , wh ich i s a s f a r f rom a n y s o r t of pl anning a s anyone cou ld imagine . Large amounts are spent on educ at ion becau se th i s has to be done , for ch i ldren mu s t b e sent to schoo l and the sys tem of education mu st b e e stabl i shed and deve l oped . But at the same t ime the qua l i ty of edu ca t ion at al l l eve l s has dec l ined . Mu ch is spent on creat ing infrastructure , sometime s with succe s s , but more o f ten with med iocre resu l t s and l ow productivity . H e a l th budgets are large bu t mo s t o f the money is spent on enormou s hospit a l s and very l i ttl e on improving ba s i c health , on preventive med ic ine , o r on providing rural health care , wh i ch wou l d help incre a s e produ ct ivity a n d c r e a t e future sources o f income f o r the ru ral sector . And so on .
45 Quite apart from the va s t and ine f f ic ient bureau c r a c i e s , pub l ic expenditure doe s very l it t l e to improve the d i s t r ibution o f income ; in fact i t may even make it wor s e . M i l itary expend iture s of many Latin American countries have a negat ive e f fe ct both dome s t i c a l l y and on extern a l account s . There are s tud i e s that attempt to show that prov i s ion o f educ a tion , hea l th , and other serv i c e s free of charge to l ow- income peopl e partly compensate s for the i r r e l a t ive poverty . Neverth e l e s s , thi s has not been p roven ; among other th ing s , the tax s ystems , in the f orm o f indirect taxe s , f a l l more heavi l y on t h e income o f p o o r fami l i e s . The soc i a l - s ecurity sys tems , wh ich are a s expens ive a s in weal thy countrie s , are de f i c ient in that sense and barely able to sustain themselves f inanc i a l ly . Among the strategic factors i s a l so to be f ound the re lat ive lack o f good f i sca l pol ic i e s in the b roader sense of inc luding not only taxation but a l so the pattern o f expendi ture and the way s o f f i nanc ing budge t s . Even du ring the booms , adequate f i sc a l re form ensu ring a broad tax b a s e , independently o f the tax schedu l e s e s tab l i shed , I f introduced , it woul d at l e a s t h a s not been achieved . cove r t h e f i nanc ing o f current pub l i c expenditure . Du ring the boom in Mexi c o dur ing 1 9 7 7 - 1 9 8 1 , the tax system became inel a s t i c , for it wa s l e f t a lmo s t un tou ched ; indeed , on the c ontrary , enormou s f i scal and other kinds of sub s i d i e s were granted . Let u s move on to wha t may be termed " s l ow- act ing factor s " that , taken together , become important to the who l e prospect . We are u sed to th inking of any rate of 3 percent as be ing ins igni f icant but , if th i s rate i s app l i ed to popu lation , it means a doubl ing over a period o f on ly twenty-three years . Th e b i rth rate in Latin Ameri ca has in fact dec l i ned , a s a consequence o f socio economic and organ i z ational f actors and o f del iberate f ami ly-pl anning po l ic i e s . B i rthrate s are st i l l h i gh , however . I n Mex ico , for examp l e , the number o f b i rth s per thou sand ha s f a l l en f rom f orty- f ive , ten years ago , to th i rty-one at the present moment . I f mo rta l ity i s c a l cu l ated at seven p e r thou sand , popu l at ion growth is s ti l l 2 . 4 percent per annum . The fa l l in Latin American popu l a tion growth h a s been achi eved through the j o in t contribu tion of so ci oeconomic factors and po l ic i e s estab l i shed for th i s e f fect . However , th i s r a t e i s h igher than the average f o r Th ird World countries and ha s had , and w i l l continue to h ave , repercu s s ions a s new cohorts stream into th e l abor market . I n actua l fact , Mex ico ' s prob l em , wh ich can be extended to Ven e zu e l a , Co l omb i a , B ra z i l , and the Central American c ountri e s , i s that de spite economic growth , and a s suming adequate patterns o f expenditure , it i s not ab sorb ing into emp l oy ment ( nor is i t c apab l e o f absorb ing ) the increa se in the I f we add to th i s the fact tha t women are labor force . increa s ing the i r part i c i pation in the work force- -a
46 c u l tu r a l and s o c i a l f actor--and that in many ca s e s they are preferred for certain type s of work , we see that a s itua t i on o f permanent oversupply o f labor i s be ing c reated , re i nforced by many other factors rel ated to the ru ral economy , th e continu a l introdu ction o f labor- saving technology , and so on . Morta l ity wi l l con t i nu e to fa l l , wh i ch i s o ften forgotten . There are countries i n Latin America where the infant mortal ity rate i s very h igh , particu larly in the va st rur a l area s . As the mor ta l ity rate f a l l s , the real probab i l ity of achiev ing the same popu l a t ion growth as Eu rope become s more and more remote . Becau se o f th e nature o f the educational system and other f ac to r s , includ ing th e ru ral origins of the labor force , the over supp ly of labo r wi l l be ma inly unski l led . Th i s s i tuat ion partly expl a i n s , in Mex ico , the intense internat i onal migra tion o f the l abor force toward the north . A mai n attract ion in th i s case i s a l so the wage d i f f erent i al o f f e red by the United States together wi th the demand f o r worke r s for c e rtain spec i f i c occupations . Ma s s ive migration can a l s o be expected f rom Centra l America towa rd Mex ico and the United S tate s , al though e conomic incentives are obviou s l y not the only c au s e . These are a l l long - t e rm factor s ; we mu s t not b e i n f lu enced by what happened y e s terday or last year bu t mu s t take note o f t h e trend s . Concurrently , the re h a s been very he avy interna l migration , as in B ra z i l toward S a o Paulo , wh ich w i l l cont inue we l l into the futu re . In Mexi c o interna l migration wa s e f f ect ive wh i l e Mex i c o C ity and o ther indu strial c i t i e s were ab l e to ab sorb part of i t . However , th i s proc e s s cou l d become ine f f ic ient and even contr ibute to soc i a l instab i l i ty in the future . A new s l ow-a ct ing , long - t erm factor i s the environ ment . E l even years ago in the United Nations Conf erenc e on the Human Env ironment , in S tockho lm , a B ra z i l ian del egate pub l i c l y decl ared tha t B ra z i l wanted pol lution becau s e it mea nt indu s tr i a l i z a t ion . The B ra z i l ians obviou s ly mu st now regret having made th i s statement and , in fact , have changed the i r pol icy . The impact o f indu stria l i z a t ion , urban concentrat ion , and modern farm i ng on th e env i ronment has begun to make i t s e l f f e l t , and solutions are bound to b e costly . Th i s is another real cost incurred a s a r e su l t o f devel opment that the economy wi l l have to absorb . There i s no l ocal solution to th i s prob l em , for th e sc ience and techno logy requ i red to c ounteract the nega t ive e f fects on the environment are not loca l ly ava i l ab l e , bu t mu st b e brought in from abroad . There i s no u s e stating that solar energy wi l l rep lace hydrocarbons , for Latin Ame rica i s f a r f rom b e ing abl� to int rodu c e solar energy on a l a rge sca l e . Anoth er s l ow-acting factor that h a s both po s it ive and negat ive a spec t s i s the evo lution o f the educ ational systems . Du ring a meeting o f expe rts at th e I nter Ame rican Devel opment Bank some years ago , an Argentine econom i s t argued tha t by 1 9 9 0 all schoo l-age ch i l dren in
47 Latin America wou l d b e actua l ly enro l led in pr imary education . 4 However , th e dropout rate is sti l l very h igh in mo s t c ountr i e s . But h e added tha t the s equ e l to th i s social evo lution a n d popu l ation growth wou ld b e a n eventu a l " un iver s i ty exp l o s ion . " Unfortunately , th i s wou ld be a n exp l o s ion from t h e po int of view o f numbers and not o f knowl edge . Furthermore , it i s doubtful whe ther there i s a s ing l e case in Latin Ame r i c a where i t cou l d be stated tha t , i n the last f i f teen yea r s , the s tandard of univer s ity educa t ion h a s not decl ined , despite modern i z a tion and the l ink ing o f teach ing and research in some departments and pos tgraduate schoo l s or inst itute s . Moreover , the ove ra l l l evel of res earch i s very l ow . Th e re a r e l iterate peopl e , more educa ted peopl e , more who have had techn i c a l educat ion , and more peop l e go ing through un iver s ity . But there is something desperately wrong with the a ims of the educa t ional systems and with the qual i ty of edu ca t i on and teach ing , the l ibrari e s , the l aborato r i e s , and so forth . Apart f rom th i s , there are almo s t no sch o l a r sh ip s , nor book s , nor servic e s . B eh ind al l th i s i s the theory o f human c ap i ta l f rom wh ich i t is inf erred , not a lway s l og ical ly , tha t a l l inve stment in edu ca t ion i s worthwh i l e . B u t one mu s t a l so cons ider the real outcome of such inve s tment , and th i s i s a ser iou s prob l em tha t cannot b e solved in the short run , e sp ec i a l l y not in countr i e s with the dynami c popu l a t ion g rowth that , a s po i n t e d o u t e a r l i e r , is cha r a c t e r i s t i c o f t h e ma j o rity o f Latin American countr i e s . The l ack o f s c i ent i f i c and technological research const i tutes yet another s l ow-acting factor , but one tha t i s cumu l at ive in the negat ive sen s e . W e have b e e n d i s cu s s ing th i s prob l em now for t e n t o f i f teen yea r s . We have a t our d i sposal a l l the l iterature on the sub j ec t , a l l th e nat ional s c i ence and technology c ounc i l s , and the inf luence of th e UN Educational , S c ienti f ic , and Cultural Orga n i z a tion ( UNESCO ) , the OECD , and other international agenc i e s . However , the work done in s c i ence and tech nology in Latin Amer ica , part icu l a r ly r esearch , exc ept for a f ew remarkab l e except ions , is very poor . No country h a s ever reached a h igh l eve l o f development without concentrated e f forts be ing made in re s earch in b a s i c s c i enc e and app l ied technology . I n La t in America we are s t i l l not doing th i s , even though there are a number of instances where cons iderab l e e f fort i s be ing made . Among the s l ow-a ct ing factors there i s a l so h ea l th . One n� merely to quote the f igures for nut r i t ion in Latin America : Rough ly a th i rd of the popu l ation- - 1 2 0 mi l l ion peopl e- - i s u ndernouri shed � i n certain area s and certain coun t r i e s the proportion is even h ighe r . The inc idence of undernou r i shment on d i s e a s e ; the lack of dr ink ing water , wa ste- d i spo sal serv i c e s , and even el emen tary hyg iene : overc rowding in urban dwe l l ing s a nd ma rg inal urban area s : and contamination , a l l o f wh i ch are
48 important e l ements in many la rge c i t ie s , contra st with th e modern system of h o s p i ta l s and the emph a s i s placed on curat ive a s opposed to the expa n s ion o f prevent ive medi c ine . A l though there h a s b e e n an improvement and morta l i ty has dec l ined , the consequence s o f the s e prob l ems are very importa nt , espec ia l ly the economic one s . There are both po s i t ive and negative a spects in a l l the preceding que s t i on s . I t mu st be emph a s i z ed that th e s e are s l ow-acting factor s . The 3 percent ra te , some t ime s cons idered to be i n s i g n i f icant , over a period o f twenty yea r s can become enormou s a n d i s capab l e of creating i n f l e x ib i l ity in t h e systems a nd o f a l t e r ing parameters . LAT IN AMERICAN I NTERDEPENDENCE We in Latin America are f aced with a probl em of enormous complexity . We are not in the same s itua tion a s in the 1 9 3 0 s , exporting a f ew primary produc t s , import ing al l k inds o f manu factu r e s , and having very f ew prob l ems invo lving f i nanc i a l interaction with the exterior . Today Latin America is intertwined in a who l e se r i e s o f inter national and dome s t i c c ompl ication s , and a lack o f data some t imes make s i t very d i f f ic u l t to eva luate the s i tua t ion . The fact i s that we have become deeply involved in a system o f interdependenc e ( whatever the va lue j u dgment abou t th i s te rm ) . Th i s is at l e a s t true for the ma j or Latin American countr i e s . Unfortunately we have never taken advan tage o f th e real interna t ional context of th i s interdependence that cou l d b e u sed to our favor externa l l y . On the oth e r hand , we have u t i l i z ed it to exc e s s in the negat ive sense in , for exampl e , externa l f inanc ing and the ea se with wh ich we have imported the nec e s s a ry and the super f luou s with the s e funds , even techno l ogy , wh i l e w e have neg l ected long - term devel opment stra tegy and technolog ical sub s t i tu t i on . We are i nterdependent and vu lnerabl e in th i s c r i s i s o f th e l a s t f ew yea r s , in a comp l etely d i f ferent way than in th e past . I f we do not cont inue to act with in th i s interdependenc e , w e sha l l b e unab l e t o cont inu e growing . Th i s de s erves mo re study and cons ideration . THE PROSPECTS FOR LAT IN AMERICA Several r emarks may b e ventured in relation to the prospect s . The deterioration of the externa l sector l ends i t s e l f to a more inter e st i ng ana l y s i s by individua l coun t r i e s than for th e reg ion a s a who l e , du e to th e wide va r i ety o f condition s . There are count r i e s l ike Mex ico , B ra z i l , Argent ina , Ven e zu e l a , and Ch i l e , f o r examp l e , that have a l arger debt but a greater capac ity to negotiate and come to terms with international ag enc i e s
49 and with credito r s . O the r s , who s e fore ign debt per c apita i s l arge bu t who s e aggregate f igures are rela tively smal l , are f aced in any event with ser iou s probl ems of l iqu idity and have a very reduced capac ity to servic e th e debt : Costa Rica i s an examp l e . I n th i s respec t , to treat Latin Amer ica a s a who l e wou l d a ppea r to b e particu larly d i f f i cu l t , becau s e it wou l d probab l y l ead u s to adopt a very pe s s imi s t ic attitude regarding the reg ion ' s overa l l capac i ty to face the f i nanc ia l and externa l debt . H owever , i f the prob lem i s examined c ountry by country , the externa l aspect is prac t i c a l l y so lved . Ren egotiation , resch edu l ing o f the debt , renewed conf idence , and improvement in dome s t i c po l icy have b e e n a ch i eved in o r d e r to face the prob l em . Mex ico i s an ou t standing example . I n th e c a s e o f B ra z i l , th ere a r e s t i l l d i sagreement s to be i roned ou t with th e I n ternationa l Monetary Fund . Ch i l e and Argentina a re work ing toward a solut ion . A number of d i f f icu l t i e s s ti l l per s i s t i n Vene zuel a . However , the s e a spects o f the s ituat ion can be expected to sort themselves ou t , e spec ia l l y i f economic recovery i n the indu s t ria l i z ed countr i e s becomes stea dy . Undoubted ly , there w i l l be very d i f f icu l t probl ems for some of the sma l l e r Latin American c ountr i e s , bu t the ou t look for the ma j or c oun trie s shou l d not inspire p e s s im i sm . Unf ortunate ly , I se e no short-term prospe c t s of rea f f i rming Latin Amer ican integrat ion pol i c i e s f rom the point of view of s ch eme s for c ommon ma rkets , free- trade area s , and so on . Other aspects o f Latin America coopera tion that have been deve l oped ma inly th rough the SELA are s t i l l too weak . S ome e f forts have a r i sen as a resu l t o f the emergency s i tuat ion bu t have not met with much conf idenc e on the part of the ma j or countr i e s . How ever , b i l ateral or t r i l ateral ac t ion cou l d b e undertaken among Latin American countr i e s ( in some c a s e s th i s ha s been done ) , wh ich may tu rn out to be important . Perhaps th is i s the c ou r s e the ma j or Latin American count r i e s shou l d take in th e n e x t f ew yea r s in order to avo id the trea ti e s , th e agreemen t s , and the rhetoric and to turn to real rec iprocal ly advantageou s action . ( In the c a s e o f C entra l America th i s wou l d depend on many other f actor s . ) I n the med ium term , wha t we shou ld be worried about i s Latin America ' s capa c i ty to rede f ine it s ob j ect ive s a s regards devel opment , not nec e s sa r i l y for the region a s a who l e but more in terms o f individu a l count r i e s o r groups o f coun tri e s . Th e s e ob j ectives wou ld have to be l ong rang e but wou l d have to b e expre s sed in med ium- term programs , wh ich in turn wou l d have to be reconc i l e d wi th short-term stab i l i z a t ion and ad j u stment po l ic ie s cu rren t l y being def ined a nd being put i n t o prac t i c e . Obv iou s ly , such po l ic i e s have the i r d i f f icul t and even dang e rou s points , for a l l ad j u s tments of the pres ent type imply repre s sed expend itu r e , particu larly in inve stment , wh ich s l ows down economic growth , generates a h igh l evel of
50 unempl oyment , and forces l arge s ectors o f th e economy to accept l owe r real income s . I n my opin ion , the mos t important probl em fa c ing u s i s how to reconc i l e the impl ementa tion o f short-term programs , s o c i a l agreements , and ad j u s tment s , with the re sumpt ion of f o rmer trend s , or the 5 to 6 percent growth rate that Latin American count r i e s we re a ccustomed to , and a t the same t ime to rede f in e the ob j ectives rela ted to devel opment so as to avo id gett ing caught aga i n in the same s ituation . Unfortun a tely , in mo st of Latin America th i s i s not be i ng tack l ed in a c l early def ined way . Let u s a s sume that in the longer run , say over the next ten year s , the economy of the indu s t r ia l i z ed coun tries pi c k s up . The que s tion i s , at wha t rate ? At present the rate of recovery is b e ing exaggerated becau s e it i s b e i ng c a lcu l a ted f rom a very l ow b a s e and f rom previous dec l ine s . I f the medium-term GOP forec a s t for th e OECO countr i e s is 2 to 3 percent per annum , it is doubtfu l that th i s wou l d have much e f f ec t on Latin America or other parts o f the Th i rd Worl d , exc ept perhap s to s teady somewh a t th e prices o f some ba s i c commod i t i e s . I t mu s t no t be ove r looked that the indu st r ia l i zed coun t r i e s them s e l v e s c omp e t e in the internat ion a l ma rke t for b a s ic commod i t i e s and tha t they are not overly conc erned abou t protect ing the intere s t s of deve lop ing countrie s . Th e o i l market woul d a l so not appear to ind icate a future real price increa s e exceeding abou t I perc ent per annum over a period of several years . Th erefore , the e f f ects of the recovery o f the devel oped countr i e s on the trade o f th e devel op ing count r i e s --Latin America in particular- woul d probably not b e very noticeable . The cons equenc e s for the North - S ou th relationship wou ld be tha t Latin Amer ica wou l d have to f i nd a prag mat i c cou r s e in order to take advantage o f all the openings provided by the l owering of ta r i f f and non tar i f f barr i er s , the GATT , general pref erenc e s , and so on and to obta in spec i a l agreements with the European E c onomic Community ( EEC ) , Japan , and o the r s . It wi l l be neces sary to try and penetrate the barrier of protection ist restrictions and d i s c r imina tion e s tab l i shed by the northern countr i e s . Th i s wou l d be an important a spec t , n o t for g loba l nego tiations o r for tho s e o n the New I n terna tional Ec onomic Order that h ave b e en th e sub j ect o f s o much rhetoric at the United Nations and in the Third Worl d , but s impl y a s part of the strategy of each ind ividua l coun try o r group o f countr i e s . I do not f e e l that a " concerted L a t i n American e f fort " wou ld work under current external cond i t ions . Sec ond , we should exp lore even further th e po s s i b i l i ty o f estab l i shing l ink s wi th the rest of the Thi rd Worl d , wh ich is someth ing th at ha s been sorely neg lec ted . Th ere have been many c a s e s o f exports to Afr ican and Asian c ountr i e s , o f exchang e programs and technical c oopera t ion . But th i s poten t i a l h a s only just b egun to
51 be explored and could be very pro f itab l e for the devel opment of Th i rd Wor l d count r i e s . There is a tendency in Latin America , and even in ECLA , to act as if the r e s t o f th e Th ird Wor l d did not ex i s t . W e tend to fo rg e t tha t th ere i s I ndia , tha t Ch ina i s importan t , tha t two o r three of th e A f r ican coun t r i e s h a ve great indu s t r i a l potentia l , that Sou th e a s t A s i a i s f a s t g rowing , and tha t the Arab c ount r i e s a l s o show p romi s e . It wou ld b e of cons iderab l e s ign i f icance i f spec i f ic po s ib i l i t i e s f o r cooperation and interchange and for interre l a t ion in trade , techno l ogy , f inanc ing , and o th e r a r e a s were to be f ound oth e r than by the forma l s igning o f trea t i e s and agreements . The interr e l a t ion between c ountr i e s o f the Th i rd Wor l d wou ld place the l atter with in a strategy of s e l f- r e l i a nc e , bu t a t pre sent i t h a s not gone beyond wi sh ful th ink ing and rhetoric ; th at i s to say , i t h a s not mater ia l i z ed in the form o f spec i f ic a c t ion . I n the meeting s of the nona l igned countr i e s , in the G roup of Seventy- S even at UNCTAD , one f a i l s to d i s c over wha t i s meant in prac t i c e by c o l l e c t ive s e l f - r e l iance or r e a l cooperat ion among Th i rd Wor l d countr i e s . S imilarly , wha t is sa id in c ertain reg ions , such as A fr ica , amounts to l it t l e mor e than dec laration s , sign ing o f agreement s , and so on , with very l it t l e appl icat ion- - a s in Latin Ame r i c a today . Neverthe l e s s , Latin Amer ica - - a t l ea s t thos e countr i e s tha t are w i l l ing and capab l e o f doing so--mu s t mak e an e f fort to open up to th e r e s t of the Th i rd Wor l d , to s e l ected c ountr i e s i n tho s e area s , in order to bene f i t f rom the u s e fu l e f f ec t s o f intera c t ion . The f ramework for such relat ionsh ips may s e em pe s s im i s t ic , bu t , at bottom, I do not f e e l tha t the S ou th can expect very much f rom the North . The northern countries have the i r own s tructural prob l ems and c on f l i c t s among thems e l ve s , ma s s ive unemp l oyment , po l ic i e s o f recovery that may fa i l , and d i s i l lu s ionment over the cooperation with th e sou th , despite th e f i r s t and second B randt report s ( wh ich do not appear to have had much impact ) . The indu s t r ia l i z ed c ountries are l ook ing inward . We in Latin Ame r i c a , a long wi th A f r ic a and A s i a , wi l l have t o d o th e same , f o r there i s n o a l terna t ive . We sh a l l have to continu e indu st r i a l i z a tion with import sub s t i tut ion , wh i l e pay ing c l o s e r a ttention to in ter national c omp e t i t iven e s s . We sha l l have to cont inue to protect ou r s e l v e s in the presence o f the GATT and the idea o f ec onomic openne s s coming f rom the North . We sha l l have to make a much greater interna l e f fort , evaluate our problems more deeply , and stop expect ing the s olut ions to our prob lems to come f rom out s ide . I n th i s context , Latin Ame r i c a ( one speak s i n gene r a l terms but th ink s , of cour s e , o f a f ew countr i e s with larger capab i l ity ) po s s e s s e s the e l ements nece s s ary for po s i t ive action , a s i s the case with many countr i e s in Africa and Asia .
52 L a s t l y , there i s the r e l a t ionship between Latin Ame r i c a and the European soc i a l i s t economi e s who s e trade with L a t i n Ame r i c a has f o l lowed e s sent i a l l y the o l d c o l o n i a l model o f importing raw ma ter i a l s a n d exporting equi pment ( and very l i ttle e l s e ) . F inancing has been more in keeping with the intere s t s o f the s e count r i e s and not with the needs of Latin Ame r ic a or the Th i rd World in genera l . However , i f the s e countries are able to l imit the i r expendi ture on d e fe nse and make the i r c ivi l economy more e f f i cient , they wi l l a l so have the potent i a l t o pa r t i c i pate i n the s e l e ctive inte rchange and r e l at ion ship that Latin Ame r ic a could e s tab l i sh pragma t ica l l y , without the need fo r general agreements . I t i s a we l l known fact tha t the so c i a l i s t countr i e s are a l s o faced with structural probl ems in i ndustry and other b a s i c activi t i e s , a s are t h e Western market economi e s . The s e a r e prob l ems that they wi l l have t o solve among them s e lves and w i th the We st , and they are mo re impo rtant than the prob l ems they may have with the S outh , at l e a s t i n t h e f i e l d o f economic r e l a t ions . NOTES 1. S e e V i ctor L . Urqu id i , " America Latina y e l Orden Ec onomico I nternac iona l : Poblacion , Al imento s , Energetico s , " Demogra f i a y E conomla , vo l . 1 3 , no . 4 ( 4 0 ) ( E l C o l e g i o de Mex ico , 1 9 7 9 ) , pp . 3 9 3 - 4 0 4 . 2 . For data on the Mex ican boom and its bac�g round , see V i ctor L . Urqu idi , " p e r spect iva s de la Economi a Mex icana ante e l Auge Petro l e ro , " Rev i sta de Occ idente , no . 1 4 ( Madr i d , June-July 1 9 8 2 ) , pp . 4 5 - 6 4 ; a l so Victor L . Urquid i , "Not by Oil Alone : The Outl ook for Mex ico , " Current H i s tory , vol . 1 , no . 4 7 2 ( F ebruary 1 9 8 2 ) , pp . 7 8 - 8 1 , 9 0 . 3 . C a r l o s Al z amora Trave r so , for SELA , and Enr ique v . I g l e s ia s , for CEPAL ( Comi s i6n Economi ca Para Ame r i c a Latina ) , B a s e s p a r a u n a Respuesta de Ame r i c a Latina a la C r i s i s E conomic a I nterna c iona l , Uni ted Nation s , Economi c and S o c i a l Counc i l , Doc . E / CEPAL / G . 1 2 4 6 , May 1 6 , 1 9 8 3 . 4 . J o s e Dagnino P a s tore , " N ivel y E s tructura de l o s C o s tos y del F inanc iamiento , Educat ivo en Latinoamer i c a , " in Mar i o B roder sohn and Mari a E s ter S an j u r j o , F inancia miento de l a Educa c i 6n en Ame r ic a Latina , Mex i co , 1 9 7 8 , pp . 1 4 4 - 1 9 7 .
3
The I nternational Scene and the Latin American External Debt Luciano Tomass;n;
The force w ith wh i ch the current internat ional c r 1 S 1 S has h i t Latin America and t h e region ' s h i gh external debt are , fundament a l l y , consequenc e s of the chang e s that have taken p l a c e in the international sys tem over the l a s t f i fteen y e a r s a n d o f t h e tran s f o rmat ion o f the Latin American economie s and societ i e s , inc luding the change s in the way s in wh ich they both partic ipate in the wor l d economy . T h e s i tuation i s a l s o undoubtedly a cons equence o f the dome s t i c po l ic i e s f o l lowed by the s e count r i e s in recent year s ; however , the s e po l i c i e s repre s ent a re spon s e - - r ight or wrong - - to the new cond itions preva i l i n g dur i ng th i s period on both the regional a n d the international scene s . The externa l indebtedne s s of the s e count r i e s may b e v i ewed a s a variab l e that depends on othe r , more far- reach ing factors . Th i s means that the causes of th e phenomenon may be interpreted in a va riety o f ways and , moreover , that mor e comprehen s ive , l ong er term solutions may be sought than when only f inanc i a l con s iderations a r e taken into ac count . S ince the late 1 9 6 0 s the rigidly h i e rarch i c a l world that emerged f rom Wor ld War I I , where interna t ional relations revolved a round the concept o f security , has begun to be e roded by a s t rong trend toward a f ragmenta t ion o f wor l d power and a vigorou s proc e s s of transnation a l i z ation . As a re su l t , the intere s t s o f the var ious national societies now ove r l ap each other in an increas ing variety o f ways , thus promoting the f l ow of inter national re lation s . The international economi c c r i s i s , the f i r s t symptoms of wh ich go back to the late 1 9 6 0 s , a l tered the evolut ion o f product ivity and the tradi tional d i s t r ibution o f spec i a l i z at ions in the indu s tria l i z ed countr i e s , putt ing an end to the cyc l e o f unprecedented expansion o f the p revious twenty years and paving the way for the producer count r i e s to ra i s e the price of o i l ; th i s in tu rn l ed to a l a rge surplus o f l iqu idity and created a c l imate of extraordinary internat ional f inanc i a l permi s s ivene s s . In the meant ime , some of th e deve loping countr i e s , inc luding the larger countries o f 53
54 Latin Ame r i c a , progres s ed more rapidly than others , achieving an intermediate s tage o f deve lopment and becom ing more c l o sely involved in the international economy . Thi s made it po s s i b l e - - and even inevitab l e - - for them to take advantage o f the opportun i t i e s and a s sume the r i sk s po sed to them by t h e interna tional environment much more inten s el y than i n the past . Thi s exp l a i n s why the current international e c onomic c r i s i s ha s had such an unusua l l y strong impact on the L a t i n Ame r i can countr i e s , f a r greater than the impac t o f the c r i s i s o f t h e 1 9 3 0 s , a t wh ich t ime the s e count r i e s were i n a much better po s i tion to d i s connec t thems elves from the external cyc l e . Thi s chapter includes an ana l y s i s o f the changes that have occurred in the international system , the character i s t i c s o f the current wo rld economi c c r i s i s , and how the Latin Amer i c an count r i e s have been expo sed to the s e factors a s a r e s u l t o f t h e trans formations they have undergone during the past f ew decade s . In the l a s t section , some conc lus ions a r e drawn with regard t o the c au s e s and characte r i s t i c s of the external i ndebtedne s s o f Latin Amer ica , and f ina l ly , some extreme ly tentat ive sugge s t ions are made regarding po s s ib l e respon s e s to that prob l em i n the l ight of t h e a f o reme n t i o n e d ana l y s i s . THE TRANSFORMAT I ON OF THE INTERNAT I ONAL SYSTEl-1 The international sys tem that emerged f rom Wor l d War I I an d l a s ted unt i l t h e l ate 1 9 6 0 s has s ince then undergone a complete trans format ion . During the immed iate po stwar period , the s tructure o f wor l d power was rigidly h ierarch i c a l and bipo l a r and wa s strong ly i n f luenced by the cold war . That s tructure began to change s ig n i f icantly a s a re sult of ( 1 ) the relative dec l ine o f u . S . power ; ( 2 ) the appearance of tensions within the tri l ateral sys tem and , in part icular , the Atlantic a l l iance ; ( 3 ) the internal d i f f i c u l t i e s experienced by t h e S o v i e t bloc a n d t h e exhau st ion o f the model i t repres ented ; and ( 4 ) the increas ing development and externa l pro j ection of certain Third World countr i e s a n d the trend toward fr agmentation o f t h e international system , a phenomenon that makes it neces sary to seek formu l a s for co l l eg i ate management o f the sys tem . According to the " new orthodox " school o f thought , l the power o f the uni ted S tates in the wo rld dec l ined sharp ly dur i ng the 1 9 7 0 s , part icularly v i s - a - v i s the Soviet Union and the Midd l e E a s t ; t h i s may exp l a in the concern revealed by the fact that in 1 9 8 0 "a 4 2 % pl ura l ity of Americans named fore ign po l i cy a s t h e ' mo s t important prob l em f a c i ng the country today ' - - ahead o f the economy and substant i a l ly ahead o f energy concerns . ,, 2 Paradox i c a l l y , the decl ine o f U . S . power has gone hand in hand with the a ppe arance o f a pro found ma l a i s e in the soc i a l i st camp . Al though Soviet mi l i ta ry power h a s
55 increased a t a rapid pace s o that i t i s a t l e a s t comparable w i t h t h a t o f t h e Unite� State s , looked upon f rom a longer-term structural point o f view , th i s 1n crea s e may be a s ign not o f s trength but rather o f weak ne s s . The i n s tabi l i ty o f the Soviet presence in the Third World , the inva s ion o f Afgha n i s tan ( cons idered a defens ive mea sure that the Soviet empire had to take on its own border ) , and the strong cha l l enge that P o land repre s ent s for the survival o f the po l i ti c a l and soc i a l system on wh ich the entire Soviet bloc i s bu i l t are matters that ra i s e very serious � u e s t ions that have not yet been adequately weighed . To thes e are added the d i f f icul t i e s that the Soviet economy has c on s i stently h a d t o fa ce , both a s regards its food base and as regards the produc tion and d i s tribution o f consumer durab l e s and the urgent need to acqu ire We stern technology . � The Soviet model as an alt e rnat ive f o r the construction o f other societi e s , part icularly i n the Third Wor ld , would appear to be van i s h ing amid the f ru s tration of the populat ions of the socia l i s t count r i e s and the growing mi l itari zation o f tho se regime s . The tensions that have a r i s en with i n the tri lateral system constitute another f a ctor o f change . The mo s t recent indication o f th i s may be s e e n in the conf l i c t s that have ari sen within t h e Atlantic a l l iance . T h e f a c t that t h e Un i ted S tates has uni l atera l ly sub s t i tuted a new vers ion of power po l it i c s for detente has a l ienated i t s I t shou ld be remembered that detente European a l l i e s . has produced po s i t ive resul t s , i n both economic and po l i t i c a l terms , for the Europeans , but not so much for the Uni ted S tate s . Moreover , the globa l i sm o f U . S . foreign po l icy i s incompatible with the European approach , according to wh i ch detente can be " d ivided , " depend ing on which que s t ion s and reg ions are at stake . The con f l i c t generated b y t h e Soviet gas pipel ine i s sue r e f l e c ted th i s ten s io n . 5 The emergence of the Third World on the global s cene , a round the midd l e of the po stwar period , con s t itutes a new factor o f instab i l i ty and change . Today thi s g roup is repre s ented by over one hundred countr i e s , ha l f o f wh ich became i ndependent during th i s period . Many o f them have reached intermediate stages of deve lop ment and have promoted accelerated indu s t r ia l i z a t ion proce s s e s , thus becoming more c l o s e l y integrated in the internat ional system . The movement of nona l i gned coun tri e s , the Group of S eventy- S even , and OPEC have come into being , and the newly i ndustr i a l i z ing countries ( N IC s ) are now an e s sential part o f the world economic and f i nanc i a l picture . The vi ewpo ints o f the var ious regions o f the deve loping wor ld mu st now be taken into account in the management o f international relations whi l e conf l ic t s o f regional origin are increa s ingly a f f ec t ing the stab i l i ty of the world in genera l . T h i s l atter c i rcumstance i s aggravated b y t h e repeated attempt s
56 o f the two supe rpowe r s to v i ew the se s ituations within the context o f the E a s t-We s t conf l ic t . 6 A l l the se factors have brought about a phenomenon o f " di f fus ion o f power , " giving r i s e t o a more interdependent but a l so more fragmented wor ld . Th i s new structure of world power presents the deve loping countri e s - - and e spec i a l ly the Latin Ame r i c an count r i e s - -with a comp l ex balance o f l imitat ions and oppor tun i t i e s . The se trends have l ed us to the point where we are movi ng f rom a wor l d dominated by strategic secur i ty cons iderat ions and by confrontation between the two superpower s to a wor l d charac ter i z ed by a c e rtain degree o f detente and by an atmosphere that is mor e prop i tious to the pur s u i t o f other intere s t s - - economi c , techno l og ic a l , s oc ia l , ecologic a l , and c u l tura l - - i n relations between To the f ragmentation o f wor l d economic and nation s . po l i t i c a l power are added the inc rea s ing complexity and d i sper s ion of strategic conf l ic t s . This proc e s s has a l s o been s t imul ated b y the appearance o f g loba l prob l ems - such as energy , t h e environment , stagf l a t ion , or externa l indebtedne s s --on the solution o f wh ich depend s the we l fare of ever- l a rger sectors o f the national s o c i e t ie s . The s e
societie s
in
turn a r e
a l s o und e r g o i n g tran s
format ion s . The prol onged per iod o f economic growth , soc i a l devel opment , and democratic s trengthen ing exper ienced by the indu s t r i a l societie s dur ing the po st war period has stead i l y raised the standard of l iving and promo ted the s trengthening and diver s i f i cation o f the c iv i l soc i e t i e s o f these countr i e s . Under pres sure f rom the i r s o c i e ti e s , the national states have committed them se lves to a wider and wider range of obj ectives that i nc l ude , i n add i tion to national secur i ty , economi c deve lopment , the r a i s ing o f income s , the ma intenance of employment , the preservat i on o f the envi ronment , and the protection of the c u l tura l identity and qua l i ty of l i f e o f the s o c iety concerned . The se obj ectives have become a dec i s ive force in the extern a l r e l ations among state s . At the same time , a s the c i v i l soci ety has grown and become articul ated i nto many d i f ferent intere s t group s , the l atter have a s p i red to take into the i r hands an in creas ing proportion o f the i s su e s that concern th e commun i ty . As re spon s i b i l i t i e s have been trans f e rred f rom the state to the c iv i l soc i ety and nongovernmental group s have there fore pro l i f e rated , i n a worl d in wh ich the performance o f such re spons ibi l i t i e s depends mor e and more on international factor s , the se group s have o f ten had to seek the sat i s f action o f th e i r intere s t s at the external l evel . 7 These new trends , wh ich may be s een at both the wor ldwide and the national l eve l s , reve a l the f a c t that a tran s i t ion i s underway f rom the internat ional system dominated by the concepts of " power " and " s ecur ity " that genera l l y preva i l ed during the immediate po stwar period to one based on " interdependenc e " and a imed at max imi z ing
57 the dome s t i c we l f are o f nationa l soc i et ie s . 8 The " real i s t i c " approach to interna t iona l relations that preva i l ed ear l ier dur ing the postwar period wa s based on several a s sumptions . The f i r s t wa s that inter national pol i t i c s were centered on the intere s t s o f the superpowe rs and that the sma l l e r state s shou ld a l ign themselve s with one or the other o f them ; thi s gave r i s e t o the formation o f b l o c s or spheres o f inf luence within wh i ch the hegemonic power s e t t l ed con f l i c t s and imposed a certain order . Re l a t ions between the b l o c s con s i s ted o f a precarious coex i stence governed b y certain rule s . The second a s s umpt ion was that national soc i e t i e s were rela tive l y s imp l e units f rom the standpo int o f the i r externa l pro j ect ion , with the ir actions depending on a l imited number o f ob j e ctive s , wh ich were usua l ly subordinated to the need to ma intain peace and security . The th i rd a s sumption , one that f o l l owed f rom the f i r s t two , wa s that the agenda o f internat ional a f f a i r s wa s l imited to a sma l l number of items and that the se were ranked accord ing to a r i g id order o f prioriti e s , with the que s t ion of secur i ty indi sputab ly ho l d i ng the f i r st place . The fourth a s sumption wa s that the agents acting in international l i f e were b a s i c a l ly homogeneou s and that they were repres ented by national states that did not recogni z e the l e g i t imacy of any other agents having th e capac i ty to act between or within state s . It is not surpri s ing that the f i f th a s sumption wa s equa l ly l imited in that i t held that the repertory o f way s in wh ich a state cou l d use power to inf luence another state wa s l imited ma inly to po l i t i c a l a n d mi l i tary matters a n d tha t t h e arenas in wh ich such power cou l d be dep l oyed we re a l so l imited , we l l def ined , and we l l known . A l l the s e a s sumptions were c a l l ed to que s t ion a s a result o f the newly emerging trend s . At th i s point one might venture to propo s e the hypothe s i s that , contrary to the c a s e in the pa st , ( 1 ) international relations are currently run by a growing number o f center s of power ; ( 2 ) the external action o f the se centers o f power i s a imed at mee ti ng a much broader range o f ob j ec t ives than in the past ; ( 3 ) the agenda o f international a f f a i r s i s more dive r s i f ied , more comp l ex , and l e s s hierarchica l ; ( 4 ) internati onal matters are managed by many new state and pr ivate agent s ; and ( 5 ) the s e agents can use power re sourc e s in a large var i ety o f nontraditional ways and in a much wider range of arenas that are more l ikely to change and to be interrela ted than before . The se trend s have given r i s e to a new type o f transnational sys tem in wh ich o n e may recon struct the structure and operation of many " sphere s , " " game s , " or " c ircu i t s " that operate on the ba s i s of the hypothe s i s j u s t de s c r ibed , u s ing the agents and power resources contained i n i t and that l ink in many new and diver s e way s the d i f f e rent nationa l s o c i e t i e s in the pur suit o f a wide range o f spec i f i c intere s t s . F rom th i s perspective ,
58 one might postulate that transnationa l i zed c i rcui t s have a r i sen in the f ie l d s of energy , food , indust ry , techno logy , f i nanc e , strategy , s c ience , ideol ogy , culture , and re l i g ion . Each o f the se c i rc u i t s has certa i n very spec i f i c f eature s . The cond i t ions under wh ich the di f fer ent count r i e s have a cc e s s to each o f them and a country ' s r e l a t ive po s i t ion within a c ircuit do not depend ex c l u s ively on its po s i tion within the international hi erarchy ( whether in the context o f the E a s t-We s t con f l i c t or of North - S outh r e l a t i on s ) but rather on its r e l a t ive po s i t ion wi th respect to the intere s t s at stake i n the c i rcuits and to the divi s ion o f l abor e s tabl i shed within each c i rcuit to attain the s e intere s t s . 9 The international structure i s becoming more f luid and inter dependent , but paradox i c a l ly it is a l so becoming more f ragmented and unsettled . The c r i s i s with respect to the development s ty l e preva i l ing in the indu s t r ia l i z ed count r ie s , d i s cu s sed next , tends to accentuate thi s trend . within th i s scenario , the deve loping , and espe c i a l l y the Latin American , countr i e s that are more integrated i n the international sys tem have become more vu lnerab l e to external i n f luence s even though at the same t ime the i r maneuvering room has expanded , so that they mu s t j ugg l e a comp l ex s e t o f r i sk s and opportun i t i e s . THE CRI S I S IN THE WORLD ECONOMY The preva i l ing po s twar style of devel opment , which wa s based on th e ideo l ogy o f modern i z ation a nd growth and on the g l ob a l pro j ection o f such a model through the demon stration e f fe c t brought about by the transnationa l corporations and the i r suppo rt ive i n s t itutiona l apparatu s , was made p o s s i b l e by the international s tructure that preva i led dur ing the early postwar pe r iod . The ma in features o f th i s s tructure were the hegemony o f the uni ted States and the predominance o f con s iderations centered on the maintenance o f that nation ' s s t rategic security , a s we l l a s that o f the other count r i e s with wh ich i t had defense commitment s within the context of th e cold war . Th i s internat iona l structure made po s s ib l e the exten s ion o f a deve lopment style that both expre s s ed and promoted the intere s t s of the Uni ted States and , a s t ime went on , o f i t s main a l l i e s . As the stru c ture o f the internationa l system broke down , so d i d the attempt to expand and d i s seminate the development sty l e deve l oped by its central powe r . Hence , s ince the late 1 9 6 0 s the wor l d economy h a s entered i n t o a s t a t e o f profound c r i s i s . T h e r e can n o long e r be a n y que s t i on t h a t t h e c r i s i s i s struc tur a l - rather than me rely cyc l i c a l - - in nature . I t has dea l t a s er ious b l ow to the deve loping wo rld , particu l a r l y to the Latin American count r i e s that had become mor e integrated in the international economy . The f i r s t man i f e station of
59 th i s c r 1 S 1 S took p l a c e i n the ecolog i c a l foundation o f the economic growth proc e s s ; it later became evident that the crux of the prob l em wa s the i ndu s t r i a l tran s formation o f the advanc ed soc i e t i e s ; f inal ly , and over the shorter term , the viru l enc e o f the c r i s i s wa s fully mani f e s ted in the f inanc i a l d i sequ i l ibria that occurred a t the wor l d l evel a n d t h a t have h a d a particularly s t rong impact o n t h e develop ing countr ie s , e spec i a l ly in Latin Ame r i c a . A l though according to th i s hypothe s i s the breakdown of the preva i l i ng postwar deve lopment style stemmed f rom the indu s t r i a l tran s fo rmation of the advanced count r i e s , it mus t be stres sed aga in that the f i r s t s igns o f the prob l em were to b e f ound in the d i s equ i l ibria that a f f ected the ecolog ica l base . The s e d i sequ i l ibria were cau s ed , among oth e r th i ng s , by the recent trends in popu l a tion growth , t h e var ious factors l imiting e f fo r t s t o increa s e foodstu f f s ' produc t ion ; t h e uncertainty a n d in creased costs i nvolved i n the supp ly o f energy and in du s t r i a l raw mater i a l s , the prob l ems posed by the exc e s s ive concentration of indu s tr i a l growth in a f ew geograph i c areas , and the threat o f env i ronmenta l po l lu t i on , generated fundamenta l ly b y t h e high den s i ty o f urban popu l a tion and e conomic activity . The f i r s t report on these i s sues , pub l i shed under t he spo n s o r sh i p o f t h e C lub o f Rome , started a debate that gave r i s e to a number o f reactions at the theore t i c a l l eve l . The dec i s ions adopted by O P E C in 1 9 7 3 in respect to international oil trade sounded the a l a rm at the level o f real i ty . 1 0 Thu s , i t began to be recogn i z ed that the rate and concentration of growth in the la rge indu s t r i a l centers had taken p l a c e at the expen s e o f the env i ronment , the natural re source s base o f economic devel opment in genera l , and the countr i e s ' ecolog ica l c apac ity to su stain pro duc tive activity . An awarene s s a ro s e o f the phy s i c a l l imits to economic growth . I n the f i na l analys i s , the awaren e s s tha t such l imits did e x i s t wa s one of the s igns that the advanced soc i e t i e s were reaching the f ron t i e r s of the i r po stwar " The c r i s i s of the wor l d economy indu s t r i a l deve lopment . i s above a l l an i ndu s t r i a l c r i s i s , " begins one of the mo st rece n t reports on t h e wor l d economy ' s pro spect s , written f rom a European viewpo int . 1 1 One might argue a s to whether the weaken ing o f the momentum of indu s t r i a l growth tha t ha s been evident in recent years in mo s t of the developed countr i e s i s leading to a po st indu s t r i a l society or to the indu st r i a l i z at ion o f servic e s , in wh ich th i s tertiary s ector wi l l become th e moving force beh i nd economic growth and e nsure the d i s s emination of the technological tran s fo rmat ions on wh ich the progre s s of these soc i e t i e s is to be based . One may a l so argue as to whether the wo r l d e conomy ha s entered a prolonged stage o f s low growth o r whether the rap id adopt ion o f techno l og i c al change s a l ready underway wi l l l ead it to
60 recover i t s past dynami sm . One may attach a great deal of importance to th e l imitations impo sed by the supp ly o f energy and natural resources o r may tak e an optimi s t i c v i ew o f th e potent i a l o f recent techno l og ic a l deve l op ments in connect ion with energy and the produc tion o f new mater ia l s . Whatever the pred ictions may be with regard to the s e que s t i on s , the fact rema i n s tha t world indust ry i s going through a pro found tran s fo rmation , that recent techno l o g i c a l advanc e s are very important , and that human kind i s on th e thre shold o f an indu s t r i a l revo lution the l ike of wh ich ha s not been seen s inc e the l ate e i ghteenth century . The extraordinary growth o f internationa l trade dur i ng the early po s twa r per iod wa s fundamenta l l y the res ul t of th e increased demand for tho se consumer durab l e s that made i t po s s ib l e to adopt t h e " American way o f l i f e " - - and t o spread it a l l over the wor l d , a demand met by inc reas ing spec i a l i z at ion among the indu s t r i a l i z ed c ount r i e s in accordance w ith Ricardian princ ip l e s . Thu s , each country atta ined a predominant po s i t ion on the market i n certain indu s t r i a l sector s , and thi s s i tuation led to con s tant price increa s e s . The s e , a l ong with the recon stru c t ion of Europe and the emergence of Japan as a great indu s t r i a l powe r , st imu l ated competit ion and tran s fo rmed the range of spe c i a l i z ations a l ready achieved by the d i f f erent countr i e s . At the same t ime , the growth of the demand for du rab le s tha t had been the ba s i s for the deve lopment o f the more dynamic indu s t r i e s du ring the immediate po s twar per iod began to weaken toward the end of th e 1 9 6 0 s and was f o l l owed by a substant i a l con tract ion , wh i l e the c ompo s i t ion o f the demand changed a s the markets f o r durab l e s became satu rated . A factor contr ibu t i ng to th i s wa s the change in th e pre f erenc e s o f the pub l i c in a growing number o f soc i a l s e c t o r s a s a r e su l t o f t h e profound soc iocul tura l tran s f orma tions that have been chang i ng l i f e- s ty l e s in the indu s t r i a l soc i e t i e s that have led to the spreading of attitude s attaching l e s s importance to having more of the same an d more o r iented toward va lues relat ing t o the qua l ity of l i f e . The se trends have been a s soc iated with the dec l ine of product ivity in the indust r i a l i z ed c ountr i e s , the fal l of investments and the reduction of the pro f i tab i l i ty o f enterpr i s e s , t h e appearance of i d l e capac i ty in a g rowing number o f indu s t r i e s , t h e s lowdown in th e rate of techno l o g i c a l innovation , th e increa sed operat ing costs o f sys tems o f product ion and o f s o c i e t i e s themse lves re s u l t ing f rom inc rea s e s in wa ges a n d in pub l i c expend itures , and , in genera l , the loss of compe t i t ivene s s in an ever-greater number of produ c t ive activit i e s . The aforementioned proc e s s of transnationa l i z ation , wh ich al lowed for the exten s ion of the preva i l i ng postwa r deve lopment s ty l e , a l so a l l owed for the sub sequent chang e s in t h e market structur e , i n the pattern o f techno l o g i c a l
61 innovation , and in th e form of organ i z ation that world production began to adopt in order to ad j u s t to tho s e change s . Here there tend s to be a new international div i s ion o f l abo r � a l though i t s future shape cannot yet be c learl y perce ived , i t i s a l ready c au s ing con f l i c t s among devel oped countr i e s a n d cou ld a l ter t h e way s in which the deve loping c ount r i e s have tradit iona l l y partic ipated in the wor l d economy . The devel oped countries had t o make ma j or ad j u s tments in o rder to cope with the s e chang e s . The ad j u s tments we re even mor e pa inful in the case o f the developing countr i e s that h a d become more integrated i n t h e wor l d economy . They had dependent and precariou s economic structu r e s and l acked r e s ourc e s to pa l l iate the negative e f fects of the c r i s i s on the i r economic growth or to f inanc e the t ran s formati ons the c r i s i s made nec e s s ary . Both types o f countrie s t r i ed in d i f fe rent ways to make the se ad j u st ments a s smooth a s po s s ible by mak ing ma s s ive u s e of externa l f inanc i a l resourc e s . Th i s wa s po s s ib l e becau s e o f the extraordinary l iquidity o f the wor l d economy f rom the beginning of the 1 9 7 0 s , when a ft e r a lmo s t ha l f a century a reb i rth o f the p r ivate f inanc i a l marke t s began a s a r e s u l t of the weakening o f the do l l ar and o f the ac cumu l at ion o f surplu s e s by OPEC countri e s . THE TRANSFORMAT I ON OF THE DEVELOP ING COUNTRIES The remarkab l e growth rates o f an increas ing numb e r o f deve loping c ount r i e s throughout t h e l a s t twenty- f ive years and the i r gradu a l integrat ion into the inter nat iona l economy have given r i s e to profound chang e s in th e i r e conomic , po l i t ica l , and social sys tems , a s we l l as in the i r relat ions with the indu s t r ia l i z ed countr i e s . As has a l re ady been no ted , in the early 1 9 5 0 s no one had much hope that the deve lopment o f the countr i e s o f the per iphery might be brought about by stimu l i f rom the externa l mark e t s and go hand in hand with the i r gradu a l integrat i on i n t o t h e wor l d economy . I n s tead , it wa s a rgued that they shou l d p romote indu s t r i a l i z at ion po l ic i e s based on import sub s t i tut ion together with mechani sms a imed at regu l ating the international ma rkets for raw materia l s . Dur ing the early stage s of indu s tria l i zation , many deve loping count r i e s t r i ed to rep la c e imports of manu facturers by dome s t i c production , part icularly in the c a s e o f L a t i n Amer ica . Import sub s t i tu t ion wa s a imed at in c reas ing the propor t io n o f national con sumption that wa s sati s f i ed by local produc t ion . One of the immediate reasons for adopt ing th i s strategy wa s that the devel oping countries were expe r i enc ing chroni c b a l ance-of -payments crises becau s e o f the s tructural s i tuat ion o f extern a l s trangu l a t i on in wh i ch they found thems e l ve s . Th i s strategy wa s a l s o i n l ine with the long-term po l i t i c a l
62 ob j ectives o f the nat iona l government s . O n the one hand , it wa s hoped that import sub s t i tu t ion wou ld make it possible to redu c e out l ay s i n foreign currency and in crease the autonomy o f tho s e count r i e s . On the other , the governing e l ites found tha t the demands of certain soc i a l sectors who s e barga ining power wa s increa s ing a s a resu l t o f the development proce s s i t s e l f could be sat i s f i ed by applying a pol icy des igned t o encourage s imu l taneou s l y growth , income d i s tribu t ion , and emp loyment . To the extent that dome s t i c demand a l l owed for the creation o f new indu s tries tha t might some day-- and th i s cons ideration h a s now become a very important one - -be ab le to compete with the externa l producers di splaced , it wa s po s s ib l e to j u s t i fy the l eve l s o f pro tection app l i ed with the arguments tha t had been put forth in f avor o f infant i ndu stry i n t h e pa st . Natural ly , to the extent that thi s condition wa s not met , the import sub s t itu t ion s trategy wa s bound to c ome up aga inst seriou s I n oth e r word s , indu s try had either to be l imitation s . gin to generate the foreign exchange requ ired for its sub sequ ent devel opment o r to ad j u st it s g rowth rate to the ava i l ab i l ity o f foreign exchange g enera ted by primary production , wh ich in certain c a s e s had been given second prior ity in the context o f the s e economic strateg i e s . I n pract ice , what u sua l ly happened wa s that impor t s o f consumer goods were replac ed b y imports o f capital good s and inputs requ i red for the operation and expan s ion o f t h e new i ndu strial park s . I n t ime , many countries a cknowl edged tha t the tendency to u s e foreign exchange with out generat ing it wa s not inh e rent to manuf actur ing , and one a ft er another they reached th e conc l u s ion tha t th ey shou ld p l a c e l e s s emph a s i s on protect ion and mo re on e f f ic i ency , competi S ince the mid- 1 9 7 0 s t ivene s s , and export promotion . ( and even e a r l i e r i n the c a s e o f i s l and states or entrepot c i ty states tha t had no a l terna tive ) many coun t r i e s have begun to try ou t , at d i f f erent rates and in d i f f erent ways - - some o f them c l early exaggerated , a s in the c a s e o f some La tin American countri e s - - new strateg i e s b a s e d on the l ibera l i z ation o f t h e dome s t i c ma rket and the opening up of the ir economies to the exterio r . Al though th i s tran s i t i on has o f ten been portrayed a s a stru gg l e between rival s choo l s , the perspect ive o f time ha s now enab l ed us to real i z e tha t th e s e stages shou l d n o t in f a c t be c o n s i dered a s a l terna t ive s , b u t rather a s compl ementary proce s s e s . For many Th ird Wor l d countr ie s , the import- sub st itu t i on strategy was the only option ava i lable at a g iven h i storical moment , in l ight o f the stage of development at wh ich th ey found thems elves and I n many the e x i stence o f an adve r s e externa l s i tua t ion . c a s e s , import sub st i tution provided a ba s i s not only for indu s tria l i zation but also for th e con s o l idation o f a country ' s national identity . Moreover , not only did th ey not see at th e t ime any e s sent i a l con f l i c t between
63 produ c i ng for dome s t i c and external marke t s , but the i r dome s t i c markets o f ten s erved a s a springboard for reach ing the interna tional market s . Although i t is tru e that the growth strateg i e s and fo rms o f externa l re l a t ionship o f the deve loping countr i e s did sub s equently undergo chang e s , it is no l e s s t ru e , a s the B randt Commi s s ion ' s report po i nted out a f ew years ago , that th e s e chang e s did not take pla c e overnigh t : They cannot accomp l i sh the s e ch anges suddenly ; but s ince the 1 9 6 0 s many deve loping count r i e s have moved towards strateg i e s to promote exports and to o f f se t d i sadvantage s du e to the insulation o f th ei r dome s t i c mark et s . A number o f countr i e s whi ch have introdu c ed export-oriented pol i c i e s have been able to exp l o i t the i r c omparative advantage i n wor l d marke t s . They inc lude some Latin American count r i e s with a f a i r l y long h i s tory o f national independenc e , and s ome i s l and and c i ty state economie s wh i ch were f rom the outset ob l i ged to rely on export demand . Once indu st r ia l i z ation ha s taken root , it i s not only in l abou r - intens ive indu s t r i e s l ike c l oth ing or l eather produ c t s , b u t a l so in mode rately capita l - in te ns ive indu s t r i e s l ike e l e c t ro n i c s , steel and shipbu i l d ing , that they can become h igh ly c ompet i tive in wo rld ma rke t s . 1 2 .
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A s a resu l t o f the imp l ementation o f the s trateg i e s , a s the same report mention s , a l l in a l l manu f a c tu r e s are looming much l a r g e r i n t h e total exports o f deve l op ing count r i e s . In 1 9 5 5 they made up only 10 percent of the i r nonfu e l export s ; ten years later they were 20 per c en t ; and i n 1 9 7 5 they pas s ed 4 0 percent . Th i s growth of expor t s evidently re f l ec t s more c omp l ex tran s f ormations i n the economie s tha t have reached intermed iate stag e s o f development , a l though it is true th at th i s growth wa s conc entrated in a l imi ted I n v iew o f the above , I mu st number of count r i e s . c omment , even though i n general terms , on the increas ing d i f f eren t i a t i on that has o c curred in recent years among the countr i e s of the per iphery and on the s ituation of th e deve l opi ng count r i e s t h a t are at an intermediate s tage . The l i terature on the sub j ect h a s pro l i f e rated in recent yea r s . The f i r s t report on the evo lu t ion o f the inte rnat ional economy , prepared by the Wor l d B ank i n 1 9 7 8 , provides a u s e fu l , a l though controver s i a l , point o f departu re f o r a d i s cu s s ion o f the que st ion : The devel op i ng count r i e s have grown impre s s ively over the pa s t twenty- f ive yea r s : income per person has increased by a lmo s t 3 percent a year , with th e annu a l growth rate a c c e l erat ing f rom
64 about 2 percent i n th e 1 9 5 0 s to 3 . 4 percent in the 1 9 6 0 s . Contra sted with what l i t t l e can be g l eaned o f th e experience of th e s e countr i e s b e f o r e 1 9 5 0 , th i s i s a sub s tantia l improvement over the h i s to r i c a l record . Moreover , it c ompa res extreme ly favorab ly with th e growth rates ach i eved by the now devel oped count r i e s o v e r t h e per iod o f the i r indu s t r ia l i zation . 1 3 The report went on to note , h oweve r , th at there had been ma rked d i f f e renc e s in the perf ormance of individu a l deve loping coun t r i e s i n th i s period : " Growth rates have genera l l y been lower in the l ow inc ome countries of Africa and A s ia , where the ma j or ity o f the world ' s poor l ive . I n countr i e s accounting for h a l f th e popu l a t ion o f the developing wor l d , income per per son has r i s en by l e s s than 2 percent a year . " I t mu st be borne in mind , th erefore , that the devel oping count r i e s d i f f e r greatly as regards the s i z e o f the i r economi e s , the i r income l evel s , the i r re sources , the i r economic structure s , the i r orga n i z ational forms , the i r tech n i c al capab i l i t i e s , and the i r l inks with the wor l d ec onomy . Thu s , a l eg i timate d i s t inction may be drawn , at l ea s t , between : ( 1 ) the o i l - expor ting coun t r ie s , ( 2 ) count r i e s that are at intermediate stages o f deve l opment , a n d ( 3 ) t h e l e s s deve loped. countr ie s , or l ow income count r ie s , that make up the so-ca l l ed Fourth Wor l d . Th ere are a l s o g reat d i f f erences among the low I n th i s rega rd , th e Wor l d B ank ha s income countr i e s : e s tabl i shed a d i stinction between mining economi e s and predominantly ag r i cu l tu r a l economi e s . The Wor l d Bank report u s ed per capita income a s the fundamenta l indicator for d i s t i ngu i shing between the latter two catego r i e s of countries . Other ana l y s e s take into account , in addit ion to per capita income , the share o f manu f ac tures in total export s , the per capita va lue of indu s tr i a l export s , and th e share of " compl ex produc t s " " S imp l e " i ndu s t r i a l produ c t s usual ly in such exports . incl ude texti l e s , c l othing and footwear , and chemi c a l s that are obtained ma inly f rom the e l ementary pro c e s s ing of othe r primary produc t s ; a l l other indu s t r i a l goods are cons idered " complex . " The fact i s that in recent yea r s some Latin Amer ican , As ia n , and southern and e a s tern European count r i e s have rapidly emerged as produ c e r s o f manu factures that are very competitive on the internat iona l market . Th i s phenomenon , some time s d e s c r ibed a s " the emergence o f two or th ree Japan s " in the field o f trade , i s becoming inc rea s ingly I n Ang l o - S axon l iterature , the s e countries impo rtant . are r e f er red to a s newly indu s t r ia l i z ing c ountr i e s ( N IC s ) . DECO include s in th i s c ategory Hong Kong , South Korea , S ing apo r e , T aiwan , B ra z i l , Mexico , portuga l , Turkey , and Yugo s l avia . A United K i ngdom Fore ign and Commonwea l th O f f i ce report entitl ed Th e N ewly I ndu s t r i a l i s ing Countr ies
65 and th e Adj u stment P rob l em , pub l i shed in London in 1 9 7 9 , a l so l i st s the P h i l ippine s , India , I ran , Ma l ay s ia , p ak i s tan , Thai land , Argent ina , Spain , Greec e , I s rae l , Ma l t a , Hungary , p o l and , and Roman ia . A feature c ommon to a l l the s e count r i e s i s that they a l l have a sub stant i a l ly h igher growth potential than th e l e s s deve l oped count r i e s and consequently have more oppo rtun i t i e s fo r ra i s i ng the l iving standard o f the poor ; the s e oppor tu n i t i e s are not exc lus ively concentrated in the ru ra l s ector . Another f eature of th e s e count r i e s i s the h igh g rowth rate o f the i r indu s t r i a l exports over th e l a s t f i fteen years and the ir increa s ing acc e s s to inter nationa l credit in the mo st recent period . Th i s means that the i r deve l opment is much mor e dependent upon inter nationa l trade and the world capital ma rke t s than tha t of t h e poo rer countr i es a n d t h a t the ir economi e s are much more s e n s i tive to trends in th e indu s t r i a l i z ed count r i e s . I t i s not surpr i s ing tha t in order to ma intain the i r e conomic growth or to pa l l iate t h e impact o f the inter nat iona l c r i s i s on th i s proc e s s , some of the s e countr i e s shou l d have requ i red sub s tant ia l extern a l f inanc ing , on the one hand , or tha t they should have obtained a c c e s s , to an unprec edented degre e , to the international capita l ma rket s , on the other . At the same t ime , it mu st a l s o be noted tha t because of the defects in th e i r accumu l ation proce s s e s and the s o c i a l inequa l i t i e s inherent in th e i r po l it i c a l systems , the pub l i c and pr ivate sectors o f many of the s e c ountr i e s u sed th i s extern a l credit inef f ic iently and i nequ itably and cons iderab ly agg ravated the conse quence s o f the i r ex terna l indebtedne s s . THE EXTERNAL INDEBTEDNE S S OF LAT IN AMERICA The above-de s c r ibed changes in th e internat iona l sys tem provided the nec e s sary , a l though not suf f i c i en t , cond i t ions for the L a t i n American count r i e s to reach such a h i gh l evel o f externa l i ndebtedne s s . l � I ndeed , th roughout th e l a s t ten yea r s , the external debt o f th e Latin American countries rose more than ten f o l d , reach ing a total o f around U S $ 3 0 0 b i l l ion , a f igure tha t represents a lmo s t h a l f the external debt of th e deve l op ing countr i e s a s a who l e . F rom anoth er point of v i ew , one might say that whereas in 1 9 7 0 the extern a l deb t o f t h e L at in Amer ican countr i e s represented a l it t l e under 1 2 percent o f t h e g r o s s dome s t i c product o f th e s e countr ie s , towa rd th e e n d o f 1 9 8 2 it repre sented 3 0 per cent o f that product . At the same t ime , a s a resu l t of th e c omb i ned e f f ec t o f t h e increa se in t h e l evel o f th e debt and the increa s e in intere st rate s , the servi c e o f the debt , wh ich in 1 9 7 0 repre s ented around 7 percent of the va lue o f export s , repres ented a lmo st 4 0 percent of the v al ue o f expor t s at t h e e nd o f 1 9 8 2 . Moreover , s ince mo st o f the new credits obta ined by the Latin Amer ican
66 count r i e s c ame f rom private sourc e s , th e repayment terms were mu ch shorter than ten years earl i e r , so that the short-term externa l debt became dange rou s l y h i gher th an the amount tha t might reasonab ly be expected to b e in curred in conne c t ion with the f inanc ing o f trade . It shou l d b e remembered tha t , wherea s i n the early 1 9 7 0 s a round 8 0 percent o f Latin Amer ic a ' s externa l f i nanc ing c ame f rom pub l ic sourc e s , at the beginning o f the 1 9 8 0 s ex actly the same proport ion c ame f rom private sour c e s . I t shou l d a l so be borne in mind tha t s in c e mo st o f th e s e debts are sub j ec t to f luctu a t ing intere s t rate s , it h a s b e e n impo s s ib l e to make a ny forec a s t s a t th e t ime o f s igning the l oan agreement about the future s e rv i c e c o s t s that in the late 1 9 7 0 s have s h o t up abruptly . A t more o r l e s s the s ame time a s the f lows o f direct foreig n inve s tment to L a t in Ame r i c a have fa l len , Latin Ame r ican countr i e s f ound thems elves in th e sudden f inanc i al squee z e . The l evel and character i s tic s o f Latin Ame r i c a ' s exte rna l indeb tedn e s s may b e exp l a ined by both inter nat ional and dome s t i c facto r s , the re l a t ive weight of wh i ch i s very d i f f ic u l t to a s s e s s as yet . On th e one hand , the f a c t th a t th i s e x t e r n a l indebtedne s s has a f f ected countr i e s tha t have f o l l owed very d i f f erent ec onomic po l ic i e s woul d seem to under l ine the importanc e o f external factors in expl a i n ing the phenomenon . On th e o ther , the c i rcums tanc e s that the ex ternal sector of L a t i n Ame r i c a s e em s to h a v e b e e n a f f ec ted mo re t ha n other deve loping reg ion s that had a ch i eved a cons iderabl e de gree o f i ntegrat ion in the wor ld economy , such as South east A s ia , wou ld s eem to indicate that dome s t i c pol i c i e s h a d a great d e a l to d o with wha t happened in Latin S ti l l i t mu s t be kept in mind that the Latin Amer ica . American count r ie s have very d i s t inct economi c , soc ial , and pol i t ica l struc tu res and hence are very d i f f erent a s regards the i r capa c i ty t o ad j u st t o the extern a l cyc l e . I t i s worthwh i l e noting three o f the factors that led to such an abundance of external re sourc e s dur i ng the p a s t decade . The f i r st ha s to do with the impact o f the two l a rg e o i l -price increa s e s and the r e s u l t ing accumu l ation o f f inanc i a l surp l u s e s in the hands o f the OPEC countr i e s , wh ich had to be recy c l ed by the p r ivate bank s . The s econd i s related to the f a l l in the rate o f inve st ment and the app l ication o f ant i - i n f l a t ionary monetary po l ic i e s by the ma in indu st r i a l countr i e s , in the context o f a protracted period o f rece s s ion , wh i ch meant tha t the s e c oun t r i e s c o u l d n o t absorb surpl uses a s dynami c a l l y a s they h ad been ab le t o d o in th e p a s t . T h e th ird ha s to do with the fact th at th e strengthening o f the r o l e o f t h e pr ivate bank s a n d t h e increa s ing u s e o f mechani sms such as syndicated loans obtained on th e Eurocurrency ma rket ( which accounted for over 9 0 percent o f cap i ta l f l ows to t h e deve l oping count r i e s dur ing the l a s t decade ) led to a lowe r ing o f standards for creditworthin es s .
67 T h i s i s becau s e the s e market s operate on a gl ob a l s c a l e a n d f e e l that , a t that l evel , they d o n o t n e e d to ana l y z e spec i f i c operat ions very carefu l ly ; i t wa s the re f o r e pos s ib l e to inc rea se operations dramatic a l l y , l ower ing c o s t s in exchange for r i sk s that are now coming to l ight in very c omplex way s . Th e f a c t is that during the 1 9 7 0 s the banks compe ted for cu stomer s to whom they cou ld loan the ir surplu s e s and tha t previou s l y inel igible c l ients , inc lud i ng the r e latively more advanc ed deve loping countrie s , became e l igible for loans . At th e s ame t ime , the demand for international c r ed i t in the Latin Amer ican count r i e s ro s e abruptly as a re s u l t o f the aforementioned trends . Many o f the se coun t r i e s h ad to undertake cons ide rab l e chang es in order to a d j u s t to the s h i f ting cond i t ions of the interna t ional economy- -whether to meet the h igher co s t o f oil or to penetrate the mark e t s more e f f i c i ently--wh i l e at the s ame t ime they had to pre s s on in the ir struggle aga inst inf l a t ion . That is why many Latin American count r i e s tr ied dur i ng t h i s period to trans form th e i r e conomi e s , rev i s ing th e incentive s o f f ered , the ir tari f f po l i c i e s , and the ir f i nanc ia l , tax , and soc i a l - secu r i ty systems , among other s . I n the proce s s , enterpr i s e s had to s eek c redit , e i ther to stay in the market if they had been unfavorab ly a f f ected by the changes or to expand if th e i r competit ive p o s it ion h a d improved . Th i s generated pre s su r e s tha t ra i s ed dome s t i c interest rates and c reated a strong incentive to obtain credit abroad , wh ere inte r e s t rate s w e r e more f avorab l e . T h e demand for external c redit ro se to unprecedented l eve l s a s a r e su l t o f the increased pub l ic expendi ture that some Latin American countr i e s unde rtook i n order to f inance expan s ion plans based o n pro j e c t s tha t w e r e e i th e r sub j ect to a l ong per iod of matu r i ty or very large in s c a l e , particu larly in the c a s e o f t h e o i l - exporti ng countr i e s . I n other c a s e s the exc e s s ive expenditure of the private sector , a proce s s that wa s ac c ompan ied b y a stro ng p r e f erence for con sumpt ion and a deterioration o f the inve stment proce s s , brought the demand for externa l c redit t o formerly unknown l eve l s . The development st rategy based on external indebted ne s s that was f o l l owed by the Latin American count r i e s dur i ng tha t per iod se emed rea sonab l e at the t ime becau s e t h e l o a n s were g ranted on very f l ex i b l e terms a n d at negative or ve ry low real intere s t rates and long I n fact , th i s s t rategy made it po s s ib l e to ma tur i t i e s . pal l iate for some t ime the impact of the internat iona l rec e s s ion on the L a t i n Ame r i c an count r i e s and for mo s t o f the p a s t decade enab l ed them t o g row at a cons iderably h igher rate tha n the indu stria l i z ed count r ie s . However , the advocates o f the s e care l e s s po l i c i e s o f externa l indebtedn e s s unde r e st imated the r i sk tha t f lu c tuat ing intere s t rates and short matu r i t i e s migh t r a i s e the co st of servic ing th e debt above a nd beyond the short-term
68 repayment capa c i ty o f the countri e s concerned , revers ing the trend toward permi s s iven e s s of the internat iona l bank s and beginning a period o f expen s ive and restri cted credit . The r i sk s imp l i c i t in such s i tuations were aggravated by the surp r i s ing lack o f regu l a t ion o f the internat iona l f inanc i a l mark e t s during thi s ent ire per iod . As has been men tioned , the internat iona l private bank s played a ma j or role in recyc l ing the f inanc i a l surplu s e s a c cumu l a ted dur i ng tho se yea r s , whereas the ro l e o f the internat iona l f inanc i a l i n s t i tutions wa s dra s t i c a l l y curta i l e d . For examp l e , I nterna t ional Monetary Fund f inanc ing , wh ich in the 1 9 6 0 s was equ ival ent to 16 percent o f the va lue of worl d trade , in th e late 1 9 7 0 s only repres ented 3 perc ent . Likewi se , in th e c a s e o f Latin Amer ica , loan s author i z ed b y the Inter-American Deve lopment Bank , wh ich had amounted to the equiva l ent of 2 5 percent of the de f i c i t on current ac count o f those count r i e s du r ing the per iod 1 9 6 5 - 1 9 7 0 , dropped to 1 1 percent dur i ng 1 9 7 5 - 1 9 8 0 , and the , Wor ld Bank ' s share dropped f rom 21 percent to 12 percent between tho se two period s . The deterioration of th e role o f pub l i c agenc i e s in providing ex ternal f i nanc ing f o r Latin Ame r i c a had very s e r iou s impl ication s , ina smuch a s , when faced with the c r i s i s , the i nternat iona l private bank s proved to be very u nre l i ab l e and to lack v i s ion : They cut down on credit and , taking advantage o f the fact that the debtor c ountries we re forced to renegot iate , shortened matur i t i e s and increa sed the cost of loans ( i . e . , r a i s ed interest rates and commi s s ions ) prec i s el y at a t ime when the debto r s were exper i encing d i f f i cu l t i e s a nd de spite th e fact that the renegot iations reduced the bank s ' r i s k s . Th i s l eads to a f inal ob servation--one tha t i s d i rectly rel ated to the purpo s e of th i s chapter-- concern ing the l ink s that ex i s t between the externa l indebtedn e s s o f L a t i n Ame r i ca a n d th e general trends o f the wor l d economy a n d o f wor l d po l it ic s . I a m referr ing t o the re spon s ib i l ity that the international community shou ld a s sume with regard to the debt prob l em . So far , the search for ways of dea l ing with the c r i s i s ha s been l e f t almo s t ent i re l y t o the c reditors , wh i l e national mone tary autho r i t i e s and interna t i ona l f i nan c i a l i n s t i tutions have pl ayed a very l imi ted ro l e and other sector s , e i ther ec onomic or po l i tica l , have been vi rtua l l y excluded . In referring to the intere sts i nvolved in the c r i s i s , U . S . S ec retary o f the T rea sury Donald Regan po inted ou t the f ol lowing : I t i s r ight for Amer ican c i t i zens to ask why they and th e i r gove rnment need be concerned about the internationa l debt prob l em . Why shou ld we worry if some f o reign borrowers get cut o f f f rom bank loan s ? and why shou l d we wo rry if bank s l o s e money ? Nobody forced them to l end , and th ey shou l d l ive with the consequ ences of th e i r own dec i s ions l ike any other bu s ine s s . . . .
69 I f a l l the u . s . government had in mind wa s throwi ng money at the borrower s and th e i r l enders , i t wou ld be d i f f icu l t to j u s t i fy u s ing u . s . funds on any e f forts to r e s o l ve the debt c r i s i s , e spec i a l l y at a t ime of dome s t i c spending ad j u stments But o f c our se , the re i s mo re to the probl em , a nd to the solution . F i r s t , a furth e r abrupt and la rge- s c a l e contraction o f LDC [ l e s s developed country] imports wou ld d o S econd , i f ma j or damage to t h e U . S . economy . the s i tuation we re handl ed bad l y , the d i f f i cu l t i e s fac ing LDC borrowe r s migh t come to appear s o hope l e s s that they wou ld be tem� ted to tak e desperate s tep s to try to e s cape . 1 •
•
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I t mu st be recog n i z ed that the current s i tuation i s a cons equ ence not only o f the po l ic i e s appl ied b y the debtor count r i e s but a l s o o f th e incon s i stent b ehavior o f p r ivate sour c e s o f f inanc i ng tha t wa s aggravated by th e lack o f regu l a t i on o f the interna t ional f i nanc i a l market s . Henc e , i t mu st a l so b e acknowl edged tha t the ent i re internationa l c ommu n i ty is re spon s ib l e for dea l ing with the c r i s i s . I n the f ir s t p l a c e , in th e future the servic ing o f the debt wi l l have t o be s cheduled i n accordance with the requ irement s of the deve lopment proce s s e s o f the debtor count r i e s and the exigen c i e s o f wo r l d economic recovery � to th i s end , the renegot iation o f ex i s t ing loans or the grant ing of new interna t i onal loans mu s t be carried out with the s e obj ective s in mind . In the s econd place , the d i s po s i t ion o f pr ivate banker s to operate wi th borrowe r s in the deve l op ing count r i e s mu s t not be sub j e c t t o sudden change s � t o th i s end , t h e bank s shou ld work in closer contact with the debtors thems e l ve s , with th e monetary author i t i e s o f the i r own countr i e s , and with the international f i nanc i a l i n s t itutions . F inal ly , mea s u r e s mu s t be taken to enab le th e s e agenc i e s t o work e f f e c t ively to ensure the nec e s s a ry compatib i l ity between inter na tional f i nancing and the rea sonably smooth behavior o f t h e wor l d economy , without neglecting the ro l e of the deve loping count r i e s in i t . I n th i s regard , i t i s e s sent i a l to s trengthen the l ink between f inanc ing and trade , wh ich h a s been seriou s ly weakened by the deterioration in recent years of the terms o f trade for mo s t L a t i n Ame r i can export commod i t ie s , by the s trong prote c t io n i s t me asure s adopted by the deve l oped count r ie s , and by the general breakdown of the ru l e s th at governed the system of internat iona l trade . H e lmut S chmidt , former chanc e l l or of the Federal Repub l. i c o f Germany , had th i s t o s a y o n the sub j ect : " C redit creates trade � trade secures c redi t . Ma j o r deve loping count r i e s balance-of -payments prob l ems cannot be cured if I n many r e spec t s the we shut ou r markets to them . deve loping countr i e s are now in a po s i t ion s imil a r to
70 that of th e German Re ich i n th e 1 9 2 0 s : Germany cou l d not meet its ' reparation ' payments because the a l l i e s we re So not prepared to to lerate German trade surplu s e s . Germany cou l d not meet i t s d e b t repayments a n d l o s t i t s c redi t-worth i ne s s . ,, 1 6 I t i s to be hoped tha t , given the present c i rcum stance s , the interna tional community wi l l be mo re far s ighted about Latin Amer i c a and the r e s t o f the deve l op ing world than it wa s about Germany a f ter Wor l d War I and tha t it wi l l thu s be ab l e to prevent the social d i s order s that wou l d inevitab l y b reak out , a l b e i t under new forms , if greater pres sure were to be put on the debtor c ountr i e s . NOTES S o ca l l ed by S tanley Hof fmann in the New York 1. Review o f Book s , Apr i l 1 6 , 1 9 8 1 . I n th i s regard , see a l so Robert W. Tucker , " Th e Pu rpo s e s of American Power , " Fore i �n Af f a ir s , vol . 5 9 , no . 2 ( Winter 1 9 8 0 ) and h i s "Amer�ca in Decl ine : Th e F o re ign P o l icy o f 'Matu r ity , ' " Foreign A f f a i r s : America and the Wor l d 1 9 7 9 , vo l . 5 8 , I nternational I n s t i tute o f no . 3 ( 1 9 8 0 ) . S e e a l so : S trateg ic S tud i e s ( I I S S ) , S trateg i c Survey 1 9 8 0 , Londo n , 1 9 8 1 . 2 . D . Yank e lovich and L . Kaagan , " A s s ert ive Amer i c a , " Foreign A f f a i r s : America and the Wo r l d 1 9 8 0 , vo l . 59, no . 3 ( 1 9 8 1 ) . S e e S . B i a l e r , " Po l and and the Soviet Imperium , " 3. Foreign A f f a i r s , vo l . 5 9 , no . 3 ( 1 9 8 1 ) ; and S . B ia l e r a n d J . A f f e r i c a , " Reagan a n d Ru s s ia , " Fore ign A f f a ir s , S e e a l s o W . G . Hyl and , vo l . 6 1 , no . 2 ( Winter 1 9 8 2 ) . " C l a s h with the Soviet Un i on , " Fore ign P o l i cy , no . 4 9 ( 19 8 2-1983 ) . 4. S e e Marsh a l l Goldman , U S S R in C r i s i s : The F a i lure o f an E conomic System, New York , 1 9 8 2 . See J o s e f Jof f e , " The Endu r i ng C r i s i s , " 5. Fore ign A f f a i r s , vo l . 5 9 , no . 4 ( Spring 1 9 8 1 ) ; and E l iot A . Cohen , " Th e Long-Term C r i s i s of th e A l l iance , " See a l s o Fore ign A f f a i r s , vo l . 6 1 , no . 2 ( Winter 1 9 8 2 ) . David A . Andelman , " S trugg l e over Wes tern Europe , " Foreign Po l icy , no . 5 9 ( 1 9 8 2 - 1 9 8 3 ) . S e e Chri stopher B ertram , " I ntroduc t ion , " in 6. Third World Con f l ict and I nternational S ecur i ty , Ade lphi S e e a l s o , on Latin Ame r i c a , P apers no . 1 6 6 , London . E s tudios I nternac ionl a l e s , Amer ica Latina D e spue s de l a s M a l v i n a s ( en t i r e i s sue ) , no . 6 6 ( S antiago , O c tober Decembe r 1 9 8 2 ) . 7 . S e e Organ i z a t ion for E conomic Cooperation and Development ( OECD ) , The We l f are S tate in C r i s i s , 1 9 8 1 ; and L . Thurow , The Z ero- Sum S o c i e ty : D i s tribution and the p o s s i b i l i t i e s for E conomic Change , New York , 1 9 8 0 . For a Latin American viewpo i n t , see F . H . C a rdo s o , L a s
71 POl l t i c a s Soc i a l e s e n l a Decada del 8 Q : Nueva s Opcione s , S a9tiago , 1 9 8 2 � a s wel l a s the a r t i c l e s pub l i shed in Critica y Utop i a , no . 6 , under the heading S o c i edad C iv i l y Auto r i ta r i smo , espec i a l l y A . F l i s f i s ch , " Notas Acerca de l Re f o r z amiento de la S o c i edad C iv i l . " 8. S ome o f the e ar l i e s t stud i e s o f th i s phenomenon , in the f ie l d o f economi c s , are R ichard N . Cooper , " The Economi c s o f I n terdependence and Foreign Pol icy in the S event ie s , " Wor l d Pol i t ic s , vol . 2 4 , no . 2 ( January 1 9 7 2 ) . Fundamental book s , f rom the standpo int o f international rel ati on s , are P ower and I nterdependence : World P o l i t ic s in Tran s ition by Robert O . Keohane and Joseph S . Nye , B o s ton , 1 9 7 7 ; and the e a r l i e r work by the s ame author s ent i t l ed Transnational Re l a t ion s a n d Wor l d P o l i t ic s , C ambridge , Ma s s . , 1 9 7 2 . For oth e r l i terature on the sub j ec t , see R . Ro sencrance and A . S t e i n , " I nterdepen denc e : Myth or Rea l ity ? " Wor ld P o l i t i c s , vo l . 2 8 , no . 1 ( 1 9 7 6 ) ; and the many pape r s on the sub j ect pub l i shed by I n ternationa l O rga n i z a t ion , such a s H . Alker , " A Methodo l ogy f o r De sign Research on I nterdependence Al ternat ive s , " vo l . 3 1 , no . 1 ( 1 9 7 7 ) ; R. Ro sencrance , " Wh ithe r I n terdependenc e ? " vo l . 3 1 , no . 3 ( 1 9 7 7 ) ; and K . J . H o l s t i e , " A New I nternational P o l i t i c s ? Diplomacy in Complex Interdependenc e , " vo l . 3 2 , no . 2 ( 1 9 7 7 ) . Some of the se pape r s , a s wel l a s o th er s , are co l l ected in R . Maghrori and B . Ramberg , G l oba l i sm Ver sus Rea l i sm : I nternational Re lation s ' Th i rd D ebate , Bou l de r , C o lo . , 1982. F inal ly , see a l s o J . N . Ro s enau , The S tudy o f G loba l I n terdependenc e : E s says on the Transnationa l i z a t i on o f Worl d A f f a i r s , N ew York , 1 9 8 0 . 9 . Th i s concept h a s been stud ied by a work ing grou p on interdependence a n d national development o f the Program for Joint S tudies on L a t in Ame r ican I nternation a l Rel ations ( RIAL ) . I have publ i shed a paper ent i t l ed " I nte rdependenc ia y De sarro l l o Nac ional , " E l T r ime stre Economico , no . 2 0 0 ( O c tober-Decembe r 1 9 8 2 ) ; see a l so K . R . Mirow and H . Maurer , Web s o f P ower : I n ternational Carte l s and the Wor l d Economy , B o s ton , 1 9 8 1 ( which inc l udes an intere s t ing ref erence to B ra z i l ) 1 0 . D . H . Meadows , et a l . , The L imits to Growth , Wa shington , D . C . , 1 9 7 2 . S e e a l s o E . J . Mi shan , The Economic Growth Debate , London , 1 9 7 7 ; K . D . Wil son , Prospects f o r Growth : Chang ing Expec tations for the Future , New York , 1 9 7 7 ; W . Leontie f f , " Th e Future of the Wor l d E conomy , " E tude s e t Expan s ion , no . 2 7 3 ( N ew York , July-Augu s t - S eptember 1 9 7 7 ) ; and C . Freeman and M . Jahoda , World Future s : The Great D ebate , London , 1 9 7 8 . 1 1 . CEPI I , Economie Mondia l e : La Montee des Tens i on s , P ar i s , 1 9 8 3 . 12 . I n dependent C ommi s s ion on I nternational Develop ment I s sue s , North - S outh : A P rogramme for Surviva l , London , 1 9 8 0 . I n ternat i o na l Bank for Recon s truc tion and 13 . Deve l opment , Wor ld D eve lopment Report , 1 9 7 8 . •
72 1 4 . For a Latin Ame r ic a n per spec t ive on th i s prob l em , see the document prepared b y ECLA for the Bogota h i gh l evel meeti ng h e l d i n May 1 9 8 3 , ent i t l ed " La C r i s i s Economica I nterna c i onal y l a C apac idad d e Respuesta de America Latina . " S e e a l so Enrique V . I g l e s ia s , " Re f l exiones s obre en economio l a t inamericana en 1 9 8 2 , " CEPAL Rev i ew , no . 1 9 ( Apr i l 1 9 8 3 ) ; and the a r t i c l e s c o l l ec t ed under th e heading C r i s i s y Deuda en America Latina , E studios I nterna c iona l e s , �antiago , no . 6 4 October-De c embe r 1 9 8 3 ) . 1 5 . Dona l d Rega n , S ta tement to the United States Congre s s , 7 Apr i l 1 9 8 3 , Wa sh ington , D . C . , 1 9 8 3 . 1 6 . He lmu t S chmidt , " Th e Wor l d Economy at S tak e : The I nevi tab l e Need f o r Ame r ican Leader ship , " The Economi s t , February 2 6 , 1 9 8 3 . ---
4
External Debt Problems of Latin America Enrique V. Iglesias
By the enc o f 1 9 8 3 the total external debt o f Latin America amounted to approximately U5 $ 3 l 0 b i l l ion ( Table 4 . 1) . It i s e s t imated to have grown by 7 percent during the year , a rate that wa s much lower than the 12 percent o f 1 9 8 2 and far below the growth rate o f around 23 per cent , wh ich wa s the average between 1 9 7 9 and 1 9 8 1 . The net f l ow of external capital to Latin America f e l l f rom a peak o f U5 $ 3 8 . 0 b i l l ion in 1 9 8 1 to U5 $ 1 6 . 6 b i l l ion in 1 9 8 2 and U5 $ 4 . 5 b i l l ion in 1 9 8 3 ( Tabl e 4 . 2 ) . This sharp drop in the growth rate o f the debt wa s ma inly the re su lt o f the restrictive po l icy adopted by the international commercial bank s with respect to Latin Ame r i c a . I n 1 9 8 3 , the s e banks granted vi rtua l ly no new autonomous loans to the region , channe l ing the ir c red i t through the renegotiations o f the external debt init iated by seve ral Latin Ameri can countr i e s . Under such c i rcumst ance s , a subs tant i a l part of the increa s e in the debt wa s accounted for by the fact that the bank s capita l i zed intere st payment s . T h i s wa s partly a r e s u l t o f pre s sure brought to b e a r b y t h e I nternational Monetary Fund to i nduce the bank s to ref inance part ( u sua l ly around 5 0 percent ) o f the intere st earned , a s a contri bution to the ad j u stment program sponsored by the Fund . The need to ref inance a cons iderab l e portion o f the intere s t payments become s obvious when one takes into account the tremendou s burden that they repre sent for mo s t o f the count r i e s o f the region . I ndeed , despite the fact that i n 1 9 8 3 intere s t payments f e l l , ma inly a s a result o f the s l ight decl ine in the preva i l ing rates on the ma in internat ional f inanc ial marke t s , they s t i l l amounted t o the equiva l ent o f 3 5 percent o f the va lue o f exports o f good s and servic e s f o r the region a s a who l e ( Table 4 . 3 ) . The share o f the bank s in the region ' s external indebtedne s s has o f course increased notably . I n the 1 9 6 0 s it was relatively i n s i gn i f i cant , whereas in the 1 9 8 0 s it was over 50 percent and in some count r i e s ( Argentina , B r a z i l , Ch i l e , Mex ico , Vene zue l a ) amounted t o 73
74 Table 4 . 1
Latin America :
Total External Debt
( end-of-year balance in bi l l ions o f u . s . do l l ars ) country
1981
1982
Latin America
2 5 7 • .890
289 . 437
3 0 9 . 800
O i l - exporting countries BOliviab c Ecuador d Mexico Pe ru c c Venezue 1a
116. 777 2 . 450 5 . 756 7 2 . 00 7
1 2 8 . 948 2 . 373 5 . 788 81 . 350 9 . 503 2 9 . 934
134 . 500 2 . 700 6 . 200 8 5 . 00 0 1 0 . 600 30 . 000
160 . 4 8 9
1 7 5 . 300 4 2 . 000
Non-o i 1 - exporting countries Argentina d Braz i 1 c d Colombia b Costa Rica Chi le d c E1 Sa1vador d Guatema 1a Guyana C Haiti C b Honduras b Nicara ua Panama C paraguay d Dominican Repub 1 i c d uruguay
g
a b c
d
8. 227 2 8 . 377 14 1 . 1 1 3 3 5 . 67 1 6 5 . 000 8 . 160 2 . 345 15 . 542 980 765 687 326 1 . 055 2 . 163 2 . 333 1 . 120 1 . 837 3 . 129
3 8 . 907 7 5 . 000 9 . 506 2 . 60 3 17 . 153 917 858 689 765 1 . 1 98 2 . 789 2 . 733 1 . 1 95 1 . 921 4 . 255
8 3 . 000 10 . 300 3 . 050 1 7 . 6 00 1 . 2 00 1 . 000 800 800 1 . 5 00 3 . 400 3 . 100 1 . 3 00 2 . 000 4 . 2 50
prel iminary es timates sub j ect t o revi s ion pub l i c debt
Inc ludes o f f i c i a l ly guaranteed pub l i c and private external debt , plus nonguaranteed long- and short-term debt with financial institutions reporting to the Bank for International Settlements Total pub l i c and private external debt
Source : Economic Commi s s ion for Latin America , on the ba s i s of o f f i c i a l f i gures and pub l i c ations of international finan c i a l agenc i e s .
more than two - thirds o f the total debt . Obviou s l y , debt s with private bank s reached the se proportions be cause o f the wi l l ingne s s o f the bank s in que stion to f i nance mo st of the region ' s d e f i c i t on current account f rom 1 9 7 4 on . In actual fact , bank loans have been ava i l ab l e in abundance , except du r ing a short rece s s ion in the mid- 1 9 7 0 s . Recent l y , however , the bank s have become much more cautious about mak ing new commi tments in general and part icularly in respect to granting loans to the developing countrie s .
11 . 3 8. 7
7.0
8.6
18 . 3
1976 13. 5
In percentage s
pre l iminary e s timates s ub j ec t to revi s i on
Sour c e :
I n t e rn a t i ona l Monetary Fund , Bal anc e of Payments Yearbook for Latin Ame r i c a e s timates on the ba s i s of o f fi c i a l fi gure s .
c
b
( sever a l i s s ue s ) ;
=
100
base 1 9 8 3
109 . 0
119 . 6
110 . 9
85 . 8
64 . 5
58. 7
a Obtained by de f l ating c o lumn 3 by the U . S . who l e s a l e price inde x ,
- 20 . 4
9. 2
12 . 3
19 . 0
22 . 9
49 . 9
43 . 7
46 . 0
30. 3
(5)
Servi c e s
Goods and
Exports o f
1 07 . 6
-29 . 5
- 20 . 2
8.9
10 . 9
14 . 8
15 . 9
18. 7
15 . 0
11 . 9
8. 3
(4)
Financing
Ava i lab l e
Net Real
-29 . 5
34 . 0
1982
4.5
29 . 1
36 . 8
38 . 0
16 . 6
1981
1983
14 . 2
19 . 0
29 . 0
29. 9
1979
1 980
17 . 3
26 . 4
1977
1978
c
8.7
5.8
14 . 5
1975
10 . 5
6.3
5.3
11 . 6
1974
3.7
4.4
8.1
1973
(3)
(1) - (2)
(2)
=
(1)
(3)
Financ ing
Net Ava i l ab le
Year
for Pro fits
and Intere st
of Capita l
Net Payments
a
(6)
(3) / (5) (6)
-27 . 4
-18 . 5
7.4
9. A
17 . 2
24 . 7
14 . 8
22 . 6
19 . 9
13 . 7
12 . 2
=
Goods and serv i c e s b
Exports of
F inanc ing/
Net Avai lable
Economi c Commi s s ion
Net Financing Avai lable After Payment of Pro f i t s and Inte r e s t
Net I n f low
do l l ar s )
Latin Ame r i c a :
( bi l l ions o f U . S .
Tab l e 4 . 2
--.J VI
Latin Ame r i c a :
34 . 1 13 . 3 18 . 0
31 . 5 10 . 1 12 . 8
24 . 5 7.7 9.9
7.1
C o s t a Rica
3.3 8.6
2.8 8. 2
2.3
7.2
Haiti
Honduras
Uruguay
14 . 7 11 . 0
9.0
interest payment on short-term debt .
prel iminary e s timates s ub j e c t to rev i s ion
15 . 7 14 . 3
14 . 4
10 . 7
10 . 6
13 . 1
10 . 5
15 . 9
15 . 5
14 . 5
3.2
7.5
7.5
34 . 6
25 . 5
21 . 6
40 . 4
19 7 7 - 1 98 2 : Internation a l Mone tary Fund , B a lance of Payments Yearbook ; Sourc e : for Latin Ame r i c a on the b a s i s of o f f i c i a l information .
a
Intere s t i n c l ude s
Domin i c an Repub l i c
Note :
14 . 0 10 . 4
8.8
9.8
Paraguay 8.5
7.0
6.7
Nicaragua 9.7
5. 3
3.1
3.6
2.4
Guatema l a
9. 3
6.5
5.3
5.1
2.9 2.0
19 . 3
16 . 5
17 . 0
13 . 7
Chile
E l S a lvador
Braz i l
7.4
1983 :
32 . 5
25 . 0
15 . 5
36 . 0
16 . 0
3.5
7.5
10 . 5
37 . 5
43 . 5
21 . 5
43 . 5
51 . 0
39 . 0
19 . 0
31 . 5
38 . 0
25 . 5
35 . 5
31 .0
35 . 0
1983
a
Economic Commi s s ion
22 . 4
22.6
14 . 9
31. 7
22 . 5
2.3
7.6
11 . 1
47 . 2
33 . 4
22 . 7
57 . 0
54 . 6
31. 7
22 . 0
18 . 9
46 . 2
31. 3
23 . 3
12 . 8
21 . 4
18 . 8
C o l omb i a
Argentina
countr i e s
Non-oi l- e xport ing
12 . 7
24 . 7
9.6
6.9
7.2
4.0
21 . 8
37 . 6
15 . 1
8. 1
14 . 7
21 . 2
17 . 9
Peru
28 . 7
29. 3
43 . 5
31. 1
38. 3
1982
7.6
16 . 0
24 . 8
24 . 0
25 . 4
Mexico
24 . 3
35 . 5
22 . 3
26 . 4
1981
and S e rv ic e s
11 . 9
23. 1
13 . 6
4.8
Ecuador
Vene zue l a
24 . 5 18 . 2
18 . 1
13 . 7 10 . 3
9.9
B o l ivia
19 . 9 16 . 5
17 . 4 15 . 7
15 . 5 16 . 0
12 . 4
1980
1979
13 . 0
1978
Latin America
1977
Ratio of Tot a l Intere s t Payments to Expor t s of Goods
Oi l -exporting coun t r i e s
Country
( perc entages )
Tab l e 4 . 3
� 0\
77 Many factors are respon s ib l e for th i s tighter attitude on the part o f the commerc i a l externa l credit ins ti tution s . I n the f i r s t place , the cyc l ic a l decl ine in the i ndu s t r i a l economie s ha s weakened the bank marke t s i n the i r countr i e s o f origin , caus ing national c l i ents to meet with payments d i f f i c u l t i e s or to go bankrupt wh i l e at the s ame t ime incre a s ing the demand f o r cred i t ; more over , many o f the bank s ' c l ients in developing count r ies have experienced payment s probl ems . Other factors accounting for the bank s ' lack o f inter e s t in granting l oans to developing count r i e s include a more genera l i zed attitude o f c i rcumspection concerning the diver s i f ication o f the ir port f o l i o s and d i sequ i l ibria in the relation between the ir capital and the i r a s s e t s . The payments prob l ems o f the deve loping countries wi th regard to the p r ivate banks have been e spec i a l l y I n 1 9 8 2 there were seriou s apparent in L a t i n Amer i c a . payments c r i s e s in Mexico and Argentina , wh ich were among the l e ading bank debtors , and a l s o in B ol ivi a , E cuado r , and Costa Rica . I n add i t ion , other countr ie s , such a s Cuba and Vene zue l a , announced tha t they were to reschedu l e the i r next payment s . THE ORIGINS OF THE PROBLEM The I nternational Rec e s s ion More than at any other t ime s ince Wor l d War I I , after 1 9 8 2 the growth o f the per iphery in general and o f Latin America i n particu l ar wa s heavily cond itioned by constra ints deriving f rom the poor economi c evo l ution of I t i s true that c au s e s o f i n t e r n a l origin- the center . such a s tho s e l i nked to the unsat i s f actory management o f f i s c a l a n d exchange p o l i c i e s and to prob l ems of an extra economic character--account for mos t o f the b ig de crea s e s in the produc t in the count r ies of the S outhern Cone , for dec l ine o f GNP in several Central American economi e s , or for the s tagnation o f economic act ivity in countri e s such a s Mexico . Neverthe l e s s , the ma j or external con s traint s s temming f rom the rece s s ion in the indu s t r i a l i zed e conomie s const ituted a brake that had a gene ra l i zed hand i capp ing e f fect on the economic growth of the entire region . Thu s , the ma in origin o f the prob l em i s to be found in the internat iona l rece s s ion , wh ich has been unu s ua l ly drawn out . I n prac t i c e , the rece s s ion in the indus t r i a l count r i e s has reduced t h e aggregate demand o f t h e c entra l count r i e s and consequently ha s brought down the price of Latin Amer ican export s ; to make matters wor s e , the deve loping countrie s have sought to o f f set the drop in prices by exporting l arger vo lume s , a move that produc e s an even greater glut o n the market and l ower s pr ices i n i t s turn . Here again , the count r i e s a s a who l e mu s t s tep
78 u p the i r e f forts s imply t o rema in i n s tatus quo . I n any c a s e , the rec e s s ion has an eroding e f fect on wha t looks l ik e a mean s of paying off the debt ( i . e . , export s ) and a f f e c t s the bank s ' opinion of the solvency o f countrie s , to the detriment o f the real source o f payment ( i . e . , loans granted on rea sonab l e terms ) . Al though the rece s s ion in the industri a l i z ed economie s in 1 9 7 4 and 1 9 7 5 wa s more c r i t i c a l than i t s counterpart today ( the gro s s dome s t i c product of the DECO countries f e l l by 1 percent in tha t perio d ) , i t l a sted only two years . I n stead , 1 9 8 2 wa s preceded by a period of meager growth in the cente r , in wh ich real intere st rates f luctuated around 6 percent , a nd in wh i ch DECO ' s volume o f impor t s decrea s ed or only marg ina l ly expanded . Continu ing th i s t rend , 1 9 8 3 wa s a l so a year in wh ich the pr i c es of the primary commod i t i e s produced by the periphery f e l l aga i n and the s ixth con secut ive year in wh ich the terms of trade deteriorated for the non petrol eum- expo rting develop ing countri e s . To th i s set o f unf avorab l e c i rcums tanc e s wa s added the above yet another of particular s i g n i f icance : ment i oned reduction in ab sol ute terms o f the net f l ow o f capital into the per iphery . T h i s decl ine wa s espec i a l l y severe in t h e c a s e o f the non- petrol eum- exporting coun t r i e s of Latin Amer ica . Th i s s ituation wa s l inked , in turn , to the un expected durat ion o f the rece s s ion in the center . Its prol ongat ion , and the repeated po stponement o f the f i r s t s igns o f recovery beyond the antic ipated date , brought abou t a l iquidity c r i s i s in the industria l i z ed economi e s th at made i t s e l f f e l t in an upsurge o f demand f o r c redit , wh ich wa s no l onge r due to the preva l ence of inf l ationary expectat i on s - - s ince , a s a l r eady shown , the rate o f in f l a tion had decreas ed- -but stemmed f rom the need to suppl ement the low cash f l ows caused by the con t inuou s and unexpected reduc tion o f s a l e s . As thi s heavy demand for credit coinc ided with stabi l i z ation po l i c i e s center ing on monetary restriction s , it generated unprecedented real interes t rates and l ed to decl ine s in production , particu l a r l y in the s ector s mo st s en s i t ive to the rate o f inter e s t ( su ch a s tho se produc ing capital goods and durab l e con sumer goods ) and to reduc tions in invento r ie s . Unfortunate ly , primary commod i t ie s , whi ch con st itute the periphery ' s s tapl e exports , are among the goods for wh ich ad j u s tment to a contract ion in demand i s made I n other instances they ma inly through a f a l l in pric e s . const itute input s for indu s t r i e s tha t are pa rticularly hard h i t by a rece s s ion in the center ( for examp l e , met a l produc t s for t h e motor veh i c l e a n d construction in du s t rie s ) , or aga in the ir inventorie s are l iable to be dra s t i c a l l y reduced when the rate o f inte rest r i s e s . Viewed f rom th i s ang l e , the per s i s tenc e of de f l a t i onary po l ic i e s i n the center has espe c i a l ly a f fected the per iphery ' s export prices but only pa rtly hit
79 dome s ti c pr i c e s i n the center i t s e l f . Cons equently , downward price rig i d i ty a s regards the goods produced in the indu stria l i z ed count r i e s h a s aggravated the deteriorat ion of the per iphery ' s terms o f trade . O f cours e , there i s noth ing new about the fa ct that stab i l i z ation pol ic ie s app l i ed in the centra l economie s are more prone to bring down the periphery ' s terms o f trade than to reduce inf l ation i n the center . What i s new i s tha t because o f the unexpected prolongation o f t h e rece s s ion a l iqu idity c r i s i s occurred th at k e p t r e a l interes t r a t e s exceptiona l ly high - - i n contrast w i t h what happened in 1 9 7 4 and 1 9 7 5 , when the real inte r e s t rate wa s negative - - and th at a l s o made for restriction o f the net f l ow o f capital into the per iphery , a c i rcums tance that l ikewi s e imp l i ed a s ign i f icant d i f ference f rom wha t had occurred dur ing the 1 9 7 4 - 1 9 7 8 cri s i s and aga in i n 1980 . As wa s a l ready s a i d , th i s dec l ine wa s partly due to the h igh l eve l s o f indebtedn e s s reached by the deve loping countr i e s and to the s lower expans ion o f bank cap i t a l and partly to the re luctance o f the inte rnat iona l bank ing system to incre a s e its loan to the periphery at a t ime when th e va lue of the l atter ' s exports wa s diminishing . The perve r s e nature o f th i s change l i e s in the fact tha t the reduct ion in the value o f the periphery ' s exports was due not to a contract ion in the i r vo lume ( in fact it expande d ) bu t to the very marked fa l l in export price s . Thu s , s ince the bank ing system took a s the index o f the per iphery ' s capac ity o f payment the current va lue o f i t s expor t s - - and n o t the i r future value , wh ich wou ld in corpo rate more normal terms o f trade , capital movements tended to aggravate rather than to a l l eviate the externa l crisis . The H igh C o s t of Credit All the indicators suggest that the terms on wh ich Latin America contracts i t s debts have reached a po int where new loans barely provide min imum re l i e f f rom the burden of indebtedne s s . Thu s F igure 4 . 1 shows tha t intere s t rates have become very po s i t ive in real terms in the past years , a f te r having been negat ive , a l so in real terms , ever s ince the mid- 1 9 7 0 s . H owever , f rom the point o f view o f the debtor coun trie s , the h igh inte r e st rates mu s t prima r i l y be con s idered in r e l a t ion to the prices o f the region ' s exports . I t c an then be seen that the real co st of credit for Latin Ame ri c a increased spectacu l a r l y between 1 9 8 1 and 1 9 8 2 , s ince the L IBOR rate rose unusua l l y h igh wh i l e at the s ame t ime there wa s a sharp drop in export pr ices ( F igure 4 . 1 ) . T h i s c l early shows t h e extent of the deterioration in the region ' s extern a l debt - s ervic ing capac ity due to exogenou s factor s .
80
F igure 4 . 1 Evolution o f London I nterbank Of fer Ra te ( L IBOR) , Nominal and Rea l
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Nomina l L IBOR fo r 6 month s , d e f l a ted by indu s trial i z ed countr i e s ' c on sumer price s b Nomina l L IBOR f or 6 month s , d e f l a ted by the unit value t a ' s exports p P rovis ional e s t ima tes
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Sou rc e : L IBOR : Morg an Gua ranty Tru s t Co . , Wor l d F inanc ial Markets ( severa l i s sue s ) : con sumer-prIc e s : IMF , In terna tional F inanc i a l S ta t i s t ic s , Yearbook , 1 9 8 1 and December 1 9 8 2 : unit va lue of export s : ECLA , on the b a s i s o f o f f ic ia l data .
81 The ava i lable data a l s o show that the e f fect o f the h igh b a s i c intere st rates s ince 1 9 8 1 has been even furthe r aggravated by the r i s e in the var iab l e component o f interest on l o a n s in Eurocurren c i e s t o developing coun t r ie s , wh ich , in turn , r e f l e c t s the greater r i sk run by the bank s in l ending money to the countr i e s in que s tion . The negat ive e f fect of the h igh b a s i c interest rates i s , moreover , two f o l d in th at they inc re a s e not only the cost o f new l oans bu t a l so tha t o f loans previou s l y contracted at variable intere s t , wh ich have inc rea s ed notab ly in Latin America s i nce th e beg inning o f the 1 9 7 0 s . The recent intere st-rate trends have thu s g iven r i s e to a new phenomenon , that o f interest rates be ing a debt burden in themse l ve s . Thu s , it is e s t imated that in 1 9 8 3 interest payments amounted t o th e equiva l ent o f 3 5 per cent o f export earning s o f Latin Ame r i can countr i e s and a lmo s t to 4 percent of the se earnings in the c a s e of th e non-o i l - exporting c ountr i e s o f the region . The s ec ond cause o f the inc r e a se in the cost of indebtedne s s has to do with the evolution o f the average time in wh ich the loans mature . Even in the absence of c omplete data on debt repayment p e r io d s for 1 9 8 2 , it seems l ikely , t o j udge b y trends in t he preceding year , that they we re shorte r , thu s accel erat ing debt- servic ing payments and putt ing pres sure on the countrie s ' capa c i ty to pay . I t i s interest ing to observe tha t B ra z i l has opted for l onger payment periods at the cost of accepting much b igger marg ins o f intere s t . Because o f thi s , its interest payment s have i n c r e a se d to su c h an extent t ha t they have g iven r i s e to b a l ance - o f- payment s prob l ems . Mex i co , on the other hand , has a ccepted shorter payment periods but sma l l e r marg i n s o f
intere s t
in recent years �
c o n s equ e n t l y ,
the ma in feature of i t s indebtedne s s c ri s i s has been the matur ing of a l a rge number of loans with i n very short spac e s o f t ime . Thu s , b o t h B ra z i l a n d Mexico have expe r i enced severe debt- servic ing d i f f i c u l t ie s , a l though the pres sure point has been d i f f erent in each c a s e . Contracting sh ort-term deb t s i s usua l ly symptoma t i c of payment s d i f f i c u l t i e s : Debto r s need new l o a n s in order to s e rve the i r debt , bu t the ent i t i e s grant ing the credi t s , in cons ideration of the greater ri sks invo lved , are unwi l l ing to grant long- term loans . Th i s inc rea s e s short-term l end ing a n d means th at there i s a greater ac cumu l ation o f debts that have f a l len du e . Even though it is s t i l l d i f f ic u l t to obtain accurate data concerning sho rt-term indebtedne s s , prov i s iona l data sugg est that it amounted to 3 0 percent o f Latin America ' s total debt in 1 9 8 1 , a f igure th at probab ly rose in 1 9 8 2 . The increa se in short-term indebtedn e s s , comb ined with the shorter ma tu r i t i e s o f medium- term instrument s , mean s that it i s nec e s s a ry to ref inanc e progre s s ive l y l arger proportions o f t h e debt e a ch year . However , a s has al ready be e n stated , t h e burden in terms o f interest
82 payments has a l r e ady reached s e rious proportion s . In add i ti on , the tradit iona l r e s chedu l i ng o f amort i z ation payments woul d scarcely r e l i eve the country in the s e c i rcumstanc e s . Moreover , the greater t h e share of the debt to be paid to the bank s , the greater the i r r i sk , wh ich make s it even more d i f f icult to obta in new loans on reasonab l e terms . Devel opment S t ra tegy B a s ed on I ndebtedn e s s Dur ing the 1 9 7 0 s , L a t i n America opted for a deve l op ment s trategy based on indebtedne s s . For a number o f years the resu l t wa s po s i tive . Although a f ter 1 9 7 4 the expan s ion of the world economy was feeb l e , the economi c growth o f L a t i n America wa s relatively b r i s k and con s ide rab ly greater than tha t o f the OECD economi e s . In addit ion , th i s s trategy seemed eminently reasonab l e s ince indebtedn e s s was " cheap , " with very low or negative real interest rate s , lengthy payment periods , and s erv ic ing payab l e i n do l l ars , who s e real value wa s be ing e roded . However , tho se who argued in favor of rapid entry into international capital marke t s and the co ncomi tant strategy of g rowth based on indebtedne s s may have under e s t imated th e real cost o f c red it ; dur ing the period nominal costs did not r e f l e c t the imp l i c i t r i sk s of debt servicing prob l ems shou ld a c on f l i c t a r i s e between the increase in l i ab i l i t i e s with commer c i a l b ank s and the l imi ts set by tho s e inst itutions in respect to the i r c ommitments . The s e impl i c i t r i sk s obviou s l y became greater owing to the fact that the s t ructural prob l ems of the OECD countries c au sed the i r economic growth rates to f a l l duri ng the 1 9 7 0 s ( by compar i son with tho s e recorded in the preced ing decade ) , wh i ch meant tha t Latin Ame r i c a h a d to contract even more debt s in o r d e r to ma intain it s h igh growth rates at a t ime when gene ral economic con ditions were not prop itious for c reating the capac ity to cope with th e accumu l ation of the ba nk debt . F rom another po int o f v i ew , the inf l a t ion unlea shed in the mid- 1 9 7 0 s wa s unexpected , so tha t the l ow real c o s t of loans wa s a tempo rary and art i f i c i a l phenomenon ; once the c red ito r s ' expec tations became more real i s t ic , the c o s t of credit more than recovered . Another factor rela ted to the strategy o f growth based on indebtedn e s s wa s that some countr i e s obv iou sly obtained mo re credit than they cou l d use product ive ly : External loans took the p l a c e of dome s t i c saving and fac i l itated an inc rea s e in con sumpt ion , specu l a t ion , a n d the pu rcha se of weapons . Al though much o f th i s state o f a f f a i r s may be attr ibuted to erroneou s indebtednes s strateg i e s , the re can be no doubt that the structure o f the international bank ing market a l so he lped to c reate t h e prob l em . I n the i n i t i a l pha s e o f the l oan cyc l e , the banks granted a l arge number of loan s , with the a im of rapidly inv e s t ing
83 the i r surp l u s o n ac count o f compet i t io n and exc e s s l iqu idity . However , there wa s o ften some a symmetry between what the banks were ab l e to loan and the capac i ty of the c ountr i e s to absorb th e funds obtained e f f i c i ent l y . Thu s , the c ombination of l ow intere st rate s , the p r e s t ige ga ined by attract ing interna t i ona l credi t , and the e a s e o f obta ining bank l o a n s whe n a l a r g e do l l ar reserve exi sted pe rsuaded some countr i e s to bor row more than the ir po s s ib i l i t i e s for inve s tment warranted and to po st pone mak i ng o f interna l adj u s tment s . The Weakne s s e s o f the I nternational F inanc i a l System I n 1 9 7 4 the international bank ing system became , de facto , a k ind of central bank for the wor l d economy . Howeve r , it wa s not in a po s i t ion to perform th i s func t ion and , a t best , was abl e to a s sume it only for a ver y short t ime . Its operation wa s relat ive ly s a t i s factory during 1 9 7 4 and 1 9 7 5 , when its net i n i t i a l commi tments wi th the deve loping count r i e s were s ti l l very l ow � today , on the other hand , i n view o f the h i gh l eve l o f its commitments in the Third Wor l d , con s iderations attaching to loan r i s k s and the need for bank s to obtain pro f i t s s tand in the way of e f f i c ient rec i rculat ion o f l iquidity . Moreove r , in prac t i c e the banks do much to accentuate the c y c l ic a l movements o f economic activ i t i e s at both the nationa l and the internat iona l l eve l . A l though in the 1 9 7 0 s tho se cyc l e s were not c l o s e l y s y nchroni z ed i n the Th ird Wor l d , they are now . T h i s synchroni z a t ion is due not only to the prolonged OEeD rec e s s ion but a l s o , and l argely , to the l ack o f intere st shown by the bank s in grant ing new loan s , the fac tor tha t at one t ime , a s h a s been s een , wa s dec i s ive in s t imu l a t ing t h e economi c growth of the region . THE ADJUSTMENT EFFORT I n 1 9 8 3 , Latin Amer ica made a tremendou s e f fort to redu c e the di sequ i l ibria that had been accumu l a t ing in th e externa l s ector s ince th e late 1 9 7 0 s . Thu s , to th e h igher exchange rate s adopted by numerou s c ount r i e s of th e reg i o n in 1 9 8 2 were added , in 1 9 8 3 , new devaluations , va riou s other mea sure s a imed a t contro l l ing imports and encourag i ng export s , and strict f i s c a l , monetar y , and wage p o l i c i e s a imed at reduc ing dome s t i c expend i ture . As a resu l t of the s e ad j u s tment po l i c ie s , and despite the unfavorabl e trends i n wor l d trade and extern al f i nanc ing , i n 1 9 8 3 th e region a ch ieved a large surp l u s in i t s merchand i s e t rade , notab l y reduced its current account d e f ic it , and also cons iderab ly reduced the negat ive balance on the balance o f payment s .
84 External T rade and the Terms o f Trade As a l ready mentioned , howeve r , the 1 9 8 3 surplus o f ove r US $ 3 1 mi l l ion wa s o n l y achi eved through a dra s t i c reduction o f import s , wh i ch f e l l b y almo s t 3 0 percent , a f ter having f a l l en by 2 0 percent in 1 9 8 2 . S ince the unit va lue of impor t s did not vary in 1 9 8 3 and s inc e it had f a l l en s l ightly i n 1 9 8 2 , the dec l ine of the vo lume o f imports wa s j u s t a s dra s t i c a s the decl ine of the total value o f imports . I n particul a r , in countr i e s such a s Vene zuela , U ruguay , Mex i c o , Peru , Argen t i na , and Ch i l e , the con traction o f the vo lume o f imports wa s so spectacu l a r a s t o reveal c l early the enormou s magnitude of the ad j u s tment e f fort tha t had been made . Thu s , the quantum o f imports f e l l by 6 0 percent in Vene zu e la � decl ined by 39 percent in Uruguay and by 3 6 percent in Mex ico , a f ter hav ing a l ready dropped by 3 0 percent and 4 1 percent , respe c t ive l y , i n 1 9 8 2 � f e l l by 2 7 percent in Peru � and decl ined by 1 7 percent i n both Argentina and Ch i l e , i n both o f wh ich imports had a l ready f a l l en by around 40 percent in 1 9 8 2 . I n contra s t to the unu su a l reduction in the vo lume of imports , the volume of exports ro s e by 7 perc ent in th e region a s a who l e and by 9 percent in the non - o i l export ing countrie s . As wa s t h e ca s e with respect to the rea l decl ine of imports , the inc rea s e s in the volume of exports ma inly re f l ected th e a d j u s tment e f fort made by the Latin Amer i c an econom i e s th rough mea sures a imed at modi fy ing the r e l ative p r i c e s o f tradab l e and non tradab l e goods and redu c i ng dome s t i c expend i ture . Neverthe l e s s , the unf avorab l e evolutio n , for the f ourth year i n a row , of wor ld trade and the cons iderab l e drop in the international p r i c e s o f o i l and other commo d i t i e s prevented th i s r e la t ively s a t i s factory i nc rea s e in t h e vo lume o f export s f rom b r inging about a s imi lar I n f ac t , the value of expor t s increa s e i n th e i r va lue . f e l l s l igh tly in t h e region a s a who l e a n d by a lmo s t 6 percent in the group o f o i l - exporting countrie s . I ndeed , a l though the drop in th e internationa l price o f o i l had a lot to do with the drop in the unit va lue of expo r t s in 1 9 8 3 , it also resul ted f rom th e decl ine o f the inter national prices of th e region ' s ma j or export commod i t ie s , such a s c o f f ee and su gar , and o f a good number of minera l s . S i nce th e u n i t value o f exports f e l l much more than that of imports , Latin Ame r i c a ' s terms of trade dec l ined by s l ightly over 7 perc ent , a f te r having f a l l en by 5 per cent in 1 9 8 2 and by 7 percent i n 1 9 8 1 . Dur ing the l a s t two yea r s , the dec l ine o f t h e terms o f trade wa s mo re pronounced i n the o i l - export ing count r i e s than in the other economi e s o f the region . Among the o i l - exporting count r i e s , the deteriorat ion in the terms o f trade dur ing 1 9 8 1 and 1 9 8 2 did not o f f set the rema rkab l e advanc e tha t had been made dur ing 1 9 7 9 and 1 9 8 0 . On the contra ry ,
85 s ince th e terms o f trade o f the latter b iennium had al ready deter iorated sharply over th e previou s f ive yea r s , not on ly wa s the r e l evant index a round 3 0 percent l ower in 1 9 8 3 than in 1 9 7 8 , bu t it reached the l owe s t level of the last ha l f c entury . I ndeed , dur ing the per iod 1 9 8 0 1 9 8 3 , i t wa s much lowe r , o n averag e , than i t h a d been during 1 9 3 1 - 1 9 3 3 , the mo st c r i t ic a l period o f the Great Depre s s io n . The B a l ance o f pa yment s B ecau se the va lue o f imports f e l l much more than tha t o f export s , the merchand i s e trade b a l anc e underwent another s ign i f icant change i n 1 9 8 3 . After the radica l turnabout o f 1 9 8 2 , whe n the U S $ 1 . 6 b i l l ion def i c i t o f 1 9 8 1 had been rep laced b y a su rplus o f over U S $ 9 . 7 b i l l ion , 1 9 8 3 brough t an extraordinary g rowth in the trade surp l u s t o more than U S $ 3 1 b i l l ion , over th ree t ime s tha t o f the previou s year . Th i s wa s , i n pa r t i cu l a r , the result of the enormou s increa s e s i n th e trade surplu s e s o f Vene zue l a , B r a z i l , and Mexico and o f the cons iderab l e chang e s in th e merchandi s e trade of Argent ina , Chi l e , Peru , Ecuado r , and U ruguay . Th e dra stic contraction o f imports wa s a l so the ma in cau s e o f the new increase in the trade su rplu s achieved by Argentina , th e increased su rp l u s obt a i ned by Ecuado r , and the sub st itution by Peru o f a sma l l surp l u s for i t s de f ic i t o f the previou s year . By contra st with what happened in 1 9 8 2 , when the impac t of th e change in the trade bal ance on the current a ccount wa s neutra l i z ed to a large extent by the sharp i n c r e a s e i n payment s f o r i n t e r e s t and p ro f i t s , i n 1 9 8 3 the part p l ayed b y the increased trade su rplu s i n reduc ing the di sequ i l ibrium on the current account wa s rein forced by a dec l ine in foreign remi ttanc e s . Such payment s , wh ich had more than quadrupled over the previou s f ive years , r i s ing f rom US $ 8 . 6 b i l l io n in 1 9 7 7 to a lmo s t U S $ 3 6 . 8 b i l l ion in 1 9 8 2 , f e l l a l i t t l e t o u nder US $ 3 4 b i l l ion i n 1 9 8 3 . Th i s wa s a r e su l t o f th e l imitation on the paymen t o f pro f it s cau sed by the sharp contraction of dome s t i c economic a c t ivity and the s l igh t dec l ine o f inte res t payment s brought abou t b y reduction o f nomi nal intere s t rates on th e internat iona l f inanc ial market . Under the se c i rcums tanc e s , the d e f i c i t on current ac count- -wh ich i n 1 9 8 2 had a l ready dropped by 1 0 percent , a f ter hav ing reached a record h igh of U S $ 4 0 b i l l ion in 1 9 8 1 - - f e l l spectacu l a r l y to under U S $ 8 . 5 b i l l ion in 1 9 8 3 . Neverthe l e s s , in 1 9 8 3 the ne t inf low o f capital wa s a l so lower than the de f i c i t on current account , a s ituat ion tha t had a l ready occurred in both 1 9 8 1 and 1 9 8 2 . Con sequent ly , th e g lobal b a la nc e of payme nts c l o sed with a de f i c i t for the th i rd year in a row .
86 The Externa l F i nanc ing and the Rea l Tran s f e r o f Resourc e s A s h a s been noted , the abrupt adj u s tment o f the balanc e - o f - payment s current ac count that took p l a c e in 1 9 8 3 wa s forced , to a very l arge extent , by the no l e s s viol ent contract ion o f the n e t inf low o f capita l . In deed , in 1 9 8 3 , the total in f l ow o f capital wa s barely one - f ou rth that received i n 1 9 8 2 ( wh ich had a l ready been very l ow ) and only 15 percent o f the average inf low o f capital dur ing the four-year per iod 1 9 7 8 - 1 9 8 1 . The negat ive impac t o f th i s sha rp drop in the net i n f l ow o f capita l become s even more obv iou s when one c ompare s the amount o f capital re c e ived with th e amount rep r e sented by net payments for intere s t and pro f it s , wh ich in 1 9 8 3 exc eeded , for th e second year in a row , that o f net loans and inve stment s rece ived . C on sequently , a s in 1 9 8 2 , instead o f receiving a net tran s f er o f real re sourc e s f rom abroad , Latin Ame r i c a made a net trans f e r o f resources to t h e r e s t o f t h e wor l d . Thu s , a s i tuation wa s provoked that , cons ide r i ng the relat ive development o f the region , may be desc ribed as perver se . The amounts invo lved in th i s tran s f er , moreover , were very h igh : U 5 $ 2 0 b i l l io n in 1 9 8 2 and a lmo s t U5 $ 3 0 b i l l ion in 1 9 8 3 , magni tudes equ ival ent to 1 9 percent and 27 per c ent of the value o f exports o f goods and serv i c e s and between 2 . 5 percent and 4 perc ent o f the gro s s domes t i c produc t . Con s i de red f rom anoth e r angl e , t h e rever s a l i n t h e di rection o f net f i nanc ia l payments tha t took p l a c e between 1 9 8 1 a n d 1 9 8 3 wa s equ iva lent to a deterioration o f one-th i rd in the terms o f trade . Thu s , th e spectacu l a r change i n the d i rection o f net f i nanc i a l f l ows pl ayed a dec i s ive role in the widespread contra c t ion o f economic a c t iv i ty in Latin America and in th e d i f f i cu l ties tha t some count r i e s experienced in s ervi c i ng th e i r extern a l deb t . As may be c l ea rl y seen f rom the data in Tab l e 4 . 2 , up to 1 9 8 1 the g ro s s amount o f capita l rece ived by th e region wa s we l l in exc e s s of its amo r t i z ation paymen t s , inves tment s abroad , and pay I ndeed , dur ing the ments for interest and pro f i t s . per iod 1 9 7 3 - 1 9 8 1 , th i s trans f e r o f r esources wa s equ iva l ent , on average , to 1 6 percent o f the va lue o f exports tha t , i n turn , increa sed dur ing that per iod a t a n annu a l r a t e o f a round 2 0 perc ent . Under such c i rcum s tanc e s , Latin Ame r i c a wa s able to make amort i z ation and intere s t payments on its ex ternal debt and on pro f i t s earned b y foreign capital th rough the new l o a n s and i nve stmen t s it rec e ived each year . Neve rthe l e s s , th e mag n i tude o f th i s net t ra n s f e r o f resou r c e s began to fal l in 1 9 7 9 , when the increa s e s in the net i n f l ow o f capital were more tha n o f f s et by the even l a rg e r inc r e a se s in payments for intere st and pro f it s . Th i s trend reached a peak in 1 9 8 2 and 1 9 8 3 , when th e net inf low o f capita l dropped sharply and the reg ion had to meet th e bulk o f i t s payments for intere s t
87 and pro f i t s f rom re sourc e s o r ig inat ing i n the trade surplu s o r f rom the internationa l re serves i t had pre viou s ly ac cumu lated . As h a s a l ready been expla ined , how ever , becau s e of the unfavorab l e externa l s i tuation , the trade su rplu s wa s p roduced not by an increa s e in expor t s but rath e r b y an extreme ly s evere contra c t ion o f import s , and th i s in turn had a negat ive e f f ect on economic activity . Becau s e o f th i s cha i n reaction , the dra s t ic redu c t ion in the net i n f l ow o f capital had a def inite e f f e c t on th e l eve l s o f product ion and empl oyment . At the same t ime , the fundamenta l cau s e o f the decl ine in net loan s and inve s tment s that took place du ring 1 9 8 1 and 1 9 8 2 wa s the procyc l ic reaction o f the internat iona l c ommerc i a l bank s - -Latin America ' a ma in credito r s - - v i s - a v i s t h e unf avorab l e extern a l s i tuat ion with wh ich the region wa s f ac ed . Th i s a tt i tude on the part o f the b ank s wa s c l early evident for the f i r s t time in 1 9 8 2 and per s i s ted in 1 9 8 3 . Thu s , according to f igures provided by the Bank for I n tern ationa l S e t t l ements , new loans g ranted by p r ivate bank s to Latin America ( excluding Vene z uel a a nd Ecuado r ) f e l l f rom U S $ 2 1 b i l l ion du r i ng the second h a l f o f 1 9 8 1 t o U S $ 1 2 b i l l ion dur ing the f i r s t h a l f o f 1 9 8 2 and barely US $ 3 0 0 m i l l ion dur i ng the se cond ha l f o f 1 9 8 2 . During the f i r s t hal f o f 1 9 8 3 , the bank s granted loans amount ing to U S $ 3 . 7 b i l l ion . Neverth e l e s s , th i s imp rovement wa s not the re su l t of a " spontaneou s " re spon s e on the part o f the banks b u t rather wa s accounted f o r b y the bank s b e i ng pres sured by the Interna t iona l Monetary Fund to c ontribute to the " re scue package s " des igned by tha t ins ti tu t ion to f a c i l itate the ad j u stment p roc e s s in a number o f La ti n American economi e s . PROBLEMS AND PROS PECTS Th e Un ique Prof i l e o f the Latin American E conomic C r i s i s T h e f igu r e s g iven so f a r show the unu sua l scope and depth of the rec e s s ive c r i s i s that a lmo s t every La t in Ame rican country i s exper ienc ing and leave no doubt that , for the region a s a who l e , 1 9 8 3 wa s the wor s t year in the l a st ha l f century . For mos t o f the countr i e s , th e redu c t ion o f income dur ing the per iod 1 9 8 2 - 1 9 8 3 h a s meant going b ack to the s tandard o f l iving o f s everal years ago . I t wa s al ready said that in many c a s e s the c r i s i s wa s partly the r e su l t o f domes t i c factor s rela ted to i l l advi sed economic s trateg i e s o r po l ic i e s , the pro l onged app l i c ation o f wh ich wa s f a c i l itated by the a c c e l e rated g rowth of externa l indeb tedn e s s and by the nationa l f inan c i a l permi s s ivene s s tha t preva i l ed dur ing the 1 9 7 0 s . I t i s no l e s s t ru e , however , tha t th e ser iou s balance-of payments c r i s i s with wh ich Latin Ame r ica h a s been faced
88 i n recent years may b e attr ibuted , t o a l a rge extent , to external c au se s that by the i r very nature wer e beyond the control of the count r i e s of the region . Such wa s the c a s e of the spectacu l a r drop in the terms of trade , the h igh nominal and real inter e s t rate s , and the severe contrac t ion o f the net i n f l ow o f private capita l . Even mor e unpredic tab l e were th e inten s i ty and the duration o f th i s phenomenon , a s i tuation c l early atyp i c a l b y compari son with wha t h a s happened in the l a rge centra l count r i e s during previous rece s s ion s . I n any event , it i s obviou s tha t at th i s s tage of th e game the so lu t i o n to some o f the mo st seriou s prob l ems fac ing the region wi l l depend ma inly on externa l factors over wh ich the region ha s l i t t le or no contro l . That is why th e dome s t i c economic p o li cy options open to the coun tri es are so c omplex and f raught with d i f f icu l t i e s and a l s o why the preva i l i ng atmo sphere is one of uncerta inty and perplex i ty . I n order to dea l with the balance-of-payments c r i s i s , beginning i n 1 9 8 2 many L a t in Ame r i c an countr i e s impl e mented dra s t i c a nd painful ad j u s tment mea sures with wh ich imports were reduced d ramat i ca l l y , to the po int that in many cases th e volume o f imports fell by over 50 per cent du r ing the l a s t two years . I n addition , the sharp deva luati ons made by many coun t r i e s in order to balance th e i r external accounts contributed to the reinforc ement of inf l ationary pre s sures th at , a f ter some time , led to the app l ication of stabi l i z a t ion po l i c i e s . Thu s , the rec e s s ive e f f e c t norma l l y produced by such po l i c i e s over the short term wa s added to that produced by the sharp drop in imports . The comb ination o f the s e factors had anothe r I nve s tment f e l l very sharpl y , and s er iou s cons equenc e : in s ome count r i e s a s ig n i f icant proportion of i n s tal led capital deterio rated o r wa s destroyed , a s many enter pr i s e s went out o f bu s i ne s s . The soc i a l con sequenc e s of th e current s i tuat ion have been no less seriou s . I ndeed , in many count r i e s , empl oymen t and real wages have reached th e lowe s t l eve l s s ince the Great Depr e s s ion and in some c a s e s have nea r l y reached the c r i t i c a l l imits of soc i a l I n some countr i e s the s ituation ha s been tolerance . further aggravated by unu sua l l y s evere natural d i s a ster s , wh ich have accentuated the l o s s o f income and the s l ow down of the economy c au s ed by the general c r i s i s . N everthe l e s s , not everyth ing wa s negative dur ing the l a st yea r s . S ome countr i e s that had a l ready f o l l owed cautious po l i c i e s with respect to foreign debt we re ab l e t o cope with th e negat ive a spects o f t h e international s ituation . Many other count r i e s o f the region have impl emented prog rams a imed at ad j u s t ing the i r b a l ance of payme nts and in th i s e f fort have rece ived some cooperation f rom th e i nterna tional f inanc ial commu n i ty : thi s h a s pre vented the immed iate e f fe c t o f the c r i s i s f rom wor s ening . Moreove r , a relat ive ly calm atmo sphere h a s been re stored
89 on the immed iate f i nanc i a l s cene 1 th i s , of cour se , doe s not mean that the probl ems h ave been s olved or tha t the r i sk of s e r iou s f inan c i a l c r i s i s has been e l iminated . The s e and other aspects of the s itua t io n d i s cu s s ed i n th i s chapter show tha t the Latin Amer i can rec e s s ion h a s a pro f i l e of i t s own . The s ituation o f Latin Ame rica i s d i f f erent f rom tha t i n oth e r region s o f th e Third Wor ld and , a s a matter o f fact , from any s imi l a r s i tuation that h a s a r i s e n dur i ng th e entire po s twar period . The Que s t ions o f the Moment Latin America h a s undoubtedly shown an extra o rd i nary sense o f res pon s i b i l i ty i n the way tha t i t h a s responded to the cha l leng e s po sed by the current external c r i s i s . Su f f ic e it to recal l that in the l a s t f ew years many o f t h e count r i e s imp l emented sharp real deva luations with a v i ew to promo t i ng the i r exports , replac ing e s sent i a l imports , a n d e l iminating none s sential import s . To reduce exc e s s ive dome st i c expend i tu re and fiscal de f ic it s , they a l s o h ave sub stant ia l ly ra i s ed the p r i c e s of many pub l i c u t i l i t i e s a n d reduced a number o f sub s i di e s . Neverth e l e s s , the s e mea sur e s - -wh ich , i n fact , are not easy to imp l ement , po l it i c a l l y speak i ng , a nd wh ich were o r i ented toward rea l lo cat ing resources to th e production of tradab l e good s - -were taken on the a s sumption that a reac t iva tion o f the interna t ional economy wou ld fac i l itate exports and r e s tore the terms of trade and b r ing intere s t rate s back to l eve l s c lo s e r to tho s e that h a d h i storica l l y preva i l ed . Unfortu na te ly , th i s wa s not the c a s e . A l though 1 9 8 3 saw th e beginning o f a recovery i n the ma i n centra l economy--the Uni ted S tates- - th i s h a s not bene f ited Latin America th rough any o f the above-ment ioned mecha n i sms . Moreover , over the l a s t f ew year s , and e spec ia l ly in 1 9 8 3 , the reg ion has been a f f ected by yet another un f avorable change on the external scene : the dra s t i c reduction o f t h e i n f l ow o f capita l , the e f f e c t o f wh ich ha s been equ iva l ent to a deterioration o f one - th i rd in the terms o f trade . That i s why dome s t i c ad j u s tment had to be rece s s ive in nature and why it wa s based on an unprecedented reduc t ion o f import s - - even e s sential one s - - and not on an increase i n export s . Thu s , prec i s e l y at the wor s t t ime - dur ing an international rece s s ion- - the region wa s ob l iged to generate a sub stant i a l trade surplu s , to become a net exporter of resource s to the c entral coun tri e s , and to accept add i t ional and exc eeding l y burden s ome costs i n order to be ab l e to re f inanc e part o f the externa l debt it had ac cumu la ted . I t therefore seemed only natura l at the end of 1 9 8 3 t o a sk our selves the f o l l owing que s tion s : What can Latin America expec t , over the short term , o f the current
90 react ivation o f the internat io na l economy ? How long can th e i nd i s pensab l e dome s t i c reac t ivat i on be po stponed if the present s i tuation of the internat ional economy continu e s to p reva i l ? After th e pro f ound trauma s of th e l a s t f ew years , w i l l moderate rate s o f economic recovery be adequate to dea l with the ser iou s soc i a l prob l ems that have a r i sen as a re su l t o f the rec e s s ion o f the l a s t th ree year s ? I n th e f i r s t p l ac e , how s teady a r e current indicators o f interna t i onal economic recovery ? I nte rna tional pub l i c opinio n views the economi c recovery o f the United States with sa t i s f ac t ion , but a l so points to the cont rad ict ions and pu z z l e s posed by the phenomena tha t accompany it . On th e one hand , the so-ca l l ed locomot ive th eory , according to wh ich the U . S . economy wou ld b e dynamic enough to pu l l a l ong the o ther indu s tr i a l c enter s , shows n o s ign o f having been conf irmed a t th i s point . O n the other hand , there are s t i l l th ree e l ements that are vital i f the international recovery is to have any s ig n i f icant e f fect on the count r i e s o f the periphery and , in pa rticu l ar , on the Latin American economi e s . F i rs t , in th e f ie l d o f t rade , the terms o f trade o f L a t i n America cont inued t o deteriorate--with some exception s - - du r i ng 1 9 8 3 and no sub s tantia l inc rea s e in c ommod i ty p r i c e s s eems t o be in s i gh t in t h e nea r future . Mo reo ve r , a s a resu l t o f certa in wel l -known phenomena , some of wh ich have to do with the h igh l evel of rea l intere s t rate s , protec t i o ni s t trends in the centra l coun t r i e s have per s i sted and even increa sed ; th i s detrac t s f rom the transparency and dynam i sm o f in terna tiona l trade and particu l arly h inde r s the growth of new expo rt s . S econd , in the f inanc i a l f ie l d , real intere st rates continue to be very h igh , a s a re sul t o f many factor s : the f a c t that the governments o f some indu s t r i a l countr i e s have u s ed t h e f inanc i a l system t o cover the ir sub stan t i a l f i s c a l de f i c i ts ; t h e nature o f t h e ant i - i n f l a tionary pol i c i e s app l ied in the l arge central economi e s ; th e di sappearance o f th e l iquid surplu se s of the o i l - expo rting c ountr i e s ; the pres sure to attract saving s in order to dea l with new cap ital- intens ive inve s tment ; and other s . Thu s , hardly anyone thinks that in 1 9 8 4 there wi l l be any sub s tantial reduction o f real intere s t rate s , a phenomenon o f fundamenta l importanc e to th e management of the externa l debt o f the deve l op ing countr i e s . Th ird , in th e f ie l d o f capital tra n s f e r s , the re h a s been a dra s t i c reduction in t h e net i n f l ow of capita l , wh ich , af ter reach ing an unprecedented l eve l of U S $ 3 8 b i l l ion in 1 9 8 1 , fe ll to b a r e ly US $ 4 . 5 b i l l ion in 1 9 8 3 ; th i s drop wou ld have been greater had not the I nternational Monetary Fund preva i l ed on the commercial bank s to increa s e somewhat th e i r loans to Latin Ame r i c a . The behavior o f th e s e variab l e s in the react ivation proc e s s i s fundamental to the viab i l i ty o f the current ad j u s tment proce s s e s . It shou ld be remembered that if
91 the terms o f trade had been s im i l a r in 1 9 8 3 to wha t they were in 1 9 8 0 ( 2 5 pe rcent h igher ) and if at the same t ime real intere s t rate s had been s im i l a r to tho s e preva i l ing when th e bulk o f th e debt wa s contracted ( on average , four points l ower than a t present ) , the region wou ld have had U S $ 2 5 b i l l ion more dur ing 1 9 8 3 ; with th i s amount it cou l d e a s i l y have met its commi tments without having to reduce its impor t s so dra s t i c a l ly and without having to resort to new externa l indebtedne s s . In other word s , i f norma l conditions were r e s tored in the area o f trade and f inanc e , Latin America wou ld b e abl e to meet i t s extern a l commitments without h av i ng to sacr i f ic e i t s potent ia l for growth . On the othe r hand , Latin Ame r i c a c anno t continu e to contract i t s e conomy . I t mu s t be made qu ite c l ear tha t the reg ion cannot cont i nu e app ly ing the current a d j u st ment mechani sms for much l onger under the ex i s ting externa l cond i t i on s . Th i s cou l d l ead , at l e a s t in some count r ie s , to s i tuations that wou ld be di f f ic u l t to contro l , both economi ca l ly and soc i a l ly , and cou ld give r i s e t o tens ions th at wou l d j eopard i z e th e very capac i ty o f the e conomie s to recover and hence to service the i r I t i s advi sab l e , the refore , t o a ccumu l a ted debt on t ime . a sk wha t th e ma in l imitations o f the current a d j u stment proc e s s e s are . We shou l d d i stingu i sh , f i r s t , amo ng adj u s tment and overadj u s tment . In rec ent yea r s , the reg ion has had to c arry out wha t e s sentia l ly amounts to a two f o l d ad j u st ment . The f irs t and better known one i s th e a d j u s tment to the extreme l y un favorab l e trend i n the terms o f trade and i n rea l intere s t rate s . The second one ha s been the a d j u s tment a imed at deal ing with a more recent but no l e s s serious deve lopment , the ma s s ive contraction of the net i n f l ow o f pr iva te capital . Thu s , becau s e the s lugg i shne s s o f inte rnat iona l trade and the " f inanc i a l depre s s ion " have o c cu r red s imu l taneou s ly , the region ha s not only had to a d j u s t but has had , in actual f ac t , to overad j u st . S econd , we have to rea l i z e that there i s a perve r s e proc e s s o f tran s fer o f resource s . Becau s e t h e net in f l ow o f capital f e l l so sharply and payments for pro f i t s and intere s t were s o h igh , Latin Ameri c a- - f i r s t in 1 9 8 2 and aga i n and to a greater extent in 1 9 8 3 --made net tran s f e r s of re sourc e s to t h e exterior th at amounted t o US $ 2 0 b i l l ion and US $ 2 9 b i l l ion respe c t ive l y . Th i s s i tuation , wh ich contra s t s sharply with what had hi stor i c a l l y been the case in the deve loping countr i e s , has become a key e l ement in the pro found depre s s ion of Latin Amer ica and one that w i l l a l so be a dec i s ive f a c tor in the e stab l i sh ment of any economic recovery po l icy to be pursued in th e future . We shou l d c on s ide r , thi rd , the asymmetry o f the c o s t o f ad j us tment . T h e r e are other e l ements that have contr ibuted to the aggravat i on of the bal ance-of-payments
92 prob l ems . Among the s e , spec i a l mention shoul d be made o f the high c o s t s and the bank surcharges that are involved in the renegot i a tion proc e s s , wh ich have been added to the negative e f f e c t s o f the h igh intere s t rates . Thi s inc rea s e i n the f inanc i a l c o s t s , which contra s t s wi th pa st experience s and wi th the c ri s i s measures tha t banks norma l ly apply to any enterpri se , has aggravated external imbalanc e s and h a s meant tha t virtua l l y all the cost of ad j u s tment has b e e n tran s ferred to t he debtor countrie s . I ndeed , th i s procedure i s tantamount to an abdi cat ion , on the part o f the international commer cia l bank s , o f the i r share o f t h e re spon s i b i l i ty fo r trigger ing the pay ments c r i s i s wi th wh ich th e reg ion is now faced . Thu s , Latin America cannot pro l ong the current proc e s s of rec e s s ive ad j u stment � ins tead , what i t needs is to ca rry out a growth - o r i ented ad j u s tment . I n sofar as it mu st for some t ime generate a trade surplu s , it wi l l have t o a ch i eve th i s b y incre a s ing export s - -by resort ing to a f actor tha t h e l p s ra i s e the ra te of economic growth - rather th an by a g a i n reduc ing import s , which wou l d only make the rece s s ion wor s e . The I nevitab l e Recovery One o f the mo s t pu z z l ing que s t i o n s o f th e moment i s the preva i l ing uncertainty about the po s s ib l e moda l i t i e s o f a n d the pro spec t s fo r interna t ional recovery . However , i f the current s i tuation wi th r e s pect to p r i c e s o f raw ma terial s , real intere st rate s , and tran s f e r s of private capita l cont inue s , two d i f ferent cou r s e s are open to the economies o f the region du r ing 1 9 8 4 . Some count r i e s who s e ex ternal s i tuat ion i s better and who s e dome s t i c a dj ust ment programs have been r e l a t ively succe s s fu l may see a mode s t recovery in the i r economic growth rate . Howeve r , because the service o f the i r extern a l debt represents such a heavy burden , th ey have l i tt l e room for the recovery o f dome stic expenditure and hence o f employment l evel s . Other countries tha t face more seriou s external s i tuat ions and in add i t ion have to deal with heavy in f l a ti onary pre s sures may see a pe r s i stence o f rece s s ive trend s , and th i s w i l l aggravate the c r i t ica l economic and soc i a l s i tuation tha t h a s preva i l ed in recent year s . I n actual f ac t , neither o f the se two options i s I ndeed , what La tin America needs i s a f i rm acceptab l e . and vigorou s recovery po l icy . There i s no que s tion , however , that any recovery proce s s a imed at strengthening the deteriorated reg iona l economy wi l l be condit ioned by both externa l and internal facto r s . Among the former , reschedu l ing o f the extern a l debt i s the mo s t important and the one tha t in the l a s t anal y s i s determine s , over t h e short run , the maneuvering room that mo s t o f the Latin Amer ican governments wi l l have for impl ementing the ir economic recovery . Over the
93 medium term , o n the other hand , the k ey e l ement for enab l ing Latin America to ach i eve rapid and p e r s i stent economi c growth is the expansion o f i t s external t rade , both with in the reg ion a nd w i th th e r e s t o f the world . Two o f the internal factors that condit ion the e f fort to put mor e dynam i sm into the economy se em to be domina n t : ( 1 ) recovery prog rams mu st be made c ompatible with th e abatement o f i nfla t ionary pre s su re s , both trad i t iona l and recent ; and ( 2 ) the patterns of growth mu s t be re structured over the med ium term in order to make it po s s ib l e to achieve , among other ob j ective s , a sub stantial increa se i n the expo r t ing capac ity o f the region . The la tter i s , moreover , a prerequ i s it e for enabl ing the region to pay the service o f its ac cumu l a ted debt on t ime . External Factor s : A N ew Mechan i sm for Re s chedu l ing the Extern a l Debt It is important to stre s s th at not all the Latin American c ountr i e s are in the s ame s i tuation a s regards th e servic ing o f the debt under the current a d j u s tment mechan i sms ; moreover , the unfavorable international s i tuation doe s not a f f e c t all o f them in the same way . Tha t i s why i t woul d be very d i f f icu l t to a rrange for a j o int r e s ch edu l ing o f the extern a l debt o f Latin Ame r i c a . N everth e le s s , becau s e o f the ab s o lute nec e s s i ty o f con diti o n i ng the se rv i c e of the debt to the requ irement s of dome s t i c recovery a nd economic development , t h e t ime seems to have c ome , for many c ount r ie s , to make g l obal propo s a l s for change s in the e x i s t ing r e s chedu l ing To th i s end , in ac cordance with the propo s a l s mechan i sms . ma de b y the G roup o f Twenty-Fou r , j o in t a c t ion shou l d b e undertaken in i nternational forums such a s t h e I nter nat iona l Mone tary Fund and the Wor l d Bank to promot e mea sures to improve t h e ex i s t ing international f inanc i a l mechani sms a nd to improve t h e internationa l env i ronment in wh ich the a d j u stment proc e s s e s are carried out . I t i s a l so important to cons ider th e po s s i b i l i ty o f the count r i e s o f the region j ointly propo s ing t o the internat iona l f inan c i a l c ommunity certain minimum cond i tions tha t mu s t be m e t i n t h e immediate future in connec ti on with the a d j u s tment proc e s ses , unt i l such t ime as the cond i t ions on th e interna t ional f inanc i a l commerc i a l markets imp rove . The se cond i t ions shou l d inc lude , among othe r s , t h e f o l l owing : 1. I n no c a s e shou ld a country devote to the service o f i t s exte rna l debt re sourc e s amount ing to more than a prudent percentage o f i t s export income , gu ided by the need to ma inta in th e min imum l evel of imports requ ired for i t s economic recovery and deve lopment . 2 . The c o s t of making ad j u s tments shou ld be di s t r ibuted more evenly by dra s t i c a l l y reducing the
94 current f inanc ial c o s t s tha t are added t o the h igh inte res t rate s . Cons ideration shoul d a l so be g iven to the po s s i b i l ity of u s ing prov i s iona l mechani sms such a s the interest- rate sub s i d i e s that were studied during the 1 9 6 0 s , e spec i a l l y for internat iona l loans f rom publ i c s ource s , wh ich wou l d considerably a l l eviate the f inanc i a l burdens , s o v i t a l to the current ad j u stment proc e s s . 3 . Amort i za t ion per iods shou l d be extended con s iderab ly in order to avo i d in future the per s i s tence of a perve r s e tra n s f e r abroad o f resourc e s . 4 . F i rm commitments should be made to ob tain additional r e s ou rc e s i n order to provide for the re f inanc ing of a h igh e r proportion of intere st payment s , to fac i l itate the expa n s ion of trade in th e count r i e s of the reg ion , and to ensu r e the f i nanc ing of s a t i s facto ry leve l s o f dome s t i c inve s tmen t . I n th i s regard , renewed support for the e f forts o f th e Wor l d B a nk , the Inter-American Development Bank , and oth e r regi onal f inanc ing agenc i e s wi l l be fundamenta l . I n recent t ime s , l ong-term g loba l solut ion s have been proposed tha t have not yet been g iven proper atten tion by the large f i nanc i a l c enters o f the wor l d . Never the l e s s , if th e current international s i tuation cont inues for much l onge r , th e force o f c ircums tan c e s might make some of th e s e a l ternatives viab l e . I n pa rticu l a r , it wou ld be wo rthwh i le to con s ider the po s s i b i l ity of con verting a sub stantia l part o f the accumu l a ted deb t into l ong- term bonds , with real interest rate s b e i ng brought back near to h i s torica l level s a nd with grace periods b e ing granted for the i r servic ing . Th i s wou l d enab l e the countr i e s to ga in time f o r undertak ing th e nec e s sary dome s t i c a d j u s tmen t s and fo r a sc e rtain ing the e f fect of th e mea sure s a imed a t inc rea s ing the ir export capa c i ty and sub s t i tut ing import s . I n any even t , the man ag ement o f the debt under ex i s t ing interna tional c i rcumstances present s the region wi th a d i f f i cu l t d i l emma . On th e one hand , in order to e l iminate the perver s e tran s f e r s o f resourc e s abroad so as to sustain dome s t ic recovery prog rams , i t woul d be nec e s sary to obta in new net credits that wou ld raise the a l ready h igh l evel o f th e ex i s t ing external deb t . On the oth er hand , i n order to meet part o f the serv i c e o f th e debt with re sourc e s generated th rough a t rade surplu s , i t woul d b e neces sary , in t h e absence o f a s ign i f icant increa se in export s , to aga in reduce the a l ready l ow volume o f impo r t s , and th i s wou l d wo rk aga i n s t any e f fort to react ivate the ec onomy . Tha t i s why , over the short term , any e f fort tha t i s made in th i s regard mu s t prov ide for both an in f l ow o f new resourc e s and a sub stantia l abatement o f f i na n c i a l c o s t s .
95 Interna l Factors The Rec overy of I nterna t ional T rade . The current preoccupat io n with the prob l ems perta in ing to the managemen t o f the extern a l debt has led the countrie s to ove r look the c l o s e l inkag e tha t ex i s t s between the i r debt and th e i r trade prob l ems . A s is wel l known , in the l a s t ana l y s i s t h e f ina l solu t ion t o ex i s ting a n d futu r e ba 1 a nc e - o f - payment s prob l ems c an o n l y b e found b y expand ing trade and inc rea s ing export income . To ach ieve th i s , it w i l l of cou r s e b e nec e s sary to increase the c ountri e s ' export ing capa c i ty � h owever , it wi l l a l so b e n ec e s sary to c reate an international environ men t i n wh ich the mark e t s for Latin American expor t s can b e expa nded and th e pr i c e s of the s e exports c a n be improved . The protec t i o n i s t prac t i c e s that have inc rea s ingly been app l ied in th e central countr i e s c e rta inly do not make i t easy for the s e c on d itions to b e met . The Protec t i on and Expa n s ion o f Regiona l T rade . w i th the contraction o f L a t in America ' s Conc omitant trade with the re s t o f the wor l d , the r e h a s been a sharp deteriora t ion of r eg iona l trade and a recrude scenc e , in by no mean s a f ew L a t i n Ame rican countri e s , of d e f e n s ive mea su r e s of protec tion i s t nature a r i s ing f rom the d i f f i cu l t ba 1anc e - o f - payment s s itua t ion faced by a lmo s t a l l the s e c ountr i e s . Th i s s itua tion mu s t not c on t inu e . I n order to reve r s e i t , i t wou ld b e nec e s sary , in th e f ir s t plac e , t o pu t a stop t o the impo s i tion o f new mea sures that h i nder intraregiona1 trade and , in the second plac e , to adopt va ri ou s mea sure s o f a pref er en t i a l type , such a s a d hoc ag reemen t s o f l imited scope o r the u t i l i z a t io n o f the purch a s i ng power o f state governme n t s to promo t e trade . To th i s end , i t w i l l a l so b e e s sent ia l to expand th e ex i s t ing reg iona l f inancial mechan i sms and promote a more imag ina tive r o l e for L a t in Ame r ican f inanc i a l i n s t i tu t i on s , some o f wh i ch a r e a l ready imp l ementing prog rams to support th e expan s io n o f intrareg iona 1 tra de . Th e s e and o th e r j o int po l i c i e s tha t might b e adopted by the r eg ion under th e p r e sent c i rcumstanc e s , both in order to promote col l ective ly the adop t ion of mea sure s a t the interna tional l eve l a nd to a c c e l e ra t e and g ive greater depth to the regiona l cooperation pro c e s s e s , were s tudied in January 1 9 8 4 in Qu i to du r ing a meet ing ( propo sed by the pres ident of Ecuador ) of heads of state and the i r per sona l repr e s entat ives a t th e min i s terial leve l . I sha l l Dome s t ic Factors That Cond ition Rec overy . n o t di scu s s th i s matter i n detai l here . I d i d s o a t the s e s s ion of the Economic Commi s s ion for Latin Ame r ica ( ECLA ) held in Apr i l 1 9 8 4 � on tha t oc ca s ion , the ECLA S e c re ta r i a t pre sented i t s views on th i s ma tte r . Never the l e s s , I cannot neg l ec t now to mention tha t in th e very
96 near future the reg ion wi l l have to dea l with a s e r i e s o f facto r s that wil l f o r c e it to tak e a seriou s look at th e deve l opment pol ic i e s and strateg i e s tha t have been app l ied up to now . Thi s is e s s ent i a l i f a degree o f economic dynamism i s to b e ach i eved tha t wi l l enab l e the reg ion to re s pond to i t s s e r i ou s soc ial prob l ems , wh ich , a s wa s ment ioned above , have been agg ravated by the . current rec e s s ion . Th e ra the r d i f f icu l t chang e s tha t may have to b e made in internat ional f inanc e a nd trade ; the burden of th e accumu lated deb t - -wh ich i s , i n a way , a mortgage on L a t in Amer ica ' s future devel opment ; the continua t ion and , in s ome ca se s , aggrava t ion o f o l d s truc tural r i g i d i t ie s ; and i n f l a tionary pre s su re s , the solu t i on to wh i ch i s only with d i f f icu l ty c ompat ib l e with scheme s for deve lopment and soc ia l j u s t ic e , are some o f the e l emen t s tha t wi l l require rev i s ion o f some ide a s and the seek ing and f o rmu l a t i on of n ew pol ic ie s . In th i s regard , as has been i l l u s t rated by recen t experien ce , it is important to remembe r th e r i s k s involved in devel opment st ra teg i e s tha t are indi s c r iminately l i nked t o internationa l f inanc e and trade . The s e r i s k s a r e now obviou s , cons ider ing the violent , pro l onged , and unpred ictab l e chang e s that have occurred in th e international pa rameters in wh i ch we have been tru s t in g . Neverth e l e s s , it i s a l so o f c ruc ia l importanc e to make it qu i te c l ear tha t th e current c r i s i s is one o f l iqu idity and n o t one o f solvency and that th e reg ion h a s the capa c i ty t o re spond a n d the mean s t o dea l i n future with i t s ma in prob l ems . I t i s to b e h oped tha t th e internat ional f inanc ia l communi ty , recogn i z ing t h e un ique pro f i l e of th e La t in Ame r ican c ri s i s , wi l l c ooperate inte l l igentl y , bear ing in mind the ex i s t ing c i rcums tanc e s , and wi l l h e l p the region overc ome th e se prob l ems o f l iqu idity so a s to prevent a rea l c r i s i s of so lvency f rom develop ing .
5
Copi ng with the Creeping Crisis of Debt A/bert Fish/ow
INTRODUCT I ON The tota l deb t of devel op ing c ountrie s , short a nd l ong term , s tood a t mo re tha n U S $ 8 0 0 b i l l ion a t the end of 1 9 8 3 , according to one recent e s t imate . The non-OPEC , non-OECD deve loping c ountr i e s mo st a f f ect ed by the in stab i l ity of th e interna t iona l economy in th e pa st dec ade account f o r some 8 0 perc en t of the to ta l . More than 3 0 perc ent o f the i r g r o s s nationa l product i s owed abroad , and in 1 9 8 2 , b e fore re schedu l in g s became the order o f the day , p robab l y c lo s e to 5 0 percent o f the i r export earn ing s wa s ea rmarked to mee t deb t servic e and ro l lover o f Such agg rega tes , and the th irty or short-te rm c re d it s . so countr i e s f orced to resche.du l e the i r debt payments s ince 1 9 8 1 , make c l ea r tha t th e deb t prob l em penetra tes deeply and b roa dl y . l Indeed , th e anx iety o f c redito r s now ex ten d s - - a s we l l i t might- - to such OPEC memb e r s a s N ig e r ia a nd Vene zuela , who s e o i l re sourc e s had ea r l ier been an a s surance of c reditworth ine s s . After a l l , it wa s the drama t ic inab i l i ty of o i l r ich Mex ic o t o meet i t s ob l igat ion s i n Augu s t 1 9 8 2 tha t f ir s t moved dry s ta t i s t i c s r e l a t ing to ex ternal deb t f rom the ob scurity of f inanc ia l pag e s to the headl ine s . Mex ico wa s the s ec ond- l a rg e s t develop ing c oun try debtor at U S $ 8 0 b i l l ion and w i th p roven oil r e s e rve s o f seeming ly unl imited va lue . If i t cou l d not service its deb t , what o f other c ount r i e s l e s s favored ? With abrupt suddenne s s , th e deg ree o f exposure o f the bank ing systems of th e indu s tria l i z ed c oun t r i e s bec ame a matter of grave c oncern . A l th ough a r e l a t ively sma l l proportion of total a s se t s- - l i t t l e more than 1 0 percent- - loans to devel oping c ountries far exc e eded th e capital ba s e s of th e l a rg e s t money c enter bank s . Interrupt ion in debt service threa tened to provoke systemic f inanc ia l in stab i l ity . B eyond that l oomed poten t i a l a dver s e rea l repercu s s ions on th e economi e s of th e Uni ted States and of the o th e r indu s trial i z ed countr i e s th rough l o s s of deve lop ing -c ountry ma rke t s . Interdependenc e wa s 97
98 tran s f o rmed f rom a rhetor i c a l s l ogan to a pra c t i c a l impera t ive . I t wa s no wonder tha t the Federal Re serve Bank , the other c entra l bank s l a rgely work ing th rough the Bank for I n terna t i ona l S e t t l ement s , and the I n ternational Monetary Fund re s ponded with a sen s e of u rg ency to the Mex ican c r i s i s . Fortuna tely , they a l s o re sponded with imagina tion . Emergency c redits we re made ava i lab l e wh i l e an ad j u s tment package wa s readied . The IMF boldly c on d i t i on ed i t s own f inanc e on c ommitments of new mon ey f rom th e c ommerc i a l banks and d e s igned i t s po l i cy recommenda tions on th e ba s i s of a s sured total capital inf l ows ra th er than pro j ec ted priva te - se c tor par t i c i pa tion . I n s tead of c oun s e l ing th e Mex ican government to adopt pol ic i e s tha t migh t suc c eed in a ttrac ting n ew l oans f rom th e priva t e s ecto r , the I MF requ ired th e b a n k s to p u t up new money as an integ r a l pa rt of a f ea s ib l e a d j u s tment packag e . Cond i t iona l i ty now wa s imposed on the bank s a s wel l a s th e coun trie s . Th e s e unprec edented a r rangemen t s soon became the o rder of th e day through repe t i t ion in th e ca s e s o f Arg ent ina a n d B ra z i l a s the f a l l o f 1 9 8 2 unf o l ded . Th ere wa s no a l ternative , g iven th e importanc e pr iva te c reditors had a s sumed . I n l it t l e more than a matter o f mon th s , bu t not without e l ab o ra t e negotiat ion s invo lving hundred s o f bank s , more than U S $ 5 0 b i l l ion o f debt had been re schedu l ed , abou t half as much short- term deb t ro l l ed over , and more than U S $ 2 0 b i l l ion in involuntary new loans c on tracted fo r the se th ree c ountr i e s . Overa l l , probably U S $ l O O b i l l ion in r e schedu l ing s have occurred . By f a r the mo s t d i f f ic u l t prob l em wa s B ra z il . Renegotia t ion o f unrea l i s t i c targ e t s o r ig ina l l y agreed upon with the Fund and the bank s earl ier in the year extended u n t i l November 1 9 8 3 , wh en the government acc epted add i t iona l au s t e r i ty mea su r e s . In the same mon th , a reca l c i trant u . S . Congre s s , a f t e r a c on s iderabl e del ay , f in a l ly approved a US $ 8 . 4 b i l l ion appropriat ion to fund an enl a rged IMF quota a nd I t c ame expa n s ion o f th e General Agreement to Borrow . with l ittl e t ime to spa r e , as the Fund wa s runn ing ou t of re sourc e s to meet potenti a l n ew needs o f devel op ing c ountr i e s . Th e i n i t i a l lag of th e Reagan admin i s tra tion in recogn i z ing th e seriou sne s s of th e Mex ican prob l em , a n d the f a i lure t o u s e the S eptember 1 9 8 2 I MF meet ing a s an occa s ion to mob i l i z e support for the Fund , a lmo st Scant week s later , a s B ra z i l proved v ery c o stly . tottered , S ec retary of th e Trea sury Dona l d Regan b ecame a c onver t to the cau s e of a more ac t ive r ol e for the Fund . Con s erva t i v e s in the Congre s s , more in tune with th e ea rl ier l a ck of enthu s i a sm o f the admin i stra t ion for mul t i l a teral in s t i tu t i on s , proved more d i f f ic u l t to I t requ i red a lmo s t a year , and l ibera l support , persuade . to obta in pa s sage of the mea sure .
99 The rel ief occas ioned by approva l of the quota in c re a s e and resolution of B ra z il ' s l ong -pending renegotia t ion with th e Fund , in c on j unction wi th s igns o f economic recovery in th e Un ited States and the oth er indu s trial i z ed c ountrie s , ha s g iven r i s e to a c e rtain optimi sm . The f ir s t s ig n i f icant shock to the spontaneou s sy stem of interna tional l end ing tha t evolved in the 1 9 7 0 s ha s been wea th ered , and mode s t repa i r s to the in s t i tu tiona l f rame work a re in proc e s s . Talk of more e l aborate reforms i s l e s s f a sh ionab l e , and everyone se ems t o want t o hope for the b e s t . But the c r i s i s may l inge r on- - i f not for the f inanc i a l sy stem , then for the devel oping count r i e s tha t are bearing th e b runt of t h e a d j u s tment . As t h e � S treet Journ a l succ inctly p u t i t , " De sp i t e the rec ent r e s cue e f fort s , deb t - r i dden deve lop ing count r i e s fa ce some b l eak prospe c t s for t h e yea r s ahead : anemic export earning s , s lugg i sh inve stment and c ru s h ing inter e s t c o s t s . Th e t o t a l foreign debt o f devel oping c ount r i e s that don ' t produce o i l , now e s t ima ted at $ 6 6 4 b i l l ion , i s expected to doub l e by 1 9 9 0 . ,, 2 That rea l i ty introdu c e s new e l emen ts o f medium- term po l i tica l , a s wel l a s economic , viab i l ity into the debt p ic ture . W i l l coun t r i e s accept the burden , particularly i f the mag i c of economic re covery is l e s s powerful than has been c l a imed ? Moreover , the future of the f inanc ia l sys tem i s far f rom c e r ta i n . The very succe s s of the short- term c r i s i s respon s e ironica l l y a l so s igna l s the end of the marke t system of Euromarket f inan c i a l intermediation tha t had f lou r i shed for more than a decade . Only by vigorou s o f f i c ia l intervention have pr iva te bank i ng arrang ements been sa lvaged . More than a new rela tionship between the IMF an d th e c omme r c i a l b a nk s is involve d . W i th i n the United S ta te s , the F edera l Re serve Board ha s been c a l led upon to persuade recalc itrant reg iona l banks o f the nece s s i ty to cont inue to l end to deve loping coun t r i e s when the i r de s i re i s to redu c e the i r expo sure . F ew antic ipate , even with improved economic c ircumstanc e s , a return to the buoyant capital mark e t s of the 1 9 7 0 s that s e rved s o wel l to recyc l e the petrodo l l ar surplu s e s . Can , o r shou l d , the qua s i soc i a l i z a t ion of internat ional l ending we have seen under the au spices o f the I MF replace i t ? Que s t i on s , and the debt prob l em , thu s pers i s t . In th i s chapter , I focu s on four o f i t s a spect s . F ir s t , I examine the o r ig in o f the prob l em in the d i s equ i l ibr ium of the international economy in the 1 9 7 0 s and in the re spons ive dome st i c pol ic i e s of the developing c ountrie s . F rom tha t b a s i s I cons ider the po s s ib i l ity o f indu s tria l i z ed-cou nt ry recovery as a solution . Th ird , I take up th e appropriaten e s s of the IMF ad j u stment packag e s now in p l a c e in many countr i e s , wi th regard t o both the i r economic and pol i t i ca l viab i l ity . F i na l l y , I eva luate the adequacy o f the ex i s t ing institutiona l framework for
100 coping with the debt prob l em , and the f inanc ial needs o f t h e develop ing countr i e s , i n t h e medium term . THE ORIGIN OF THE DEBT PROBLEM F rom Debt-Led Growth to Growth -Led Debt The expa n s ion of the Eurocurrency ma rke t in the 1 9 6 0 s wa s , on the who l e , of l i ttle signi f icance to devel op ing count r ie s . European c entra l bank s and trans national corporations were th e principal transactor s . Only a s th e decade wa s drawing to a c l o s e , largely under the impu l se o f a rec e s s ion- induced decl in ing convent iona l demand f o r loan s , did money center banks beg in to search out new prospec t s . They found a h i therto un tapped c l ientel e among the rapidly g rowing countr i e s o f the develop ing wor l d that later wou ld be chr i s tened the " newl y indu s t r i a l i z ing coun t r i e s " : B ra z i l , Mex i c o , and Korea , among others . Capita l began to f l ow to f inance the increased imports required by accele rating economic expans ion . Such loans , and not merely export promo t ion , were the b a s i s o f a mo re e l a s t ic supp ly o f fore ign exchange f ac ing the s e count r i e s and permi tted a mor e agg r e s s ive a n d a cce l erat ing g rowth strategy . Bra z i l ' s economic mira c l e in particular wa s charac ter i z ed by such debt- led growth . Th e sudden i n j ection o f petrod o l l a r s into world f inanc ial ma rk ets i n 1 9 7 4 a l tered both the pace and the purpo s e of borrowing . OPEC exporters rea l i zed a current account surp l u s in tha t year o f a lmo s t $ 7 0 b i l l ion as a resu l t o f the quadrupl i ng of o i l prices and p l a c ed much of it in short- term depo s i t s with comme r c i a l bank s . Tho se do l la r s we re loaned for a longer term to countr i e s tha t w e r e importers o f o i l in o rder t o f inanc e th e i r much l a rg e r balance-of -payments def i c i t s . Amid predic tions o f impending doom and d i s a ster , p r ivate f inanc ial ma rke t s f ound a way not only to k e e p th e g l obal economy a f loat , but with i n short orde r , to fuel renewed expan s ion . That way wa s unprec edented incre a s e o f ex ternal deb t , e spec i a l l y on th e part o f the deve loping countrie s . C ountr i e s did not have to borrow at tha t t ime . Th ey cou l d have reduced th e i r purch a s e s of o i l , or f a i l ing th at po s s ib i l ity , have restric ted other import s . But such r e s pon s e s wou ld have imp l ied pa s s ing a l o ng the o i l tax i n th e form n o t only o f lower rea l income s bu t a l so o f d imini shed output and empl oyment . That wa s an un popu l a r cho i c e for mo s t governments , e spec i a l l y when they were tak ing c redit for improving economic performance . The other option wa s to a c c e l erate the g rowth o f exports to o f f se t the increased c o s t o f impo rts � a l though no l e s s a redu c t ion o f real income , such a strategy at l e a s t promi sed to be l e s s contrac t i onary tha n pol i c i e s a imed prima r i l y at import reduc t ion . That cho i c e aga in seemed
101 dub ious when rec e s s ion i n the indu s t r ia l i z ed coun t r ies wa s s l owing agg regate trade growth in 1 9 7 4 and 1 9 7 5 . More g radua l , debt- f inanced a d j u s tment wa s the refore attract ive to many count r ie s , an option rendered the more al lur ing by i t s cheap c o s t . Not a l l coun t ries were e l i g ib l e . Those that had the luxury o f borrowing were predominantly the one s tha t had a l ready e stab l i shed prior l ink s to th e market : They tu rned f rom debt- l ed growth to g rowth - l ed debt . In the ea r l i er period they cou ld cou�� on an e l a s t i c suppl y of foreign capital and cou l d , and d i d , set amb itiou s growth targ e t s i ndependent o f a fore ign- exchange constraint . I n the l a ter period , th ey operated under greater r e s t r i c t ion . A l though they borrowed more , coun t r i e s wer e not fac ing un l imited suppl i e s o f c redi t : The i r g rowth rates had t o b e set more mode s tly , with l a rger debt f inanc ing the l a rger needed import requ irement s . Not a l l e l igible cou nt r i e s cho se such a path . T a iwan and S ingapore , for examp l e , a c c epted a more immediate ad j u s tment and r ea l ignment o f real wages to rema in compet i t ive in export s . The mo re dependent economie s were upon th e i r exports , the mor e inc l ined they were to f avor agg r e s s ive e f forts to expand ma rket sha res rather tha n to a c c ept cont inu ing debt- f inanced balanc e - o f payments de f i c i t s . I n such sma l l o p e n economi e s , import sub s t i tution wa s not a p rominent part of med ium- term adaptation , and export c ompet i t iven e s s wa s b e s t accomp l i shed b y short-term f l ex ib i l i ty . Enough coun t r i e s opted for de f i c i t f inance to permit f inanc i a l mark e t s to su s ta in wor l d demand . By mak ing money cheap the bank s induced borrower s to ma intain and expand th e i r imports to o f f set the export surpl us of the o i l produce r s . In th i s f a sh ion , a c l a s s i c poten t ia l oversaving s , non- fu l l - empl oyment so l u t ion to t h e su rplus p rob l em wa s averted , and g l obal recovery cou l d bu i l d upon th e continu ing g rowth o f the midd l e - income devel oping c ountr i e s . Increased indebtedne s s thu s had p o s i t ive ex terna l i t i e s . F rom a national perspect ive , th i s sort o f s t ra tegy a l so produced favorab l e r e su l t s . The s e l e c t group o f c ountri e s that were ab l e t o borrow expe rienced better economic performanc e . The poor e s t countr i e s , on the other hand , had to adj u s t immed iately and painfu l l y , despite larger o f f i c i a l l ending mob i l i z ed in th e i r beha l f . As a c on s equenc e , a wider gu l f opened between the midd l e inc ome and the low- income count r i e s in the 1 9 7 0 s , even a s i t na rrowed between s emiindu s t r ia l i z ed and indu s t r ia l i z ed c ountrie s . Pe r capita income gr ew b etween 1 9 7 0 and 1 9 8 0 a t a n annua l rate o f 3 . 2 percent in the middle- income countr ie s , 2 . 4 percent in the indu s t r ia l i zed count r ie s , and not a t a l l i n th e l ow- income countries othe r than India and China . 3 Tab l e 5 . 1 conf i rms th i s dominant ro l e o f the N I C s in c redit ma rk e t s in th e immediate a f termath o f the o i l -price
7.3 12 . 7
12 . 8
6.0
12 . 4
8.0
4.4
30 . 9
8.6
4.6
10 . 1
6.4
3.7
26 . 4
Korea
Argentina
Chi le
4.5
3.3
7.1
2.9
5.7
1977
O i l exporte r s
Low income
Southern Cone
N IC S
c ountri e s
A l l deve loping
1979 1981
472 . 0
23 . 7 453 . 5
4.7
559 . 9
540 . 4
27 . 5
53 . 8 5.6
b
40 . 8
15 . 1
1 19 . 0
65 . 2
17 . 0
b
71 . 4
11 . 1
27 . 2
38 . 3
26 . 4
14 . 9
14 . 9
99 . 0
58 . 2
62 . 7
8. 5
19 . 0
27 . 5
20 . 5 31 . 2
64 6 . 5
630 . 1
29 . 3
7.9
67 . 0
18 . 0
15 . 3
70. 5 137 . 5
75 . 2
12 . 0
4.9 11 . 7
2.6
13 . 4 10 . 8
( 11 . 4 )
10 . 4 24 . 1
28. 3
38 . 1
45 . 7
b
1978- 1980
1 9 7 6- 1 9 7 8
(7.6)
24 . 1
6.1
9. 9
29 . 8
b
1980- 1982
b
15. 6
35 . 7
51. 3
(�rcentages o f tota l )
3 98 . 2
381 . 4
16 . 3
3.6
14 . 5
12 . 7
47 . 1
54 . 8
6.7
12 . 5
19 . 2
14 . 8
1973-1976
15 . 7
1980
1 9s 2 1983
7 24 . 8
711 . 6
31. 3
11. 2
82 . 0
21 . 0
14 . 8
78 . 3 1 60 . 3
81 . 8
17 . 2
b
3 8 •. 0
55 . 2
35 . 8
b
b
( 24 . 9 )
27 . 0
13 . 2
12 . 3 12 . 3
1983
767 . 7
7 58 . 6
33 . 0
17 . 0
83 . 0
23 . 0
17 . 0
173 . 0
90 . 0
88 . 0
18 . 0
42 . 0
60 . 0
42 . 0
b b b b b b 3 00 . 7 354 . 5 4 21 . 4 492 . 6 551 . 3 5 85 . 6 14 9 . 5 b b b b b b 115 . 9 135 . 0 185 . 4 1 60 . 9 2 11 . 9 2 17 . 7 48 . 4 57 . 4 66 . 1 75 . 7 88 . 2 97 . 0 33 . 6
334 . 3
1978
do l l ars )
Sources o f Chan2e
3 29 . 3
12 . 3 3 15 . 6
8.7 255 . 3
5.7 212 . 0
5.3
1 78 . 7
4.6
145 . 5
Venezue la
Tota l
2.1 1.9
12 . 8
8. 3
35 . 3
2.2 1.8
11 . 0
5.8
27 . 3
48 . 6
4.7 40 . 1
9.7 6. 2
8.3
14 . 9
11 . 2
27 . 1
35. 2
122 . 7
2 80 . 3
2.2
8. 9
21 . 2
17 . 9
15 . 4
34 . 6
4.8
13 . 0
8.9
21 . 8
28. 6
10 1 . 5
228 . 0
1976
Nigeria
Mexico
Algeria I ndone s i a
e xporters
S e l e c ted o i l
Low income
Southern Cone 7.9
23 . 3 16 . 9
18 . 9
13 . 8
Braz i l
Mexico
NICS
82 . 3
190 . 8
1975
66 . 2
1 60 . 8
( i n bi l l ions of U . S .
51 . 3
c
1974
1 30 . 1
a
1973
Deve loping- Coun t ry Debt
Non o i l expo r t e r s
Tab l e 5 . 1 I-' 0 N
Ma j or exporters on manuf acture s ,
l e s s Argentina ,
Indone s i a ,
Debt inc l ude s short- and l ong-term
but inc luding Mex i c o
Exc lude s loans from IMF .
inc ludes Mediterrane an European countr i e s .
inc l ud i ng nonguaranteed .
and Ven e z ue l a ;
Exc lude s Mex i c o
debt ,
Nigeri a ,
Deve loping c ountri e s inc lude IMF def inition of nono i l deve loping countries p lus Algeria ,
( cont . )
D.C. ,
1973-198 2 :
W.
C l ine ,
Internat ional Debt and the Stab i l i ty of the Wor ld Economy
(Washington ,
1 9 8 3 ) ; N i g e r i a and Algeria , 1 9 7 3 - 1 9 8 2 : World Bank , World Debt Tab l e s and World F inanc i a l Market s , June 1 9 8 3 ; Ch i l e , 1 9 7 3 - 1 9 8 2 : R . Zahler , " Recent Southern Cone L ibe r a l i z at i on Re forms and Stab i l i zation Pol i c i e s : The Chi l ean Case ( 1 9 7 4 - 8 2 ) , " Journal o f Interame r i c an Stud i e s and Wor ld A f f a i r s , November 19 8 3 , and Wor l d F inanc i a l Marke t s , June 198 3 ; B r a z i l , Mexico , Kore a , and Argent i n a , 1 9 8 3 : Organi zation for Economic C oope r a t i o n and Devel opment , Extern a l Debt of Deve l oping Countri e s , 1983 Survey ; Ch i l e and Euromoney , March 1 9 8 4 ; Algeri a , 1 9 8 3 : Economi s t , Quarterly E conomi c Review , no . 1 , Venezue l a , 1 9 8 3 : 1984 ; Indone s i a , 1 9 8 3 : Economi s t , Quarterly Economic Revi ew , no . 1 , 1984 ( e s t imate o f inc remental loan s ) ; Nige ri a , 1 9 8 3 : W a l l street Journa l , February 2 1 , 1 9 8 4 .
and Venezue l a ,
NICs ,
Sourc e s :
Nono i l c o un t r ie s , 1 9 7 3 - 1 9 7 6 : International Mone tary Fund ( IMF ) , Wor ld E conomi c Out l ook , 1 9 8 3 ; 1 9 7 3 - 19 7 6 : IMF , World Economic OUtlook , 1 9 8 3 , p lu s short-term debt estimated as . 4 5 time s total IMF , Wor l d Economic Out look , 1 9 8 3 , p lu s short- term debt nono i l short-term debt ; low income 1 9 7 3 - 19 7 6 : e s timated a s . 0 5 times nono i l short-term debt ; a l l deve loping countri e s , NIC s , low income , nono i l coun t r i e s , 1 9 7 7 - 1 9 8 3 : IMF , World Economic Out l ook , 1 9 8 4 ; Brazi l , Mexico , Korea , Argentina , I ndone s i a ,
C
b
a
Tab le 5 . 1
I-' o w
104 shock . They accounted for over two - f i fths o f the in c reas e i n all deve loping- country debt between 1 9 7 3 and 1 9 7 6 . Mex ico and Braz i l , togethe r , accounted for about a quarte r . A l l l ow- income count r i e s could manage l it t l e more than 1 0 percent , a lmo s t exc lus ively f rom o f f i c i a l source s . F ive o f t h e nonsurp l u s - o i l expo rters virtua l ly matched that partic ipation . For some o f the borrowe r s , the new credits became habit f o rming , even a ft e r real p r i c e s of o i l began to be e roded and indu s t r i a l - c ountry growth recovered a f te r 1 9 7 5 . Balance-of-payment d e f i c i t s dec l ined only gradua l ly , a s bank wi l l ingne s s to continue to l end opened up new po s s ibi l i t i e s for pub l i c spending . The data in Tab l e 5 . 1 reveal a continued high l evel o f part i c ipation o f the N I C s in total borrowing and expans ion o f the role o f the o i l - exporting countri e s . Al though borrowing had its origins in the o i l c r i s i s , i t took on a l i fe of i t s own , o n e i n f luenced b y t h e higher price n o t merely o f o i l b u t a l so o f manu factured impo r t s . S ince banks pre f erred o f f i c i a l guarante e s , and the s e c o u l d more read i l y be g iven on pub l i c l o a n s a n d indirect borrowing o f state enterpr i s e s , private international c redit markets imparted a s i gn i f i cant b ia s toward publ ic sector expan sion . Th i s , too , f avored tho s e midd l e- income count r i e s with a more pe rva s ive network of state enter pri s e s and intervent ion i s t tradition . Count r i e s found the speed and l e s s exigent requirements o f the private bank s a we l c ome contra s t to the r i g i d i t i e s o f o f f i c i a l loans . Bank s , on the i r s i de , found the i r new cus tomers an important source o f pro f i t s . Banks made the ir money on the h igher up- f ront commi s s ion fees and spreads for loans to deve loping count r i e s , and l ow real interest rates , or even negat ive rate s , were no worry . I ndeed , they were we l c ome i n minimi z ing the debt- serv i c i ng prob l ems o f the deve loping- country borrowe r s . As long a s bank depo s i tor s were wi l l ing to accept neg l igib l e return s , and surp l u s o i l producers h a d s u c h a pref erence for l iquidity that they were , the arrangement wa s quite sat i s factory . As a resul t , deve loping- country debt grew at a rate o f about 20 percent a year f rom 1 9 7 3 to 1 9 7 8 , in creas ingly we i ghted by the f l oating-rate loans of bank s . Lende r s bore the r i sk o f a mi smatch between overni ght depo s i t s and s ix- or e i ght-year loan s ; borrower s bore the r i sk of chang ing intere s t rate s and had the ir cost s pegged to the London I nter-Bank O f f e r Rate ( L IBOR) . In add i t ion , count r i e s were expo sed to the high rates o f loan turnover imp l i c i t in the short-maturity s tructure of commerc i a l loans . Thi s tran s lated i n t o debt- s ervice r a t i o s that far exceeded previou s l y conventional s tandards , without providing comparab l e acce s s to increased real re source s . A r e l a t ive ly sma l l number o f count r i e s thu s embarked on a strategy o f growth - l ed debt in the 1 9 7 0 s sub j ect to spec i a l vu lnerab i l i t i e s . They were f inancing medium- and
105 long-term capital formation o n the b a s i s o f short- term I nherent credits with an uncertain and variab l e price . in any debt strategy was an inab i l i ty to know its real return becau s e the future prices o f exports were an important determinant o f the poten t i al bene f i t s . Compound ing i t in thi s c a s e were an uncertain c o s t o f debt and a dependence upon future conditions o f suppl y o f c redit requi red t o ro l l over ex i sting loans . Y e t up to the se cond o i l -price shock , the gamb l e wa s worth taking . Export g rowth wa s susta ined in wor l d markets a t favorable p r i c e s despite wor r i e s about protection i sm . As a cons equence , the ratio of debt out standing to export proceeds wa s more favorabl e for non o i l deve loping countries in 1 9 7 9 than in 1 9 7 0 - 1 9 7 2 ( al though a s s i s ted b y r i s ing o i l revenues for some new exporters in the g roup ) . Debt se rvi ce , even if c l a iming a l a rger share o f exports than ear l ier ( a s grace periods expired and intere s t rates c rept upward ) , wa s st i l l a mode s t 1 9 percent for the g roup a s a who l e . Short-term loans were not yet much in evidence and po sed no c a sh f l ow prob l em . The ratio o f r e s erve s to debt out s tanding at the end o f 1 9 7 9 wa s a th ird more sat i s factory than the level in 1 9 7 0 - 1 9 7 2 . � I n the meant ime , a s noted earl ier , tho s e deve lop ing count r i e s with acce s s to the f inanc i a l market succeeded in susta in ing the ir rates o f growth far more e f f ectively than tho s e fo rced to do wi thout . They did so becau s e they uti l i zed increased foreign s aving s t o f inanc e higher leve l s o f inve s tment . Evidence on the consumption be havior o f a number o f the ma j or debtor count r i e s i s reported i n T ab l e 5 . 2 . 5 I t conf i rms the produc t ive appl i c a t ion o f the much larger foreign capital i n f l ows in the p e r i od a f te r 1 9 7 3 . I n the f i r s t p l a c e , despite the a c c e l erat ion in borrowing , the prope n s i ty to consume out o f net foreign proceeds in 1 9 6 5 - 1 9 7 8 wa s not stati s t i c a l l y s i gn i f icantly greater than in the prior period . If foreign resources were not a l l appl i ed to inve s tment , ne i ther were they diverted to consumption in proportions d i f ferent than they had been . S econd , the share a l l ocated to savings f rom foreign borrowing in 1 9 6 5 - 1 9 7 8 wa s sign i f i cantly greater than the a l location f rom g ro s s national product for Korea ; for both B ra z i l and Mexico , the deviations are in the right d i rection a l though f a l l ing short of stat i s t i c a l s i gn i f i cance . I ndeed , for the s e three largest debto r s , the savings coef f i c i ents f rom net capital in f l ow are h igh enough so that the hypothe s i s that a l l borrowing was saved cannot be r e j ected . A t the ma rg in , for the se count r i e s , debt tran s l ated more than pro port iona l ly into inve stment . Third , even a f ter the second o i l shock in 1 9 7 9 - 8 0 provoked further uncerta in t i e s and reduced growth and inve s tment , there wa s no systemat i c tendency toward greater consumpt ion out o f Some count r i e s did show a r i s e , B ra z i l mo st borrowing .
106 Table 5 . 2
Consumption Behavior o f Debtor Nations Margin a l Propensity to Consume from National Product 1 96 5 - 1 981
Argentina Braz i l Chi le Colombia Indone s i a Korea Mexico Venezue l a a
. 76 a ( 2 1 . 39) . 79
Marginal Propen s i ty to Consume from Foreign Ca,Eital
1965-1978 . 82
1 9 7 9- 1 9 81 1 . 02
( 2 . 49) - . 02
( 1 . 20) . 90
( . 04 ) . 95 ( 2 . 84 ) . 69 ( 2 . 67 ) 1 . 00
( 1 . 91 ) . 51 ( 1 . 62 ) . 20 ( . 50 ) . 76 ( 4 . 63 ) . 48 ( 1 . 97 ) - . 51 ( 1 . 54 ) . 38 (1. 72)
( 48 . 24) . 86 ( 3 3 . 92 ) . 73 ( 3 5 . 68) . 67 ( 3 7 . 80 ) . 68 ( 3 4 . 87 )
( 6 . 84 ) . 20 ( 1 . 82 )
. 76 ( 36 . 26 ) . 46 ( 1 . 16)
. 43 ( 1 . 30 ) . 54 ( 7 . 40 )
t -va lues in parenthe s e s
Source : Fund ,
D a t a on national ac counts from International Monet ary
International F i nanc i a l Stat i s t i c s , various is sues .
prominently , but the only stat i s t i c a l l y s ign i f i cant change wa s Mex i co ' s in the d i rect ion o f greater saving . F inal ly , the pattern o f expend itures in a nondebtor country l ike c o l omb ia is not much d i f f erent f rom that in the la rge s t debto r s . Th i s conc lus ion o f no gro s s d i sp l a cement o f dome s t i c saving i s corroborated b y IMF stud i e s compar ing changes in average ratios o f saving to GNP wi th rel a t ive changes in the current a ccount between the late 1 9 6 0 s and the 1 9 7 0 s . Taking i nto account a s we l l s imul taneou s inve st ment increa s e s , the " i ncrea s e s in externa l def i c i t s can in mo st c a s e s be accounted for by expans ion of inv e s tment ( re l a t ive to total ou tpu t ) rather than by growth of consumption . ,, 6 The c ro s s - sect ional methodo logy l eads to the stronger r e s u l t that debt had its princ ipa l appl ica tion in inve s tment , not true in my samp l e for such borrowe r s as Argentina , Ch i l e , and I ndone s i a . What seems c l ear is tha t count r i e s did not borrow in order to in crea s e the i r consumption ratios , al though the i r ab solut e consumption may have r i sen . Al though some count r i e s encountered d i f f icul t i e s and were forced to r e s chedu l e and a l though some ana l y s t s rema ined skept i c a l o f t h e mag ic o f the market , the consensus j udgment about deve loping- country debt unt i l the s econd o i l shock wa s a po s i t ive one . Rapidly growing
107 debt wa s a s o l ution rather than a problem . Even in 1 9 8 0 i t could b e stated i n a n I MF O c c a s ional Paper : I n sum , the overa l l debt s i tuation during the 1 9 7 0 s adapted i t s e l f to the s i zable strains introduced in the payments system and , in broad terms , ma intained i t s relative po s ition v i s-a-vis other r e l evant economic variab l e s . Though some coun t r i e s exper i enced di f f i cu l t ie s , a genera l i zed debt management prob l em was avo ided , and in the aggregate the outlook for the immediate future doe s not give cause for a l a rm . 7 A Changed I n ternational Envi ronment Even a s tho se l ines were b e i ng written , the b a s e s for opt imi sm were being eroded b y a deteriorating g loba l economy . I n the f i r s t ins tance o i l p r i c e s soared again under the impul se o f uncertain supp l i e s a s war broke out in the f a l l o f 1 9 7 9 between I ran and I raq . After con s iderab l e vo l a t i l ity i n the spot marke t , the new average 1 9 8 0 o i l price settled at a l evel almo s t two and a ha l f t ime s greater than i t s 1 9 7 8 value o f US $ 1 2 . 8 3 a barre l . The immediate impact , remi n i s c ent of the f i r s t o i l -price shock , wa s a l arge O P E C surp l u s o f f set by a l arg e nono i l � deve loping- country de f ic i t . Once aga in there wa s a rec e s s ion in the indu s t r i a l i z ed countr i e s , a s contrad i c tory po l ic i e s sought to con tain inf l a t io n , but th i s t ime more seriou s ly . The impact on deve loping - country expor t s and terms o f trade wa s to prove longer l ived . F i na l l y , there wa s a new e l ement in the f o rmu l a : Rea l intere s t rates began an upward a s c ent . Where before the cap i tal market f a c i l itated d e f i c i t f i nance , i t now pena l i zed n o t o n l y t h e f l ow b u t a l so the stock of p a s t debt contracted on a f loat ing bas i s to boot . Tab l e 5 . 3 quant i f i e s the approximate contribution o f each o f the s e three adve r s e factors to the current account de f ic it rea l i zed by the group o f nono i l deve l op ing count r i e s a s a who l e . The ro le o f the o i l -price shock , even a l l owing for the f avorable impact on such countri e s a s Mex ico , P eru , Egypt , and a few others , i s I n second shown a s paramount in t iming and magni tude . place is the rec e s s ion- induced reduction in export earnings , the r e su lt o f both s l ower growth in vo l ume and deterioration in price . Th i s negative inf luence i s mo s t pronounced in 1 9 8 2 . B y that t ime the seve r i ty and l e ng th of the s lowdown in the indu s t r i a l i z ed count r i e s produced a vo lume dec l ine as we l l as an increas ing cumu l a t ive price e f f ec t . It is not surpri s ing that b y 1 9 8 2 coun t r i e s found thems elves in more and more balanc e - o f payments d i f f icu l ty . H igher intere st rate s , despite the attention they have rece ived , are of l e s se r , but accelerat ing , importance
108
Tab le 5 . 3 Sources o f Deterioration in the Current Ac count of Nono i l Deve loping Countries , 1 9 7 9- 1 982 ( bi l l i ons o f U . S . do l l ars )
1978 Actual trade balance - 36 . 6 Ad j usted trade balance O i l e f fect Rec e s s ion e f fect Export volume Terms o f trade Debt service ( gross } - 19 . 4 Intere st Rate e f fect ( gros s ) Intere st rate e f fect ( net ) Current account -41 . 3 Ad j us ted current account -41 . 3 Source :
1979
1980
1981
1 98 2
-51 . 3
-7 4 . 3
-7 9 . 6
-52 . 2
-46 . 3 5.0
-57 . 3 17 . 0
-47 . 8 18. 6 13 . 2
-28 . 0
-40 . 4
-1 . 1
.5
Cumulative 1 9 7 9- 1 98 2
8.8
13 . 2 -55 . 1
14 . 8 46 . 2 23 . 2 21. 3 -59 . 2
55 . 4 59 . 4 23 . 2 34 . 5
11 . 4
23 . 0
33 . 8
-.5 -61 . 0
.2 6.5 -89 . 0 -107 . 7
14 . 0 - 86 . 8
20. 2
-56 . 5
-71 . 8
-11 . 8
-6 9 . 4
Actual trade balance and current account based on Monetary Fund , World Economi c Outlook , 1 9 8 3 ;
�a tional
adj us ted trade balance : actual minus sum of o i l and re c e s s ion actual cost of net imports of o i l ( u s ing o i l e f fects ; oil e f fect : import price o f industri a l i z ed countries ) minus e s timated c o s t using o i l price that varies after 1978 with export pr i c e s o f o i l - importing compo s i te of terms of trade and countries ; recess ion e f fect : volume ef fects ( does not add because of interaction ) ; export volume : nono i l export va lue time s cumUla tive negative percentage devi ation between actual export vo lume o f o i l - importing countri e s and volume predicted by 3 . 2 percent OECD growth in 1 9 8 0 - 1 9 8 2 ; terms of trade : cumu lative negative percentage deviation between actual nonoi l terms o f trade ( e xport prices o f nonoi l , o i l - importing countries , import pri ces of o i l - exporting countries in 1 9 7 3 - 1 9 7 4 , 1 9 7 9 - 1 9 80 ,
nonoi l countr ies in others ) and terms of trade predicted by 3 . 2 percent OECD growth and decel eration of industri a l i z ed country inflation at one perc entage point per year ; debt s ervi c e ( gros s ) : based on Internation a l Monetary Fund , Internat ional Financial Statisti c s ; intere st- rate e f fect : based on a 1 9 7 5 - 1 9 7 8 average real prime rate (measured us ing the December to December price inde x ) o f . 7 5 appl ied to short-term loans , and for e f fect net of Interest on l ong earning a s s ets , to short-term net liabi lities . term and medium- term loans was calculated by using the real prime rate with a weight of one - third and the OECD long-term fixed intere st rate with a we i ght o f two-thirds , corre sponding to port folio weights reported in Organi zation for Economi c , Cooperation and Deve lopment , Rate s were External Debt of Deve loping Countr ies ( Pari s , 1 9 8 2 ) . app l i ed to average annual debt , obtained by us ing average of year- end Thi s method approximates we l l actual gro s s and net intere st debts . payments reported in Internat ional Monetary Fund , Wor ld Economi c s
actua l minus sum of o i l e f fect , Outlook . Ad j us ted current account : rece s s i on ef fect , and net intere s t ef fect .
109 i n exp l a i n ing the deterioration i n the current account . One reason for the i r l imited power i s the o f f s etting e f f e c t o f deve loping- country a s s ets o n which earnings wou l d have been l ower had real rates not increased abruptly in 1 9 8 1 and 1 9 8 2 . Thi s i s r e f l e cted in the sma l l e r net improvement fo r current account for 1 9 8 2 compared to the ad j us ted current a ccount , a s shown in Tab l e 5 . 3 . But thi s doe s not capture the fu l l s ignif icance o f t h e r i s e in t h e intere st rate . T h e increa se n o t only contributed to the current account de f i c i t but a l so had immed i ate adve r s e e f f e c t s on the debt- service ratio . Be tween 1 9 7 8 and 1 9 8 1 intere s t payments on the debt ro se f rom $ 1 9 b i l l ion to $ 5 5 b i l l ion for all nono i l deve loping countr i e s , and the ratio to exports inc reased f rom 7 . 3 to 1 1 . 9 percent . The change for Latin American borrowe r s wa s much greate r , a s t h e r a t i o o f intere s t s ervice t o exports c l imbed f rom 1 4 . 9 to 2 5 . 4 percent . Only dec l in ing amo rt i z ation kept the ove r a l l debt- service ratio with in bound s . Potent i a l l ende r s were concerned . That the higher nominal rate s at f i rst were part i a l l y equ iva l ent to shorter matur i t i e s , because they were compensat ing for i n f l a t ion rather than s ignal ing a deterioration in the capa c i ty to pay , did not a lway s reg i s te r . Such h igher rates thu s exacerbated the c r i s i s and were a c ruc i al factor i n making developing-country ad j us tment more d i f f i c u l t j u s t when export demand wa s f a l l ing o f f . Rece s s ion in the industr i a l i z ed countr i e s in t h e p a s t h a d at l e a s t b e e n part i a l l y o f f set b y mor e abundant a n d cheaper loanab l e funds . H igher rates had a furthe r e f fect : They determined the inertial growth of the debt , an inert i a l growth tha t wou l d h ave to be o f f set by export surp l u s e s tha t reve r s ed the real resource f l ow I exp lore th i s consequence in to deve loping count r i e s . the next s e c t i on . The new real- interest- rate regime wa s largely the consequenc e of consc ious pol icy i n the indu s t r ia l i z ed countrie s . T igh ter money became the principal instrument to reduce i n f l ation . Reaganomic s carried the proc e s s a further s tep by marrying lax f i s c a l po l icy and an ins i s tence on l owe r i n f l a tion ; t h e predictabl e consequence wa s higher d e f i c i t s , intere st rate s , and unemployment . Re s t r i c t ive pol i cy a l so produced other cons equences that reinforced the tendency for intere st rates to r i s e . Reduced surp l u s e s were rea l i zed by o i l produc ers fac ing a softer and more c ompeti tive market , so that forme r source of s aving s to f inance the d e f i c i t s o f the oil importers wa s no longer ava i l ab l e . I nternational capital markets magn i f ied the sho ck . Banks , concerned about the i r expo sure , r a i s ed premiums to o i l - importer borrowe r s ; more importantly , they became mor e re luctant to l e nd . They began to prefer shorter l o an s - - o s te n s ibly trade c redi t s , but in rea l i ty , l ike a l l l ending , balanc e - o f -payments f inanc e . E s t imated debt o f
no
l e s s than a year doub led between 1 9 7 7 and 1 9 8 2 wh i l e med ium- and l ong- term f inance increased b y about 5 0 per cent . As the data in Tab l e 5 . 3 sugge s t , the cumu l a t ive e f f e c t s of the externa l shock s experi enced a f ter 1 9 7 9 we re suf f i c ient to convert the large 1 9 8 2 de f i c i t o f $ 8 7 I n the ab sence o f the s e b i l l ion to one o f $ 1 2 b i l l ion . cumu l a t ive e f f e c t s , the some t ime s drastic e f forts on the part of countr i e s to curta i l the i r imports wou ld have led to s igni f i cant imp rovement in the i r payments s i tuation rather than the severe d i f f i cu l ty actua l l y experienc ed . A l l togethe r , the total value o f imports wa s cut back by some $ 4 0 b i l l ion in 1 9 8 2 . That wa s the inevi tab l e consequence o f conf ront ing mounting debt- service ratio s with f i r s t c l a im on fore ign-exchange receipt s . For the large s t debtor s - -Argentina , Bra z i l , and Mex ico--debt service in 1 9 8 2 , exc l uding r o l l over o f short-term debt , ave raged about 8 0 percent o f export earnings . But the data in T ab l e 5 . 3 a l so make it c l ear that the sharp i n i t i a l r i se i n the de f i c i t f rom its 1 9 7 8 l evel mu s t be expl a i n ed on other grounds . By 1 9 8 0 , even l eav ing a s ide the o i l -price shock and the price of export s , the current ac count def i c i t had r i sen by a third . I t is a mi s take t o bl ame the o i l -price and r e c e s s ion shocks a lone f o r what wa s also an inadequacy o f the func tioning o f capital marke t s . For one thing , a s the data in Tab l e 5 . 1 showed , there wa s much increased borrowing by C h i l e and Argentina a s they pursued more open capita l marke t s a s an integral part o f their new international mone t a rist stab i l i z at ion exper iment s . B e tween 1 9 7 8 a nd 1 9 8 1 the i r previou s l y moderate debt a lmo s t treb l ed , a s they a l one accounted f o r some 1 2 percent o f increased deve loping- country indebted ne s s . H igh dome s t i c inte r e s t rates in conj unction with preannounced and- - i n the c a s e of C h i 1 e - - f ixed exchange rates encouraged rapid capital i n f l ows that were trans l a ted into l arger import s , but without the same propo r t ion s aved a s wa s true o f the e a r l i e r NIC bor rowing in the a f termath o f the 1 9 7 3 oil shock . For anothe r , o i l exporter s , and in part i c u l ar Mex ico , rel ied heav i l y on externa l f inanc e to sustain high rates o f growth o f product and , di sproport ionately , o f impor t s . The very i n i t i a l shock o f higher o i l p r i c e s worked to the i r advantage . They borrowed not to accommodate to adve r s e externa l c i rcumstanc e s , but rather to exp l o i t the i r new r i ches . Need l e s s to say , they were attractive c l ients for bank s again flush with Eurodepo s i t s in sea rch o f app l i cation . F i n a l l y , some o i l - importing countr i e s , promi nent,l y Bra z i l , became hab i tuated to debt - f inanced ad j u stment l, under s tated th e d i f f e rent and more per s i stent inter nati ona l rec e s s ion , and took f ew precaut ionary mea sure s . ' B ra z i l cho s e for internal pol i t i c a l reasons to expand in 1 9 8 0 at the expense o f a deteriorat inq payme nts po s ition .
111 I t wa s checked early o n by a n increas ing ly ine l a s t i c supp l y o f credit . As a cons equence i t s debt expanded r e l a t ively l e s s than that o f its Latin Ame r i can ne ighbo r s . Between 1 9 7 8 and 1 9 8 1 , the principal debtors i n La ti n Ameri c a were respons i b l e for more than 4 0 percent of the increa s ed debt tabu l a ted i n T ab l e 5 . 1 , compared to an i n i t i a l partic ipation of 3 0 percent . Almo s t a l l of the new debt wa s accumu l a ted on a f l oating- rate bas i s , and progre s s ively the cheap intere s t rates became unava i labl e . For many , prudent import po l ic i e s might have averted some of the later g r i e f . A prominent exception was B ra z i l , who s e large ou t stand ing debt absorbed virtua l l y a l l o f t h e foreign exchange borrowed a n d who s e r e a l imports re ma ined compre s s ed . B ra z i l wa s a l so exempt from the cap i t a l f l ight that comp l icated debt management in Argent ina , Mexi co , and Vene zue l a . The exc e s s of debt change over the current account de f ic i t and reserve accumu l a t ion amounted to some $ 4 5 b i l l ion between 1 9 7 9 and 1 9 8 2 . Pub l i c - sector obl igations f i nanced ac cumu l a tion o f pr ivate a s se t s abroad in the se c a s e s . s Th i s country var i ab i l i ty i s l o s t in the aggregation o f T ab l e 5 . 3 . The c ount r i e s with r e l at ively large re s erves that ga i ned f rom higher intere st rates are not tho s e most. a f f ected by payments prob l ems becau se of l agging export s . Nor did prices for a l l produc t s move unifo rmly . The terms of trade of As ian o i l - impo rting countr i e s f e l l by 5 . 5 percent between 1 9 8 0 and 1 9 8 2 ; tho se o f the Latin Ame r i can count r i e s by 1 3 . 6 percent . 9 However much external events imp inged , neverth e l e s s ( a s they imp re s s ively did ) , dome s t i c pol ic i e s and international negl igence were a l so components o f the seriou s ly deterior ating s i tuat ion that f ina l l y became patent in 1 9 8 2 . G l obal equ i l ibrium i n response to the s econd o i l shock wa s ach i eved at l ower l eve l s o f real income . I n s tead o f bu f f ering the impac t a s before , deve loping country debt now transmitted it . Only so long a s growth l ed debt wa s compatible with deve l oped-country ave r s ion to re c e s s ion and with OPEC wi l l ingne s s to hold Euro currency depo s i ts y i e l ding l ow o r negat ive real rates cou l d the strategy be e f f e c t ive . I t made l i tt l e d i f fer ence that current account de f ic i t s in the early 1 9 8 0 s wou ld have been i n l ine with the trend o f modest improve ment had the externa l environment rema ined stab l e . Wha t counted wa s that t h e strategy cho sen wa s no longer viab l e , but a l s o not ea s i ly reve r s ib l e . Once in debt , it wa s more d i f f i cu l t to maneuver . A L I QU I D I TY CRI S I S ? B y the f a l l o f 1 9 8 2 there wa s widespread agreement that the re wa s a debt prob l em . T ime mag a z ine , perhaps with an overeagerne s s to s e l l cop i e s , made th e s i tuation a cover s tory and chris tened i t a " debt bomb . " Othe r s
112 more sober and analyti c a l l y inc l ined d i f f erentiated be tween a l iqu i d i ty c r i s i s and a solvency prob l em : a short term interruption o f c a sh f l ow versus a long- term abi l ity to repay debt . The ma j or ity v iew , inc luding that o f banker s , gove rnment o f f ic ia l s , and independent ob serve r s , incl ined to the forme r . The Wor l d Bank , in i t s 1 9 8 3 report o n external debt , sta ted i t a s f o l l ows : There i s no genera l i z ed debt c r i s i s : rathe r , the mu tual d i f f i cu l t i e s o f deve loping count r i e s i n servic ing f o r e i g n borrowing a n d o f comme r c i a l bank s i n obtain ing s e r v i c e payments on foreign l ending are an outgrowth o f the broader economi c probl ems that grip a l l o f the wor l d ' s economi e s . The resolution o f the se d i f f i cu l t i e s l i e s in a r e s toration o f economic hea l th to the global economy and a re sumption o f strong growth in international trade . 1 0 There i s ba s i s f or such a characteri zation in the magni tude o f the e f f e c t s set in mot ion by the o i l -price shoc k in late 1 9 7 9 and the pol icy response to i t , a s Table 5 . 3 has a l r e ady b rough t out . T here i s a l so persua s ive evidenc e f rom c a s t ing t h e perspect ive f o rward rather than backward . As the IMF ' s medium- term scenarios show , a s Morgan Guaranty ' s balance-of-payment s model confirms , and a s W i l l iam C l ine ' s more recent pro j ections for nineteen o f the l arge s t debto r s reempha s i z e s , " I f th i s growth rate [ 3 percent annu a l l y for indu s t r ia l i z ed count r i e s ] can be ach i eved , the debt prob l ems of the deve loping count r i e s shou l d be manageab l e and shou ld show cons ide rabl e improvement . . The central result o f th i s anal y s i s i s that the debt probl em c a n be managed , and that it i s e s sentia l l y a prob l em of i l l iquidity , not inso lvency . � l l I am partial to th i s a s s e s sment . Yet at the s ame t ime it requ i r e s qual i f i ca t ion in two impo rtant respect s . For one , the analogy o f count r i e s to f i rms i s not ent i r e l y adequate . S o l vency for a f i rm i s d efined by an exce s s o f a s sets over l iabi l i t i e s � otherwi s e it i s bankrupt , and its c redi tor s may bene f i t f rom the d i s solution . On the other hand , countr i e s do not cease to ex i s t , nor can th e i r a s s ets , at l e a s t any more , be sei z ed for d i s t r i but ion . Second , t h e techn i c a l requ i r ement for solvency at a country l eve l - - a z ero cumu l a t ive balance o f payments over a very long t ime hor i zon , in order to guarantee repayment o f accumu l a ted intervening debt- - i s o f l imited S i nce po l ic i e s are variable , prac t i c a l s i gn i f i canc e . such a cond i t i on in p r i n c i p l e cou ld a lway s be met over a suitably l ong period . So can the add i t i ona l requ i rement that the real return on borrowing repay its co s t , s ince capital i n the deve loping count r i e s rema ins rel a t ively scarce . •
•
113 A mo re r e l evant so lvency c r iterion i s there fore not the eventual capa c i ty to pay , but the medium- term prospect for dec e l e ra t i ng the inc rea s e in debt rela t ive to export s . Such a c r i t e r ion incorporates ava i l a b i l ity o f fore ign exchange rather than saving a s the determin ing constra int in meet i ng external obl igation s . 1 2 It a l so sub s t itutes the ex i s tence o f a l imiting debt- export ratio , with continuou s growing debt , for the condition o f debt f u l l repayment . For the debt-export ratio to converge to a maximum , wi th deve lop ing countr i e s s t i l l recipients of a net re source tra n s f e r f rom the indu stria l i z ed , requ i re s that export growth exceed the intere st rate . 1 3 I f it doe s not , the further borrowing nec e s s a ry to cover both interest payments an d import purcha s e s wi l l exceed t h e inc rea s e in exports a n d f o r c e t h e debt- expor t r a t i o to con tinuou s l y h igher l evel s . Wi th imports and exports exactly equa l , the rate o f growth o f the debt i s s imply equ a l to the uncovered interest c o s t s tha t mu st be bo rrowed . If exports do not g row a t the intere s t rate , the debt- export ratio r i s e s . Only by running a merchand i s e surp l u s ( i . e . , tran s f err ing real r e sour ce s to creditor count ries ) can debtors prevent the debt- export ratio r i s ing when intere s t r a t e s exceed export growth . That , o f cou r s e , i s wha t many such count r i e s have been forced to do s ince 1 9 8 2 , Rather , it amounts bu t that does not make them solvent . to the i r acceptance o f the present d i s equ i l ibr ium a s a permanent state and the i r refusal to see beyond the tempo rary f avorab l e balance o f payments to the l ong er term impl ication s . E s t imates sugge st tha t such a tran s f e r o f rea l resou r c e s f rom the Latin Ameri can coun t r i e s amounted to U S $ 2 0 b i l l ion in 1 9 8 2 and US $ 3 0 b i l l ion in 1 9 8 3 , repre senting 19 and 27 percent respectively o f the value o f exports o f goods and service s . " Thus wa s prolonged a s ituation tha t , tak i ng into account the r e l at ive degree o f deve lopment o f the region , can only be qua l i f i ed a s perver s e . ,, 1 4 More genera l l y , for all the countr i e s in the Wor l d Bank report ing system , the po s i t ive n e t tran s f e r o f $ 1 6 b i l l ion in 1 9 8 1 wa s converted to a negative U S $ 7 b i l l ion in 1 9 8 2 and a larger negative $ 2 1 b i l l ion in 1 9 8 3 . 1 5 Favorab l e medium- term pro j ections o f the bal anc e o f payment s , without regard t o the nece s sary tran s f e r o f re sourc e s t o the developing countr i e s , a r e thu s n o ipso facto guarantee o f so lvency . Nor are even demonstra tions o f decl ining debt- export ratios , i f th ey are achieved through prematu re graduat ion to expo rt of real re sourc e s . Such exerc i s e s ignore the magn i tude o f the sacri f ic e ent a i l ed for the deve loping countr i e s . They a s sume that ab i l ity to pay is equ ivalent to wi l l ingne s s t o pay regard l e s s o f the c o s t s . But I have an add i t iona l obj ection to the preva l ent charac teri z a tion o f the debt prob l em a s a s impl e
114 l iquidity c r 1 S 1 S . My concern i s that the balanc e - o f payments proj ections underly ing such a diagno s i s are overly optimi s t i c . They p l a c e a n undu e emph a s i s upon economic recovery in th e i ndu s t r ia l i z ed count r i e s as a solution to the debt prob l em o f the developing nation s . Careful attention to the quantitat ive e s timates put f orward is therefore in orde r . B ecau se of both the ir care and th e i r inf luenc e , I focu s upon Wi l l iam C l i ne ' s recent deta i l ed pro j ection s . l 6 H e started with a stat i s t i c a l ly e s t imated r e l a t ionship o f total OECD imports to indu s t r i a l i z ed- country income growth . H e made thi s appl icable to all nono i l -deve loping- country exports by adding a 1 percent h igher trend rate o f growth . Tha t tran s la ted a 3 percent annual growth i n OECD income into a 6 percent real increa s e i n deve loping-country nono i l expo rt s . It a l so impl ied a h igher e l a s t i c i ty o f three between per c entage chang e s i n indu s t r ia l i z ed country income and export s . Vo lume e f f e c t s were only ha l f o f the story . Favorab l e terms - o f - trade e f f e ct s , h igher prices f rom do l l a r deva luation , and enhanced deve loping- country competitivene s s owing to agg re s s ive real deva l uat ion made up the d i f ferenc e . The terms - o f - trade e s t imat e s were country spe c i f ic wh ere pos s ib l e , unl ike the volume e s t ima te s . I t wa s neces sary a l so to e s t imate import requirement s . For a l l countr ie s , an import e l a s t i c ity o f unity wa s a s sumed for nono i l imports , with a cyc l ica l ad j u s tment for increas ing growth . To th e s e nono i l trade balanc e s were added imports a n d expor t s o f o i l , both o f wh ich were held cons tant i n volume terms . F ina l ly , the service b a l anc e , inc luding inte r e s t obl iga t ions , wa s added to arrive at the current account de f i c i t . With addit iona l a s s umptions about reserve ac cumu l a t ion and foreign in ve s tment , one arr ives at net borrowing needs . I n accordance with the e a r l i e r d i s c u s s ion , spe c i a l attention shou l d be directed to t h e e s t imates o f expo rt growth . I have ree s t ima ted export volume for non- o i l importing countries a s a who l e a s we l l a s for some sub groupings directly a s a funct ion o f indus trial i z ed in I have done th e same for real expo rt p r i c e s , c ome growth . introduc i ng the real interest rate , the change in the rate of i n f l a t ion , and variation i n the value of the do l l a r as addit ional rel evant variabl e s . The latter two are e sp e c i a l l y s ign i f i cant . Tab l e 5 . 4 presents the re spons ivene s s of export vo lume and the terms of trade with respec t to the growth , and change s in the growth , o f th e indu s t r i a l i zed countr i e s . Underly ing e s t imat ing equa tions are pres ented in the Appendix to th i s chapter . The data in Tab l e 5 . 4 sugge st ill the f i r st ins tance that C l ine ' s e s t ima tes , and others constructed s imi l arly , over stated the sen s i t iv i ty o f real growth of deve loping country export s to conditions i n the indu s t ria l i z ed countr i e s . Whether f o r nono i l count r i e s a s a who l e or for subgroup s , for the longer period or for the sho rter
115 s ince the f i rst o i l shock , the s e directly e s t imated e l a s t i c i t i e s are sma l l er than three . The so l e exception is th e country- spec i f ic e s t imate for Korea , who s e much h ighe r export growth produ c e s a h igher va lue . As a re su l t , indu s t r ia l i z ed- country recovery has a much l e s s drama t i c impac t on export performanc e . Whe rea s C l ine impl ied a doubl ing o f nono i l export growth f rom 3 to 6 percent i f indu st r i a l i zed countr i e s moved from a 2 to 3 percent rate o f expan s ion , the compar ab l e e f fect for non o i l countr i e s as a group is a much more l imited r i s e f rom 4 . 7 to 5 . 7 percent ; for o i l - importing count r i e s in the per iod a f ter 1 9 7 3 , the e s t imate is a d i f f erence between 5 . 0 and 6 . 7 percent . What the se more mod e s t re spon s e s r e f l e c t i s the s trength of developing- country exports in recent years even in the face o f internat iona l rec e s s ion . As output growth in the indu s t r i a l i z ed count r i e s s l owed continuou s ly f rom 4 . 1 percent in 1 9 7 8 to - . 3 percent in 1 9 8 2 , exports of the o i l - impo rting count r i e s continued to inc rea s e at high rates we l l in exce s s of wor l d trade genera l l y . In 1 9 8 0 they grew a t 9 . 2 percent ; i n 1 9 8 1 , at 5 . 3 percent ; dec l ining f ina l ly by 1 . 1 percent in 1 9 8 2 . That i s shown in the sma l l weight attr ibuted to export vo lume short fa l l s i n T ab l e 5 . 3 . By C l ine ' s f o rmu l a , growth rates shoul d have stood at . 9 , . 6 , and - 3 . 9 percent respective l y . Deve loping- country exports were ab l e to hol d up better becau s e of increas i ng compe t i t ivene s s in indu s tria l i z ed- c ountry market s tha t , made s a l e s more independent of total demand . They a l so cou l d becau s e deve lop ing country demand wa s better susta ined , at l e a s t through 198 0 . S ometh i ng between 2 0 and 25 percent of a l l nono i l exports were s o l d t o o ther deve loping countri e s . The sharp f a l l o f f in trade in 19 8 2 r e f l ected the c l o sure of such markets a s income decrea s ed . Recovery in the indu s t r i a l i zed count r i e s wi l l there fore make a d i f ference to the performance o f the deve l oping countri e s , but perhaps l e s s centra l l y than ha s been ma inta ined . I n particu l ar , it i s far f rom obviou s tha t the more rapid expan s ion now antic ipated for 1 9 8 4 wi l l have the further bene f icent e f f e c t s pre sumed , e spec i a l l y s i nce developing-country growth wi l l cont inue to lag . My quarrel is with exaggeration o f the sen s i tivity rather than with the order o f magnitude o f export growth if recovery shou l d proceed at 3 percent . S ome th ing l ike 6 percent is a reasonab l e l evel con s i s tent with my e s t ima ting equations . Reduced export vo lume i s not , a s we have seen , th e mo st important factor respo n s i b l e for s o f ter deve loping country earning s . Ra th e r , despite rather succ e s s ful e f forts to export , the prices o f the i r products have f a l l en drama t i c a l l y in recent year s . During 1 9 8 1 and 1 9 8 2 prices of pr imary commod i t i e s exported decl ined by mor e than 2 5 percent . Even deve loping- country exporters o f manu factured produ c t s encountered d imin i sh ing prices
116 Tab le 5 . 4
E l asticities for Deve loping-Country Export Volume and
Terms of Trade with Re spe ct to OECD Income Growth and Changes in Income Growth Export Volume
Nonoi l deve l oping countri es , Brazi l , exc l . cof fee a Brazi l , inc l . coffee Kore a ( 1 9 6 4 - 1 9 8 2 )
Industr i a l i z ed Country Growth 1 . 08 1 . 83
1963-1982
4 . 30
Nonoi l , o i l - importing countries , 1 9 7 3 - 1 9 8 2 Exporters o f manufacture s a Low income As ia Western Hemisphere Terms o f Trade
Nono i l deve loping countries ,
1 . 73 2 . 46 2 . 29 1 . 51
b
1964-1982
Braz i l , exc l . coffee Korea ( 1 9 6 5 - 1 9 8 2 ) Nono i l , o i l - importing countries , 1 9 7 4 - 1 9 8 2 Exporters o f manu facture s Low income Asia Western Hemi sphere
Changes in Industr i a l i z ed C Country Growth 1 . 37 1 . 46 . 77 1 . 27 1. 18 1 . 86 1 . 29 2 . 50
a
Standard errors greater than coeffic ient b Terms of trade measured by percentage change in deve loping-c ountry export unit prices minus percentage change in deve loped- country export pri ces C
Average o f current and l agged respons e s to changes in growth rate s ; terms of trade improvement reali zed over only a two-year period
Source :
For data 1 9 6 3 - 1 9 8 2 :
�a tional
I nternat ional Monetary Fund
( IMF ) ,
Financial Stati stics , Handbook , 1983 ; 1 9 7 3 - 1 9 8 2 : IMF , World Economi c Out look , 1 9 8 3 ; for underlying regre s s ions , see Appendix to Chapter 5 .
117 and deteriorat ing terms o f trade . Pro j ections o f exports mu st therefore take into account the evo l u t ion o f pric e s a s we l l a s quantity . C l ine ' s e s t imat e s o f cons iderably improved terms of trade were on shaky ground . The r e l a t ively h igh e l a s t i c ity o f three that he obtained with respect to a one - percentage point i nc r e a s e in indu s t r ia l i z ed country growth i s not corroborated i n Tab l e 5 . 4 . There , mo s t e l a s t i c i t i e s with respect to chang e s in indu s t r i a l i z ed-country growth are smal l e r , e spec i a l l y for the catego r i e s o f h i gh-vo lume growth . T h i s re spons e i s cyc l i c a l , l eading to improvement in the terms o f trade as a resu l t o f a ccel erat ing income growth without c ontinuing g a i n s in spite of stab l e , h i gher l evel s . I have pres ented the average impact on the terms of trade , rea l i z ed over a two-year period s ince both current and l agged change s in income growth ente r , o f a one-percentage-po int accel eration in growth . One o f t h e r e a s o n s for C l ine ' s h igher respons ivene s s i s s emant i c : H e apparent ly summed the two-year e f f e c t . Another i s that one o f h i s f ew stat i s t i c a l l y s igni f i cant e s t ima tes wa s for B ra z i l , wh ich showed a large impact , and that the average wa s then app l ied to count r i e s with out informa t i on . The g roup r e su l t s a re mor e rel i ab l e . 1 7 These terms - o f - trade e s t imates are an intermediate stage i n the forec a s t o f deve loping-country export and import value s . C l ine proceeded to such absolutes by f ir s t pro j ecting the export prices o f the indu s t r i a l i z ed countrie s a s the sum o f general price inf l ation and do l la r depre c ia tion . Th i s gave import prices . Then he added the e s t imated improvement in the terms o f trade to get export price s . Al l tol d , the s e factors add about 2 0 percent to the va lue o f exports and are thu s the mo st important source o f imp rovement in foreign- exchange earnings i n 1 9 8 4 . The imp l i c i t a s sumpt ion i s tha t depre c i a t ion o f the dol l a r w i l l a f fect exports and impor t s f u l l y and there fore neutra l ly . But th e j o int rise in prices o f traded goods wi l l act to ame l iorate the burden o f a debt denominated in do l l ar s . The real intere s t rate denomi nated in export p r i c e s wi l l be forced down to l ower leve l s as S ome of the con sequence s w i l l the out s tanding principa l . o f d i s i n f l at ion are thu s reversed . Such neu t ra l ity i s not conf i rmed by the expe r i ence with a variable dol l a r dur i ng the 1 9 7 0 s . A l though deve loping-cou ntry import pric e s almo s t r e f l e c ted fu l ly the combined e f fects o f in f l a t ion and changing valuation , export prices did not . I ndeed , the stat i s t i c a l mea surement of t h e e f fects shows a perver s e tendency . There i s a po s i t ive , rather than neutra l , relat ionship between the annual terms o f trade and do l l a r appreciation , other r e l evant factors h e l d constant . More concrete ly , in the l a s t c a s e of s i g n i f icant do l l ar deprec iat ion i n 1 9 7 8 , when indu s t r i a l - country income growth wa s at a rate o f 4 . 1 percent , export prices
118 o f pr imary commod i t i e s f e l l cons iderably . Export unit va lue o f ma j or deve loping- country exporters o f manu factures f a i l ed to r i s e as rapidly as the value of manu factured exports of the indu s t r i a l countri e s . As a cons equence , the aggregate terms of trade o f o i l - import ing count r i e s dec l ined by 3 . 4 percent . The r e s ponse to do l l a r apprec i a t ion depends upon the underl y ing demand and suppl y conditions of deve loping country imports and export s . Only if non-U . S . supp ly is perfectly e l a stic ove r the rel evant range wi l l the do l la r price change o f import s exac t ly r e f l e c t do l la r apprec i a t i o n o r deprec iat ion . T h e same i s true for devel oping country export s , for wh ich an add i t ional determinant is the share of non-U . S . demand in wo r l d demand in the I n short , the re i s ab sence o f such a perfect e l a s t i c ity . no theoretical reason t o impo s e neutr a l i ty i n the fa ce o f oppo s i ng emp i r i c a l evidence . 1 8 B eyond the mate r i a l a l r eady pres ented , I have a l s o examined the quarterly change s in p r i c e s o f L a t i n Ame ri can export commo d i t i e s s inc e 1 9 7 3 , becau s e annual change s obscure the within-year movement s . The se regre s s ions - vari ou s forms were tried- -do n o t rep l icate the more than unitary e l a s t i c i ty of p r i c e s with respect to the do l la r exchange rate f ound b y IMF studie s . 1 9 T h e coe f f i c i ent i s much sma l l e r and i n s i g n i f icant , al though o f correct s ign . The impl icat ions o f dampen ing the p r i c e inc r e a s e for C l ine ' s e s t imate s , and tho s e o f Morgan Gua ranty tha t a s sume a 2 5 percent increase in p r i c e s o f nono i 1 commodi ties be tween 1 9 8 2 and 1 9 8 5 ( and now more concentrated becau s e of the f a i lure of s i g n i f icant recovery in 1 9 8 3 ) , are qu i te impo rtant . Tab l e 5 . 5 ma inta ins the a s sump t ions o f a 1 0 pe r c e n t depr eciation o f t h e do l la r a nd a 5 per c ent i n f l a tion a n d ad j u s t s impo rt p r i c e s b y s l ightl ¥ l e s s than the i r sum in accord with p a s t re spon s ivene s s . 2 It merely sub s t i tu t e s a n a s sumption o f n o term s - o f - trade increa se over the 1 9 8 4 - 1 9 8 6 period , a generou s reading of the recent experienc e , in wh ich do l l a r depre c i a t ion would more than o f f set the in i t i a l cyc l i c a l e f f ec t s o f h i gher growth in 1 9 8 3 and 1 9 8 4 and some mode st inc rea s e in inf l ation with recovery . Further , it mak e s no a l l owance for th e potential add i t i ona l e f fects o f country deva lua tions on the export volume o f the aggregate . Part of the supply e f f e c t w i l l b e o f f s et by compen s a t ing removal o f internal sub s idie s , a s we l l a s o n the demand s ide by sub s t i tution among deve loping - c ountry supp l i er s a s they compete with each othe r . There is a f a l lacy of compo s i t ion in s imply aggrega ting individual country re spon s e s wi thout regard f o r t h e pol ic i e s o f o ther s . Moreover , the pro j ect ion i s intended to br ing out the tendenc i e s inh erent in t h e external envi ronment , rather t h a n po s s i b i l i t i e s o f changed dome s t i c po l ic ie s . The data in Tab l e 5 . 5 reve a l how s e n s i t ive C l ine ' s opt imi sm wa s , not with re spect to internat ional recovery , but to the valuation o f export s . E l imination o f the
119 Tab l e 5 . 5 Alternate Balance-of-Payments Pro j ections for Large O i l - Importer Debtors ( in b i l l ions of current u . s . do l lars ) 1983
1984
1985
1986
Exports
125 . 2
1 49 . 5
1 66 . 4
Imports Interes t
135 . 4 29 . 3
157 . 2 30 . 1
172 . 1 30. 7
185 . 2 192 . 0 32. 6
F i sh low Current account Debt Net debt / exports
- 30 . 9 3 27 . 6 1 . 88
- 28 . 3 3 54 . 3 1 . 86
- 26 . 7 377 . 6 1 . 78
- 28 . 6 403 . 0 1 . 71
-30 . 9 3 27 . 6
- 20 . 2 3 46 . 6
-12 . 6 355 . 8
-12 . 6 3 65 . 5
C l ine CUrrent account Debt Net debt / ex�rts Source :
Exports :
1 . 88
1 . 55
1 . 40
1 . 28
1 9 8 3 base year times real growth of 6 percent
time s price increa s e of 1 2 . 6 percent in 1984 and 5 percent sub 1 9 8 3 base year for nonoi l imports time s sequent ly ; imports : Cl ine ' s real growth times pri c e increase of 1 2 . 6 percent in 1 9 8 4 and 5 percent subsequently ( o i l imports from C l i ne ) ; intere s t : based on debt at end o f previous year , with rate weighted at two- thirds of L I BOR plus premium , one -third at fixed rate , less income on reserve s ( C l ine ' s methodology ) ; current account : incorporates services c a l culated us ing C l ine ' s methods and his e s t imates of tran sfers and merchandi se balance and intere st a s above ; debt : current account less C l ine ' S direct investment and reserve acqu i s i tion of . 2 times change in imports ( C l ine ' s methodo logy ) .
surge in exports he pro j e cted in 1 9 8 4 with mor e rapid growth , large dol l a r depr e c i a t i on a n d s ig n i f ic ant improvement in the terms o f trade means tha t debt wou ld have to grow a lmo st twi c e a s rapidly a s or ig ina l ly indicated . Debt- expor t ra t i o s fa l l , but much more s l owly , mak ing obviou s the cont inu ing precariou s ne s s o f t h e s ituation i f t h e scenario i s even marg i na l l y l e s s favorab l e . Export p r i ce increa s e s serve a s the med ium for recreat i ng the inf l a t i onary environmen t of the 1 9 7 0 s and l e s sen ing the bu rden o f the debt . C l ine ' s empha s i s upon the v irtue s o f deve l oped c ountry recovery , even a t the expense o f h igh inter e st rates , wa s there fore equa l ly ove r s tated . At the l ower e l a s t i c i t i e s e s t ima ted in Tab l e 5 . 4 , the immediate impact on value o f expor t s o f a one-percentage-point increa s e in indu s trial country growth i s much c l o s e r to 3 percent than to 6 . Hence the ma rgin o f supe riority over the foreign-exchange s aving s o f a s ing l e - percentage-po int redu c t ion i n intere s t rates is halved to 2 . 5 rather than th e 5 c l a imed . 2 1 Moreove r , the proport iona l dec l i ne of a s ing l e percentage point in inte r e s t rates i s much sma l l er th an a s im il a r one-percentage-point inc rease in growth rates and much easier directly to negotiate .
120 Because the e f f ec t o f indu s tria l i z ed- country growth on expor t s is cumu l a t ive , cont inuing expan s ion at rea s onab l e rates imp l i e s much l a rger leve l s of future fore ign-exchange earning s and hence capac ity to service deb t . The pol icy i s sue , however , i s not a tradeo f f be tween recovery and h igh inte r e s t rate s ; rather , it is the concern that the ba l l ooning U . S . pub l ic de f ic i t s , despite a pos i t ive e f fect on demand , wi l l s t i f l e expans ion by ra i s i ng rate s . N o r shou ld i t be forgotten tha t the cont inuing h igh real rates are equiva lent to a deteriora t ion i n the terms o f trade : O f f setting that deterioration by vo lume i nc r e a s e s s t i l l means l ower income for the deve lop ing countr i e s . And intere st rates enter c r i t i c a l l y , a s pointed out earl i e r , i n prevent i ng debt f rom accumu l a t ing inertia l l y . C l ine ' s proj ections sat i s f ied the condition o f a higher export g rowth than intere st rate both by a l ow real rate Inby vigorou s export re spon s e by oil importer s . deed , t h e debt-export r a t i o converges to z ero a s l a rger and and l arger merchand i s e surp l u s e s wou l d be obta ined . The amended resul t s in Tab l e 5 . 5 do l ikewi s e , a l though at a much s lowe r rate . Y e t i t is e s sentia l to empha s i z e tha t ne i ther mee t s an amended so lvency requ i r ement tha t a l l ows for a continu i ng tran s f e r o f re sourc e s , on c ommer c ia l terms , f rom the r ich to the poor countr i e s . That wou l d c a l l for debt to expand at higher rate s , or intere s t paymen t s to proceed at a l owe r . U n der cond i t ions o f a re source tran s f e r equ iva l ent to 1 percent of nono i l deve l oping-country inc ome , and a gro s s inter e s t rate o f 1 0 percent , debt wou l d h ave t o expand i n i t i a l l y at a n annua l rate o f a lmo st 1 3 percent . W i t h export g rowth at 1 2 percent , the debt-export ratio wou l d i n i t i a l l y c l imb , c onverging to a va lue o f 2 f rom i t s 1 9 8 2 l evel o f 1 . 4 . F o r c ount r i e s with l ower than average export- income ratio s , the l eve l wou ld b e even h igher . Rap id expan s ion of exports , however neces sary as a c omponent o f so lvency , shou l d not be made into a mechan i sm for premature capita l export . 2 2 The consequenc e s o f the mode s t r e s tatement o f the rate o f nomin a l export growth in Table 5 . 5 shou l d intro duce equ a l caution about other opt imi s t i c s c enario s . I am not a l one . The Data Re sourc e s , I nc . ( DRI ), and Wharton pro j ections of deve lop i ng country expor t s have been l e s s buoyant than tho se o f C l ine or Morgan Gua ranty . So , too , have been the expe c tations o f the IMF . 2 3 That such a di f f erence i s po s s i b l e through very l imited a l ter ation o f export proj ect ion s revea l s the inherent vu lner ab i l ity o f the debtor c ount r i e s and the precar iou sne s s o f the present s i tuation . There i s ba s i s for concern on ground s other than careful examination o f recent exper ie nc e . Extrapo l a t ion o f pa st trends , i f anyth ing , may b e too optimi s t i c . We may not return to su c h f avorab l e r e l a t ion sh ips in the futu r e .
121 I n the f i r s t p l a c e , i t i s b y no means a s sured , with the h igher unemp l oyment rates now preva l ent in the indu s trial i z ed countr i e s , that recovery w i l l be as trade inten s ive as it wa s a f ter 1 9 7 5 . Protect ion i s t tenden c i e s a r e much s tronger a s a consequence a n d a r e add i t iona l l y f e d b y an a s ymmetric pattern o f g rowth among the indu s t r i a l countr i e s . A l agging and increa s ingl y l e s s c ompetit ive Europe i s a sou r ce o f spec i a l concern . But s o i s a United States in wh ich e l e c t ion-year po l it i c s strengthen t h e hands o f spec i a l intere s t s . Within a s ingle week in January 1 9 8 4 , four e s cape - c l a u s e actions were f i l ed , not a l l eging unfair trade , but me rely i n j u r y ; du r ing the preceding three y ears only f ive such c a s e s had been b rough t . Note a s wel l tha t deve l op ing countries compet i t ive i n h eavy indu st r i e s ( they tend to be the N I C debto r s ) are a spec i a l target . Under t h e formu l a pro posed for c a rbo n - s t e e l imports , for examp l e , the share for Japan and the European Economi c Community woul d hard ly be a f f ec ted , whi l e tha t for devel op ing count r i e s wou l d dec l ine f rom a current market share o f about 1 0 percent to a mere 3 percent . I n the s econd i n stanc e , the present commitment to r e s tr a i n inf l a tion redu c e s the l ik e l ihood o f rep l icat ing the c ommod i t y booms o f the l a s t decade . D emands for s tocks a re unl ikely to expand as rapidl y wi th real recovery . I ncreas ing prices will a l so encounter r e s i s tance f rom purcha s e r s who wi l l see them a s chang es i n re l a t ive prices , rather tha Q a s accompanying general i n f l a t ion . H i gh rea l intere s t rates will have the same e f fect of moderating demand . I n the th i rd p l a c e , an exc lus ive focus on recovery in the indu s t r i a l i z ed count r i e s igno r e s the consequenc e s o f debt- impo sed depre s s ion in the develop ing c ount r i e s upon th e i r trade growth . Currently , intra-deve loping c ountry trade i s respo n s i b l e for about a fourth of deve loping-country expo rt s . Th i s ma rk et i s mo st rapidly growing for the manu factured produ c t s many o f the l a rg e s t debto r s are e spec i a l l y able to supply . F ina l l y , there a re even some who que s t ion the l ik e l ihood o f cont inu i ng re covery , e spec i a l l y i f U . s . budget de f i c i t s per s i s t beyond 1 9 8 4 . T h e s e concerns are more than theoretical . It is rel evant to note tha t the i n i t i a l s tages o f the indu s tria l i z ed- country recovery in 1 9 8 3 , mor e vigorou s a t 2 . 5 percent than had b e e n predicted a n d therefore a l a rger change in income growth than pro j ected f o r 1 9 8 4 , had l i t t l e p o s i t ive e f f e c t on the va lue o f developing coun try expor t s . Prel imi nar y r e su l ts for the mo st indebted Latin Amer i c an countr i e s showed continuing deteriorat ion in the terms o f trade , a long wi th absolute dec l in e s in export pric e s . 2 � To b e sure the do l l a r con t i nued to apprec iate , b u t many analy s t s , becau se o f prospect ive h igh i ntere s t rates , were l e s s incl ined t o predict s ign i f icant depre c ia t ion in 1 9 8 4 . Tha t wi l l have
122 i t s repercu s s ion s upon export p r i c e s and further erode the b en e f i t s o f OECD recovery . De sp ite l ack o f buoyant export demand in 1 9 8 3 , th e balance o f payments o f the pr inc ipa l debto r s did not deteriorate . On the con trary , the current accounts improved , e sp ec i a l l y tho s e o f oil exporters l ike Mex ico and Venezue l a . These countr i e s had l i t t l e a l ternat ive but to c ompre s s the i r imports dramatical ly to adapt to the l ack o f credit . They did so at the expense of income growth . For th e o i l exporter s , it meant l earn ing the nec e s s ity and po s s ib i l ity o f import sub s t i tut ion pra c t i c ed earl ier by th e o i l importers . The rea son for th i s deta i l ed treatment of C l ine ' s pro j ec tions i s not to sub s t i tu t e another set , nor even to que stion th e manageab i l i ty of the c r i s i s with developed country recovery and deve loping - c ountry adj u s tmen t . Rath er i t i s to empha s i z e that the respon s ib i l ity for adapting to th e overhanging d e b t seems l ikel y to f a l l d i sproport iona tely upon the debto r s , with onl y part i a l ame l ioration f rom th e mag i c o f indu s t r ia l i z ed- country g rowth . Th e IMP says a s much : . . . th e r e su l t s of S c enario A are l e s s f avorabl e a s fa r a s growth i s concerned , and imply s tronger ad j u s tment e f fort s , than tho s e pre sented l a s t y ear . I n p a r t becau s e o f a l ower f l ow o f bank lending , th e new Sc enario A env i sages a lower d e f i c i t . . despite cond i t ions tha t wou ld be l e s s f avorab l e for export s . The resu l t i s tha t the aggregate real GDP of non - o i l deve lop ing coun t r i e s in 1 9 8 6 i s now expec ted to be abou t 5� percent l e s s than previou s ly e s t imated . The vo lume of the i r impor t s is pro j ected to be nearly 13 percent l e s s . 2 5 .
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Opt imi sm about interna tional recovery ha s the luxury of ignor ing th e impl ications f o r t h e wi l l ing ne s s o f deve loping c ountr i e s t o pay under adver s e cond itions . Rea l i sm requ ire s a c l o s e r l ook . THE IMP ADJUSTMENT PACKAGE S T h e E conomic s o f S tab i l i z a t ion Wha tever the future may hol d , the recent pa st has been unamb iguou s in forc ing a d j u s tment programs upon many debtor c ount r ie s , as we l l as on o the r s adver sely a f f e c ted by the downturn o f the world e conomy . Such a d j u s tment has been under the a eg i s o f the IMF in both For th e in stanc e s , but with a c ruc i a l d i f ferenc e . debto r s , the s e a rrang ements have inc luded a c ruc ial c omponent o f continu i ng , i f redu c ed , bank l ending . The
123 I MF h a s thu s taken o n a n enhanced ro l e , qu it e apart f rom the impre s s ive quantitat ive expansion of i t s commitments . The emph a s i s on developing-country adj u s tment in a rriving a t such a greement s speak s to a s truc tural c omponent o f the debt c ri s i s that adherents to a sheer l iquidity view tend to ignore . If the i s sue were one o f mere t emporary balance-of-payments d i f f ic u l t i e s o f the debtor c ountri es , owing to unantic ipated externa l c ir cums tanc e s , the Fund ' s own c r iteria woul d c a l l for compen satory f inance rather than the condit iona l i ty imposed in fact . That cond i t i ona l i ty i s ba sed on the premi s e that many debtor count r i e s have ad j u s ted incomp l etely and imper f ec tl y to a new and h a r sher externa l env ironment . For th e IMF , the f a i lure a r i s e s from exc e s s agg regate demand as we l l as f rom an a l l ocat ion o f expend iture tha t i s bi a sed aga i n st expor t s . Wha tever the va riab i l i ty i n the spec i f i c s o f particu l ar programs , the s e e l ements are the central one s . F i r s t , iden t i f i ca t ion of bal anc e - o f - payment s prob l ems with exc e s s demand enta i l s a need for r e st r ict ive I n pa rticu l a r , pol i c i e s to res tra in dome st i c expenditure . the pub l ic sec tor i s typ i c a l ly s ing led out for def i c i t s tha t contr ibute n o t o n l y to demand b u t a l so to dome st ic c re d i t c reation . E l iminat ion o f sub s id i e s , inc rea sed tax e s and pr i c e s o f pub l ic s e rvi c e s and o f produc t s produced by s t a t e enterpr i se s , a n d reduced ou tlays a r e typ i c a l l y recommended . Th e empha s i s on f i sc a l pol icy i s augmented b y i n s i s tenc e upon contro l s over expa n s ion o f dome s t ic c redit . Be f o re i t ga ined wider a cademic fa shionab i l i ty , the Fund pioneered in the monetary theory o f the b a l anc e o f payment s tha t r e l a t e s chang e s in net international r e serves to interna l monetary pol icy . S ta rt ing f rom that p remi s e mea n s that f inanc i a l bal ance is a s important a s control over expend i tu r e s . In pra c t i c a l terms , i t mea n s a dvocacy o f h igh rea l inter e s t rat e s to e l iminate f inanc i a l repre s s ion a n d encou rage dome stic saving . S e c ond , a furth e r consequence o f the Fund outl ook is to l ink dome s t i c i n f l a tion directly to balanc e - o f payment s performance . Al though i t i s pos s ib l e s i g n i f icantly to attenuat e tha t l ink b y a f l ex ib l e exchange rate that does not become ove rva lued , as the Fund i t s e l f h a s conc eded by back ing away f rom the f ixed-rate reg ime s i t i n s i s ted upon in the 1 9 5 0 s and 1 9 6 0 s , a tta inment o f p r i c e stab i l i ty i s a principa l ob j ect ive . I n f l a tion i s not regarded a s neu t ra l , becau s e i t s acceptanc e redu c e s d i s c ipl ine o f the pub l i c s e c t o r a s wel l a s inevitabl y l eading t o ine f f i c ienc i e s in re source a l l oc ation . A direct imp l ication i s conta i nment o f nomina l wag e in cr ea s e s and r e j ect ion of index ing a rrangements tha t ca rry forward pa s t inf l a tion . The exchang e ra te i s th e th i rd key price tha t mu st be set r ight . Rea l deva l u a t ion , in wh ich the Fund s t i l l
124 bel i eve s , i f not the neoorthodox international monetar i s t s , I n th e f i r s t instanc e , it reduc e s real h a s two e f f e c t s . income by increa s i ng th e price o f tradab l e goods and the reby contributes to th e ob j ect ive o f dec rea s ing expen I n th e second p l ac e , the relative price change d i ture . mak e s exports and import sub s ti tu t e s more pro f i tab l e and imports more expens ive . Rea l ignment o f produ c t ion im prov e s the trade balanc e , wh ich- - given the r e s t r i c t ions · on supply o f ext e rnal capital and continuing h igh intere s t rates-- i s the o n l y source o f improvement o f th e fore ign accounts . The pa ckage i s a formidab l e undertak ing , pa rticularly when c omb ined with other efforts to d i sman t l e control s and to rely more f u l l y on ma rket incentive s . For a l l the empha s i s upon aggregate demand in dev i s ing a d j u s tment programs , there is an impl i c i t , i f s impl e , theory of supply : Supply re sponds e l a s t i c a l ly to ma rket s ignal s . For e f f i c iency ' s sake the s igna l s mu s t be the r ight one s . The prog rams may thu s be ex igent , but nothing l e s s wi l l wo rk . The Fund goes fa rther i n the i r defen s e t sugg e s t ing tha t th e adve r s e e f f ec t s o f cond it iona l i ty- - c r i t ic i z ed s inc e the 1 9 5 0 s by Latin American s tructura l i s t s- - shou l d not be exaggerated . I t i s some t ime s c ontended tha t the r e s trained demand management pol i c i e s- -wh ich are always c entra l to Fund prog rams - -a r e i n imical to g rowth However , an analy s i s o f 26 recently approved stand-by and extended arrangements revea l s tha t , in a great ma j or ity o f the c a s e s , rea l g rowth rates are pro j ected to improve even dur ing th e f i r s t prog ram year by compa r i son with the two yea r s prior to the prog ram ; only in 7 o f th e 2 6 c a s e s i s g rowth expected to dec l ine . 2 6 •
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S ince such prog rams typ ic a l l y are adopted in the midst o f dec l ine , such a sta t i s tic does not preclude a legit ima te conc ern fo r th e output cons equenc e s of demand restraint under cond i t ion s now preva i l ing in many of the debtor deve loping countrie s . I n princ ip l e , were th e d iagno s i s o f genera l i z ed exc e s s demand correct and demand for exports very e l a s t i c , the IMF pol i c i e s wou l d l ea d to reduc ed real income , bu t not at the expen se of unempl oy ment o r exc e s s capa c i ty . Growth cou l d and wou l d re sume , l ed by production o f exports and o f import sub s t i tute s , even a s th e ba la nc e of payments improved and i n f l a t ion I n 1 9 8 2 and 1 9 8 3 there wa s scant evidence dimini shed . f or such a conc l u s i o n , a s the count r i es mo s t a f f l ic ted by th e debt c r i s i s and f o l l owing po l i c ie s of res traint exper ienced s igni f i cant dec l ines in growth , a c c ompanied in some cases by a c c e l e rat ing i n f l a tion . The rea sons are r e l a ted to structural chara c t e r i s tic s o f many o f the s e devel op ing countr i e s . I n s tead o f the stab l e a n d r e s po n s ive aggregate supply func t ion
125 pre sumed by Fund orthodoxy , and th erefore ignored , supply condi ti o n s a r e a c r i t i c a l f a c to r inf luenc ing the e f f ec tiven e s s of s tab i l i z a t ion a ttempt s . 2 7 In th e f ir s t insta nc e , a d j u s tment lags between expendi ture reduction and output rea l lo ca t ion are impor tant . Redu c ed f i sc a l de f ic i ts , even accompa nied by de valua t i o n , do not nece s s a r i l y tran s l a t e qu ickly , and in th e r igh t proportion s , into private dec i s ions to emp l oy labor and capital to produ c e exports . Nor i s such labor and c a p i ta l fully mob i l e . Export supp l y is not perfectly e l a s t i c . The direct adve r s e outpu t r e su l t s o f expendi tu re contra c tion are f e l t immediately wherea s the ind irect bene f ic ia l e f f ec t s take longer to work themselves ou t . I n the second p lac e , the contraction i n dome s t ic credit and r i s e in intere s t rate s wi l l c reate shorta g e s o f working c a p i t a l and l ead t o curta i lment of output- not merely demand . F i rms wi l l f ind it mor e pro f itab l e to specu l a te f inanc ia l ly tha n t o produc e . Adding t o th i s impul se i s the e f fect o f reduced imports . B ecau se inpu t s are not perfectly sub s t i tu tab l e , impor t s are an important determinant o f potential supply . Balance-of-payment s improvement obta ined by cutt ing back on e s s ential impor t s soon ha s rami f i c a tions that ex tend th roughout the produ c t iv e system . I n s imilar f a sh ion , dra s t i c retrenchment o f th e pub l ic sector c an be c o s tly . The mo s t f l ex i b l e component s o f pub l i c budget s , o f c entral a n d lo c a l government s a s we l l a s o f s tate enterpr i s e s , a r e inve s tment expend i tu r e s . Capita l f o rmation , f requently c omp l ementary to private produc t ion , is sacr i f iced for immediate economi e s , with imp l i c a t ions f o r sub s equent produc t ive capac ity . Agg regate supp ly i s therefore not cont inuou sly forthcoming a t the po i nt o f fu l l emp l oyment a s demand is reduced , with the e f f e c t s o f restraint f a l l ing sol el y on th e rate o f i n f l a t ion . I n fac t , inf l a t ion i s f ed by th e reforms introduc ed . Corrections o f d i s torted pub l ic s ector p r ic e s , remova l o f sub s id ie s , increa s e s in tax e s , and so on a l l lead to a once for a l l inc re a s e in prices . So do the increa s e in rea l inter e s t rates and the r i s e in import prices fol l owing f rom devaluat ion . The s e c o s t components o f in f l a t ion may b e ex tended in two ways . Wag e s may be indexed to the inf la t io n rate , and so a l so rise . I nc re a s ed intere s t rate s , and deva luation , wi l l a l so force u p government payment s o n internal and externa l debt r e s pe c t ive l y . The s e , o f cour s e , p l a ce a dd i t ional demands upon dome s t i c credit and further pres sure on intere s t rate s . D i s in f l ation , in other words , i s much mor e compl i ca ted than s imply reduc ing demand a n d c a r r i e s with i t the r i sk of exacerbating output dec l ine s . The very ins tru ments of s tructura l re form through r e l a t ive price chang e mak e i t mor e di f f ic u l t to ac comp l i sh . Concentrat ing on i n f l a t ion , at the expen se o f real bal anc e-of-payments and produ c t ion target s , may be counterprodu c t ive .
126 E l iminating index l inks and i n f luenc ing expectations mo re f avorabl y make the task o f dampening i n f l a t ion e a s i e r . The f o rmer i s ea s ie r and more rel iably done fo r wage s than the interest rate o r the exchange rate , with adve r s e consequence s for t h e d i s t r ibution o f income . C onvinc ing the pub l i c of dec l in i ng i n f l a t ion , in the midst of con trary inertia l tendenc i e s and h i sto r i c a l evidenc e , may a l s o lead to serious d i s tortion o f the exchange rate , with eventual adver s e cons equenc e s for the balance o f payment s . That i s certainly o n e l e s son o f th e Southern Cone expe r ience , in which preannounc ing ( and , i n C h i l e , f ix ing ) the exchang e rate became the c enterp i e c e o f neoorthodox pol icy . P reoc cupa t ion with th e wrong target p roved c o s t l y , not l ea s t in contributing to the ac cumula t i on o f exc e s s ive deb t . The Fund ' s approach to i n f l a t ion make s it too central a goa l , wh i l e a t the same t ime g iving inadequate atten t i on to the poten t i a l short-term incons i stenc i e s between ad j u s tment and d i s i n f l a t ion . In e s tab l i shing its in f l a t ion targe t s , and hence credit l imit s , i t errs , appa rently del ibera tely by the t e s t imony o f one o f i t s sta f f , on t h e s ide o f unrea l i sm : " I n genera l , correc t ive p o l i c y prog rams shou ld a im at reductions in the rate of in f l a t ion tha t are perce ived a s s ign i f icant-- even i f they do not appear part ic u la r ly rea l i s t i c - - in order to in f luence expec tations i n th e r igh t di rection . " 2 s But such a stra tegy contr ibut e s to inadequa te , exc e s s ively s t r i ngent monetary po l icy and to expecta tions that c annot long be ma inta ined . I t i s surpri s ing to see the Fund rely upon irrationa l expectations to make its po l ic ie s work . On the p o s i t ive s ide , the Fund prog ram i s des igned to encourage and , now , to requ ire continued capital in f l ow to l e s sen the costs o f ad j u s tment . But equ i ty inve s tmen t , now b e ing emph a s i zed a s a sub s t i tute for borrowing , i s a c t ively d i scouraged by the dec l in es in in c ome and make s no c ontr ibution . Nor i s new money in the form of loans f l ock ing to count r i e s in the mid s t of wrench i ng internal contra c tion . Th i s d i s c u s s ion o f the orthodox ad j u s tment prog rams now be ing undertaken by the l a rge st debtor count r i e s mak e s c l ea r two e s s en t i a l point s . O n e i s tha t th ey may be c o s t l y in the i r output consequences over some t ime , a l though attai n ing the i r balance- o f - payments and in f l a t ion target s . O f the se , a favorab l e trade account i s much more certain , i f only because the constraint o f l imited externa l f inance mak e s i t a nec e s s i ty . Mo reover , the very dec l in e in nat ional produc tion redu c e s import demand and becomes the b a s i s for the trade improvement reg i stered . Even in f a i lure , the inte r e s t s o f the c reditors are gua ranteed p r i o r i ty . I n the second i n s tanc e , g ranted fully suc c e s s ful a d j u s tment , there will s t i l l be a deva luation- induc ed l o s s in real national income . Changed r e l a t ive p r i c e s
127 f or labor and capital a s wag e s are r e s tra ined and intere s t rates r a i s ed may a l so provoke a po s s ib l e deteriora t i on in i t s d i s tribution . I n a dd i t ion , the pub l i c s ec tor ' s ro l e wi l l have dimini shed . D i rect expendi ture s will have been reduced , and state enter pr i se s curbed . I n short , the impact o f a dj us tment wi l l have s ign i f i cant and d i f f erent i a l e f f e c t s upon important intere s t s and there fore nec e s sari ly a s igni f ic ant po l it i c a l content . The P o l i t i c s o f Ad j u s tment It shou l d c ome as no surpr i s e a f ter th i s d i s cu s s ion tha t stab i l i z a t i on pol i c i e s encounter s ign i f icant popu l a r r e s i s tanc e . More than a decade ago , Richard C ooper cal cul ated tha t currency deva luation approx imately trip l e s the chance that the respon s ib l e f inance min i s ter will be gone with i n the f o l l owing year and doub l e s the probab i l i ty tha t the government w i l l fa 1 1 . 2 9 If con temporary s ta t i s t i c s a r e perhaps more favorab l e , i t doe s n o t ref l ec t a chang e i n popu l a r rea c t ion , b u t rather speak s to the durab i l i ty of author i ta r ian reg ime s who s e c l a im t o power part ia l ly re s t s on t h e wi l l ingne s s t o impo s e the unpopu l a r . Au ster i ty programs unde r s tandably encounter re s i s tanc e because they a f f ec t e stabl i shed intere s t s and c l a ims on income . Wo rk e r s re s i st e ro s ion of wage s and mount ing unempl oyment . Emp l oyers c omp l a i n about higher tax e s and intere s t rates and about redu c ed sub s id i e s . It i s not d i f f ic u l t to c on struct a coa l i t i on o f oppo s i tion to po l ic i e s that s e em to guarantee c erta in present l o s s e s , whi l e only hold ing out the probab i l i ty of eventu a l bene f it s . To a b e l eaguered c i t i z enry , s tab i l i z a t i on appears a n eg at ive- sum game , even in compari son with the deteriorat ing economic cond i t ions tha t provoked it in the f i r s t in s tanc e . But t o f rame the matter i n terms o f perce ived s e 1 f interes t i s t o character i z e the oppo s i t ion too narrowly and mater i a l i s t ica l ly . I f i t were not for p a s t experience , more rep l ete with s top-go cyc l e s than suc c e s s ful stab i l i zation , and a re spectab l e l i terature skept ical of the exc e s s ive c o s t s of orthodox po l ic i e s , d i s sent wou l d not run as deep . Wha t ha s been added to the se tradit ional respons e s th i s t ime i s the further conv i c t ion tha t the origins o f th e p roblem are external . Th i s i s a c r i s i s manu f actured in th e boardrooms of New York bank s , requ i ring payment s due despite an indu s t r ia l i z ed- country rece s s ion and h igh intere s t rate s . F o r even the o i l importer s , the e f f e c t s o f th e o i l sho c k s recede in favor o f the s e factors tha t have we ighed more heav i ly in 1 9 8 1 a n d 1 9 8 2 . There i s a l so a conv i c t i on tha t the bu rden i s b eing sha red unequa l l y , without regard to the cost imposed on
128 poorer countr i e s i l l equ ipped to bear i t . A recent l etter to the Economi s t f rom B ra z i l made th e po int more e l oquently than the rhetoric of forma l statemen ts : C it i z en s o f the " f i r s t wor l d " refuse to under s tand that rece s s i on , for u s , mea ns more starva tion , mor e c h i l dren abandoned by mi serab l e pa rents a n d a sharp inc rease in infant mo rta l i ty and i l l iteracy Y e s te rday I helped a man who had an epil ept i c f i t . He had told h i s doctor he wa s taking only ha l f of the pre scribed quant i ty o f medic ines in o rder to make them l a s t l onger . . I f th i s i l l iterate B ra z i l ian f inds out that the loss o f his j ob wa s caused by a rec e s s ion provoked by th e ob l ig a t ion to pay back the money wh ich f ir s t-world banke r s enticed us to borrow , plus intere st , he wil l certainly become a sort o f Sandin i s t , or wo r s e . 3 0 .
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Under mounting so ci a l consequenc e s o f a d j u s tment , and in conj unction with ex ternal in terest payments tha t exceed new borrowing , defaul t - - o r a t t h e l e a s t u n i la teral renegotiat ion- -become s an eve r mo re attrac t ive option . Both Mex ico in 1 9 8 2 � and Arg en tina a f ter the e l e c t ion o f P r e s ident Al fons in have e s sentia l l y imposed a morator ium wi thout repudia ting the i r ob l igation s . The precedent has been l o s t on other s , al though it has not dimin i shed the z e a l o f the IMF in its cond i t iona l i ty or th e pref erence o f the banks for c a s e-by- c a s e trea tment . Rigid s tab i l i z a t ion prog rams and seeming bank int ransigence do not f i t we l l wi th the new pol i t i c a l e f f erve sc ence in Latin America . A c ivi l ian pres ident I n B ra z i l , rul e s in Argen tina wi th a ma j o r i ty manda t e . th e mi l i tary i s b ea ting a retreat to the barracks in d i s array . I n Ch i l e and U ruguay , pres sures for greater popu l a r pa rticipat ion are moun t ing . The present c r i s i s do e s n o t have i t s roots in popu l i st exc e s s e s o r democ ra t i c f a i l u re s : I t i s th e produ c t of a now in creas ingly repudia ted techno c racy tha t deemed economi c management above a n d beyond po l itical contro l . I t do e s n o good t o i n s i s t upon th e techn ical qua l i ty o f the ad j u s tmen t package and to ignore the se new rea l i t i e s nor to f launt externa l intervention at a t ime when re s tora t ion o f nat iona l pride i s a central source of l eg i t imacy for the new c iv i l ian po l i t i c ia n s . The s e n ew p o l i tical rea l i t i e s in some o f the larg e s t debtor s , a n d not a l one in L a t in America a s the P h i l ippines exempl ify , cannot help to inf luence re spon s e s to t h e debt c r i s i s . Up t o a point , auster ity c a n improve the pro spec ts for meeting ob l igations by generat ing trade surplu s e s and hence the ab i l ity to pay . But app l i e d too l ong and too painful ly , auster ity can provoke a ho s t i l e r e j e c t ion o f interna tional c l a ims in favor of dome s t i c
129 pre s sure s . S eeming ly rational c a l cu l a t ions tha t demon strate the fut i l ity of defau l t becau s e of the pena l t i e s o f interrupted poten t i a l future capital f l ows and inter f e rence with current me rchandi se transactions c arry l e s s we ight in the f a c e o f s o c i a l d i s ruption . A n uncertain future may seem l e s s adve r s e than the known depre s s ion , aga i n s t which conventional reactions seem futi l e . Even were the prospects for trade to improve , more popu l a r government s cannot f u l l y ignore the magn i tude of the tran s f e r s they are b e ing a sked to make out of nat ional income . A s the externa l debt mounts to more than half of total product in Argent ina , Mex i co , P eru , Korea , the Ph i l ippine s , and Ch i l e- - in the l a tter to 9 0 percent- -h igh real intere s t rates impo se a palpabl e e f f ec t on the standard of l iving . At a 7 percent rate , in the Ch i l ean case in 1 9 8 4 , the intere st p ayments amoun t to more than the equiva l ent o f the income o f the poo rest f i f th o f the popu l a t ion . I f the impact is l e s s dramatic for other s with lower debt- income ratio s , the reduction i n national income s ti l l rema i n s signif icant and sen s i t ive to re ign ing intere s t rates set abroad . I r a i s e the i s sue o f th e po ten t i a l dimini shed wi l l ingn e s s to pay contractua l debt servi ce w ithout concluding , a s some erroneous ly may , tha t a return or continua t ion of authoritarian i sm can avert t h e probl em . I t can a s sure only i l l u so ry stab i l i ty . E f f e c t ive medium- term economic ad j u s tment requ ir e s a f lex ib i l ity in th e face of changing cond itions tha t mi l i tary regime s have rare ly , rather than commonly , shown . The capac ity to engage in continuing income tran s f e r s of large mag n i tude u l t imately depend s upon informed cons ent rather than forc e . Even in the short term , d i s c redited author itarian governments have shown l ittle capac i ty to manage s tabil i z ation programs . Moreover , the new po l i t i c a l forces have l earned f rom the errors o f the p a s t . F ew pol i t i c a l l eaders in the large debtors be l i eve in easy popul i s t so lut ions . There is broad recogn ition that a l though mo st countr i e s erred by exc e s s ive and a symmetrical integration into wor l d capital markets in t h e 1 9 7 0 s , export promo t ion and expans ion are an indi spensabl e commitment in the 1 9 8 0 s to reduce dependenc e . In the s econd place , there is no i l l u s ion that foreig n re sourc e s wi l l be ava i l ab l e in the future in the proportions o f the rec ent p a s t ; interna l saving wi l l b e requ ired . Th ird , there i s wide spread appreciat ion that sheer expans ion o f th e pub l i c sector does not con s t i tute an acceptab l e deve lopment strategy any more than fu l l rel iance upon market s igna l s . F inal ly , there i s l i tt l e f a i th in the po s s ib i l ity of ma s s ive income red i s tr ibution in the short term . The s e a r e important bridges t o a more consensual s tab i l i zat ion s trategy who s e prospe c t s for min imi z ing the real income dec l ine turn c r i t ic a l ly upon the c apac ity to d i s t r ibute the l o s s e s equ itably . The apparent succ e s s i n the Mex ican stab i l i z at ion prog ram stems f rom the
130 ab i l i ty not merely to enforce lower real wages but to l imit the e f f e c t s of inf l ation on the pr ices of certain e s sential produc t s for the ma s s o f the popu l a t ion . An othe r e l ement , of cours e , wa s the immediate and sub s tant i a l debt - service re l i e f by restructuring short-term debt and putt ing o f f amorti z ation unt i l 1 9 8 5 . S uch a con s ensual s trategy , ironic a l ly , may invo lve measures more dra s t i c than the conventional ones imposed by the Fund . I n a depre s s ion o f th i s magni tude for B ra z i l and Argentina , and with inf l ation wel l in exc e s s o f three digi t s , more dramatic e f fo r t s may we l l be nec e s sa ry to deal with an internal debt who s e interest payments a lone are the principal pre s sure on pub l i c - sector borrowing requ i rement s ; to reduce real intere st rates that have sharply curtai led private inve stment ; to halt the un lea shed spiral of r i s ing p r i c e s and c o s t s . The s e are not easy tasks , and i t wou ld be wrong to minimi z e the i r d i f f icu l ty o r to ignore t h e po tential probl em o f recon c i l ing au sterity and l e g i t imate popu l a r c l a ims . Only if there are degre e s of f reedom for dome s t i c po l i cymakers to act can ad j u stme nt be achi eved . If the bal ance o f payments and debt service take ab solute prior ity , internal di sequ i l ibrium wi l l per s i s t and wi l l be a cons tant provo cation for u n i l ateral default that cou ld we l l be inimi c a l to restoring g l o b a l recovery in t h e 1 9 8 0 s . THE INSTITUT I ONAL FRAMEWORK The pol icy Ma trix At the beginning o f 1 9 8 4 , the e l ements in place to deal with the debt prob l em were l i t t l e changed from what they were in Augu st 1 9 8 2 . What had been added wa s add i t iona l resources f rom the quota increa s e o f the IMF and the cons iderab l e expe r i ence gained by the repet i t ive tasks of renegotiating debt and o f hammering out country ad j u s tment package s on a c a s e-by- c a s e bas i s . That th ere wa s so l i ttl e change der ived l e s s from sati s f action with the po l icy matrix than f rom l ack of con sensus on the appropriate more far- reach ing r e forms . F inanc ial c i r c l e s were f ar f rom tranqu i l . Wor ld F inanc ial Market s , in i t s June 1 9 8 3 a s s e s sment , found want ing the " re l a t i vely opt imi s t i c , l a i s s e z - f a i r e school that a s sume s the current debt s i tuation is a f a i r l y short-term l iquidity i s su e " t o b e solved prima r i ly through LDC ( l e s s developed country ) ad j u s tment al ong w i th some OECD recovery . " By ignoring long- term structural e l ements o f the inter nationa l debt prob l em o r ove r s tat ing the prospects for global recovery , th i s approa ch r i sk s forcing exc e s s ive de f l a tionary costs on borrowers . I t i s a l so ove rly optimi s t i c about market forces providing amp l e new borrowing . ,, 3 1
131 The present s i tuation derives i t s stab i l i ty f rom the tenuou s mutual inter e s t s of creditor bank s and debtor countr i e s in th i s moment o f c r i s i s . Bank s are commi tted to extending add i tional credits to count r i e s currently in d i f f icu l ty only becau s e they perceive such a po l i cy to be in the i r s e l f - intere s t . They are not development insti tution s . Bank s are l ending involunta r i l y in order to avert d ef au l t s tha t woul d expo se the precar iousne s s of the ir balance sheet s and with s ome hope o f u l t imate re payment under better future condition s . Their " l ending trap " is the counterpart of the " debt trap " ensnar ing count r i e s that mu st borrow to meet the ir intere s t pay ment s , increa s ing the i r debt without counterpart resources for adequate impor t s to underwrite recovery or even export expan s ion . Countr i e s continue to pay becau s e they fear the immed iate losses from trade potenti a l ly interrupted a s a resu l t of defau l t and hope for re sumpt ion o f needed capital f l ows in the future . Such a s i tuation serves each party badly . I t ha s led bank s to short- s ighted e f forts to obtain l a rger pro f i t s to compensate for the i r perceived greater r i s k . T h i s ha s taken the form o f increased margins in the form o f one - t ime fees and o f ongo ing premiums over the depo s i t rate . F o r the res chedu l ings comp l eted f o r Latin America , amount ing to s ome U S $ 4 4 b i l l ion for s even countr ie s , bank s have obtained commi s s ions o f between 1 and 1 . 2 5 percentage po ints , a s we l l a s revi s ed spreads tha t have usua l ly added about a fu l l percentage point to previous one s . The s e earning s might have added between US $ 7 0 mi l l ion and US $ 1 3 0 mi l l ion to pro f it s of the larg e s t n ine u.s . bank s , depend ing o n the rel evant marg ina l tax rates . They trans late into an increased return on loans to tho s e s even count r i e s o f about 2 5 percent i n comparison with prev ious terms , quite independently o f higher spreads be ing charged on new loans . 3 2 I ronica l l y , the ab solute e f fect on total pro f i t s i s relatively sma l l , a s i s the e f fect o n the borrowers . The cos t o f the h igher premium over L I BOR to Mexico is le s s than 1 percent o f foreign- exchange earning s , for examp le , s ince what i s relevant to the country i s the total intere s t rate and n o t the marg i n . B u t the i l l wi l l i s cons ider abl e o f arbitrarily impos ing increased costs of servic ing on an a l ready burden some debt . Such charg es are not market determined because the lend ing i s invo luntary ; ' pre s s ed by Mex ico , Argentina , and Braz i l , the bank s in fact subs equently agreed to reduc e the i r spreads some what . The c ount r i e s were j o ined in the ir prote s t s by Paul Vo lcke r , mot ivated by concerns of system s tabi l ity rather than immediate prof i t s . At the s ame time , of course , the large money-marke t bank s a r e themselves n o t p l ea s ed b y t h e demands on them . C i t ibank , in particu lar , s eems to have reacted aga inst Vo lcker ' s intervent ion , a l though all the s e bank s are being
132 forced to set a s ide larger loan lo s s res erves to sat i s fy bank examiners and a Cong re s s concerned with exc e s s ive bank exposure . Large U . S . b ank s mu st a l s o cope with second- t i e r bank s who have much l e s s to gain f rom a con t inued l ending r e la tionship wi th devel oping count r i e s and do not want to renew outs tand i ng loans , even at higher spreads . Mich igan National Bank ha s even taken C i t icorp to court over the i nvoluntary exten s ion o f a US $ 5 mi l l ion part i c i pation in a Petro l eo s Mexicano s ( PEMEX ) loan . For new money , the money-market bank s can no longer count on tapping the i r regional c o l l eague s . On the i r s ide , a s we have seen , the countr i e s have fared badly . For a l l of K eyne s ' s o f t-quoted d i c tum about the advantage o f l arge rather than smal l debts in deal ing with creditors , th e count r i e s have been ab l e to extrac t only mode s t add i tional resources f rom f inanc ial marke t s and that at the expense o f au sterity prog rams . They have been forced to g ive prior ity to merchand i s e surp l u s e s a n d in t h e dominance of a s ing l e po l i cy ob j ec t ive have f a i l ed to des ign as yet more adequate and longer-term re spon se s to the i r s ituat ion . The Fund has performed three e s s ential functions in mak ing th i s del icate arrangement work . For one th ing , it has o f f s et individual bank prudence that wou ld cal l for a reduced commitment and shorter maturity by impo s ing proportional l ending target s . Th i s new cond i t iona l i ty impo sed on the bank s defeats the f ree- rider prob l em inherent in a pure market r e lationship . Each bank wou ld hope the others would part i c ipate , mak ing i t better of f ; such behavior , becau s e none wou ld , wou ld mak e them a l l worse o f f . For another th ing , the Fund h a s dev i s ed ad j u stment programs that a s sure the lenders o f develop ing country e f forts to meet the i r obl igations and thereby avo id the moral h a z ard of countr i e s s imp ly borrowing more without an intent ion to repay . F ina l l y , the I MF , in c on j unction with t h e B I S , c e n t r a l bank s , a nd indu s t r i a l c ountry governments , h a s made ava ilable pub l ic resource s to s at i s fy immed iate l iqu idity requi rement s and to suppl ement the pr ivate market . Central authority has thu s been ind i spensab l e to a continu ing bank-country rel ationship . The principal vi rtue of th i s imp l i c i t tripartite debt reg ime has been it s capac ity to blunt ser iou s repercu s s ions to the f i nanc i a l system o f the debt shock s that have o c curred . S trains have been evident . Count r i e s have reacted aga i n s t the d i s c ipl ine imposed by the Fund , and in the c a se of Vene zue l a , no agreement ha s yet been pos s ib l e . Banks have , in the c a s e of B ra z i l , found the Fund so preoccup ied wi th the integ r i ty o f its own stab i l i zation package tha t the i r loans we re in danger of being decl ared nonperforming . Until the prog ram wa s approved , they could not l end B ra z i l the money needed to cover the over du e intere s t payment s . S t i l l , becau s e both bank s and the countr i e s need the Fund , th i s c a s e-by- c a s e f ramewo rk ha s
133 survived . As suc c e s s f u l a s thi s ad hoc arrangement ha s been thu s far in re sponding to c r i s i s , it ha s two s e r iou s de f i c ienc i e s . For one , it has contributed to a continu ing short-term menta l i ty . The bank s s t i l l see the i r advantage in a minimum amount of add i t iona l l ending or renegotiation they are prepared to undertake . They , and even the Fund , prefer to s e e the country on a short l e a sh and cons tantly accountab l e . Al though the arrangement may el iminate the mo ral ha z ard prob l em , it doe s so at the r i sk of m i s c a l c u l at i ng t h e provocation to d e fau l t . And , o f course , it i s prec i s e l y that uncerta inty that reinforces the pre f e rence for deal ing not only with one country at a t ime , but a l s o one year at a t ime . The s tructure i s thu s potentia l l y u n stabl e . I n the s econd place , current po l ic i e s f a i l to addre s s the adequacy o f the long-term supply of capita l . Qua s i s oc ia l i zat ion of the international bank ing sys tem by the Fund in an eme rgency i s one th ing ; continuing impo s i t ion o f broader systemic goa l s i s quite another . There i s no reason to b e l i eve that the private pro f it c a l c u l u s wi l l produ c e the right amount o f capital for the r ight deve l oping countries in the future . One of th e c au s e s o f the present c ri s i s i s prec i s ely such market f a i l ure . Vo lunt ary lending wi l l not recuperate qu ickl y , according to al l p r e sent s igns and pa st h i sto r i c a l reac t ion to external debt probl ems . P r e s ent u . s . economic pol icy mak e s the p ro spects even bl eake r . A recent quarterly report o f the Bank for International S e t t l ements c a l l ed attention to the evolut ion o f a s egmented f i nanc i a l market . " On t h e one hand , we s tern bank s have now v i r tua l ly stopped a l l voluntary l end ing to th e th i rd wor l d a n d E a s tern Europe , because o f concern about repayment . But bu s ine s s transac t ions among the indu s t r i a l nations appear to be picking up b r i sk l y a s Amer ican bank s a c c e l e rate the i r borrowing f rom other We s tern count r i e s t o f inance America ' s payment s d e f i c i t . ,, 3 3 Deal ing exc lu s ive ly to avert the wor s t i s not nec e s s a r i l y equ ival ent to the good , let al one the b e s t . The pres ent pol icy context i s f raught with dange r s . Recovery may not continue at i t s present pac e , plac ing more demands upon a potent ia l ly unstab l e bank-country relationship . S o c i a l c o s t s in some of the deve lop ing count r i e s may lead to f a i lure to l ive up to stabi l i z ation targe t s . The cont inu ing pattern o f ad j u stment via trade surpl u s e s may evoke even more pronounced tendenc i e s toward protec t ionism, with s ignif icant cons equenc e s f o r t h e s tru c ture o f t h e trading system . Reaction aga inst rapidly r i s ing imports f rom th e NICs can sp i l l over to impo rts from indu st r i a l - c ountry compet itor s . The se po s s ib i l i t i e s , and with them s l owed indu st r i a l - c ountry growth , are real . That rea l ity contributes to a perva s ive uncerta inty , i t s e l f a constra i nt on recuperation of the
134 g l obal economy i n the 1 9 8 0 s . More Radi c al Alternat ive s I n the af t e rmath o f the Mex ican shock , when prospec t s s e emed much dimmer f o r muddl ing through and the per i l s more immed iate , a var i e ty o f more radical r e fo rms were suggested . 3 � De spite d i f f e re nc e s among them , many shared common character i st i c s . One wa s reduc tion o f current debt service to deve loping countr i e s in a dec i s ive f a sh ion , th ereby a l leviat ing the foreign-exchange con straint that forced sharp redu c t ion in economic growth . Anothe r wa s reduction o f the tota l debt burden faced by the countrie s through a tran s f e r o f resourc e s from c reditor bank s and / or i ndu s t r i a l count r i e s , e i ther in the form of writing down the debt o r re schedu l ing on favorab l e terms . A th ird wa s an enhanced ro l e f o r a pub l i c presence in f inanc i a l markets to mon itor and inf luence l ending and borrowing a s we l l a s c ountry ad j u s tment . The mo s t common means o f f ered for ach i eving the s e ob j ec t ives wa s purcha se o f bank deve l op ing- country loans by an ex i s ting , o r new , international agency . Bank s would s e l l the i r loans at a d i scount in exchange for the secu r i t i e s o f the agency , thu s sub s t i tut ing a known but l imited l o s s for the i r pres ent unc ertain expo sure . The agency in turn would recon tract the debt o f the coun t r i e s at longer ma tu r i t i e s and lower price s , pa s s ing a l ong the bank wr ite-down and po s s ibly add it ional con c e s s ions from spec i a l governmental appropria t ions . The new arrangements wou ld thu s improve the qua l ity of bank port fol i o s , sh i f t the debt to an interna t iona l develop ment i n s t itution who se concerns wou l d be broader , and d i s t r ibute the c o s t s o f exce s s ive debt accumul ation mo re equ itably among bank s , indu s t r i a l count r i e s ( through forgone tax e s on potential bank pro f i t s and capital con tribut ions to the agency ) , and develop ing countr i e s . Anothe r approach , analogous to corporate reorgan i z a t ion , woul d sub s t i tute for pre s ent bank loans f ixed shares in coun try export earning s , thu s a v i rtual equ ity participation . C ountr i e s wou l d pay only a c e i l ing per centage of export rece ipt s for debt servic e , and c reditor s would share in the bene f i t s o f recovery by l arger ab solute repayment s . These plans have been c r i t ic i z ed for the ir short coming s . 3 5 Mo s t s a l i ent has been the fa ilure expl i c i t l y t o provide for f l ows o f new c a p i t a l o n c e pa st debts have been reorgan i z ed . Anothe r is the vo lume of pub l ic re sourc e s requ i red to fund purcha s e o f the bank loans , even i f capital i s only f ra c t iona l ly paid in . Al though the agency wou l d i s sue its own secur i t i e s , as the World Bank does , and no actua l expenditure wou l d need to occur , an appropr iation for capital would be nec e s s a ry and sub j ec t to the r e s i stance recen t ly encountered in the
135 expan s ion o f IMF quota s . A th i rd c r i t ic i sm i s that th e i r general ity encourag e s even sound debtor countrie s to r e l ax the i r ad j u s tment e f f o r t s in f avor of unneeded debt r e l i e f . The s e observation s , a l though they have mer i t , exagge rate the d e f i c ienc i e s inherent in the pl an s . The f a i lure to a s sure new l ending in the needed amount s i s , a f ter a l l , one o f the ind i c tment s of the pre s ent s itua tion . I n th i s respec t , the plans share the optimi sm o f tho s e who be l ieve t h a t in the l o n g term capital ma rket s can be tru sted to provide the n e ce s sary resourc e s . It woul d not be dif f icu lt to a s sure continuing i nvo luntary l ending o f bank s s ince the i r entire por t fo l io wou l d not be e l iminated , nor would the requ i r ements be a s great with reduc ed debt se rvic e . I ntere s t ingly enough , other propo s a l s that do empha s i z e guarante e s to underwr ite c ap i t a l f l ows have fared no better . 3 6 Nor i s the i s su e impo s s ib l e leve l s of pub l i c expend i ture . H a d an approp r ia tion of the magn i tude ex tended to the Fund been app l ied to purch a s ing deb t , i t c ou l d have made p o s s i b l e , with paid- i n cap i tal o f 1 0 per cent , a tran s fer of almo s t U S $ 3 0 0 b i l l ion in loan s , c l o s e to the entirety o f bank expo sure . F ina l l y , the potential exc e s s a l l eviat ion o f the burden on deve loping countries by sub s t i tuting debt re l ie f for ad j u s tment is ea s i l y managed . Charac ter i stic of the se reforms i s an expanded , rather than reduced , pub l ic pr e sence in developing c ountr i e s . I ndeed , by redi str ibuting th e portfo l io of debt ex po s t , it compen sates for the exce s s ive rel iance on private i n s t i tutions to re s o lve a development prob lem . The real i s sue i s not the techn ical adequacy o f one propo sal ver su s another . D e s igns can b e perfected , and addit ional f e ature s added . Nor is it even the spec i f i c d i s t r ibut ion o f c o s t s to b e shared among bank s , deve l op ing countrie s , and indu s t r ia l i z ed count r i e s . The s e wi l l determine the preference f o r one o r another approach and are a matter for negotiation . I ndeed , we have a l ready seen how the bank s have l owered the i r spreads in response to pres sure s on them ; othe r conc e s s ion s , l ike a cap on intere st payments that converts costs above a spec i f ied rate i nto automa t i c - - and cheape r - - re schedu l ing , may a l so emerge . But n e i ther the s e change s , nor more far- reach ing reforms tha t would involve l arg er tran s f e r s o f resource s , are encouraged by the pre s ent debt reg ime . Bank s are unwi l l ing to opt for mod i f ications even i f both they , and the system , could be made better o f f . To admit the need for change is to con f i rm the inadequacy of pre s ent arrang ements and to r i sk test ing them . Al l a long the bank s have been saying tha t the prob lem is minima l , even wh i l e agree ing to re schedu l e some $ 1 0 0 b i l l ion in debt . To c a l l f o r help that did not come wou l d be counter produc t ive ; a t best there fore , banks are reactive and
136 l imited to short-term pa l l iat ive s under the i r control . Deve loping countr i e s are not much better s i tuated . Th e l eading debtors mu s t proc l a im the i r commitment to the present system and the u n f a i l ing integr ity of the i r obl i gat i ons i f they a r e t o have a c c e s s t o the a s s i stanc e they need . F o r a l l th e talk o f a " debtor ' s OPEC , " incentives for i nd ividua l compl iance are much s tronger than g roup repudiat ion . D i f f ering individual c i rcum s tanc e s and prospec t ive la ck of a united f ront make any other pol icy a r i sky one . Fore ign min i sters may j o intly advocate genera l resolution s , but individual c entra l bank e r s cont inue to pay periodic v i s it s to New York to deal with the prob l em . I n th e l a s t analys i s , lack o f leadership b y the indu s tria l i z ed countr i e s , and e spec i a l l y the United S tate s , rather than the inab i l ity to dev i s e a better framework for deal ing with the debt prob l em , exp l a ins the present inac t i on . The Reagan admini s trat ion i s s e l f c on f e s sedly skept i c a l o f the mu l t i l ateral B r etton Woods system and even of ex tens ive cooperation among the indu s t r ia l i z ed countrie s . I n the el ect ion year o f 1 9 8 4 , a s th e c r i s i s a tmo sphere o f 1 9 8 2 rec eded , c a s e-by- c a s e emerg ency c are rather th an sys temi c ana ly s i s ga ined i n a l lu r e . Mak ing t h e debt i s sue a narrow l iquidity prob l em conformed to such a mind- set . Ab sent a f inanc ial col lapse , the c o s t s r ema i n impl i c i t rather than budgetary : Tax payers pay through s l owe r growth and increas ing a l i ena tion of the devel oping wo r l d rathe r than by appropria tions . I t i s not a unique predicament . K eyne s , in the mid st o f the Great Depre s s ion , wrote a l e s s c i ted pas sage appropriate to pre sent c i rcumstanc e s : I t i s a s though two mo to r-drivers , me eting in the midd l e of a highway , we re unab l e to pa s s one another becau s e n e i ther knows the ru l e o f the road . The i r own mu s c l e s a r e n o use : a motor eng ineer c annot h e l p them: a better road would not se rve . Noth ing i s required and noth ing wi l l ava i l , exc ept a l i tt l e c l ea r th ink ing . So , too , ou r prob l em i s not a human prob l em o f mu s c l e s and endu ranc e . . . On the contrary , it i s , in the strictest sense , an economi c prob l em o r , to expre s s it better , a s sugg e s t ing a b l end o f economic theory with the art of statesmansh ip , a prob l em o f po l i t i c a l I c a l l a ttent ion to the nature o f the economy . prob l em , becau s e it po ints us to the nature o f the remedy . I t i s appropriate t o the c a s e tha t the remedy shou l d be found in something wh ich can f a i rl y be cal l ed a devi c e . Yet , there are many who are suspic iou s o f devi c e s , and in s t inctive l y doub t the i r e f f icacy But th e l o rr i e s o f the se peopl e wi l l never , I fea r , •
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137 get by .
S 7
I t requ i red the Great Depre s s ion o f the 1 9 3 0 s for Keyne s ian coun s e l f ina l l y to b e a dopted , and then impe r f ectly . B i l l ions o f do l l a r s o f potenti a l outpu t were irrevoc abl y l o s t . The develop ing countr i e s are conf ronting no less an economic trag edy in the 1 9 8 0 s . So far it has not much inf luenc ed o f f i c ia l perceptions in the indu s tria l i z ed countrie s . " C l ea r th ink ing " re ma ins sporadic and l imited to sho rt- term c r i s e s l ik e the respon s e to the Mex ican s i tuat ion in Augu s t 1 9 8 2 , a by produc t of wh ich wa s ea s ing of U . S . monetary pol icy . Ideolog i c al i n s i stence upon the magi c of th e market domina tes pragma t i c adaptation to its f a i lur es . The debt prob l em we confront is t e s t imony to l imitat ions o f market forc e s . An active partic i pant in l ending concedes as much by a f f i rming , " wh i le the international debt s i tua t ion i s manag eab l e , i t w i l l not manage i t s el f . " s s We have f a i l ed onc e . Three yea r s ago , I wrote o f the then l ooming c r i s i s : The principal danger i s not the who l e s a l e defau l t b y deve l op ing countr i e s a n d the po s s ib i l i ty that i t may bring the wor l d f i nanc i a l sys tem c rash ing down . The p r inc ipal dang er is that ava i l ab l e inter nat iona l f inance wi l l be inadequate to ma inta in a rea sonab l e leve l o f wor ld e conomic growth in the 1980s. If the supply of fund s proves inadequate , it w i l l be the l a rg e s t debto r s --many of them Latin American count r i e s--who wi l l be mo st in danger . They wi l l have to bear the b runt o f the adj u stment burden themselve s . The developed count r i e s may n o t rea c t to s t rength e n the system in t ime to avoid s l owing of growth of the i r exports to the developing count rie s . The burden w i l l fal l p r ima r i l y on the developin� countr ie s . Interdependenc e i s s t i l l a symmetr ic . 9 •
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•
Tha t progno s i s unfortunately has proven accurate . The appa rent l imited impact upon the U . S . recovery , and that o f other indu s t r ia l i z ed countr i e s now showing s ign s of mo re rapid growth , is the wrong l e s son to dr aw f rom th i s exper ienc e . The r ight one i s that there i s s t i l l t ime t o a c t t o deal with the probl em before the economic and pol itical consequences become i rrever s i b l e . There i s no shortage o f prac tical p ropo sal s , or " devic e s . " Even in th e ab sence o f U . S . l eadership and larger re source s for o f f ic ia l l end ing o r tran s f err ing some o f t h e deb t , t h e World Bank a n d t h e I nternational Monetary Fund can help br eak the impa s s e by extend ing the hor i z on o f deve lop ing- c ountry ad j u s tment and bank partic ipation beyond the current preoccupat ion with the immediate term . More f l ex ib i l i ty in the des ign of adj us tment programs , under taken in c l o ser co l l aboration wi th the comme r c i a l
138 bank s , and more pol i t ic a l sens i t ivity wou l d make a s ig n i f icant d i f f erence . The l a rg e s t bank s , in the i r own sel f- intere s t , cou l d ta ke more i n i t ia tive in propo s ing chang e s in current l ending prac ti ce , such a s a ccepting more o f the r i sk o f intere s t - rate variab i l i ty , mak ing renegotiations more automa t i c i n the even t o f adve r s e external shock s , renegotiating l a rger sums for longer period s , and so forth . Continu i ng pa s s ivene s s i s a formu l a for develop ing c ountry di scontent and ongo ing uncerta inty in f inanc ial market s . The bank s ' s take need not b e l e f t to oth e r s to defend . I n the l a s t analy s i s , the debt prob l em i s a develop ment prob l em , not one of l iquidity o r so lvency or even of the vu lnerab i l ity Of the f inanc i a l sys tem . A s such , it is not exc lu s ive to the performance of th e devel op ing count r i e s alone , but has rami f ications , increa s ingly i f s t i l l unequa l ly , f o r the deve loped a s wel l . N o r is th e i s sue a technocratic on e , devo id of pol i t i c a l content . Unt i l th i s real i z a t ion becomes more perva s ive , we sha l l cont inue t o cope with the c reeping c r i s i s o f debt rather than conf ronting and reso lving i t .
1. 1
We s t e rn Hemi sphere
a
. 49 . 31
( . 74 ) 1 . 7 8a
. 71
. 64
. 26
. 04
. 10
a
a
Ad j us ted 2 R
- . 10 1 . 95
1 . 71
1 . 42 ( 1 . 59) 1 . 50 ( . 41 )
2 . 25 ( 1 . 40 ) - . 03
1 . 61
D-W
Sourc e : Nono i l deve loping countrie s : Internat ion a l Monetary Fund ( IMF ) , I n t e rnational Financ i a l �t i c s , Y e a rbook , 1 9 8 3 ; nonoi l , o i l - importing countries : IMF , Wor l d Economi c Outlook , 1 9 8 3 .
l e s s than o n e
Standard errors i n parenthe s e s
c �-va l ue
( . 73 )
(2 . 5) 1 . 51
(3.8)
2 . 29
Low i n come
3.9
1 . 73
4 . 30
c
( . 52 ) 1 . 83
1 . 08
As i a
b
2 . 46 ( . 51 ) c
10 . 2 (6. 5) 1.5 (1.4)
(5.8)
(2.4) 6.0
2.5
2.1 (1. 7)
Exporters o f manu f a c ture s
1963- 1982
Product
Country
one ob s e rvation omi tted to ad j ust for autocorrelation o f the r e s idua l s
b
a
o i l - importing 1973-1982
countrie s ,
Nono i l ,
1964-1982
c o f fe e
inc 1 .
Brazi l ,
Kore a ,
coffee
exc 1 .
Bra z i l ,
Nonoi l deve l oping countri e s ,
Cons tant
Indu s t r i a l i z ed-
Growth o f
Perc entage
E s t imat i n g Equations for Export Volume E l a s t i c ity i n Tab l e 5 . 4
Perc entage Change in Export Vo lume of :
Tab l e 5 . 6
APPENDIX
I-' W \0
c o f fe e
1965-1982
exc l .
exc l .
coffee
( 10 . 1 )
( 2 . 9) .8 ( 1 . 81 ) 1. 1
( 1 . 99 ) -.3 (1. 3) .8 ( . 7) -1 . 9
b 13 . 9 ( 7 . 8) -5 . 7 ( 7 . 9)
8.0 ( 2 . 1) 1. 21 ( . 29 ) . 87 ( 1 . 08 ) 1 . 85 ( 1 . 11) 1 . 58 ( . 49 ) 1 . 96 ( 1 . 69 ) 2 . 07 ( . 74 ) 1 . 16 ( . 22 ) 1 . 26 ( . 31 ) . 95 ( . 30 ) 1 . 24 ( . 88 ) 2 . 17 ( . 58 ) ( . 54 )
( . 27 ) 1 . 33 ( . 64 ) 1 . 83
( . 45) . 22 ( 1 . 64 ) 3 . 30 ( 1 . 67 ) 2 . 51
S tandard error i n parenth e s e s
1983 ;
Nono i l deve loping countrie s : nonoi l o i l - import i ng c ountr i e s :
corrected f o r autocorr e l a t i o n
( . 64 )
( . 27 ) - . 23 ( . 99 ) 1 . 56 ( 1 . 01) - . 52 ( . 42 ) . 00 1 ( 1 . 46) 1 . 40
- . 30
Rate
1 . 84
( . 30)
2 . 17
2 . 69
2 . 02 ( . 16 ) . 86 ( . 36 ) 1 . 36
2 . 61 ( . 13 ) 1 . 06
2 . 81
32 ) 86 11) 76
(. . (. .
c
c
c
. 86
1 . 70
. 86
. 58
. 95
. 91
. 95
. 54
. 15
. 07
1 . 20
2 . 30
. 28
. 89 2 . 49
( . 74) . 23
2 . 21
c
c
c
Ad j us ted 2. R
D-W
17 ) 70 61) 22 62 ) 73 21 ) 57
(. . (. . (. . (. .
. 73
Dol lar Appre c i ation
International Monetary Fund ( IMF ) , Internati ona l F in an c i a l Yearbook , IMF , World Economi c OUtlook , 1 98 3 .
( . 84 )
( . 59 ) 2 . 47 ( 2 . 04 ) 2 . 81 ( . 89) 1 . 75 ( . 30) 1 . 85 ( . 37 ) . 62 ( . 42 ) 2 . 24 ( 1 . 01) 4 . 18
1 . 63
( . 25 ) 2 . 05 ( . 91 ) - . 32 ( . 92 ) 1 . 45 ( . 37 ) 2 . 04 ( 1 . 29) - . 59 ( . 56 ) 1 . 38 ( . 20) 1 . 10 ( . 23 ) 2 . 78
Rate
InflaIntere s t tion
1 . 53
perce ntage change i n expor t u n i t values o f indus tri a l i z ed countries
Source :
c
b
a
We s t e rn Hemi sphere
Asia
Low i ncome
Nono i l o i l- importing countrie s , 1 9 7 4- 1 9 8 2 Exporters o f manufac ture s
Ko rea
Bra z i l ,
Nono i l deve loping countr i e s ,
Kore a ,
Brazil ,
.4
( . 9) -.2 ( 3 . 2) 4.0 (3. 2) 19 8 1 - 1 9 8 2 1 . 5 (1.3) .4 (4 . 5) 3 . 30
1964-1982
Cons tant
Change in Indu s tri a l i z edCountry Change G rowth 073 , 74 Lagged Rate
a Es tima ting Equations for Terms of Trade in Tab l e 5 . 4
Non o i l deve lopi ng countrie s ,
Tab l e 5 . 7
I-' � 0
141 NOTES See Tab l e 5 . 1 and sour c e s indicated there , a s 1. we l l a s O rgan i z ation f o r Economic Cooperation and D eve l opment ( OECD ) , External Debt of D eveloping Countr ie s : Genera l Survey 1 9 8 2 , Paris , 1 9 8 2 , for debt e s t imates a t t h e e n d o f 1 9 8 2 . T h e U S $ 8 0 0 b i l l ion e s t imate i s f rom A . W . C l ausen , pres ident of the World Bank , as c i ted in the N ew York T ime s , January 2 6 , 1 9 8 3 , p . 4 5 . Such a total pre sumably incorpora t e s a broader devel oping c ountry d e f i n i t ion than the other source s c ited , in v iew o f the i r e s t imate of approximately U S $ 7 0 0 b i l l ion out s tanding to deve loping count r i e s at the end of 1 9 8 2 and o f a s l owing f low o f add i t iona l pr ivate loans in 1 9 8 3 . 2 . Wa l l S treet Journa l , November 2 5 , 1 9 8 3 , p . 1 . 3 . Wo rld Bank , Wor l d Development Report 1 9 8 2 , p . 2 1 . 4. International Monetary Fund ( IMF ) , Wor l d Economic Outl ook , Wa shington , D . C . , 1 9 8 3 , p . � 5 . The s e data cover the pe r iod 1 9 6 5- 1 9 8 1 . During tha t interval the c omb ination of export opportunit ie s a n d a c c e s s t o credit gives rea son to suppos e that s impl e l e a s t squa r e s captures a saving s function uncon st ra ined by fore ign-exchange shortag e . To avo id prob l ems of appropriate defl ator s , the functions are e s t ima ted in rat i o form : + c CA + c CA l 2 r where S is gro s s national sav ing s , Y is g ro s s nat ional prOduc t , Y i s real gro s s dome s t i c product , and CA is r the current account de f ic it . The c oe f f i c ient I - a i s the e s t imat ed ma rg inal propen s ity to con sume out o f g ro s s nat ional produc t , and c and c are the period- spec i f ic 2 1 propen s i t i e s to con sume out of the de f ic i t for 1 9 6 5- 1 9 7 8 and 1 9 7 9 - 1 9 8 1 . 6. IMF , Wor ld E c onomic Outlook , p . 1 4 3 . 7. I MF , External I ndebtedn e s s o f Developing C ountr ie s , Occa s ional Paper no . 3 , Wa shing ton , D . C . , May 1 9 8 1 , p . 1 1 . 8. See my " Causes and Consequences of the Latin American Depres s io n of 1 9 7 9 , " MS , October 1 9 8 3 , for a deta i l ed d i s cu s s ion o f the impact of ex ternal and internal cond i t ions upon the expa n s ion of the debt of the reg ion and of princ ipal debtor countri e s . 9. I MF , Wor l d E conomi c Outlook , tab l e 1 4 , pp . 1 8 3 - 1 8 4 . 1 0 . Wo rld Bank , Wor ld Debt Tab l e s , 1 9 8 2 - 8 3 , Wa sh ington , D . C . , 1 9 8 4 , p . vi i . 1 1 . W i l l iam R . C l ine , I nternational Debt and the S tab i l ity of the World E c onomy , wa�h i ngton , D . C . , S eptember 1 9 8 3 , p . 7 1 . 1 2 . Tha t i s , i t tak e s a s the appropriate con straint for developing-country repayment the capac i ty to generate fore ign- exchange earning s rather than dome st ic saving .
Sly
=
a
+
bllY
142 F o r a n examp l e o f the la tter , se e OECD , Ex terna l I ndebtedn e s s o f Developing Count r ie s , app . 3 . 13 . Spec i f y ing the fo l lowing equat ions : x M
t t
dD
=
=
gt x e 0 ( l+a ) X M
t
- X
+ iD . t t t gt 1t we can solve fo r debt , D , a / ( g- i ) X ( e - e ) . Then t the l imiting debt- export rat i o , D ( t ) / � ( t ) a / ( g- i ) . 14 . Economic C ommi § s ion for Latin Amer ica , Balance Prel iminar de l a Economia Latinoamer icana Durante 1 9 8 3 , Santiago , December 1 9 8 3 , p . 2 9 . 1 5 . Wor l d B ank e s t ima tes reported in the New York Time s , January 2 6 , 1 9 8 4 , p . 4 5 . 1 6 . C l in e , I n ternational D eb t , pp . 4 6 - 7 1 . 1 7 . S ee Arth icus R . C l ine , " Deve l oping C ountry D eb t Under Al ternative G l obal Condition s : 1 9 8 3 - 8 6 , " in Systemic R i sk and Pol icy Respon se s , Interna t i onal Deb t : Wa shington , D . C . , 1 9 8 � , where he reports i n tab l e A-I very l ow unad j u sted R for his country e s t ima t ing equa t i on s . The la rgest is for B ra z i l : . 31 . The regre s s ions in the Append ix do con s i s tently better and are a better ba s i s for a s s e s s i ng the evo l u t ion of trade for deve l oping countr i e s taken together . 18 . The analy s i s o f the e f fect o f chang es o f the val ue of the do l l a r on the pr i c e s of develop ing- country expo rts ha s to start f rom the demand and supply curves for indu s tr ial i z ed-country imports expre s sed in do l la r s . A chang ing va lue sh i f t s the non-U . S . demand , because prices are d i f ferent , and supp ly o r ig in a l l y i s expre s s ed in non-U . S . cur rency in s imi l a r f a sh ion . Only i f devel oping-country supp ly i s a l l expre s s ed in non-U . S . do l l a r terms , and perfectly e la stic , wi l l apprec iation and depre c i a t i on be fully re f l ected in do l l a r pric e s . But a l a rge propor t ion o f supply i s contrac ted in do l l ar terms and is not nec e s s a r i l y elastic in the short term . 19. IMF , Wor ld Economic Outlook , app . A . 9 , pp . 1 5 4 f f . The commodi ty price index in que stion can be f ound in Inte r-American Deve lopment Bank , Economic and S o c i a l P rogre s s i n Latin Amer ica , Wa shing ton , D . C . , 1 9 8 3 . Pe tro l eum wa s exc luded . 2 0 . For determin ing the price o f devel op ingcountry imports in th e presence o f both do l l ar deprecia t ion and general p r ice increa se , I have used the e s t ima ting equation : 2 R . 94 OECDP = 4 . 9 + 1 . 1 8 DC P - . 7 9 D 1 + 1 . 0 3CP D-W 2 . 07 ( 2 . 63) ( . 12) ( . 09) (� 4 1 ) =
=
-----
=
=
wh ere the constant i s for 1 9 7 3 - 1 9 7 4 only , CP i s inf lation in the i ndu s tr i a l i zed count r i e s mea sured bY- the con sume r pric e i ndex , DCP is change in in f l a tion , and DI is change in a do l la r i ndex aga inst other currenc i e s in accord with
143 the I MF we igh t s . S tandard errors are in parenth e se s . 2 1 . C l ine f ound an e l a s t ic i ty a s great a s s even based on the aggrega tion of country e s t imate s , and a va lue o f f ive der ived f rom the e l a s t i c ity e s t imat e s o f S e e I nt e rnational Debt and the h i s pro j ection mode l . S t ab i l ity o f the Wor l d E c onomy , p . 6 5 . The a c tu a l s imu l a t ions show a w i d e r d ivergence becau s e t h e sharp dec l ine in the debt-export ratio reduc e s the r e l a t ive importance of intere s t payment s . 2 2 . One percent o f deve loping-country GDP i s approx imate l y equal , o n average , t o 4 percent o f expor t s . U s i ng the 1 9 8 2 export-debt ratio and the current intere s t rate y i e l d s t h e resu l t in t h e text . 2 3 . S e e the Wha rton Wor l d Economic Outlook , O c tober 1 9 8 3 , and the DRI re sul t s for the L a t in Ame r ican princ ipal debtor s , both quoted in Thoma s O . Ender s and Richard P . Mat t i one , Latin America : The C r i s i s o f D eb t and Growth , Brook ing s D i scu s s ion Papers in I nternational Economic s , no . 9 , Wash ington , D . C . , De cember 1 9 8 3 . 2 4 . E conomic Commi s s ion for Latin Amer ica , Bal anc e P rel iminar , tab l e 1 1 . 25 . IMF , Wor ld Economi c Out look , 1 9 8 3 , p . 2 0 . 26 . I b id . , p . 1 6 . . For a recent review o f stab i l i z ation po l i c ie s , 27. see R . Dornbu s c h , " S tab i l i z ation Po l ic ie s in D eve loping Countri e s : What Have We Learned , " and R . C . Porter a nd S . 1 . Ranney , " An E c l e ct i c Mode l o f Recent LDC Macro economic p o l icy Ana l y s e s , " both in Wo r l d Deve l opment , vo l . 1 0 , no . 9 ( Oxford) , 1 9 8 2 . 2 8 . Manue l Gu itian , in T . K i l l ick , ed . , Ad j u s tment and F inanc ing in the Devel op ing Wor l d , p . 9 5 . 2 9 . Richard N . Coope r , Currency Devaluat ion in Deve lop ing Countr i e s , E s says in I nternational F inance , no . 8 6 , P r i nc eton , N . J . , June 1 9 7 1 . 3 0 . The E conomi st , October 1 5 - 2 1 , 1 9 8 3 , p . 4 . 3 1 . Worl d F inanc i a l Marke t s , June 1 9 8 3 , pp . 1 1 , 1 2 . 3 2 . The s e e s t ima tes start f rom the terms and sums re schedu l ed as reported in Latin American Week ly Report , May 2 0 , 1 9 8 3 , plu s sub sequent news account s . On average , spreads were 1 pe rcent h ighe r than dur ing the period when the loans were i n i t i a l l y contracted in the l a te 1 9 7 0 s , a l l owing for intervening grace periods . Commi s s ions for reschedu l ing ranged between 1 . 2 5 and 1 . 5 perc ent , o f wh ich 1 percent wa s regarded a s pro f it ( tak ing into account the Wo rld Bank typ i c a l commi s s ion p ayment o f . 2 5 percent) . C ommi s s io ns are pre sumed to be paid i n i t i a l ly , even if not accounted in bank earnings in that f a sh ion , and to y i e l d a return of 1 0 percent a year . The average annual value , spread over the l i f e o f the loan , is there fore greater than the s impl e average ( approx imately twice a s large ) . To th e before- tax annual earning s ob tained by summing incremental spreads and the average annual value
144 o f commi s s ions , a l ternative marginal tax rates are app l i ed to arrive at a f ter- tax pro f it s . The se are then compared to the approx ima te share o f loans to th e s e countr i e s in tot a l bank a s s e t s to a s s e s s the increa sed returns on th e i r holding s . Equiva l ently , one can approx imate the resu l t , excluding c ommi s s ions , by not ing that the spread on re s chedu l ed loans h a s doub l ed . S ince such reschedu l ed loans are about one- fourth o f the tota l extended by bank s to these countr i e s , the e f f e c t i s about a 2 5 percent r i s e in a fter- tax earning s . The c a l cu l ations are reported in the Wa l l S treet Journa l , December 5 , 1 9 8 3 . 3 3 . N ew York T ime s , January 2 6 , 1 9 8 4 . 3 4 . Among the author s o f var iou s swap propo s a l s are Peter Kenen , F e l ix Rohatyn , and Richard We inert . I my s e l f advanced a s imi l a r propo sa l much earl ier th at the Worl d B ank ab sorb some of the commerc i a l bank port fo l io o f deve loping-country loans in exchange for Wor l d B ank S e e Albert F i sh10w et a 1 . , Rich and Poor Nations bonds . in the Wor l d Economy , New York , 1 9 7 8 , pp . 6 7 - 6 8 . The exchange o f debt for export partic ipa t ion shares has been advocated by Norman A . B a i l ey . Many of the s e pl a n s are c i ted i n C l ine , I nternation a l De b t a n d t he S tabi l ity o f the Wor l d Economy , pp . 1 1 4 - 1 1 5 . 3 5 . The se c r i t i c i sms and o ther s are summa r i z ed in C l ine , I nternational Debt and the Stab i l i ty o f the World Economy , pp . 1 1 7 - 1 1 9 . 3 6 . Among tho s e advocating such po l ic i e s are Haro l d Lever , W i l l iam Bo l i n , Jorge del Canto , a n d f inancier Mino s Z omhanak i s . For deta i l ed re f e renc e s see ibid . , p. 117 . 37. J . M . Keyne s , E s says in P e r sua s ion , vo l . 1 1 , C o l l ec ted Writ ing s o f J . M . K eyne s , London , 1 9 7 2 , pp . 3 3 5 - 3 3 6 . 3 8 . Wo rl d F inanc i a l Marke t s , June 1 9 8 3 , p . 1 5 . 3 9 . The pol i t i c a l Economy o f the Western Hermi spher e : S e l ected I s su e s for U . S . p o l icy , Joint Economic Commi ttee , 9 7 th Congre s s , 1 st S e s s ion , S ept ember 1 8 , 1 9 8 1 , p . 1 6 3 .
6
Lati n American Debt: Act Two
Pedro-Pablo Kuczynski
I NTRODUCT I ON Al though events have not changed my e a r l i e r two a s s e s smen t s , l it i s appropr iate to cons ider whether fundamental changes have oc curred in recent month s , as of the end o f 1 9 8 3 . F i rs t , it i s c lear that the economic recovery in the Un i ted states has not so far been accompanied by an equ iva l ent recovery e l sewhere in the indu s t r ia l i zed wo r l d . As a resul t , the recovery in the growth o f world trade i s s ti l l s low , and the growth o f the industrial i z ed wor l d i s st i l l b e l ow what wa s env i saged b y a numb er o f obs ervers a s one o f the key ingred ients for ma j or debtors to be able to meet the inte r e s t on th e i r external deb t s . 2 Further mo re , a l though some commod i ty prices have rebounded f rom the depths o f 1 9 8 2 , others-- particularly minera l s--are s ti l l extreme ly depre s sed , so that the terms of trade o f a number o f deve loping countr i e s a r e we l l b el ow the peak l evel s of two or three years ago . The s e two discourag ing trends , wh i ch are related , may wel l chang e for th e better . But a number o f factors lead one to qu e s t ion whether such an improvement wou ld be a susta ined one : th e cont inu ing high level of real intere s t rate s ; the l ag o f inve stment , part i cu l a r ly a s a resul t o f s ick heavy indu s t r i e s in North Amer ica and Europe ; and there fore the p o s s i b i l ity that the wor l d faces a long cyc l e o f s l ow economic growth , w it h the Latin American countries l e f t with a large debt incurred in a pa s t i n f l a t i onary and h igh-growth era . The th ird important feature o f the l a s t month s h a s b e e n t h e extent o f b e l t - t ightening a n d austerity in a number o f countrie s . Mex ico h a s been the mo st v i s ibly suc ce s s fu l , and its e f forts have been a ided by the c l o s e l ink s o f Mex ican trade a n d s e rvi c e s t o t h e Uni ted States and have therefore bene f i ted from the economi c recovery there . The ad j u stment e f fort in o ther countr i e s has been very l a rge a l s o . I n part , o f cour se , it h a s been the unavo idab l e resul t of th e lack of interna tional loans and 14 5
146 the shortage o f fore ign currency . The current account d e f i c i t o f Latin America ha s f a l l en f rom U S $ 3 8 b i l l ion in 1 9 8 1 to my e s t imate of U S $ 1 8 b i l l io n in 1 9 8 3 , l arg ely a s a resul t o f the squ ee z e in impor t s . At the same t ime income per person h a s dec l ined sharply , by as much as 1 0 percent in the three-year period 1 9 8 1 through 1 9 8 3 . The s i z e and suddenne s s of the ad j u s tment g ive rise to que s t ions about whether i t is sustainab l e for very long f rom a po l i tical po int o f v i ew , particularly if it is con s idered tha t the bu lk o f the ad j u s tment probab ly f a l l s o n urban l ower- income group s . The fact that , g iven the lack of re source s , there is no a l terna t ive to belt t igh tening doe s not mean tha t i t wi l l nec e s sarily b e accepted or that t h e economic managers who are impl ement ing it wi l l be kept on . The add i t ional factor to weigh in the outlook i s that new capital f l ows are very d i f f icu l t t o mob i l i z e . Al though the external f inanc ing needs of Latin Ame rica have for now sh runk sharply , the ava i l a b i l ity of external f inanc e ha s fa l l en even more . I n the ana l y s i s that f o l l ows , I e s t imate tha t net commercial bank loans- - a f ter repayment or r e f inanc ing o f amort i z at ion to Latin American countr i e s for 1 9 8 3 - -wou l d b e on the order o f US $ 8 b i l l ion , compared to about US $ 2 5 b i l l ion annua l ly in the period 1 9 7 9 - 1 9 8 1 , an admittedly u n s u s ta inab l e rate . But now i t appea rs tha t t h e net new l ending i n 1 9 8 3 wi l l o n l y b e abou t US $ 6 b i l l io n o r l e s s becau se di sbu r s ements on ma j or loans accompany i ng res tructu r ings , e spec i a l l y in th e c a s e s o f Argent ina and Bra z i l , were del ayed for severa l month s when tho s e count r i e s we re unab l e to meet var iou s targ ets in th e stab i l i z a t ion programs agreed with th e I n terna tional Mon etary Fund . I n fact , periodic re negot iations o f programs and targets have in s evera l c a s e s c a s t doubt on their viab i l ity and implementation . O f the l a rger countr i e s , only Mex ico me t the agreed prog ram and l owered i t s pub l ic - sector de f ic i t f rom 1 7 percent o f GNP in 1 9 8 2 to about 8 - 9 percent i n 1 9 8 3 , a g iant step accompanied by a 5 percent dec l ine in per capita income . Ma j or program renegotiat ion s have taken place i n Argentina , Bra z i l , Ch i l e , and P eru , and further renegotiations may we l l be nec e s s ary . No l a rge- s c a l e expan s ion o f net l ending f rom o f f i c i a l sourc e s h a s yet taken place to o f f set the shortage o f fund s , a l though th ere are beg inning s both a t t h e mu l t i l ateral agenc i e s a n d a t national export c r e d i t agenc i e s , wh i l e pr ivate inve stment c a p i t a l f l ows obviou s l y rema in a t very l ow l eve l s . As a resul t , some countries have had to " f inanc e " th e gap by delaying payments , and l arge arrears of intere st and trade payment s have bu i l t up . Despite th i s somewhat unsa t i s f actory picture , both l enders and borrowe r s have shown tha t they can overcome ma j o r ob stac l e s succ e s s fu l l y , in the sense of avert ing an internat iona l f inanc i a l c r i s i s . " Muddl ing th rough "
14 7 appea rs to have wo rked , a t l e a s t so far . However , the potential pol itical and soc ial cost to debtor countr ies has been h igh . There h a s not been enough empha s i s on th i s c o s t ; much d i s cu s s ion i n th e ma s s media o f the in du stria l i zed countr i e s ha s focu sed o n such que st ion s a s whether the debt can b e " pa id back " ( no t the rea l i s sue for capita l - importing countr i e s - - the key i s sue b e ing the paymen t o f intere s t ) or whether the international b ank ing sy stem i s severely endangered ( unl ikely , a l though some bank s face potential earnings prob l ems ) . Al though every one recogn i z e s tha t ma j o r ad j u s tment is neces sary , focus ing on ways to e a s e the c o s t o f ad j u stment in the debtor countr i e s might help to c reate the c l imate in wh ich mechani sms could b e e s t ab l i shed to prevent the eventua l it i e s that l ende r s fear mo s t . Among them wou l d be a prolonged suspen s ion o f intere s t payments b y a ma j or debtor country , wh ich wou l d force l e nde r s to pl a ce such loans on a nonaccruing b a s i s and wou l d b e particularly pa inful for the bank s tha t have not so far made enough reserve provi s ions for such loans , particularly in North Ameri c a . A more central i z ed approach to the s tudy o f such mechani sms shou ld b e contemp la ted , with a larger rol e for the governments o f l enders and borrower s rather than exc l u s ive r e l ianc e on the present ma rket arrangement s . Among areas o f priority are a cce le ration of di sbur semen t s a n d n e w l ending f rom o f f ic i a l sou r c e s a n d way s to d imi n i sh the intere s t burden , g iven the fact that at present ge nera l interest l eve l s , inc lud ing the c o s t o f re f inan c i ng s , Latin America i s spending close to 45 percent of i t s export income to mee t intere s t payments . I t i s d i f f icult to j udge the l ik el ihood of a break down in th e present sys tem in the case o f ma j or debtor count r ie s . Even though it obviou s ly shou l d be avo ided- it woul d b e harmful to both borrowers and lende r s - - and th ere a re economic s igns tha t it cou ld b e avo ided , it i s t o a cons iderab l e extent a matter o f peop l e and po l i t ic s . P o l itic s lags behind economic trend s . S o far , there ha s been l i tt l e po l it i c a l back l a sh to economic probl ems in ma j o r debtor countrie s . But trends a rgue for a n attitude sharp income o f read ine s s rather than mere hope : dec l ine s ; rapid i n f l a t ion and growing unemployment ; increa s i ng ma l nu t r i t ion ; and l a s t , but not l e a s t , a I t i s to be hoped that perceived l o s s of sovereignty . the s o- ca l led debt prob l em wi l l in t ime di sappear as other c r i s e s have , but a more del iberate approach wou l d be a u s e ful way o f mak ing such a hope come true .
148 LAT IN AMER ICAN DEBT :
ACT TWO *
Th ere i s a d i s tinct rumb l e . I s i t the n o i s e o f a n impending s econd c r i s i s o f Latin American and other deve lop ing-country debto r s , o r i s i t the s tart-up of world economic recovery , wh ich wi l l gradua l l y pu l l away l ender s a n d borrowers a l ike f rom t h e edge o f a f inanc i a l aby s s ? I n th i s chapter , I wi l l upda te what h a s happened since th e f al l o f 1 9 8 2 , wh en th e f inanc i a l wor l d awoke to the po s s ib l e cons equenc e s o f the inab i l i ty of Mexico to meet th e principa l repayments on it s ex tern a l pub l i c a n d pr ivate debt . I wi l l then look at the pre sent status o f the ref inanc i ng s and o f the debtor economi e s , and wha t the prospec t s f o r the future a ppear t o b e . The debt prob l em o f deve l op ing count r i e s i s l argely a Latin American one . 3 The relat ive s i z e of the debt of the reg ion is much l arger than in the case o f other deve loping areas ; i t s compo s ition- - two-thirds f rom commercial bank s- - g ive s it short ma tu r i t i e s and commer cia l interest rates ; a nd expo rt earn ing s with wh ich to serv i c e th e d e b t are modest in relat ion to t h e burden o f debt servi c e . These f eatu r e s mean tha t the grave economic prob l ems that have been facing mo st Latin American coun tries in the l a s t year o r so are unl ike ly to spread , at l e a s t with the same force , to other develop ing a rea s . On the other hand , the reg ional concentration o f the prob l em means tha t vi rtua l l y al l countri e s in Latin America and th e C a r ibbean are viewed a s one by commerc ial bank l ender s , an a t t i tude tha t ha s dra s t i c a l ly cut capital i n f l ows to the region , regard l e s s o f coun try d i f ferenc e s , and thus makes the task o f recovery much more d i f f icul t . The fact tha t th e externa l debt ha s been bu i l t up over the l a s t decade , bu t e spec ia l ly in the l a s t four yea r s , shows that th e p roblem i s not only a cyc l ical one but a longer- term one . As in a natura l catastrophy , the f i r s t s t e p i s eme rg ency action , fo l l owed later b y reconstruct ion and recovery . The h igh intere s t ra t e s o f 1 9 8 1 - 8 2 , together with th e unexpected depth and duration of the interna t iona l rec e s s ion , wh ich led to a sharp deteriorat ion o f the terms of trade o f develop ing count rie s , were th e c r i t ical factors that sparked the debt c r i s i s of 1 9 8 2 - 8 3 . I n the wake o f Argent ina and Mex ico , interna tional commercial bank l end ing g round to a ha l t , forc ing , a s foreseen , th e renegotia t ion o f part of th e ex ternal commerc ia l bank debt o f B ra z i l , Ch i l e , and Vene zue l a , a s we l l a s Ecuador , Pe ru , and U ruguay . * " La t in American D ebt : Act Two " i s the t i t l e o f my a r t i c l e in the F a l l 1 9 8 3 i s sue of Fore ign A f f a ir s , as we l l a s the t i t l e of th i s chapter .
149 D I MEN S IONS OF THE DEBT PROBLEM In 1 9 8 3 the inte r e st payments on the external debt o f the Latin American and C a r ibbean countries a r e expected to be c l o s e to U S $ 4 0 b i l l io n , a s l ong a s international short-term intere st rat e s do not increa s e above the i r level at midyear . Th i s number h a s t o b e s e t aga in s t pro j ected merchandi s e expor t s of about U S $ 9 6 b i l l ion , compared to US $ 1 1 0 b i l l ion in 1 9 8 1 . Even with a s ig n i f icant immed iate recovery o f expor t earn ing s a s a resul t o f renewed economic growth in the indu s t r ia l i z ed coun t r ie s , the intere s t burden wou ld s ti l l b e very h eavy , l ik e l y to continue into 1 9 8 4 and 1 9 8 5 , unl e s s there i s a ma j or o f f s etting inf l ow o f capita l . The prob l em for the ma j o r L atin American debtor count r i e s is therefore s imp l e and s ta rk : ma j or out f l ows without comparab l e in f l ows . Even though devel o p ing countrie s , rega rdl e s s of the i r l eve l s o f , income , s u f f ered heav i l y f rom the internat ional consequenc e s o f the 1 9 8 1- 8 2 rece s s ion , the debt a spect of the p rob l em is b a s i c a l l y conc entrated in Latin America . Other deve lop ing areas have ma j or balance- o f - payment prob l ems , o f course . For examp l e , much o f sub - S aharan A f r ica has been engul fed in a chron ic ba lance-of- payment s prob l em s ince the o i l -price inc rea s e s o f the early 1 9 7 0 s . Today some important o i l - export ing count r i e s , such a s I ndone s ia and N igeria , a r e c augh t in a f inanc i a l and economic squee z e as a resul t o f th e drop in o i l pric e s and the cuts in exportab l e volume s . Other s , such a s Korea , the Ph i l ipp ine s , and Yugo s l avia , have been hard h i t by the internationa l r ec e s s ion . However , the ma j or probl em b rough t on by the international rec e s s ion and the high inte res t rates o f 1 9 8 1- 1 9 8 2 i s concentrated in Latin America . Only the Ph i l ippines , among the count r i e s shown in Tab l e 6 . 1 , h a s l eve l s o f debt that are comparabl e t o tho s e o f the ma j o r L a t i n Ame r i can borrowe r s . The que s t ion i s not only a stat i s ti c a l one . Th e fact that mo s t internat iona l bank s have cut back very sharply on new loans to Latin America a l mo s t regard l e s s o f country di f f erenc e s - - o th e r than opera tions that a r e t i ed t o re schedu l ings and t o stab i l i z a tion programs supported by the International Monetary Fund-- has tended to precipitate payment s prob l ems . Even count r i e s with l ow debt burdens , such a s C o l ombi a and Trin idad and Tobago , are not f ind ing i t easy to obtain new loans . Fortunately , the s e attitudes o f l enders , who have gone f rom optimism to p e s s imi sm , have not extended to the economi e s o f A s i a , so tha t at pre s ent there i s l i ttl e r i sk o f a genera l i z ed debt c r i s i s . The fact tha t the debt prob l em i s large l y , a l though not exc lu s ivel y , a Latin American one is i l l u s trated by repeat i ng two s impl e compa r i s on s , wh i ch a re i l lu s trated in th e tabl e :
1.1
1. 3 1.2 1. 5 4.2 0.9
3.9 3.9 4.5 3.9 2.3 3.4
12
21 18 48 11
14
50 46 50 46 29 42
�a l
Sourc e :
D erived by th e author from Bank for International Settl ement s , Maturity Dis tribution o f Inter Bank Lend ing ( Jul y 1 9 8 3 ) ; Morgan Guaranty Tru s t Co . , World Financ i a l Marke t s ( June 1 9 8 3 ) ; Internati ona l Monetary Fund , International Finan c ial Statis tic s , variou s i s sue s ; and World Bank , various Annu a l Reports .
All o ther deve loping c ountr i e s exc ept c entra lly planned economi e s and Middl e E a s t OPEC countries
Exc luding trade payment e rrors
Including Caribbean and other countries not l i s ted
original short- term deb t ; exc l udes refinanc ed amounts in 1 9 8 3 and a l s o exc ludes portions o f longer- term debt f a l l ing due w i thin one year
d
c
b
a
d Tota l o th e r LDCs The s e are e s t imat e s , Note :
350 sub j ec t to error ,
21 11
Ph i l ippines Nigeria
5 12 330 and shou ld be used with care.
12 19 24
5 13 28 38 c 27
15 22 37
Algeria Indon e s i a Korea
Argentina Bra z i l Ch i l e Mex ico Venezue l a b To ta l Latin Ame r i c a
(5) E s timated Intere s t Due 1 9 8 3 as % o f Exports ( 3 )
dol l a r s )
(4) Ra tio o f ( 1 ) to ( 3 ) Debt t o Exports
( in bi l l ion s of U . S .
(3) E s timated 1 9 8 3 F . O . B . Merchand i s e Exports 9 22 4 22 14 96
(2) a Short- Term Debt a s % of ( 1 ) 25 20 19 30 45 25
(1) Tota l External Deb t , I n c luding Und i sbursed , at End 1 9 8 2
E s t imated Deb t Burden of Some Ma j or Deve loping Countries
39 86 17 86 33 330
Tabl e 6 . 1
t-' \Jl o
151 •
The ra tio o f the s tock o f out s tand ing deb t to the f l ow of merchand i s e export earning s , wh ich provide th e fore ign exchange to s e rvic e the debt- - admittedly an ove r s imp l i f i ed mea sure o f the weight o f debt � - - i s more than th ree t o one i n the c a s e of Latin America compared to about one to one for the res t o f the developing wo rl d .
•
As a resul t , in 1 9 8 3 Latin American and C a r ibbean countrie s as a g roup w i l l need to devote , a t pre s ent inter e s t rate s , about 4 2 perc ent o f th e i r merchand i s e export earn ing s to pay intere s t on the i r exte rn a l deb t , compared to 12 perc ent on average for o ther develop ing countri e s . The ra tio approache s 5 0 perc ent for the l a rg e debtors such as Argent ina , B ra z il , I t i s a s i f a homeowner had to and Mex ic o . devote h a l f h i s month ly income to intere s t payments on h i s h ome mortgage . The s e numb e r s a s sume tha t wo rld intere st rate s d o n o t r i s e for t h e s econd ha l f o f 1 9 8 3 , a n d tha t export earning s are o n target . Wh i l e th e l a tter i s neverth e l e s s a good po s s ib i l i ty i n view of th e improved comp e t i t iven e s s of Latin Amer ican exports as a resu l t o f the l a rge deva lua tions o f th e last y ea r , th e out look for intere s t rate s i s unc erta in . Obviou s l y , repayment s o f princ ipa l are n o t counted in the s e numb e r s . On th e med ium- and long - te rm deb t , pr incipal repayments repre s ent approx imat el y anoth e r 2 0 percent o f export ea rn ing s for Latin America a s a who l e , a f ter th e ref inanc ing s commi tted or under d i scu s s io n s o far in 1 9 8 3 .
TRENDS IN THE DEBT PROBLEM S ince Mex ico announc ed in Augu s t 1 9 8 2 tha t it wa s unab l e to meet the repayment o f pr inc ipa l on the ex terna l debt of i t s pub l ic and private s ector s , a numb er of ma j or events and trends have unfolded . At th e r i sk of over s impl i f icat ion , the s e trends can b e grouped into negative and po s i t ive , a l though the interre l a t ionships are qu i t e compl ex . P e rhaps the mo st st r ik ing on the negative s ide h a s b e e n th e virtual interruption o f new commerc ial bank l ending to a lmo st a l l Latin American countrie s . Ac cord ing to the l a s t a nnual report of the B ank for I nter national S e t t l ement s , th e net f l ow- - a fter repayment s - f rom commerc ial bank s t o L a t i n Ame r ica in the second half o f 1 9 8 2 wa s only about US $ 5 b i l l ion , mo stly becau s e o f t h e d i sbu r s ement o f earl ier commitments to B ra z i l , compa red to an annua l rate o f about US $ 2 5 b i l l ion start ing in 1 9 7 9 and up to th e f i r s t ha l f o f 1 9 8 2 . 5 Net fl ows
152 have f a l l en further i n 1 9 8 3 , and are l ikely to b e much above U S $ 8 b i l l ion , mo stly as a result of net lend ing a s soc iated with debt re schedu l ing . The mu s i c h a s indeed s topped . Net f l ows , in the other devel oping coun t r ie s , mo stly i n A s i a , have a l so decl ined but a t a s l ower pace . S ince comme r ci a l bank s provided more tha n two - th irds of th e capital inf low into Latin Amer ica , not j u s t for the last three years but for th e last decade , the interruption creates ma j or a d j u s tment probl ems . The interruption o f net n ew l end ing adds to the inab i l i ty of B ra z i l to meet its princ ipal repayments a f ter D ecember 1 9 8 2 an d to the sub sequent s imilar probl ems o f Vene zuela , Ch i l e , Ecuado r , P eru , and U ruguay , in addition to the ex i s ting probl ems in Arg entina and Mex ico . It is equa l l y true that l end ing wa s proc eed ing at an unsusta inab l e pac e , much f a ster than the growth o f the capita l o f the lending bank s , and that l arge f i sca l de f i c i t s in mo s t bo rrowing countr i e s were a ma j or cau s e o f exc e s s ive borrowing . 6 A sec ond and rela ted development ha s been the cut back in trade f i nanc ing . Lende rs , particularly th e sma l l e r bank s , have natura l l y enough reduced the i r l in e s of c r e d i t for export a n d import f inancing a n d in some c a s e s el iminated them a l together . O f f i c ia l export agenc i e s , wh ich play a key ro l e i n med ium- term equ ipment f inanc ing , have a l so cu t back . Al though c l ea r sta t i s t i c s a r e no t ava i labl e , the dearth o f new f i nanc ing , comb ined with th e dra s t ic economic rec e s s ion in virtua l l y a l l Latin Ame rican and C a r ibbean countrie s , ha s l ed t o a sharp drop in th e exports f rom the indu s t r ia l i z ed coun t r i e s to Latin America , and a l s o in the exports between La tin American coun t r i e s and between them and other deve l op ing count r ie s . I n the c a s e of B ra z i l , for examp l e , one - th i rd o f exports in 1 9 8 1 went to th e re st of Latin America and to other devel oping countri e s , prima r i ly in Africa and the Midd l e E a s t , a l l o f them depre s sed ma rke t s at presen t . Exports f rom the indu s t r ia l i z ed count r i e s to Latin Amer ic a , wh ich accounted for one-th i rd o f the i r exports to non-OPEC deve loping countrie s , fell by 2 1 percent in 1 9 8 2 and were st i l l f a l l ing in 1 9 8 3 . U . s . exports in Latin Amer ica , wh ich were in 1 9 8 1 equ iva lent to two th irds th e value o f U . S . exports to we stern Europe and doub l e tho s e to Japan , a l so f e l l by the same proport ion in 1 9 8 2 . Th i s fal l in export sa l e s f rom U S $ 4 2 b i l l ion in 1 9 8 1 to U S $ 3 4 b i l l ion in 1 9 8 2 had a co s t of b etween 1 0 0 , 0 0 0 and 1 3 0 , 0 0 0 direct j ob s l o s t in the United S tate s , and i s continuing i n 1 9 8 3 . 7 Even though Latin America ab sorb s only abou t 7 percent o f the exports o f the in du s tria l i z ed countr i e s , the sharpne s s of the drop in expor t s , wh ich a f f ec t s i n particular a l r eady depre s s ed indu s tr i e s such a s equ ipment and ma chinery , i s un doubtedly a drag on world economic recovery . For some European countr i e s , th e f a l l in sa l e s to deve lop ing
153 countries cou l d , i n 1 9 8 3 , make the d i f f erenc e between a mild economic recovery and no growth at a l l . A th i rd rela ted po int i s the ex tent o f the economic depre s s ion in Latin America . For a t ime in 1 9 8 1 , some economi e s , pa rticularly Mex ico , sh i elded themselves f rom the wor l d rece s s ion by ma s s ive external borrowing to f inance pub l i c inve s tmen t and con sumption . A s the l end ing s topped and l ong-del ayed a d j u s tment mea sure s , such a s deva luat ion and pub l ic spending cut s , had t o be taken , the rec e s s ion h i t with doub l e forc e . Deva luation s had to be much l a rg e r than if they had been taken in t ime , g iving a tremendou s impetu s to i n f l a t ion , which i s running we l l above 1 0 0 percent annua l l y in the three l a rg e s t economie s o f Latin Amer ica . For exampl e , Mex ico ha s had a deva luat ion of about 4 0 0 percent ( in terms o f p e s o s per do l l a r ) i n the l a s t e ighteen month s . C omparab l e deva lua t ions have taken p l a c e over the same period i n Argentina , C h i l e , B ra z i l , a n d Vene zuel a . The e f fect on the indu s t r i a l private sector , wh ich in all the s e cases had been encouraged by the pol i c i e s o f the author i t i e s t o borrow abroad , ha s been deva stat ing : Dome s ti c s a l e s in some c a s e s have fa l l en by 3 0 to 4 0 per cent in real terms as income s have l agged beh ind i n f l a tion . Th i s ha s sharply cut the ab i l i ty o f en terp r i s e s to g ener ate c a sh f l ow , wh i l e the amount needed in local currency to service externa l debt ha s increa s ed th ree or four I t i s not a n exaggeration t o say t ime s i n th e l a s t yea r . tha t a ma j or port ion of pr ivate l a rge- sca l e indu s t ry in Latin Amer ica- - not to mention chron i c a l l y s ick state The wor l dwide enterpr i s e s - - i s today in e f fect bank rupt . inten s i f ication o f trade barrier s , a direct result o f the internat iona l rece s s ion , agg ravates the prob l em . Th e pol icy o f s t imu l a t ing economie s th rough publ i c spend i ng reached i t s peak in 1 9 8 2 , when t h e pub l ic- sector de f ic it s o f s everal countr i e s reached record s . In Argent ina , B ra z i l , and Mex ico , t h e pub l i c- sector de f ic it s a s a proportion o f th e Gros s National P rodu c t peaked a t 1 4 , 1 2 , a n d almo s t 1 7 percent re spectively . D ef i c i t s o f th i s mag n i tude , l ea d ing t o l arge sub sequent exchange rate deva luation s , have pu l l ed up annual rates o f in f l a t ion so far in 1 9 8 3 to perhaps 3 0 0 percent in Argentin a , about 1 3 0 percent i n B ra z i l , and over 1 0 0 percent ( a l though dec l in ing ) in Mex ico . Such st ra to spheric numbers eventua l ly lead to ma j o r soc ia l and pol itical s tra ins . I nevi tab ly , th e proc e s s of s trengthen ing pub l ic f inanc e s create s for a wh i l e even more in f l ation and d i scontent , as pub l ic enterpr i s e prices and tax e s a re ra i sed . No one can deny the urgent need f or ma j or f inanc i a l surgery , particu l a r l y on exchange ra t e s a n d pub l i c f inanc e s . However , the suddenne s s a n d s i z e o f the mea sures requ ired , tog eth er with the fact tha t th ey have not been backed up by a s igni f icant external capital in f l ow to help th e adj u s tment , are c reat ing a potential ly
154 exp l o s ive mix ture o f f a i l ing income s , r 1 s 1ng unempl oyment , and g a l l op ing in f l a t ion . For examp l e , for L a t in America as a who l e 1 9 8 3 wi l l be th e th i rd succ e s s ive year o f I e s t ima te tha t over dec l i n ing rea l income p e r person . the period 1 9 8 1 - 1 9 8 3 real income per head wi l l have f a l l en by about 1 0 percen t , and by l a rger percenta g e s in the l ower midd l e- income g roup s , such as government wo rker s and nonun ion i z ed s ervice workers . Unemp loyment ra te s , wh ich are a dmittedly very dif f i cu l t to mea sure in Latin America , ar e probab ly hovering c l o s e to 2 0 percent in ma j or in du stri al centers such as Buenos Ai re s , Mex ico C ity , Sao Pau l o , and Santiago de C h i l e , withou t count ing th e in direct un emp loymen t o f peopl e work ing part t ime or s e l l ing lottery t ickets and kn ickknacks on s treet corners . s With the g radua l weakening o f the s y s tem o f extended f ami l i e s help ing the i r kin , and wi thout any unempl oyment in suranc e , such numbers a re not sus tainab l e for very l ong . Why ha s there been no social exp l o s ion so f a r ? There I n the c a s e o f Mex ico , for i s no ea sy general answer . examp l e , th e rapid income growth unt i l 1 9 8 1 h a s provided some cush ion , as has temporary or permanent migration to the United State s . A wel l - d i s c ip l ined po l itical organi zat ion a n d trad i t io n , w i t h c l o s e contro l over t h e ma j o r trade union s , ha s enab l e d t h e government t o keep wag e ad j u s tmen t s beh i nd p r i c e increa s e s , a key el ement in the f ight aga i n s t i n f l a tion . I n other c a s e s , the lack o f appa rent reaction may come f rom the suddenne s s of the chang e , wh ich ha s l e f t popu la tions s tunned , so to speak . Ano th e r e l ement ha s been the inc rea s ing d i s cu s s ion o f economic i s su e s i n the pre s s wh ich , a s a resul t o f g row ing l i teracy in urban area s , ha s c reated an awa ren e s s of the mag n i tUde o f the economic prob l ems be ing faced . The new P eruvia n f inance min i s t e r , for exampl e , got an un expec tedly sympa th etic pub l ic re spon s e earl ier in 1 9 8 3 to h i s prog ram to cut pub l i c spending t o the bone . In genera l , however , i f th ere i s no bread o n the tabl e , the s e po s i t ive devel opments can ove r time b e o f f set by great s o c i a l s tra ins . The comb ination of i n f l a tion , un empl oyment , and decl in ing real income s prov ides a breed ing ground for such ten s ion s . Expl o s ions are us ua l l y n o t announc ed . On th e p o s i t ive s ide o f the l edg er , th e mo s t important devel opment in the l a s t y e a r ha s been t h e un qu e s t ioned d e s i re o f mo st governments to put th e i r f inanc ial hou s e in order . B ra z i l took that dec i s ion a s early a s Decembe r 1 9 8 0 , but i t takes t ime and a ho spitab l e international envi ronment t o succeed . Al l the govern ment s o f the ma j or economie s of th e region have taken s i g n i f icant and , in s ome c a s e s , dra s t i c economic s tep s in th e l a s t s ix to nine month s . Undoub tedly , the interruption o f s ig n i f icant new l ending by comme r c i a l bank s ha s b e e n th e ma j or s t imu lus for such mea sure s . B u t tha t interruption i s a l so th e b igge s t que st ion mark o n whether th e stab i l i z a t ion prog rams can succeed in a
155 We wi l l l ook a t tha t c ru c i a l reasonab l e period o f t ime . que s t ion later . The other pos i t iv e but a l so qua l i f ied development i s the dec l ine i n wor l d intere s t rates sin ce mid- 1 9 8 2 . The London interbank ra te for s ix -mon th depo s it s , wh ich ha s been th e ba s e rate fo r mos t internat iona l bank loans , ha s f a l l en f rom a peak of 1 6 percent in June 1 9 8 2 to abou t 1 0 percent in the l a s t quarter o f 1 9 8 2 , the l evel wh ich it had i n Ju ly 1 9 8 3 , at the t ime o f wr i t ing . Two point s qua l i f y th i s progre s s : the s ign i f icant increa s e in bank charg e s above th i s b a s e rate , and the uncerta inty surrou nd ing future i nterest rates . The incre a s e in bank charg e s i s part icu l a r l y impor tant i n th e case o f Mex ico , wh ich wa s pay i ng very l ow On th e ba s i s of the n ew marg ins over the interbank rate . charg e s , Mex ico i s paying about 1 3 percent a s o f mid- 1 9 8 3 o n i t s ref inanced debt ( a tota l o f abou t U S $ 4 0 b i l l ion ou t o f U S $ 6 0 b i l l ion i n va riab l e rate debt ) . T his l evel resul t s f rom three change s : The ba se rate i s now ( at the opt ion o f the lende r s ) the pr ime u.s. l ending rate , wh ich i s genera l l y h i gher than the interbank rate ( wh ich is a depo s i t ra te ) ; th e spread above that b a s e rate ha s been sub s tant i a l l y ra i s e d ; and var i ou s addit ional f e e s have b e e n a ttached t o t h e ref inancings a n d th e new loans S im i l a r charg e s are inc luded in a s soc ia ted with them . the r e f i nancings nego t ia ted for Argen t ina , B ra z i l , Ch i l e , Ecuado r , P e ru , and U ruguay . Mo s t of the se countrie s were a l ready paying h ighe r c o s t s than Mex ico , so that the e f fe ct on them o f the chang e s i s sma l l er . Furth e rmore , there a re rea son s for th e change s ; management f e e s for new loans a re norma l ( a l though the new charges are on th e h igh s ide ) , and the sh i f t to a U . S . prime rate b a s e option wa s important in orde r to convince sma l l e r regional bank s in t he United States to rema in in th e l oan s . On the oth e r hand , the a rgument that h igher charges are j u s t i f i ed becau s e debto r s had become r i sk i e r i s more debatabl e . For one th ing , the r i sk become s d i f f icu l t to mea sure when a debtor can not s ervice his deb t ; no premium can compensate tha t r i s k . I n fac t , in the c a s e of ma j or U . S . and Canadian corpora tions wh ich have undergone debt res tructurings in recent year s , the intere st ra te cha rged by bank s du ring the reorgan i z a t i on per iod has o f ten been b e l ow ma rket ra te s . The se corpora t ions have been repre sented by f inanc ial adv i s e r s independent of the bank s : S o f a r mo s t ma j or L a t i n Amer ican debtors have not wanted to an tagon i z e l ender s b y h i r ing independent f inanc ia l adv i s er s , a l th ough th e h i s tory o f th e ref inanc ing s so fa r shows tha t there migh t have been mer i t in an ou t s ide opinion on rea l i st i c debt- serv i c i ng po s s ib i l i t i e s . The other uncerta inty concerns the trend of U . S . short- term intere s t rate s , wh ich are the preponderant inf luence on rat e s in the E u rocurrency ma rket . A l r eady in the second qua rter o f 1 9 8 2 , the interbank Eurodo l lar
156 rate wa s up b y about 1 percent , add i ng o n a n annual ba s i s US $ 2 . 2 bi l l ion t o Latin American intere s t payments abroad . If short-term u . s . rates were to go up anothe r point or so in the s econd ha l f , a s s ome economi s t s predict , becau s e o f the e f fe ct s o f the u . s . budget def i c i t , the total increase i n debt- s ervi c ing co st for Latin America s ince the spring o f 1 9 8 3 would have been close to US $ 5 b i l l ion on an annual ba s i s , a very s ign i f icant sum at a t ime o f sharply reduced c ap i t a l inf lows . A third - po s i t ive deve lopment , wh ich f lows from the decl ine in impor t s and i n intere s t paymen t s , is the sharp reduction in the current account d e f i c i t o f the region , name ly the requi rement for external f inance that rema in s after current i n f l ows , princ i p a l l y expor t s o f goods and service s , have been u s ed to pay for current out f l ows , ma inly imports and intere s t . The very nature o f develop ing economi e s , wh ich need to impo rt capital in order to supp l ement the i r inadequate dome s t i c saving s , mean s that they have a current account d e f i c i t and thu s a need to borrow abroad and attract i nve s tment cap ita l . However , Latin Ame r i c a and the Car ibbean , l argely a s a r es ul t of the drop in income s a nd t h e sharp dec l ine in impo rts of the l a s t year , has gr e a t ly reduced i t s n ee d for external f i nance . The current account de f ic i t o f the region has f a l l en f rom US $ 3 8 b i l l ion i n 1 9 8 1 to US $ 3 3 b i l l ion in 1 9 8 2 , and i s expe cted to fall to about US $ 1 8 to 2 0 b i l l ion i n 1 9 8 3 , a s long a s international intere s t rates rema i n at midyear leve l s . If intere s t rates we re to r i s e aga i n , t h e f inanc i ng g a p wou ld beg in t o r i s e aga i n . A return to the inter e s t rates preva i l ing in mid- 1 9 8 2 , for examp l e- - even though it i s h ighly improbab l e--wou ld entirely wipe out the improvement in the current account de f i c i t o f the l a s t year . The uncerta int i e s about how Latin American and Caribbean count r i e s w i l l f inance thems elves over the next coup l e of years are undoubtedly a cru c i a l concern o f both l ender s and debto r s . Even though the f inancing gap has been sharply cut , the ava i l ab i l i ty o f externa l re source s has decl ined even more . The future trend o f commercial bank l ending i s uncerta in and a part of the new loans that have accompanied recent reschedul ing s of commerc i al bank debt is b e ing used to f inance the higher charge s above the base intere s t rate . Foreign direct inve s tment , wh ich unt i l recently covered about one- f i fth to one-quarter o f the current ac count de f i c i t , ha s s lumped in the wake o f the rece s s ion both in the i ndu stri a l i zed countries and now in Latin Amer ica . The return o f f l ight cap i t a l that l e f t a number of ma j o r Latin American economi e s in recent year s could be important , but wi l l take t ime . F i na l ly , a s we wi l l d i sc u s s later , the mu l t i l ateral deve lopment i n s t itutions - - such a s the Wor ld B ank and the I nterAmerican Deve lop ment Bank- - f ace resource constraint s . I dent i fy ing sou r c e s o f n e t c a p i t a l inf lows- - inc luding about US $ 8 b i l l ion o f
157 commerc i a l bank l ending , approximately US $ 2 b i l l ion o f net d i sbursement f rom the Mu l t i lateral Deve lopment Bank , and an equiva lent amount of supp l i e r cred i t s previou s l y negot iated- - 1 eave s a s igni f icant f i nancing gap , l a rger than what can be covered f rom pr ivate inves tment . Thu s , even though the overa l l f i nanc ing gap has decl ined , the probl em of covering it ha s become far more acute . I s i t reasonab l e to expect countries to work th e i r way o u t o f the i r pre sent economic a n d f inanc i a l pred ica ment ? I n recent months variou s pro j ections 9 have been con structed to show how and whether ma j or debto r s can work the i r way out o f the i r pre s ent probl ems . Mo st of the se pro j ections show t h a t i f t h e indust r ia l i z ed economie s grow at a reasonab l e rate ( say 3 percent per year ) , if intere st rates do not incre a s e beyond mid- 1 9 8 3 l eve l s (T o percent for the s ix-month Eurodo l l ar inter bank rate ) , and , mo st e specia l ly , i f a modi cum o f capital inf lows can continue , then mo st o f�he ma j or debtors cou l d resume economic growth and service the ir externa l debt more or l e s s comfortably by about 1 9 8 6 . But there are many uncerta int i e s . Mo st pro j ections highl ight the very l imited room to maneuver in the next two or three years . The rel ationship between l enders and debtors has c reated an unu sual degree o f interdependence . Thi s is particularly the c a s e with commercial bank s , wh ich have provided the bul k of external capital to Latin America in the l a s t decade . The r e lat i onship is a l i ttle l ike that I f one j ump s o f f suddenly , of two peop l e on a see- saw : both are l ikely to get hurt . Very large l o s s e s cou ld a f fect ma j or international commercial bank s i f countries are unab l e to work the i r way out o f troub l e . The prob l em do e s
not only concern u . s .
bank s ,
but a l s o bank s
in
Europe , Canada , and Japan as we l l as part of the debt to suppl i e rs . However , g iven the la rge share of the Latin American debts he ld by U . S . bank s ( about 45 percent o f t h e debt t o commerc i a l bank s ) , it i s l ikely that l eader ship on the i s sue w i l l have to come f rom the U . S . s ide . S i z abl e reduc tions in net income cou ld a f fect some large bank s i f s ig n i f icant loan lo ss res erves ha d to be set a s ide f o r ma j or Latin American deb t s , in the event that intere s t payme nts lagged sub stant i a l ly behind schedu l e . Bank s have a l ready set up such re s erves for some of the debts owed by the Latin Ame r i can pr ivate secto r . For probl ems to be worked ou t , there i s a c l ear need to change the perception o f hope l e s s ne s s that permeates the intern at iona l c l imate at present , part icularly as seen by debtor countr i e s . T h i s pe s s imi sm cou ld encourage some debtors to l eave the hard road of f inanc i a l di scipl ine a n d ad j u s tment a n d be tempted b y appa rently e a s i e r solutions such a s a " carte l " o f debtor s . Export more ? Import quota s on yarn , orange j u ice , spec i a l ty steel s , wh ich are j u s t three recent examp l e s , are con veying the wrong me s s age . More o f f i c i a l fund s ? The
158 quota increa s e for the IMF i s hav ing a n uph i l l battle in the u . s . Congre s s . Economic recovery in the indu s t r i a l i z ed wor l d ? H i gh and r i s ing r e a l intere s t r a t e s cou ld s l ow down the recovery . A s l enders and borrower s l ook for solution s , they f ind c lo s ed doo r s and bl ocked path s . Another important need i s to ma intain an atmo sphere o f c a lm . Each new confrontation c reate s an air o f c r i s i s that make s it d i f f i cu l t t o ma intain a f l ow o f l ending f rom banks l e s s invo lved internationa l l y . Sma l l er and so-ca l led regional bank s , wh ich account for about 15 per cent o f the internat ional commercial bank debt out s t and ing of Latin Amer ica , undoubtedly want to get out o f the se loans , a trend that wou ld put great pre s sure on the larger bank s to increa se the i r expo sure even more than pl anned . So far a con f rontation has been avoided , but any rumo r s o f an impend ing c r i s i s i n a particular country obviously make the t a sk more d i f f i cult . The sens i t iv i ty o f individu a l countr i e s ' probl ems i s i l l u strated by the c a s e o f Bra z i l , which faces a fairly dra s t i c ad j u s tment prog ram with the IMF . As o f thi s wri t i ng , i t appears that the IMF ha s re s tored the ab i l i ty o f B ra z i l to draw under the f a c i l ity agreed earl ier i n t h e yea r , a f te r B ra z i l imp l emented a new , tough set o f ant i - i n f l ationary mea sure s ma inly t o keep wage ad j u s t ments be l ow i n f l ation . Thi s has avo i ded , for the t ime be ing , a ma j or prob l em for B ra z i l ' s lender s , who se d i s bur s ements on a US $ 4 . 4 b i l l ion l o a n a r e t i e d t o di sburse ments on the IMF f ac i l i ty . However , the dearth of add i t iona l capital i n f l ows continu e s to mak e i t d i f f i cu l t f o r Braz i l t o service i ntere s t on t ime . As prob l ems are a i red pub l i c l y , inc luding the i n i t i a l we l l -pub l i c i zed requ irement by the Bank for I nternat ional Settlements that B ra z i l had to repay an e a r l i e r emergency loan on t ime , the task o f avo iding con f rontations and po s s ib l e c r i s e s become s more d i f f icu l t . S T I PULAT I ONS FOR DEBTORS AND LENDERS unt i l now , market mechani sms have hand l ed the probl ems of debtor countr i e s a s they aro s e . But i t i s not c l ear whether such me chani sms can cont inue t o be e f f ect ive by thems e lve s , without leadership by the govern ments of the ma j or indu st r i a l i z ed countries . For the On the one l ending bank s , a serious d i l emma a r i s e s : hand , i t is qu ite c l ear that they cannot cont inue lending at anyth ing l ike the breakneck pace of 1 9 7 9 - 1 9 8 1 ; on th e other hand , i f net l ending doe s not expand moderately and lending do e s not continu e , it wi l l be very d i f f icult for l ende r s to c o l l ect inter e s t on pa st loans . For deb tor governments , mos t of wh ich c l early recogn i z e the need for tough b e l t - t i ghtening mea su re s , the prob l em is that au s te r i ty may be too c o s t l y in soc i a l and po l i t i c a l terms and that a gradual approach may not be fea s ib l e becau s e
159 o f the lack o f externa l f i nance and the delay in the recovery o f export earning s . Rathe r than d i scu s s ing whether we are o r are not in a c r i s i s , or whe ther i t i s an i s su e o f i n s o lvency ( that the borrower s can " never " pay ) o r i l l iqu idity ( that they cannot pay now) , which are que st i on s o f degree and def i n i ti o n , it i s more u s e fu l to ou t l ine the preconditions for both the debto r s and the l enders to work the i r way out of the probl em . F ir s t , it i s u se fu l to d i s t ingui sh between the immediate future and the l onger term . The coming year i s probably the c r i t i c a l one , s ince export income o f the debtors wi l l s ti l l lag for a t ime unt i l an international recovery i s in fu l l swing , wh i l e large intere s t payment s wi l l cont inue at a time o f very l imited capital in f l ows . Th i s i s not to say that there i s not a longer- term probl em , a s the ref i nanc ings b e ing a rranged now s tart becoming due i n three or four years . Moreover , th ere are h i storic reason s , summar i z ed late r , which sugge s t that the pattern o f development o f Latin Amer ica cannot ea s i ly be changed . Neverthe l e s s , f rom the prac t i c a l po int o f view o f deal ing wi th t h e mo s t urgent prob l ems f ir s t , it is important to ana l y z e po s s ib l e action in terms of what i s po l i t i c a l l y feasible now , not a year or two f rom now . Anyone f ami l iar with the mood of par l i amen t s in ma j or indu s trial i z ed countr i e s , e spec i a l ly the U . S . C ong re s s , ha s to recogn i z e that there i s no room for qu i ck b ig s cheme solutions whe re taxpaye r s wou ld directly or in directly have to put up sub s ta nt i a l new funds . S e cond , no s i ng l e party can carry the who l e load o f ad j u s tment . Any arrangements mu st i nvolve some e f fort on the part of both the lenders and the borrowe r s . Th i s ha s been the c a s e so fa r , a l though the degree of e f fort by each s ide-- name 1 y continu i ng some po s i tive net f l ow o f l ending by th e bank s , a n d f i nanc ial d i s c ipl ine and au ster ity on the part of the debtor s- - i s viewed I t i s doubtful i f ser ious suspiciously by the o the r . prob l ems can be avo ided i n the future without some inter vention by the governments o f the ma in lenders to help s t imu late a larger capital inf l ow . Third , any way out thu s h a s to empha s i z e the restoration o f capital i n f l ows . To be sure , the s e f l ows cannot over t ime rely only on commerc i a l bank fund s . A better balance than in the l a s t dec ade h a s to be found between inve s tment capital and loan s . Obviou s l y direct and port f o l i o inv e s tment wil l tak e some time to revive . F ina l ly , it i s e s sential to remove the obstac l e s to the reviva l of export growth . The extent to wh ich the growth of protection i sm i n recent years has a f fected Latin American economie s i s not c l ea r . Countr i e s in South and East Asia have been a f f ected a s much , i f not mo re . But it i s c l ear that spec i a l intere s t s in North Amer i c a , Europe , and Japan , for wha t are l o c a l l y very understandab l e reason s , bu t wh i ch a f fect only a relatively
160 sma l l percentage o f labor forc e s and o f commerce , are ga i n ing s trength a s the e f fe ct o f the rec e s s ion gets tran s l ated , after a lag , i nto political proce s s e s . Government s are applying remedi e s that may no l onger be needed by the t ime they are impl emented but wh ich could have proport ionately s i gn i f ic ant e f f e c t s in the abi l i ty of debtors to s e l l abroad and earn fore ign exchang e . I n l ook ing at the immediate future , th e mo s t urgent mea sur e s are to keep up an i n f l ow of capita l , to reduce the burden o f interest payment s , and to s top the r i s e of protec t i o n i sm . The ro le o f the governments in the ma j or indu s t r i a l i z ed count r i e s i s c ruc i a l in a l l th ree action s , al though the extent to which governments are po l i t i c a l l y ab l e to commit themse lve s , hope fu lly in a concerted approach , is qu ite l imi ted . PROPOSED SOLUTI ON S T h e ab i l i ty o f t h e international f inanc i a l f i re br igade , the I nternationa l Monetary Fund , to funct ion i s c ruc ia l . I t i s e s sential to put in place a s soon a s po s s ib l e th e increase in the resourc e s ( pa id- in quo tas o f countri e s ) o f the IMF . S everal po ints should b e made . F i r s t , ava ilabl e IMF resourc e s are nearly dep l eted . If any large i ndu s t r ia l i z ed country were t o need spec ia l a s s i stance f rom the Fund now , a d i s t inct po s s ib i l i ty , the re sourc e s o f the Fund wou l d be exhau s ted . S econd , even the quota increase contemp la ted , o f about 5 0 percent , s imp ly catches up with pa st wor l d inf lation and wou l d not contribute s ign i f icant new real re sourc e s . Th i rd , the Fund i s not a s some po l i tic ians appear to th ink a g ive away to develop ing countri e s . It is a currency poo l , wh i ch mak e s fore ign exchange ava i l ab l e to al l member countrie s - - the Uni ted S tates h a s been a borrower in the past- -under rather strict cond i t ion s , in order to rep l en i sh th e foreign-exchange res erves of countr i e s I t i s not a pro f ac i ng balance-of -payment s prob l ems . F ina l ly , s ince the quota vider o f long- term capital . increa se wi l l probably take at least unt i l mid- l 9 8 4 to be put into p l ac e , there is st i l l a need for a temporary spec i a l fac i l ity , f inanced by the ex i s t ing General Ag reement to Borrow o r some o ther form o f cooperation among capital surpl u s count r i e s . l O I f the quota increa s e o f th e IMF cannot be approved a s propo sed , even if the approval tak e s many month s , such a negat ive wou l d b e a c l ear s ignal , both to debto r s and to l ende r s , that the ma j or countri e s of the wor l d do not cons ider the present prob l em s important enough . S ome debtors wou l d be tempted to defaul t , and l ende r s wou l d then w i n d up knock ing a t the doors o f th e i r c entral bank s f o r wha t cou ld then amount t o a costly b a i l - out . It is unfo rtunate that the increa s e in the resourc e s of the I MF , wh ich wa s needed a nyway , ha s coinc ided in t ime with a
161 po l i t i c a l debate , espec i a l ly in the United States , on whether th e debt prob l em shou ld b e l a id at the door of the l ender s or the debto r s , both o f wh ich are seen a s v i l l ai n s . A second avenue that shoul d b e exp lored quick l y i s how t o s t imu l a te more lending by the Wor l d Bank and the InterAmerican Development Bank . Unfortunately , the net resource t ran s fer--di sbur s ements l e s s payment s of princ ipal and intere st--of the Wor l d B ank to Latin America in the f i sc a l year ended in June wa s only about U S $ 5 0 0 mi l l ion , a relat ively mode s t sum , and has s tayed at approximately that level s inc e 1 9 8 0 . Even though d i sbursemen t s rose in f i sc a l 1 9 8 3 to U S $ 2 . 3 mil l ion , becau se o f a larger proportion of s ector support loans , amort i z at ion and intere s t absorbed the who l e o f the in crease . The InterAmerican Development Bank , wh ich h a s a l ower c o s t mix o f funds because o f the conc e s s ional Fund for Spec i a l Operations supported ma inly by the United S tate s , h a s been ab l e to raise the net tra n s f e r moderately f rom about U S $ 6 0 0 mil l ion to US $ 8 0 0 mi l l ion over the s ame I n' order to inc re a s e World Bank l ending , whi ch period . i s t ied to pro j ec t s , many of wh ich have e ither been su spended o r been sharply s l owed down in the last two yea r s , there i s a need for greater resources and for more f l ex i b l e l ending po l ic i e s . The United S tates ha s b a s i c a l l y opposed such po l ic i e s , which woul d empha s i z e sector support or " s tructural ad j us tment" l oa ns , a l though i t has recently toned down its oppo s i t ion somewhat . The entry o f Ch ina into the Bank , and the uncerta inty of future contributions o f indu s t r ia l i z ed countr i e s , par t i cu l a r l y the United State s , to i ts conc e s s ional window- - th e I nternational Devel opment As soc iation--has drawn Bank funds away f rom po s s ib l e loans to Latin American bo rrowe r s . Latin Ame r i can count r i e s are thu s g iving spec i a l support to the I nterAmerican D evelopment Bank . With i t s recently approved increa s e in capita l , the regional bank can now s i gn i f icantly expand i t s activi t i e s , a l though some redirect ion o f l ending po l i c i e s may be needed f o r the di f f icul t two or three years ahead . I n both th e c a s e o f th e World B ank and the I nter American Deve lopment Bank , a qu ick- fix solution to future funding ha s been promoted by tho s e who recommend a doub l ing o f the so-c a l l ed gear ing ratio , wh ich i s the ratio o f capital contributions by the ma j or c redit worthy members o f the i n s t i tut ion ( ba s i c a l l y the OECD countr i e s ) to the outs tanding borrowing s . The solution envi saged i s thu s s imply to borrow mo re without providing more guarantee capita l . Thi s i s not a worthwh i l e cours e . The fact that depo s it- tak ing comme r cia l banks have a ratio o f paid- i n capital to a s se t s in the United States o f about 5 to 6 percent i s not rel evant to a long-term devel opment inst itu t i on that ha s to borrow the bu lk o f i t s re sourc e s in the capital marke t s . Bondho lder s , who rightly view the ob l igations o f both i n s t itu t ions ( and
162 th e Asian Deve lopment Bank a s wel l ) a s guaranteed by the United S tate s , Japan , Germa ny , e tc . , wou l d now begin to l ook instead at the i r loans to deve l oping countrie s . The r e su l t ing downgrading of the bonded debt o f the Wor l d Bank a n d th e reg ional mul t i l atera l development bank s would be c o s t l y to borrowe r s and wou ld end up be ing an i rreve r s i b l e s t ep . I t i s e a s i e r to increa s e a s soon as po s s ib l e the capital of the World Bank - - and r e s tore fund s to the Fund for Spe c i a l Operation s o f the I nte r-Amer ican Devel opment Bank - - particularly s inc e the capital increa s e s requ ire l it t l e c a sh . The recent I nterAmerican D eve lopment B ank capital increa s e involved only 4 . 5 percent in c a s h . In e s senc e , t h e development bank s are thu s a l ready l ik e i n surance or guarantee scheme s organ i z ed t o pa s s th rough re l a t ively low- c o s t funds to the ir borrower s . It is probabl y e a s i e r t o increa se the i r cal lab l e capital , o r " guarantee " capab i l ity , than to e s tab l i sh a who l e new guarantee scheme , a l though that idea shou ld not be d i s carded i f i t becomes ab solutely neces sary to s t imu l ate a ne t f l ow o f commerc i a l l ending . New lending by the mu l t i l ateral agenc ie s , a s long a s it can b e targeted a t the r e a l prob lems faced b y coun t r i e s , is preferab l e to mor e empha s i s on cof inanc ing with commerc ial bank s . I n the pre sent marke t cof inancing with commerc i a l bank s wi l l not work s imp ly on the ba s i s of c ro s s -defaul t c l au s e s , such a s the Wor l d Bank and I nter American Devel opment Bank have provided between the i r l o a n s and t h e rel ated comme r ci a l bank loan s . T h e who l e o f international bank l ending i s cr o s s-defau l ted ; namely a de f au l t on one l oan can trigger a legal default on all the debt and guarantees o f a part icular bo rrower , yet that has not prevented payment delays and de facto I n the present market , only a guarantee wi l l def au l t s . work , but i n that c a s e both th e international i n s t i tutions and the c ount r i e s are better off wi th stra ight lending at the l e s s - than-commerc i a l rates tha t the mu l t i lateral deve lopment bank s c an provide . Third , it i s urgent to reduce the intere st burden , bu t the prob l em i s comp l ex . Much depends o f cou r s e on th e cours e of internat ional intere s t rates themsel ve s , wh ich are c l o sely l inked with U . S . rates and di f f i cu l t t o predic t . B u t even i f b a s i c rates rema in at the i r mid1 9 8 3 l evel , it is c l ear tha t the intere s t burden is very heavy indeed . Th i s h a s s t imul a ted a numb er o f pro posa l s 1 1 to refund the debt o f some ( or a l l ) devel oping country debtors into long-term obl igations at l e s s than market interest rates . Unfortunate l y , mo s t o f the scheme s are unl ike l y to be f ea s ib l e po l i t i c a l l y and wou l d probab ly a l s o have negative s ide e f fects , pr inc ipa l ly in dra s t i c a l l y redu c i ng new commerc i a l bank l end ing for a long t ime . I t i s qu ite unl ike ly that any of th e scheme s so far advanced to reduce the load o f debt cou ld b e imp l emented
163 in the next yea r , since they a l l require , in vary ing degree s , the mu l t i lateral approva l of governmen t s . Opin ion i n cred i tor count r i e s i s genera l l y not sympa thetic to such scheme s . P rogre s s ive s look upon the s e idea s as a b a i l - ou t o f imprudent l ender s , and con s e rva tives a s a ba i l -out o f irre spon s ib l e debtor government s . Notwi th stand i ng the need to s tudy and def ine po s s ib l e genera l arrangements for the medium term , remed i e s and pa l l i a t ives are needed now rather than later s i n c e the coming year is probably the mos t c r i t ical one . Th e scheme s , in th e improbab le event that they were economic a l l y and po l i t i c a l l y f ea s ib l e , a l s o run into the probl em that they wou ld probably stop further bank l end ing for a very l ong t ime . The charge aga inst bank earn ing s wou ld be too l a rg e b ecau s e the loans cou l d not be recyc led except at very l a rge d i scount s . Moreover , the idea that o f f ic i a l i n s t i tutions , such as the IMF , wh ich are having a hard t ime ra i s ing add i t iona l resources for their e s t ab l i shed opera t ion s , shou ld bear th i s add i t iona l burden s e ems imprac t i c a l . 1 2 Y e t the recyc l ing scheme s do mak e the important po int tha t the debt- servic e burden i s too h igh . Perhaps it i s po s s ib l e to comb ine , in a contingency plan that woul d be a c t ivated in an emergenc y , a temporary reduc tion o f the intere s t burden without damag ing the prospec t s for continued l ending on a moderate s c a l e . For the bank s , many of wh ich wou ld obviou s ly re s i s t such a move s trong l y , i t wou � d at l e a s t have the advantage of redu c i ng the increase in the i r lend ing , s inc e at pre sent , before Lati n Ame rican export growth revive s and new sourc e s of c ap i t a l i n f lows can b e devel oped , an addi tional do l l ar o f intere s t service by th e bor rower s i s f inanced ( i n s impl i f ied terms ) b y a n add it ional do l l a r of bank l ending a n d expo sure . I t may be better , at lea s t during th e immed iate recovery period , for l ende r s t o s ac r i f ice abou t f i fty to s ixty cents o f net a f ter- tax earn i ng s wh ich a do l la r o f added intere s t income pro vide s , in exchange fo r not h aving to put up an extra do l l a r of lending . I t i s worth cons ider ing whether the bank s might not be better o f f wo rk i ng out a temporary arrang ement on interest cha rge s than having to come up with l a s t-minute f inanc i ng packag e s in the mid st of a c r i s i s . I stre s s that such an arrangement wou ld have t o be temporary and could not be done b e low the ma rket co s t s o f fund s , i f the central obj ective o f keeping s ome f l ow o f l ending i s t o be ma intained . Under s evera l o f the re fund ing scheme s proposed so f ar , th e intere st reduc tion woul d be b el ow the c o s t of funds to the commerc i a l bank lende r s . Let u s , for the purpo se of argument , a s sume that th e new rate under the s e scheme s were set at 9 percent . The saving s to the L ati n America debtors in intere s t per yea r , at today ' s cost o f money , wou ld be about U 8 $ 7 b i l l ion . Tha t saving , howeve r , wou l d greatly if not i rreparab l y damage
164 the chances o f f inanc i ng the rema inder o f th e current account def ic i t o f Latin America . A mo re mode st propo sa l to reduce interest charge s , fo r examp l e , t o no mo re than 1 percent over the London interbank rate , inc lud ing a l l other charge s , f o r a per iod o f about two yea r s - -unti l wor l d recovery beg ins to pu l l up Latin America fore ign exchange earning s--wou ld s t i l l save debtor s a t present rates about US $ 4 . 5 b i l l ion annua l ly without damag ing to the s ame ex tent the chance s for new l ending . I t i s unl ikely that bank l enders wou l d by thems e lves acc ept such a scheme , even if it wer e propos ed on a contingent b a s i s . There wou ld no doubt have to be some government persua s ion . Given the t ime con straint s , direc t per sua s ion , a s ha s occurred in t h e recent r e f inanc ing s , may b e better than a l a rge interna tional conf erenc e , wh ich I f interest rates look at a l l requ i re s much prepa ration . a s i f they a r e again o n th e r i se , cons ideration o f some sort of scheme to reduce the intere st burden at l e a s t temporarily wil l become urgent . Otherwi se , a s export earning s f a i l ed to recover in the wake o f th e nega t ive e f f ec ts of h igher inte rest rates on recovery in the indu stria l i z ed c ountr i e s , l ende r s would f ind thems elves f ac ing the d i l emma o f hav ing to lend more in order to get pa id th e h igh er interest due . A related point i s whether a quid pro quo for the reduc tion in intere st charg e s might be n ec e s sary , such a s some f orm o f med ium- term international o r g overnment guarantee for net new l ending . Even if th i s were po l i t i c a l ly f ea s ib l e , howeve r , it would take t ime to put such an arrangement in p lac e . P e rhaps the unders tanding that a guarantee woul d , as a l a s t resul t , b e g iven ser iou s con s ideration by governments wou l d be enough stimulus to arrange a contingent scheme to reduce interest c o s t s in the immed iate futur e . That and the continua t ion o f net capital i n f l ows are th e only avenues of action open for th e short term , together with th e continuat ion of di f f icult au sterity mea sures in the borrowing coun trie s . Med ium-Term S o lutions For the med ium term , the proper empha s i s shou l d be to continue to f i nd ways to stimu late new cap i ta l f l ows , e spec i a l l y in the immediate yea r s ahead . To do that within the short time ava i l ab l e is extreme ly d i f f icu l t . No one sch eme or source o f f l ows wi l l do . Compl ica ted new arrangements are unl ikely to b e f ea s ibl e . Nor can new f l ows s imply b e bl ank checks to underwr ite a reviva l o f state enterpr i s e def i c i t spend ing in borrowing coun trie s .
165 Long-T erm So lut ion s I t i s c lear that the po l i c i e s that cou l d y i e l d re sult s soon a r e d i f f ic u l t to enac t . Moreover , something i s needed on each front , e spec i a l l y on rep l e n i s h ing the resourc e s o f the IMF and on lower ing the intere st burden without j eopard i z ing new f l ows , a mo s t d i f f icul t task . I n order to put a l l the p i e ce s o f the package together , some f o rm o f concerted act ion by th e governments o f the ma j or money and capital markets of the wor l d is needed . O f cour se , each month tha t p a s s e s without a ma j or c r i s i s reinforces the fe e l ing i n some quarters that the wo rst i s over and that even tu a l l y the prob l ems wi l l evaporate in the wake of world recovery . Such a v i ew gives an unea sy comfort but is not c on s i s tent with the probl ems as s een f rom th e debtor countr i e s , which face enormous prob l ems . So far , the temptation to stray f rom the path o f IMF - suppo rted auster ity h a s b e e n avo ided b y t h e govern ment s of Latin America . But the present equ i l ibrium i s a tenuou s one . I t i s quite conceivab l e that the government ec onomic teams that have f o l l owed such po l i c i e s could be j etti soned in the face o f strong po l i t ical oppo s i tion . The ref inanc ing s l inked to the IMF c redit fac i l it i e s wou ld then be c a l led into que stion and a period o f confu s ion cou l d we l l f o l l ow . At that po int some governments may b e tempted to talk a nd th ink o f a debto r s ' carte l , in the sense of a coordinated suspens ion of debt s ervic e . The idea is at pre s ent viewed by f inanc ial po l i cymakers in mo st countr i e s a s a product o f the lunatic f r inge . But if the s e o f f i c ia l s and the ir pol ic ie s do not rec e ive enough external support now , there is the r i sk that the l ender s migh t face a very d i f f erent c a s t o f character s . Tha t i s why it i s important to focus in a more concerted f a sh ion on po s s ib le solutions wh i l e the prob l em appears to be i n remi s s ion . B e s ide s the areas a l ready mentioned , there are othe r s that c o u l d be o f great importance to economic recovery , al though not immediately . The longer hor i zon doe s not mean that the neces sary po l i c i e s should not be put in place now . Two important areas are private inve stment and credit insurance . Pr ivate inve s tment is not a promi s ing source for the next year or two , but could be o f great importance once economie s revive . I n the early 1 9 6 0 s , pr ivate direct inve stment provided about 40 per cent o f the net capital i n f l ows into Latin America , I n recent yea r s , particularly into B ra z i l and Mexico . the proportion has f a l len to 2 0 to 2 5 percent . In 1 9 8 1- 8 2 , net f l ows were about US $ 6 to 7 b i l l ion annual ly , a sum that ha s f a l len in 1 9 8 3 . I t i s e s sential to e s t ab l i sh th e preconditions now for an inve stment re covery later . Mex ico ha s a l ready begun to take mea sure s , for examp l e by redu c ing in prac t i ce th e requi rements for dome s t i c owne r ship . Peru i s break ing away from the Andean Group ' s i l l - conce ived restrictions on fore i gn
166 direct indu s t r i a l inve stment . Mu l t i l ateral inve stment guarantee s cheme s , wh ich have been under study for many years at the Wor ld Bank and e l sewhere , deserve another look . O f equal or even greater importance i s pr ivate dome s t i c inve s tment , s ince its reviva l would pu l l back into L a t i n Amer ican count r i e s part o f the large sums wh ich have f l ed in 1 9 8 1 - 1 9 8 3 . For examp l e , perhaps U S $ 2 0 to 25 b i l l ion i s e s t imated to have left Mex ico and venezue l a , the two mo st notab l e c a s e s , in that period . Whi l e some o f what has gone out wi l l s tay out , more rea l i s ti c exchang e rate s , po l i t i c a l stab i l i ty , and a revival o f dome s t i c markets wou l d , in t ime , begin to attract some o f the f l ight capita l . Unrecorded f l ows o f th i s type cou l d make a big d i f f erence once the beginn ing s o f improvement are v i s ib l e . S ince i t i s important to keep some bank l ending going , albe i t on a more contro l led s c a l e , several scheme s have been advanced under wh ich a mu l t i l ateral credit in surance f ac i l ity could be e s tabl i shed , to be run on an agency b a s i s by the Wor l d Bank o r the IMF , or a combina tion o f the two . The fac i l i ty wou l d cover add i t iona l S etting up a mu l t i l ateral arrangement i s l ending . probab ly des irable but po l it i c a l ly d i f f i cu l t and t ime con suming . In the meant ime , individua l export credit agenc i e s , work ing with the Wo r l d Bank and the I nter American Deve lopment Bank , cou ld mo re quickly get them F or s e lves organ i z ed . 1 3 The resou r ce s are th ere : examp l e , a s o f M a y 1 9 8 3 , t h e U . S . Export-Import Bank had bare ly committed one- tenth of its autho r i z ed l ending for f i s c a l 1 9 8 3 , l argely becau se o f the cutback s in deve lop ment pro j ects around the wor ld . Commitments for the fu l l f i sc a l year are who l ly to be we l l below autho r i za tion s . O f cour se , chang e s in l eg i s l ation would in some c a s e s be requ ired , but they wou ld probab ly be e a s i e r to obta in than for a mu l t i lateral scheme and cou ld be set in motion wh i l e a mu l t i l atera l arrangement is des igned and evaluated . On the mu l t i l ateral f ront , the idea of an Export Devel opment Fund 1 4 has much appeal , e spec i a l ly i f it cou ld be expanded f rom l ending to deve lop ing coun tr i e s for capital good s impor t s to helping to f inanc e the export s o f th e s e countr ie s , wh ich repre sent , in genera l , tran sactions that are l i qu i d , u sual ly secure , and suitab l e for commerc ia l f inanc e . By de f init ion , the mo s t urgent task i s to conf ront the more immed iate prob l ems . There i s , however , only l imited time to put into e f f ect pol i c i e s wh ich wou ld produce r e su l t s by 1 9 8 6 - 8 7 , when the f i r st big repayments on the recent ref inanc ings are due . The s truggl e into recovery wi l l not be easy , s ince the economic prob l em in th e case o f the ma j or Latin American countr i e s i s not s imp ly a cyc l ica l one but a r i s e s in part f rom the i r h i s tor i c al stage o f deve lopment . For count r i e s such a s Argentina , B r a z i l , Mex i c o , and Vene zue l a , with relatively large internal mark e t s in compari son with th e export-
167 ori ented E a s t As ian economi e s , the th ru s t o f deve lopment has been indu s trial i z ation for dome s t i c consumption and the bu i l d ing o f infrastructure for a rapidly g rowing popu l ation . In that s e n s e , the pattern of development h a s s ome s imi l a r i t i e s with that o f the Uni ted S ta t e s a century ago , wh ich a l s o empha s i zed infrastrueture and indu stry for a growing internal market . The di f f erence i s that real inte rest rates wer e then at the h i s toric norm o f about 3 percent in real terms , whereas today , for Latin American bor rower s , the real rate on the i r commerc ial debt i s c lo s e r to 9 perc ent in real terms . Moreover , three-quarters o f th i s external commer cia l debt i s owed by the pub l ic sector . The r a i l road and steel barons o f a hundred years ago have been rep l a ced as borrowe r s by i ne f f ic ient state enterpr i s e s , and the widows and orphans o f the B r i t i sh Empire a s l ender s by large anq powerful bank s . The bal ance of negotiating power ha s therefore s ig n i f icantly changed . Anoth e r important f eature h a s been tha t the ma j or Latin Ame rican economi e s have not in the l a s t three decade s been abl e to prov ide enough j ob s , particu l a r l y for t h e growing lower midd l e c l a s s , wh ich wields increas ing political powe r . P o l i t i c a l pre s sur es h ave thu s bui l t u p t o provide j ob s through the government and state enterpri s e s . S imi l a r p re s su r e s act to ma intain over valued exchange rates and intere st- rate sub s i d i e s - -wh i ch help middl e- c l a s s con sumption- - a l 1 of wh i ch tends to bu i l d up budg et d e f i c i t s , s t imu late borrowing , and hol d ba c k the growth o f export earning s . T h i s set o f poli c i e s a l so tends t o h o l d back empl oyment , part icularly i n manufactu ring , where advanced soc i a l leg i s l ation f o r a minority o f the l abor force tend s to pu sh up wage c o s t s t o l eve l s that are uncompetit ive internationa l l y . Such po l ic i e s under l i e , wi th periodic chang e s in emph a s i s , much o f Latin America ' s rapid economi c growth in the postwar per iod and wi l l not change qu i ckly . There is therefore a long - term a spect to the debt prob l em beyond the admi ttedly mor e p re s s ing cyc l ic a l prob l em . CONCLUS I ONS A c l ean and s imp l e , conceptu a l l y sat i s fying scheme to " solve" the debt probl em obviou s l y h a s inte l l ectual appeal , wh i l e the pre s ent muddl ing through i s fraught with dange r . For the t ime be ing , however , po l it i c a l rea l i t ie s , espec ial ly in t h e U n i t e d S tate s , make i t very di f f ic u l t to env i s age an a l l -encompa s s ing scheme . The re i s f ar more po l i t ical concern within the united States on Central Amer ica than on the debt que s t ion , a l though th e l ong-term e f f e c t s of the latter cou l d turn out to be very s e r i ou s . A s long as noth ing exp lode s , there wi l l b e l it t l e intere s t i n setting u p contingency mechan i sms . Only a real c r i s i s , wh ich hope f u l ly w i l l not occur but
168 i s unfortunately a d i s tinct po s s ibi l ity , wi l l powe r fu l l y concentrate t h e minds o f pol icymak ers other than the centra l bankers and Trea sury o f f ic i a l s who have a l r eady I n the meant ime , everyone woul d be better been invo l ved . o f f if lender s , autho r i t i e s in the lender s ' countr i e s , and ma j or borrower s work together in setting up a con certed program to help ex i s t ing o f f ic i a l inst itutions to do more and to e s tabl i sh contingency plans to l ower the intere s t burden of commerc i a l debt , if nec e s sary , in the event that the debt burden c annot be managed . Both l ender s and debto r s face a c r i t i c a l period . Wh i l e there are indeed some chanc e s that the prob l em w i l l gradu a l l y be overcome b y wor ld economic recovery , the r i sk of ma j or c r i s e s ahead are h igh indeed . It is there fore vital to antic ipate the s e prob l ems in a con c erted fashion , we l l ahead o f t ime , rather than run the risk of fac i ng them a t the very l a s t minute . NOTES 1 . The art i c l e that appears in th i s chapter wa s in I t i s reprinted the F a l l 1 9 8 3 i s sue of Fore ign A f f a i r s . by permi s s ion o f Fore ign A f f a i r s , F a l l 1 9 8 3 . Copyr ight 1 9 8 3 by the Counc i l on Foreign Relation s , I n c . The art i c l e wa s wr itten some month s earl i e r , f o l l owing a f i r s t art i c l e on the s ame sub j ect pub l i shed in the same j ournal in the Winter 1 9 8 2 - 1 9 8 3 i s su e . Foreign A f f a i r s has g iven permi s s ion for t h e reproduc tion o f t h e paper here . I am indebted to E l i z abeth K . Rabitsch of F ir s t B o s ton for help w i t h background for t h e art ic l e . The views expre s s ed are per sona l . 2. S e e , for examp l e , W i l l i am C l ine , I nternat ional D ebt and the S tab i l i ty o f the Wor l d Economy , Wa shing ton , D . C . , September 1 9 8 3 . " Latin American D eb t , " my a r t i c l e i n Foreign 3. A f f a i r s , Winter 1 9 8 2 - 1 9 8 3 . 4 . Compar ing stock s to f lows can be mi s l eading . However , s ince intere st i s a proportion o f the debt out s tand ing , the compari son i s of some u s e . A l s o , it could b e a rgued tha t al l export s , including s e rvi c e s ( such as tou r i sm) , shou l d be taken into account . S ince Latin America a s a who l e has a negat ive balance on s e rvic e s , the concept o f export o f goods and serv i c e s seems an inappropriate mea sure . 5 . Bank for Interna tional S ettlement s , F i f ty-Thi rd Annual Report , B a s l e , June 1 9 8 3 , p . 1 1 6 , showed only U S$ l O O mi l l ion . However , a later e s t imate of July 1 9 8 3 showed US $ S b i l l ion o f net f l ows fo r the second ha l f of 1 9 8 2 , l arge ly for t h e rea son noted . The f i r s t quarter of 1 9 8 3 showed no net loan f lows to Latin America other than tho s e a s soc i ated with the Mex ico and B ra z i l re f inanc i ng s .
169 6. See " Latin American Debt , " pp . 3 5 4 - 3 5 7 , 3 5 9 . 7 . My e s t imate , based on a ratio o f about twe lve thou sand to f i f teen thousand j ob s per US $ l b i l l ion in s al e s . 8 . O f f ic ia l stat i s t ic s , wh ich ar e somet ime s based on narrow stati s t ical amount s in Argent ina , B r a z i l , and Mex ico , show l ower numbe r s , however . 9 . Fo r examp l e , among other s , Morgan Guaranty Tru s t , Wo r l d F inanc ial Markets , June 1 9 8 3 ; W i l l iam R . C l ine , Deve loping Country Debt Under Al ternat ive G l obal Cond itions , 1 9 8 3 - 8 6 , Wash ington , D . C . , 1 9 8 3 . The l a rg est inte rna tional bank s h a v e the ir own pro j ection s , a s ha s the Federal Reserve B ank o f New York . 10 . S e e " Latin American Debt , " pp . 3 6 2 - 3 6 3 . 1 1 . For examp l e , F e l ix Rohatyn o f L a z ard Freres ( in Bu s i ne s s Week , F ebruary 2 8 , 1 9 8 3 ) sugges ted tha t a 'ma j or portion o f credits be turned into l ong- term l ow inte r e s t bond s , under the a eg i s o f the IM� Peter Kenen o f P r inceton unive r s i ty ( N ew York T ime s , March 6 , 1 9 8 3 ) propo sed that a spec i a l agency buy the loans f rom the commerc i a l bank s at a d i scount wi th the proceeds of l ong term bond s . A propo s a l a l ong s imi lar l ine s , but u s ing the Wor l d Bank , has been made by R ichard We inert in Foreign p o l icy ( Spring 1 9 8 3 ) . Minos Z ombanak i s h a s pro po sed a Loan Gua rantee Fund i n the I MF ( The Economi st , Apr i l 3 0 , 1 9 8 3 ) . There are a number o f other intere st ing propo s a l s . For a d i s cu s s ion , s ee Yves Laul an , " A N ew 12 . Approach 'ro I nternat ional I ndebtedne s s , " the Banker , Ju ly 1 9 8 3 . 13 . See , for examp l e , Harold Lever , " The Lever P l an , " The E conomi st , July 9 - 1 5 , 1 9 8 3 . 14 . See Wi l l iam H . B o l i n and Jorge del C anto , " LDC Deb t : B eyond C r i s i s Management , " Fore ign A f f a ir s , vo l . 6 1 , no . 5 ( Summer 1 9 8 3 ) .
7
Capital Market Fi nanci ng to Developing Cou ntries Ariel Buira
The worl d economy has faced s e r ious d i f f icul t i e s in recent years . The s e have been r e l ated e s sentia l l y to the externa l debt probl ems that have a r i s en in an important number o f deve loping count r i e s , wh i ch have threatened the stab i l i ty o f the international monetary sys tem . Thus far , the system ha s been ab l e to ad j us t to the s e prob l ems in such a way as to avo id its breakdown . Neverthe l e s s , there i s an urgent need to adapt i t to the new c i rcum stanc e s preva i l ing in the wor ld economy , if the emergence o f recurrent c r i s i s is to be avo ided . I n th i s context , the search for new mechan i sms for recyl ing f inanc i a l re sourc e s f rom surp lu s to def i c it nations to ensure the appropriate supp ly o f funds for b a l ance o f payment s and development f i nance has been of particular concern . The purpo se o f th i s chapter i s to put in perspect ive the origins o f the pre s ent d i f f ic u l t i e s and the ir impl ica tions with regard to future f inanc ing for LDC s , and po s s ib l e solutions . ORIGINS OF THE CRI S I S unt i l recently , the number o f deve loping count r i e s w i t h acce s s to t h e interna tional c a p i t a l ma rkets wa s l imited and the amounts they rece ived did not repre s ent a sub s tantial proportion o f the ma rkets concerned . The rapid expan s ion of international l ending to LDC s can be a s sociated with the growth o f the Eurodo l lar markets in the 1 9 7 0 s . As late as 1 9 7 0 - 1 9 7 2 , external f inanc ing to the deve l op i ng countries wa s s t i l l l argely provided through non-debt- c reating f l ows f rom o f f i c i a l sourc e s and l ong term capita l inve s tment from pr ivate source s . Howeve r , i n the years fo l lowing the quadrup l ing o f wor l d o i l prices at the end o f 1 9 7 3 , the international cap i t a l markets experienced an exp l o s ive growth- -by some e s t imate s growing f rom U S $ 2 0 0 b i l l ion in 1 9 7 3 t o US $ 2 , 0 0 0 bi l l ion in 1 9 8 2 - -becoming the s i ng l e mo st important channel for 170
171 the tran s f e r o f saving s f rom surp lus to d e f i c i t countr i e s . A l a rge part o f the resourc e s for thi s expansion wa s provided by short-term bank depo s i t s o f the govern ments of o i l - exporting count r ie s , and the l a rge st part o f the marke t s ' a s se t s were pr ivate bank cred i t s to the governments and o f f ic i a l enti t i e s of d e f i c i t countr i e s . The f l ex i b i l i ty o f the Euromark e t s and the relative e a s e with wh ich they w e r e ab l e to tran s form short-term depo s i t s into medi um- term loans determined the ir strong growth . The i nc rea se in the demand for credit generated by the sharp r i s e in o i l p r i c e s wa s more tha n matched by an i nf l ow o f funds into the market , and unt i l mid- 1 9 7 9 spreads were genera l ly f a l l ing , intere st rates were barely po s i tive , a n d credit conditions i n the internat ional capital mark e t s tended to favor borrowe r s . As a result o f th e s e factors , t h e share o f f inancing provided b y o f f ic i a l creditor s - - bo th government a n d mu l t i l ateral devel opment f inanc e i n s t itut ion s - - to nono i l LOC s d imi n i s hed in rel at ive terms f rom some 6 7 percent in the per iod 1 9 6 7 - 1 9 7 0 to about 3 5 percent by 1 9 8 2 � l ikewi s e , pr ivate mark e t s supp l i ed approximately ha l f o f the capital needed by th e s e c ountr i e s to f inance the i r current account de f i c i t s in 1 9 8 1 - 8 2 . Bor rowing by the developing countries tended to be heav i l y conc entrated i n some individu a l nation s � a l though some forty to forty- f ive count r i e s gained acc e s s to the mark e t s , the two larg e s t borrower s , Mex ico and B ra z i l , accounted for about 4 0 percent o f a l l the funds ra i sed in 1 9 7 8 - 1 9 8 1 , and the f ive l arge st averaged 67 percent i n th e s ame per iod . I n 1 9 8 2 , Bra z i l and Mex ico together accounted for 26 percent o f the total LOC debt servi c e , and the share o f the f ive large st debtor s amounted to 4 0 percent . The role p l ayed by the interna tional f inanc ia l market s ha s to be underscored . I n bridging t he l a rge current de f ic i t s , the pr ivate markets made i t po s s ib l e for indu s t r i a l countr i e s to meet the higher wor l d o i l pric e s without a deeper a n d longer rece s s ion than they su f fered . The more advanced nono i l deve loping count r i e s were abl e to borrow heavi ly to ma intain the i r l eve l s o f inve s tment � thu s , the i r economi c growth wa s sustained a t about t h e average trend rate o f 5 percent . I n so do ing , th i s group o f c ount r i e s he lped su stain international trade and activity in the wor ld economy . Howeve r , s ince c ommerc i a l bank loans are character i z ed by h igher intere s t rates and shorter matu r i t i e s than cred i t s provided by o f f ic i a l source s o f deve lopment f i nanc e , th i s change in the s tructure o f f inance wa s to give rise to a more than proportional increase in the debt- s e rvice burden o f borrowe r s . Thi s , coup led with the sharp incre a s e in l endi ng to LOC s , wa s bound to give r i s e t o que st ions regarding the long- term viab i l ity o f thi s pattern o f f inance and o f the cred i tworthine s s o f the . deve loping countrie s . Neverthe l e s s , the conditions in
172 the interna t ional cap i ta l ma rke t s , a l ong wi th the expand ing wor l d trade , a l l owed the postponement of the prob l em . The s e f avorab le trend s we re rever s ed in 1 9 7 9 . The su s ta ined increase in wo rld ene rgy demand , together with the ex i s tence o f negat ive real intere s t rates in the internationa l capital mark e t s - -wh ich made it more pro f it ab le to keep oil in the ground , s e t the cond i t ions for a second o i l c r i s i s . Th i s l ed to a sharp deterioration in the b a l ance-of-payments po s i tion- -and thu s t he credit worth i ne s s - - o f the o i l - impo rting countrie s , e spec i a l ly tho s e among the deve loping group . Furthermore , a s a response to the inf l ationary pre s sures generated by th e o i l -price increa s e , mo st of the ma j or indu st r i a l count r i e s adopted restrictive monetary pol i c i e s a f ter late 1 9 7 9 . Thu s , the cost o f borrowing , a s ind icated by L I BOR p lu s average spread , wh ich had f luc tuated between 6 . 5 and 7 . 7 5 percent in the period 1 9 7 5 - 1 9 7 7 , averaged 13 percent i n 1 9 7 9 , nearly 18 percent in 1 9 8 1 , and around 15 percent in 1 9 8 2 . The se h i s toric a l ly h i gh rates o f intere s t , in both nominal and real terms , were to resu l t in a sharp incre a s e in the burden of debt- service payments of the devel oping coun trie s . S ince 1 9 8 0 , the tightening o f credit conditions h a s a l so b e e n re f l ec ted i n a widening o f spreads a n d a greater r i sk d i f f erentiation among borrowe r s . Matu r i t i e s on new borrowing , particu larly for the ma j o r borrowers , were shortened . Thu s , the ratio o f short- term to total debt for the g roup of nono i l deve loping countr i e s rose f rom 1 5 percent i n 1 9 7 8 t o 1 8 percent i n 1 9 8 2 ; for the four large s t debto r s , such ratio inc reased f rom 16 percent in 1 9 7 8 to more than 25 percent by 1 9 8 2 . The restrictive stance o f th e monetary po l i cy adopted by the United States and other ma j or industrial countries wa s to have other s i gni f icant e f fects on the leve l of internat ional economic activity and the external env i ronment . The volume o f wo rld trade , wh ich had g rown at annual rate s o f 9 - 1 0 percent in the 1 9 6 0 s and 6 percent In in the 1 9 7 0 s , ha s rema ined stagnant s ince 1 9 7 9 . addit ion , the deep and protrac ted rece s s ion in the in du strial count r i e s wa s to r e su l t in a sharp f a l l in commodity prices , wh ich in some c a s e s f e l l to th e i r l owe s t l eve l s i n r e a l terms s ince records ex i s t . On average , commo d i ty prices f e l l by more than 3 0 percent between Decembe r 1 9 7 9 and November 1 9 8 2 ; since then , they have fo l l owed a moderate upward trend , inc r e a s ing by some 15 percent in the ten months to S eptember 1 9 8 3 . As a resul t o f f a l l ing commodity pr i c e s and con tinued inf l at ion , the terms o f trade o f nono i l deve lop ing countries deteri orated sharply . l Moreover , the rec e s s ion and resu l t ing unemp loyment in industrial count r i e s have g iven rise to s t rong protection i s t trend s , wh i ch have been partic u l arly apparent in a number of sectors in which deve loping countr i e s have a comparat ive advantage .
173 I n a n e f fort to sustain economic g rowth under such extreme ly adver s e externa l c ondi tions , nono i l LOC s incre a s ed sharply the i r external indebtedne s s . Total outstanding debt o f the s e count r i e s i s e s t imated to have increased f rom U5 $ 1 3 0 b i l l ion in 1 9 7 3 to U 5 $ 3 9 0 bi l l ion in 1 9 7 9 and to more than U 5 $ 6 0 0 b i l l ion in 1 9 8 2 ( see I n r e lation to the group ' s output and export s , Tab l e 7 . 1 ) . extern a l indebtedn e s s ro s e to record leve l s and for an unprec edented number o f count r i e s the debt- s e rvic ing burden reached c r i t i c a l proport ion s , as r e f l ected in the record number o f debt r e s chedu l ing ( see Tab l e 7 . 2 ) and the sharp r i s e in extern a l payment arrear . By the midd l e o f 1 9 8 2 , intense concern aro s e in the international community regarding the ab i l i ty o f some of th e larger bo rrower s to meet the i r external f inanc i a l c ommi tmen t s : thu s , a growing reluctance o f bank s t o extend n e w c redits wa s apparent . Another factor that contr ibuted to the t ightening of market conditions wa s the sharp dec l ine and virtual d i s appearance o f OPEC surplu s e s in 1 9 8 1 and 1 9 8 2 . Furthermore , some e s t imate s show that even i f the p r ice o f o i l doe s not fal l below U5 $ 2 9 a barre l - - th.e benchmark price agreed upon in March 1 9 8 3 - - the OPEC count r i e s wi l l experience a de f ic i t o f between U 5 $ 2 5 and U 5 $ 3 5 b i l l ion f o r 1 9 8 3 and o f some U 5 $ 1 0 to U 5 $ 2 0 b i l l io n in 1 9 8 4 . One e f fect o f the r educ tion o f OPEC surp l u s e s ha s been a dec l ine in the amount of resourc e s ava i lab l e to the interna tional f inanc ia l marke t s . Al though OPEC surp l u s e s have been rep l aced by a greater volume of depo s i t s by f i rms and corporations o f indu s t r i a l countr i e s , bank s tend to regard the s e depo s i t s a s l e s s permanent and more vo l a t i l e than tho s e o f surplu s - o i l - export ing countries and therefore tend to manage the s e fund s more cautiou s l y . As a resul t o f the s e fa ctor s , it i s e s t ima ted that net bank l ending , which had increa s ed f rom U5 $ 2 6 b i l l ion in 1 9 7 8 to more than U5 $ 5 0 b i l l ion in 1 9 8 1 , wa s cut back to some U5 $ 2 5 b i l li o n in 1 9 8 2 , and a further drop has been reg i s tered in 1 9 8 3 . According to the B I 5 , new c redit to Latin Amer ican count r i e s f e l l f rom U5 $ 1 1 . 7 b i l l ion in the f i r st seme ster o f 1 9 8 2 to only U 5 $ 3 0 0 mi l l ion in the second . S ta t i s t i c s show an increase in new credit to Latin America o f U5 $ 3 . 7 b i l l ion in the f ir s t seme ster o f 1 9 8 3 : h owever , such loans were mo stly supp l i ed in a s soc i ati on with f inanc i a l programs supported by the IMF . After a l ong period o f rapid growth , the abrupt s l owing of cred i t commitments by the private bank ing sy stem generated the concern that the inab i l ity o f a f ew ma j or borrower s to ref inanc e matur ing loans cou l d g ive rise to a l iquidity c r i s i s in the se countri e s . G iven the h i gh exposure o f the pr ivate bank ing in the s e nation s , s e r ious fears arose with respect to a po s s ib l e c o l l ap s e o f t h e international f inanc ial system .
19 . 0 28 . 9 38 . 3
Debt servi ce ratio A l l nonoi l ' d eve l oping c ount r i e s Ma j or borrowe r s b c Latin Ame r i c an countr i e s
19 . 0 30 . 6 37 . 2
26 . 8 29 . 0 27 . 8
117 . 2 162 . 8 168 . 6
391 . 1 276 . 0 143 . 5
1979
20 . 1 32 . 7 38 . 4
32 . 9
30. 4 34 . 3 32 . 1
123. 8
172 . � 1 90 . 7
550 . 8 4 00 . 0 2 18 . 0
1981
17 . 6 28 . 0
26 . 9 29 . 5 27 . 9
111 . 0 156 . 1 164 . 9
467 . 6 330 . 5 176 . 6
1980
23. 4 38 . 4 48 . 8
35. 8 41. 1 38 . 6
1 99 . 4 2 24 . 4
143 . 6
6 14 . 2 4 45 . 3 231 . 1
1982
19. 3 30 . 1 42 . 0
37 . 8 43 . 8 40 . 0
2 00 . 5 2 30 . 0
145 . 1
659 . 1 474 . 6 254 . 5
1983
a
Romani a ,
C o l omb i a ,
Ecuador ,
external pub lic debt .
and Moroc co .
statISti c s ;
Internation a l Monetary Fund ( IMF ) , World E conomi c Outl ook ; IMF , International Financ i a l IMF , Recent Economic Development s ; Merri l l Lynch Economi c s I nc . , Latin Ame r i can Quarterly .
Inc ludes the Car ibbean countrie s ;
Egypt ,
The twenty ma j or borrower s among the nono i l deve loping countri e s are Braz i l , Mex ico , Argentina , Korea , Chi le , Yugo s l avi a , Phi l ippine s , Greece , Portuga l , Ma l ay s i a , I srael , Tha i l and , Hungary , Peru , Turkey ,
Source :
c
b
E s t imated
27 . 9 30 . 7 28 . 6
Ratio o f externa l debt to GOP All nono i l dev e l oping countri e s Ma j or borrowe r s b c Latin American countri e s
a
175 . 5 18 6 . 7
1 30 . 2
336 . 3 233 . 4 119 . 1
of goods and s e rvi c e s A l l nono i l deve l oping c ount r i e s Ma j or borrowers b c Latin American c ount r i e s
Ratio o f exte rnal debt to exports
( b i l l ions o f u . s . dol l a r s ) A l l nonoil deve l oping c ount r i e s b Maj or borrowe r s c Lati n American count r i e s
1978
Extern a l Debt o f Nono i l Deve loping Countries
Total outstand ing debt
Tab l e 7 . 1
I-' -.J ""
A
P
1978
1979
4
3
4
7
8
13
14
( continued )
17
2
P,C
P
P
C
P
C
P
P C
Total numb e r o f renegoti ations
P
P
C C P,C P,C
C
C
C
C
A
C C A
P A,C
P
A
P
P
C
C
P,C
C P
C
C P,C C
C
C
1983
P
P
P
P,C
C A
p
C P
C
C
1982
Zaire Zamb i a P
C
P
1981
P
4
A
C
P
1980
Uganda Yugo s lavia
Senega l Sierra Leone Sudan Togo Turkey
Mexi c o Nicaragua Pak i s tan Peru Poland Roman i a
Lib e r i a Madag a s c a r Ma lawi
A C
A
1977
C
A
P
C
1 9 76
Ind i a Jama i c a
P
P
1975
1974-1983
Ecuador Gabon Ghana Guyana
Costa R i c a Cuba
Repub l i c Ch i l e
1974
Mu l t i l at e r a l Debt Renegotiations ,
Bra z i l Centr a l A f ri c an
Argentina Bol ivi a
Tab l e 7 . 2
I-' " U'I
Th i s tab l e does not inc l ude some cases
( cont . )
Wor ld Bank Debtor Reporting System .
Paris C l ub agreements
Aid consor t i a renegotiations Commercial b ank agreements
�:
P:
c:
A:
Note :
Tabl e 7 . 2 for whi ch s u f f i c i ent information was
not avai l able .
I-' -J 0\
177
The res pon s ib i l i ty for the current d i f f icul t i e s i s widespread . Part o f the current debt prob l ems can be t raced to bank l ending practice s . Underpinned by the conf idence tha t a country could not go bankrupt or d i s appear , bank analy s e s o f countr ie s ' debt- servic ing capac ity and pro spects were o f ten perfunctory and the trad i t i on a l yard s t ic k s of credit appra i s a l were not appl ied . 2 Neverthe l e s s , credit expans ion wa s s t imu l a ted by the h igher average pro f i tab i l i ty o f internat ional l ending operation s , the good record o f fore ign borrowe r s , and the f ierce competit ion among bank s . I t i s equa l ly c l ea r that a number o f important country borrowe r s did not undertake su f f i c i ently large and t ime ly ad j u stment e f fort s , bel i eving that the rec e s s ion wou ld be short- l ived and that demand for the i r exports woul d s o o n recover . Moreove r , they did not expect real intere st rates to rema in at very high l eve l s I n fact , they wou ld not have , for such a l engthy period . had ma j or indu strial count r i e s adopted a more bal anced f i s c a l and monetary pol i cy stanc e . The current l iquidity prob lems in the deve loping c ountr i e s may be attributed more to the sharp r i s e in interest payments than to the increa s e in external debt outs tanding . Wh i l e intere s t payments on the external debt o f nono i l LOC s increased a lmo s t ninefold between 1 9 7 3 and 1 9 8 2 , amorti z ation payment s only increa s ed approximately fourfo l d . I ndeed , at mor e norma l l eve l s o f intere s t rate s o f , say , around 3 percent in r e a l terms , and with annu a l rates o f economic growth o f 4 perc ent , tho s e nations ma intaining a constant extern a l debt-to-GOP ra tio wou l d be able to f inance s i gn i f icant current account de f i c i t s and to cover the i r intere s t payments without d i f f icu l ty . Correct ive po l icy mea sure s are a l ready under way in many countr i e s , a nd t h e external current account def i c it o f the nono i l LOC s appears to be moving into a more viab l e range . However , th e scale o f the dependence on external f inanc ing for many nations is such that the s i tuation c annot be turned around overnight wi thout the r i sk of s evere internal d i s ruption for the countr i e s concerned , a s wel l a s worri s ome imp l i c ations for the worl d economy . There is a danger tha t the cutback in capital f l ows to deve l op i ng count r i e s may b e so sharp that it may not only prevent orderly po s i t ive ad j u s tment , but may prove destab i l i z ing , i n i t i a l l y to the countr i e s bu t soon a f t e r to the bank s , who would s u f f e r l o s s e s that wou l d impa i r the i r capital base . The strains tha t have recently become apparent in the f inanc i a l system--namely the high expo sure of the private bank ing system to the large s t LOC s , the d i f f icult current s i tuation and pro spe c t s faced by mo s t devel oping coun tries , the increa sed ne rvou s n e s s o f the ma rket , and the recent sh i f t in banker ' s attention toward a greater po l i tical ana l y s i s o f potent ial borrowers-- sugge st that
178
i n the future commerc i a l bank s wi l l not cont inue per forming the ro l e o f ma j or f i nanc i a l intermed i a r i e s in the recyc l ing o f funds from surp lu s to def i c i t nations that they have p l ayed in the recent p a s t . At the same t ime , the e l ement s of instab i l ity that such a pattern of recyc l i ng has introduced to t h e international �onetary sys tem have generated doubts about the d e s i rabi l i ty of i t s continuation . Cons equent ly , a need a r i s e s for des igning new f i nanc i a l mechani sms for recyc l ing . The i s sue is two fold : ( 1 ) in the short run , to ensure that f inanc i a l f l ows to count r i e s with s e r i o u s debt or l iquidity prob l ems continue at an appropr iate rate , so as to avo id a world l iquidity c r i s i s ; and ( 2 ) g iven that present prob l ems a r i s e to a con s i derab le extent f rom an absence o f adequate sour c e s o f deve lopment f inance that has forced LDC s to resort to short- and medium- term f inanc ing , a s econd i s sue s t i l l rema i n s for the med ium and long terms , that o f appropriate deve lopment f i nanc ing . THE PROVI S I ON OF ADEQUATE SHORT-RUN F I NANC IAL AS S I STANCE Notwiths tanding a l l the d i f f i c u l t i e s and uncertain ties s t i l l inherent in the current s i tuation , the threat o f a l iqu i di ty c r i s i s i n the world economy appears to have been cons iderably d imi n i shed in recent month s . The fears o f an interruption o r even reve r s a l o f private c apita l f l ows to LDC s seem to have been averted by c o l l e c t ive l ending agreement s , invo lv i ng the autho r i t i e s of the a f f ected countr i e s , th e private bank s , and inter national i n s t i tutions--ma inly the IMF and the B I S . 3 Neverthe l e s s , a strengthening o f the international f inanc i a l system ' s ab i l i ty to cope with such a potent i a l l iquid i ty c ri s i s wou ld be t h e b e s t way to avo id i t s occurrenc e , s i nc e i t wou l d increase sub s tanti a l ly the conf idence in the system . I ndeed , the I nternational Monetary Fund has an impo rtant role to p l ay in th i s overa l l proc e s s . However , Fund resourc e s - -presently around 2 - 3 percent of the value o f international trade- - are c l early insuf f ic i ent to a l low it to p l ay th i s ro l e to the extent requ i red . The need to inc rea s e the s i z e o f the Fund has been widely recogn i z ed . I n pract ice , howeve r , thi s proc e s s has been cons iderab ly hindered by a l ack o f cooperation on the part o f the indu s t r i a l nation s . The dec i s ions taken regarding the E i ghth General Rev iew o f Quota s , Which wi l l serve the international commun ity through much o f the present decade , are a c l ear examp l e o f such s i tuation . Notwi th s t anding the techn i c a l stud i e s supporting the need for an increa s e in quo t a s o f 1 0 0 to 1 2 5 percent and the demands o f the deve loping nation s , agreement could not be reached for an inc rea s e o f more than 4 8
179 percent . I t i s evident that such a n increa s e wi l l be insu f f i c ient to a l l ow the IMF to meet the f inanc ia l requ i rements o f member countrie s during t he coming year s . As a resu l t , the Fund h a s been forced to suppl ement i t s re sourc e s b y borrowing f rom member countr i e s . I t i s important to note that the Group o f 1 0 dec ided in early 1 9 8 3 to increase the i r aggregate commitments under the Genera l Agreement to BorrOll1 ( GAB ) f rom SOR6 . 4 b i l l ion to SORl 7 b i l l ion . They a l so agreed that , in the future , GAB ' s re source s wou ld be ava i lab l e for purcha s e s b y tho s e members-- inc luding non-GAB partic ipant s- -who s e payments d i f f icu l t i e s might endanger t h e international monetary system . Obviou s l y , th i s may be cons idered a s a mechan i sm that a l leviates the po s s ib i l ity o f payments d i f f icu l t i e s by one or two ma j or debtor countr i e s giving r i s e to a worl d bank i ng c r i s i s . However , the enlargement of the GAB doe s not bene f i t a l l Loe s , s ince only the large s t among them may endanger the internat ional monetary I t i s a l s o important to note that the widening system . o f GAB r a i s e s some que stions regarding the dec i s ion mak ing proc e s s o f the Fund , s ince the Group o f Ten has a veto on the approva l o f loans under such agreement s . Thu s , i t i s obvious that the incre a s e o f resources under the GAB can under no c i rcums tanc e s be cons idered a s a sub s t i tute for an increa s e in quota s . The recent exper i ence o f countr i e s that have faced a l iquidity c r i s i s and resorted to the B I S s hows that when rapid f inanc i a l support is needed the Fund c annot provide i t under e x i s t ing po l i c i e s . However , s ince B I S suppo rt is o f ten cond i t ional on a Fund - supported ad j us tment program , the que stion come s to mind whether the Fund should not i t s e l f provide such support . There is no certainty that the B I S wi l l in the future a s s i s t non-B I S countr i e s ; thus , a n increased capac ity o f the Fund to deal with emergency s i tuations at short not i c e wou l d appear nec e s sary . I n add i t ion to increa s ing i t s resourc e s , there fore , the Fund wou ld have to mod i f y i t s po l i c i e s to make draw ings ava i l ab l e in a matter of days rather than month s . The need to e s tabl i s h a new f ac i l i ty , wh ich had been informa l ly cons idered in the past in connection with prob l ems cau s ed by capital f ight , shou ld be recogn i z ed in th e l ight o f current probl ems . Acc e s s to th i s f ac i l ity wou l d b e l imited t o tho s e countr i e s fa c ing a l iquidity c r i s i s a s a result o f cap i t a l out f l ows or o f a very sharp decl i ne in acc e s s to extern a l cred i t . I n such c a s e s , if the Fund were not sat i s f ied that the stance o f the country ' s current economic pol i c i e s wa s in broad terms appropr iate , i t wou ld require a po l i cy s tatement by the author i t i e s s imi lar to that required at pres ent for upper credit tranche drawing s . Obv iou s ly , the commerc i a l bank s mu s t continue to p l ay an important ro l e . The resourc e s o f mu l t i l ateral i n s t i tutions shou ld be seen a s comp lementary and
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support ive o f f i nanc i a l f l ows on commerc i a l terms rather Equa l ly important i s the than competit ive with them . adoption o f cooperative and respon s ible attitudes on the part of the private bank ing community and the autho r i t i e s o f cred i tor count r i e s l eading to r e s chedul ing o f debt s ervice payments and to ref inancing impor�ant amounts of short-term debt at longer matur i t ie s . Th i s would con tribute importantly to avo idi ng a poten t i a l l iqui dity cri s i s . MEOI UM- AND LONG-TERM F INANC IAL NEEDS OF LOC s The present debt c r i s i s ha s resul ted to a cons ider able extent f rom an exc e s s ive dependence o f LOC s on short- and med ium- term external f inancing , a s ituation that has been determined by the absence o f adequate I t i s apparent that the sourc e s o f deve lopment f inance . continued u s age o f medium- and short-term f inanc ing i s bound t o g ive r i s e t o l iqu idity probl ems in the medium term for coun t r i e s that rely heavi ly upon it , even i f the f inancing is a l l d e s t ined to sound inve s tment pro j e c t s . The s i tuation i s even more serious presently , s inc e the s tructural nature o f th e economic ad j u s tment requi re men t s f aced by LOC s ca l l s for l a rger amounts o f longer term f inanc ing . Furthermore , payment s on a large pro portion o f the externa l debt o f LOC s wi l l be fa l l i ng due in the med ium term ; therefore , if no add i t ional mea sures are taken , recent debt- reschedu l ing agreements cou ld , through the bunch ing o f maturi t i e s , compound the externa l debt prob l ems in the coming year s . The Current E conomic Ad j u s tment P roblems P ro found economi c ad j u s tments have become nec e s s ary in deve loping countr i e s in recent year s , partly as a r e su l t o f th e important change s in techno logy and in the s tructure of markets , but ma inly becau se of the chang e s that have taken place in r e l a t ive pri c e s - - i n t h e f i e l d s o f energy , raw materia l s , a n d manufactur e s - - and the It is unprecedented l eve l s reached by interest rate s . evident that adj u s tments a r e much mo re d i f f icul t to achieve in a wor ld suf f ering f rom stagnat ion than in an expanding economy . T h i s i s the prob l em that mu s t be addre s s ed by ad j u st ment prog rams today . To do so , it is not s u f f ic ient to r e s tore or ma intain a certain bal ance between aggregate supply and aggregate demand . It i s a l s o neces s ary to restructure the economy in such a manner that it wi l l permi t a n increased production i n certain s trategi c s e c t o r s a n d t h e diver s i f ication o f export s , so a s to r e s tore economic growth . � Th i s proc e s s mu s t be accompanied by an incre a s e in the rate s o f s aving s and inves tment .
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External debt s e rvice requires the generation o f sub s tant i a l trade surp l u s e s in th e debtor countr i e s . However , it i s e s sent i a l to d i s t ingu i s h between : ( 1 ) the strengthening o f the balance o f payments th at re su l t s f rom a redu ct ion in growth and economi c a c t iv i ty ( i . e . , f rom a d e f l a t ionary po l i cy ) , and ( 2 ) attaining a solut ion to balanc e - o f -payments probl ems compatible with acc eptab l e rates o f growth and viable over the medium term . That i s to s ay , i t i s neces sary to d i s t ingu i sh be tween a temporary improvement in the bal ance o f payment s that re sul t s from a depre s s ed cyc l i c a l po s it ion and a more l a s t ing s t ructural ad j u stment compa tible with h i ghe r l eve l s o f activity and employment . Thi s d i s t inction sugg e s t s that ad j u s tment prog rams requ i r e , bes ide s a prudent management o f demand , an increa s e o f investment and production i n certain key sectors o f the economy that play a strategic ro le in its r e s t ructuring . Evident ly , th i s type o f ad j u s tment needs substant ia l f inanc ial resource s . There ex i s t s a number o f LOC s where economi c d i s equ i l ibri a h ave b e e n generated predominantly by growing pub l ic- sector de f i c it s . In fact , a great deal of the fore ign borrowing by such count r i e s resul ted f rom pro nounced increa s e s of the ir f i s c a l d e f i c i t s , creat ing a s trong l ink between debt service and f i sc a l po l icy . If the governments o f the s e nat ion s are t o pay the service on the i r external pub l i c debt , they mu s t e i ther extract an exc e s s ive share o f r e s ourc e s f rom the p r ivate sector or reduce expend iture s . Thu s , the s erv ice o f the external debt i n the s e c a s e s requ i r e s a sharp reduction o f f i s c a l d e f i c i t s . Neverthe l e s s , substant ia l amount s o f longer-term external f inanc ing mu s t be d i rected to the s e count r i e s i f the i r growth prospect s are not be seriou s ly impa ired . Th e s e f inanc ing f l ows wi l l al so h e l p to reduce the r i sk o f a po s s ib l e defau l t on extern a l paymen t s . Furthermore , the recovery o f wor ld trade may be h indered i f the adoption o f exce s s ively de f l a t ionary ad j u s tment programs in LOC s generates a substant ia l decrea s e in th e s e countr i e s ' import s . I t i s e s sential , therefore , th at the deve l oping countr i e s imp l ement po l i c i e s leading to the requ ired structural ad j u s tment o f the i r economi e s , con s i stent with the ma intenance of international trade f l ows . Cons equent l y , the f i nanc ia l requ irements of t h e group mu st be pla ced w it hin the framewo rk of the international ad j u s tment proc e s s and recogn i z ed as a probl em o f the international community . The Ro l e o f Externa l Debt R e s chedu l ing In general , ex ternal debt r e s chedul ing may provide I n the f i r s t place , a s ha s bene f i t s o f two kinds . a l ready been d e s c r ibed , it may contr ibute sub s tant i a l ly
182 to the s o l ut ion o f short- run l iquidity prob l ems . S econd , by spreading externa l payments over longer per iod s , i t may a l l eviate t h e pres sure s on t h e external sector o f Loe s a n d f ac i l iate t h e adoption o f an order ly program o f economic ad j u s tment � indeed , the f ina l purpo s e o f re schedu l i ng shoul d be the r e s toration o f the debtor country ' s creditworth i n es s . The bene f i t s of the f i r s t k i n d h ave a l ready b e e n evident i n the present c r i s i s . However , it seems l e s s c e rtain that the r e s chedu l ings recently agreed wi l l a l l ow a sub stant i a l improvement in the capac i ty o f LOe s to s ervice the ex ternal debt . So far , a sub s tantial amount o f th e extern a l payments f a l l ing due in the short term ha s been renegot iated by the ma j or borrowe r s . The terms in which th e ope rations have been settl ed c ompr i s e , in genera l , an intere st rate o f L IBOR plus two po ints o r mor e and amorti zation per iod s of around s i x to e i gh t year s , with grace periods between two and f our years . Th i s sugge s t s tha t many Loe s wi l l face a very heavy concentrat ion o f amort i z at ion payments in the near future . I n order for th e s e countries to be ab l e to cover the repayments f a l l ing due , the i r b a l anc e of payments and economic cond i t i o ns wou l d have to experienc e ma j or improvements over a r ela t ively short period o f t ime . H owever , in a number o f c a s e s externa l a s wel l a s internal f actor s may prevent tho se countr i e s f rom reach ing such an improvement with in the time span a l l owed by current resch edu l ing agreement s . On the one hand , the moderate economic recovery o f the deve loped countr i e s a n d th e per s i s tence o f protec t i on i sm are l ik e l y to under mine the deve loping countrie s ' ab i l ity to sustain a l a rge export expan s ion . On the other hand , the structural nature o f the economi c imb a l ances faced by mo st deve lop ing count r i e s requ i re s , bes ides large amoun t s o f develop ment f inanc e , periods of ad j u s tment longer than tho s e invo lved in many o f t h e r e s chedu l ing agreements tha t have been agreed . Obviou s l y , i f the l ength o f the ad j u s tment period i s n o t enough t o permit the structural change s requ i red , the creditworth ine s s o f the s e countr i e s wi l l not be f u l l y re stored , a n d therefore t h e ma in cond it ion o f a succ e s s ful re schedu l ing wi l l n o t b e reached . I n such an event , the reschedu l ing opera tion wou ld merely repr e s ent a post ponement o f the prob l em for the near future . Al though comme r c i a l bank s seem to earn record pro f its out o f the debt - r e s chedu l ing exerc i s e , for th e debtor count r i e s succ e s s ive debt- restructuring exerc i s e s imply a h igh co st . They a r e o f ten s e e n a s a new f a i l ure to meet internationa l obl igations and create an atmo sphere of uncerta i nty , if not o f recurring c r i s i s , tha t h inders the recovery of conf idenc e , g ives rise to capital f l ight , d i s courage s inve stmen t , and d i s rupts economi c l i f e . Moreover , un l e s s debtor countries can greatly expand the i r exports , the fu l f i l lment of debt payment ob l i gations
183 may turn them i nto sub s tantial capital exporte r s . I nterest payments at p reva i l ing rates o f intere s t a l one on a total external debt o f the order o f U S $ 3 0 0 mi l l ion woul d requi re Latin America to generate a trade surp l u s o f s ome U S $ 3 5 b i l l ion a year . I n t h a t event , a n d after s everal years o f c o s t l y economi c ad j u s tment , i t is p o s s i b l e that LOC s government s wou l d face growing pol i t i c a l pres sure s to direct export surp l u s e s to of f s et s ome o f the negative soc i a l e f fe ct s o f the adj u s tment programs i n s tead o f u s i ng them to pay the i r interna tional creditors ; that i s , the w i l l ingne s s to pay o f some LOC s might decrea s e . A s s e t s that are within a debtor ' s j ur i sd i c t ion are not l iab l e to c l a im by the bank s . Thu s , debtor ' s wi l l ingne s s t o pay i s the factor that u l t imately determin es the re imbur s ement o f c red i t sourc e s . Wi l l ingne s s t o pay h a s not been a ma j or i s sue in the proc e s s of international l ending , becau se the net t ran s f er o f re sour c e s - -wh ich ha s a negative r e l a t ion with intere st rates- -wa s po s i t ive unt i l 1 9 8 2 . S ince then , i t ha s been negat ive ; never thel e s s , th e re scue packages have kept net exports of capital f rom LOC s at l ow level s . It would appear that the reduction in net f l ows resu l t ing f rom the e l imina t ion o f the s e packag e s together with the h i gh spreads charged by comme rc i a l bank s on the res tructur ing of debt and the new money l ent and the per s i s tance o f adver s e externa l deve lopment s - - re l ated e s sentia l ly with the evo lution o f wor l d economic recovery , interest rate s , and protec t i o n i sm in the indu st r i a l countr i e s - - cou l d br ing the wil l ingne s s - to- pay i s sue to the fore f ront o f the l ending proc e s s . POS S I BLE OPTION S FOR THE FUTURE Al though the fi nanc i a l d i f f i cu l t i e s of LOC s genera l l y re f l ec t a l iquidity rather than a solvency c r i s i s , it i s evident that t h e avo idanc e o f recurrent l iquidity prob l ems in th i s g roup o f nation s requi r e s the adoption o f mea sures o ri ented toward a structura l ad j us tment of the i r economi e s a n d an improved function ing o f the internationa l monetary system . The debt probl em , therefore , cannot be I ndeed , s eparated f rom the i s sue o f deve l opment f inanc e . the solut ion o f the s e prob l ems seems to be one of the ma j o r cha l l eng e s f a c i ng the wor l d economy in the 1 9 8 0 s . Obviou s l y , the b e s t long- run so lution to the debt cri s i s woul d be for the count r i e s concerned to " grow out o f debt . " Th i s woul d require , bes ides the continuation of the s e r ious ad j u s tment e f forts a l r eady under way in many LOC s , a susta i ned recovery in the wor l d economy , a dec rea se in international inter e s t rate s , and the reve r s a l of the protection i s t tendenc i e s in the indu s t r i a l countri e s . A cont inued expans ion o f LOC s ' exports woul d make th e external d e b t s i tuation o f the s e na t ion s much
184 mo re manageab l e and , a t the same t ime , woul d provide them with the fore i gn exchange they requ ire for th e i r deve lop ment . Neverth e le s s , whether the LOC s wi l l face such a favorable exte rnal environment in the next years i s s t i l l uncerta in . A s a r e su l t o f a comb ination of factor s , the pace of expa n s ion i n the wo r l d economy over the med ium term i s l ikely to rema in s l owe r than dur ing earl ier periods . L ikewi s e , the prospects o f l a rge f i s cal d e f i c i t s i n certain indu s trial nat ions generate serious concerns regardi ng th e future evolut ion o f interest rates . Such a scenario does not sugge st the rapid el imination o f protection i st barriers in t h e developed wor l d . I t wou l d appear , there fore , that the solution to present debt d i f f icul t ie s requ i r e s secur ing su f f ic ient f i nanc i a l f l ows to LOC s on longer matur i t ie s . As has been stated , at present i t se ems un l ikely tha t the capital markets will sat i s fy such needs spontaneou s l y . Furthermore , th e po s s ib i l ity that c o l l ec t ive l ending agreeme n ts -- invo lving the comme r c i a l bank s , internat ional i n s t itution s � and the autho r i t i e s o f the a f fected coun tr i e s - -woul d become a permanent arrangement is almo s t n i l , s inc e th i s wou l d imply long periods of out s ide superv i s ion o f the debtor country ' s economi c pol i c i e s , and becau s e i t i s doubtful that i t wi l l b e po s s ib l e to secure the continued part i c ipation of hundreds of sma l l bank s i n such an exerc i s e over a numb er o f years . The po l it i c a l strains tha t such a s i tuation cou l d create are enormou s . I n th i s context , the need to des ign a l ternative mechani sms for providing LOC s with adequate f l ows of f inanc i ng s eems evident . The inc rea se of foreign direct inve s tment has been f reque ntly mentioned a s one po s s ib l e I n fact , r i sk capital provided a l a rge sha re option . 5 of the f inanc e requ ired for the development o f LOC s du r ing the n i neteenth and early twentieth c enturie s . The commerc i al bank ing system ha s a s sumed th i s ro l e in recent years . G iven the current prob l ems , it wou l d seem de s i rabl e , f rom a f inanc ial point of view , for equ i ty to play a much l a rger part in devel opment f inanc e today . The poten t i a l threats to the stab i l ity o f the wo r l d ' s f in anc ial system would decre a s e i f r i s k s were shared by thou sands of i nve sto r s , who s e capital or equ i ty cou l d become nonperforming without t h e risk o f spreading t o othe rs . However , the bal ance- o f - payments and f i nanc i a l prob l ems that develop ing count r i e s face have sub stan t i a l l y decreased the i r attract ion to f o r e i g n inve stors in view of th eir reduced cap a c i ty to tran s fer pro f i t s and other payment s on foreign d i rect inv e s tment . Th i s , coup led with the fact that the deve l oped count r ies account for a growing share o f total direct inve s tment--LOC s ' share in foreign inve s tmen t f e l l f rom 31 percent in 1 9 7 0 to 2 7 percent i n 1 9 8 0 - -makes i t very unl ikely tha t the rates o f
185 growth reached by such inve s tment dur ing the 1 9 7 0 s may be susta ined in the c oming years . Therefor e , it wou l d s e em nec e s s a ry to deve lop po l ic i e s t h a t encourage a greater i n f l ow o f externa l direct inve stment , inc luding th e development o f regu l a tory f ramewo rk s s a t i s f a c to ry to th e foreign inve stor and the h o s t country . I t seems c l ea r that meeting LDC s ' f i nanc i a l needs in the med ium and long run requ i r e s a sub s tantial increa s e in c redit f l ows to the s e nation s o n much longer maturi t i e s and at l ower spread s . 6 The d i f f icu l t i e s seem to b e particu l arl y serious for t h e Latin American countr i e s , g iven the l arger magn i tude o f the ir ex ternal debt . C overing the pub l i c sector ' s f inanc i a l needs cou l d be ach ieved by greatly enlarg ing t h e re s ourc e s o f i n s t i tu ion s s u c h a s t h e Wor l d Bank a n d t h e regional deve lop ment bank s to permit them to recover the rela tive po s i tion they h e l d in the 1 9 6 0 s . Evident l y , th i s solution c a l l s for the coopera tion o f indu s t r i a l countries in the f orm o f h igher contributions to the c ap i ta l b a s e o f the s e inst itutions and o f s trong l e adership t o overcome the po l it i c a l d i f f icu l t i e s it fa ce s in ma j o r count r ie s . Another approach that has been sugg e s ted i s the c reation of a mu l t i l ateral government- guaranteed fund that wou l d operate on comme r c i a l l i ne s , obtain ing l ong term credi t s in dome s t i c and international marke t s . The fund wou l d g rant , s ay , f i f teen-year f inanc ing for pub l i c inve s tment pro j ects and f o r the purcha s e o f capital good s , permitting the achievement o f h igher leve l s o f inve s tmen t and g rowth i n deve loping countrie s , a s we l l a s improv i ng the i r pro f i l e a nd therefore the i r abi l i ty to pay and the i r creditworth i ne s s . For indu s t r i a l countr i e s faced with a rec e s s i on , th i s could mean h igher l eve l s o f export s a n d economic activity , mak ing it ea s ier t o over come po l i t i c a l re s i s tance to inc rea s ed deve lopment a s s i stance as we l l as the protec tion i s t trend s apparent i n the wo rld today . Such a scheme woul d a l s o contribute to the growth and s t ab i l ity o f international capital mark e ts . Other scheme s , s ome o f wh ich have been in ex i s tence on a smal l s c a l e , might be u sed a s supporting mechan i sms to dea l with the external f inanc ing needs o f the pub l ic sectors o f LDC s over the med ium and l ong terms . I t ha s been sugge sted that the ro l e of export credit guarantee agenc i e s may be extended , so as to ensure aga inst r i sk not only the trade f l ows to the devel op ing wo rld but a l s o the l ending requ ired to cover i t s resul t ing current account de f i c it s . 7 with thi s purpo s e , individua l agenc i e s in the c reditor nations wou l d in sure bank lending for balanc e - o f -payments f inanc ing , rely ing both on the i r own analys i s and on the adv i ce of the IMF . w ith in sured cred i t ava i l abl e , each debtor country wou l d be in a better po s it ion to mee t bo th the trading de f i c i t and the inter e s t payments on ex i s t ing debt . s
186 I t h a s been suggested tha t such a mecha n i sm might be further rein forced by pub l i c o r pr ivate compa n i e s o f f e ring po l it i c a l r i sk insurance on l o a n s to deve lop ing countr ie s . Th i s sugg e s t ion may be appl icable to some region s . Neverth e l e s s , it does not seem to appeal to the Latin American countries s ince such guarantee s have never been provided , not even by the larg e s t borrowe r s in the area . Po l i tica l guarante e s could g ive r i s e to both po l i tical and l egal p robl ems in th e s e nations s ince they are contrary to the C a lvo doc t r ine incorporated in the const itutions of several countr ie s . The recyc l ing o f adequate f inanc i a l f l ows to the private sector of LOC s could b e cons iderably e a s ed through the c reat ion o f o f f ic i a l guarantee programs . Evidently , the authori t i e s o f debtor count r i e s shou l d stand re ady to a s sume t h e r i s k s related w i t h currency convertib i l ity and tran s f erab i l ity o f external payment s , but not tho s e l inked to pure ly commerc i a l r i sk s that by th ei r very nature mu st be a s sumed by the private ent itie s invo lved . Th i s d i s t inction mu st be c l early made if the private sector i s to cont inue to develop a s such . L ikewi s e , pr ivate c red i t to LOC s' private s ectors cou l d be direc ted toward the f inanc ing of spec i f ic pro j e c t s . Th i s wou l d have the advantage o f ensur ing the produc t ive u sage of credits and might a l l ow , by d imin i sh ing the r i sk s invo lved in such operation s , a decrea s e in spread s . At the same t ime , to the extent tha t in suranc e mechanisms in lending to LOC s - - such a s tho se a l ready sugg e s ted--are e s tabl i shed , pr ivate bank s might be ab l e t o keep the i r a s set l eve l s b e low the l imits s e t by regu l atory autho r i t ie s , wh i l e increas ing the amount o f credit potentia l ly ava i lable t o LOC s b y s e l l ing o f f part of the i r l oans . F o r instanc e , a comb inat ion o f trans f e r gua rante e s a n d pr ivate r i sk insurance cou l d convert a syndic ated loan into a ma rketab l e secu r i ty tha t could b e sold to pen s ion funds , regional bank s , a n d so on . C o f inanc i ng with mu l t i lateral development i n s t itu tion s c oul d , i f procedu r e s were made more ag i l e , contr ibute sub stant i a l ly to the expans ion o f cap i t a l f l ows to the develop ing count rie s . S imilarly , a new form o f co f inanc ing betwe en governments and commer c i a l bank s cou l d be c o n s i dered a s a means o f stretching matu r i t i e s and reduc ing c o s t s to borrower s whi l e preserving an important rol e for the f inanc ial marke ts . The magni tude o f the probl ems related to the pro v i s ion o f adequate f inanc i a l f l ows to the deve l op ing countr i e s i n the medium and long run may be rough ly quant i f ied . Let us con s i der f i r s t the demand s ide . Dur ing the l a s t f ew year s , imports o f capital by LOC s ro s e to l eve l s between 4 . 5 percent and 6 percent o f GOP . Al though the se nations mu s t be cons idered structura l capital importers , such f igu re s seem to be h i gh by h i stor i c a l s tandards . As suming that the current a ccount de f i c i t a s a perc entag e of GOP f a l l s to more norma l
187 l evel s - -o f , say , 3 percent o f GOP- - and u s ing the ba s i s o f Wor l d Bank pro j ections fo r th e future evo lut ion o f economic growth i n the devel oping world and wo r l d inf l ation- - a round 5 . 5 percent in rea l terms and 5 per cent respec t ively- - o ne coul d rea s onab ly expect the current account d e f i c i t of the nono i l LOC s to b e of about U 5 $ 1 2 5 b i l l ion by 1 9 9 0 . T o thi s , one shou ld add a moderate inc re a s e in interna tional re serves to reach an equivalent o f three month s ' impo r t s . Thi s would mean an addit ional res erve accumu l ation o f some U 5 $ 4 0 b i l l ion in 1 9 9 0 . Thus , total f inan c i ng requ i r ements o f the nono i l devel oping c ount r i e s wou l d be o f the order o f U5 $ 1 6 5 b i l l ion in 1 9 9 0 . L e t u s now con s ider the supply of f i nanc i a l re sourc e s . As sume tha t comme rc i a l bank s are wi l l ing to expand s i gn i f i cantly the i r loan s , so that net bank l end ing to LOC s incre a s e s at 3 . 5 percent per year in real terms between 1 9 8 2 and 1 9 9 0 . On the ba s i s o f the above a s sumption for inf l ation , such net f l ows wou l d amount to about U5 $ 4 0 b i l l ion in 1 9 9 0 . Thi s is i n fact a very I t mus t be r ec a l l ed tha t a s a optimi s ti c a s sumption . re su l t o f the debt- re s t ructur ing agreements , matur i t i e s o f about U 5 $ 8 0 to U5 $ 1 0 0 b i l l ion have been sh i f ted to th e second ha l f o f the 1 9 8 0 s in Latin Amer ica a l one . There fore , the exerc i s e a s sume s that a large part o f the s e matu r i t i e s p l u s tho s e o r ig ina l ly fal l ing due i n the second hal f of the 1 9 8 0 s w i l l b e ref inanced . Th i s woul d imply such very h igh leve l s o f g ro s s bank l ending to the devel oping countr i e s , particu l a r l y tho s e in L ati n America , that it i s doubtful tha t they may b e attained without the a c t ive support or partic ipa t ion o f th e authori t i e s o f indu s t r i a l countries th rough some type of o f f ic i a l c o f inanc ing arrang ements . However , at present there does not appear to be a su f f i c ient awa re n e s s o f th i s prob l em . In fact , some of the bank regu l a tory agenc i e s o f f inanc i a l c enters are moving in the oppo s i te d i rection , that of t ightening superv i sion and l imi t ing bank exposure to dev e l oping count ri e s . I f the rates o f growth o f private d i rect inve s tment and o f f i c i a l tran s f e r s ma intain the trend reg i s tered du ring the last ten year s , the s e annual f l ows to nono i l LOC s wou l d amount t o some U5 $ 4 0 b i l l ion b y the end o f th i s decade . Credit f rom o f f i c i a l sourc e s - -name l y the Wor l d B ank and the r eg iona l devel opment bank s- -may c ontribute impo rtant ly to meet th e f inanc i a l requi rements o f th e s e countri e s ; neverthe l e s s , the reluc tance of the indu s t r i a l count r i e s to increa se sub stant i a l l y the capital b a s e of the s e i n s t i tutions might l imit--by s impl y ma inta in ing i t s trend r a t e o f g rowth- -net new f l ows o f c redit to LOC s f rom the s e sources t o some U 5 $ 3 5 b i l l ion in 1 9 9 0 . There f o re , under such optimi s t ic a s sumption s , there wou ld still rema in an externa l gap o f approx imately U5 $ 5 0 b i l l ion by the end o f the 1 9 8 0 s even without taking into account the po s s ib i l ity of c ap i t a l out f l ows . More
188 rea l i s t ic a l l y , o n current trend s , the gap i s l ikely to be s evera l t ime s l a rge r . If there is a f a i lure o f l eader ship in the ma j or indu s t r i a l countries and the mechan i sms nec e s s ary to f inanc e such a gap are not created , the deve l o p i ng count r i e s wi l l be forced to reduce even further the i r current account def i c i t s and to l imit s ig n i f icantly the ir rate s o f economic growth . An a l ternative method , and perhaps a s impl e r one , for securing the n ec e s sary net f l ows wou l d invo lve a ma j or res tructu r ing o f amort i z at ion payments on externa l debt owed to commerc i a l bank s so a s to produc e a po s i tive b a l ance on capital ac count that wou l d suppl ement dome stic saving s and permit the s e economi e s to attain ac ceptab l e rate s o f g rowth and e f f ec t a po s i t ive ad j u s t ment . For i n s ta nc e , a s s ume a country f a c e s over the s econd part of the decade debt- service payment s , inc lud ing amo r t i z a t ion , equ ivalent to 6 0- 7 0 percent of export revenue s , a resu l t of adding the amorti z a t ion of the recently r e s t ructured debt to th e ex i s ting amorti z at ion schedu l e . Such a s i tuation wou l d be d i f f icul t to sustain s ince i t wou l d s e r iou s ly l im it the country ' s g rowth possibilities . Suppo s e on the other hand , that a fter an i n i t i a l per iod o f adj u s tment , a new debt restructuring tak e s place that ex tend s the grace period through th e r e s t o f the decade and di s t r ibut e s amo rt i z ation payments over ten to f i f teen yea r s start ing in 1 9 9 0 . Debt- s ervice paymen t for th e r e s t o f th e 1 9 8 0 s wou ld b e reduced t o intere s t payments a l one , t h e equ iva l ent of , say , 2 5 t o 3 0 percent o f export earning s . Th i s i s c l early a much mo re manageab l e prospec t , s ince i t wil l contr ibute t o the r e s toration o f con f idenc e both external and internal and wi l l permit the attain ment o f sat i s factory rates o f g rowth , p l ac ing th e economy in a better po s i t ion to face the 1 9 9 0 s . Over the next ten to f i fteen years the r e s t ru ctured ma tur i t i e s o f the 1 9 8 0 s wou l d repre sent a s ignf icantly sma l l e r propor t ion o f export revenue s , both becau s e o f the ir d i s t r ibution over a longer period and becau s e th e debtor woul d have a larger export b a s e . Thu s , the res tructured matu r i t i e s shou l d prove much e a s i e r to r e f inanc e through t h e marke t . I n a s en s e , a new and l onger- term res tructuring c ou l d be seen a s comp l ement ing short- term mea sures adopted in 1 9 8 2 and 1 9 8 3 under the pre s sure o f event s , comp l eting the requ i red proc e s s for putt ing ma j o r Latin American debtors back on a su s tainabl e g rowth plan . At th e same t ime and by so doing it wou ld di spel un certa in t i e s and r i s k s th at s t i l l hang over the inter national f inanc ial s y s tem . CONCL U S I ONS The stra ins that have recently a r i s en in the inter national monetary system , and the prospec t s for the
189 coming yea r s , sugg e s t that mo s t o f th e debtor countries wi l l not rece ive adequa te f inanc i a l f l ows un l e s s a new pattern of f inanc i ng is developed . I n the short run , th e ma in o b j ect ive i s to ensure adequate f inanc i a l f l ows to the more indebted countrie s , so a s to avo id r epeated f inanc ial c r i s i s . Al though th i s po s s i b i l ity ha s been cons iderab ly a l leviated so fa r by c o l l e c t iv e l end ing agreements , i t i s s t i l l nec e s sa ry to strengthen the system ' s ab i l i ty to cope with the l ikely recurrence o f such c r i s i s . T h i s require s , among other mea sure s , a sub s tantial incre a s e in I MF re sourc e s , a mod i f ication o f i t s po l i c i e s o n drawing s t o a l low a rapid f inanc ial support to tho s e countr i e s in serious l iquidity prob l ems , and the cooperation o f the private bank ing commu n i ty to re schedu l e important amount s o f extern a l debt at long er matu r i t i e s . However , even if th e short- run prob l ems re l a t ed with potential l iquid i ty c r i s i s are appropriately dea l t with , there s t i l l rema ins t h e i s su e o f secur ing su f f i c ient f inanc i a l f l ows for development f inanc ing purpo s e s . In f act , it may be stated that present prob l ems have resul ted to a gre a t extent f rom the lack o f adequa te sour c e s of development f inanc e . The d i f f icu l ti e s a re more ser iou s pre sentl y , g iven the s t ructural nature o f the economic prob l ems faced by mo st LOe s and the po s s ib i l ity that recent debt-re schedu l ing agreements g ive rise to new l iqu idity c r i s i s when the grace per iod s come to an end . The externa l indebtedn e s s prob l em thu s i s c l o s e l y l inked to th e i s sue o f development f inanc e . The b e s t po s s ib l e solut ion t o the s e prob l ems wou l d be o n e o f " growing o u t o f debt . " I n addi tion t o the adop tion o f s e r iou s ad j u s tment ef forts in the develop ing countri e s , " g rowing out o f deb t " wou l d requ i r e a strong and sus tained recovery in the world economy , a s ig n i f icant dec l ine in intere s t rate s , and a t l ea s t the a ttenua t ion of protect ion i s t trends in the indu s t r i a l wo rld . In th i s contex t , i t i s evident that devel opments out s ide the control o f LOe s are play ing and wi l l pl ay a dec i s ive rol e in the suc c e s s o f the ad j u s tment e f forts o f debtor countrie s . Today , mo st deve l oping nations are f u l l y aware o f the n e e d t o ad j u st the i r economi e s in order t o f ind a sol ution to the i r current probl ems . Tak ing into account th e common intere s t in overcoming the debt c ri s i s and in restoring the g rowth of the wor ld economy , it seems rea sonab l e to demand tha t indu s t r i a l nations support the s e e f forts by adopting mea sures that contribute to the s e ends . Neverthe l e s s , since it i s doubtful tha t the external environment will take a very favorabl e turn in the nea r future , adequate f inanc ial f l ows to LOe s mu s t be s ecu red with longer-term matu r i t ies , i f a solut ion to the debt d i f f icu l t i e s i s to be found . Th e s e f l ows woul d contribute importantly to the expans ion o f interna t ional trade and
190 the growth o f the wo r ld economy . At a t ime when capital ma rkets w i l l no t be able to p l ay the l ead ing ro l e o f the pa st decade , mul t i lateral f inanc ial inst itution s - - such a s th e Wo rld Bank and th e regional devel opment bank s-- and government agen c i e s shou l d play a much l a rg e r ro l e i n t h e recyc l ing proc e s s . The s e mechani sms c o u l d b e reinforced b y schemes t o ensure bal anc e-of- payments l ending to LOC s and by s t imul a t ing the increa se of foreign direct inve s tment . The s e mea sure s , a s we l l a s susta ined e f forts of ad j u s tment and coope ration , can a l l ow u s to f ind a way out of the present prob l ems . Al ternatively , and perhaps more s imply , the requ ired imp rovement in the capital a c count cou ld be secured by a ma j or r e s truc tu r ing ex erc i s e tha t woul d s i g n i f icantly redu c e or el iminate amorti z a tion payment s to the bank s over the r e s t o f the decade , d i s tribut ing th em over a period o f ten to f i fteen years s tart ing in 1 9 9 0 . Th i s wou l d a l low Latin American economi e s t o e f fect a po s it ive ad j u s tmen t , diver s i fy the i r export s , and recover reason able rates o f growth , thu s p l a c ing them in a better po s i t ion to f a c e th e futur e . A l though th e externa l debt prob l em wi l l be with u s at l e a s t f o r the r e s t o f the decade , it is in the intere s t o f debtor and c reditor count r i e s tha t it n o t be a l l owed to sharply reduce the deve lopment pro spec t s of LOC s . The soc ia l and po l it i c a l con sequenc e s o f f a i l ing to secure acceptab l e rates o f g rowth in th e deve l oping world du ring a protracted period wou l d be very g rave indeed . NOTES The idea s expre s s ed in th i s paper are strictly per sona l . The author wishes to acknowl edge th e inva luab l e a s s i s tance o f Jav ier Gu zman C . in th e prepa ration o f th i s paper . 1 . Accord ing to e s t imat e s of the IMF , o f the U S $ 6 7 b i l l io n increa se in the aggregate current account de f i c i t of the nono i l LOC s f rom 1 9 7 8 to 1 9 8 1 , more than 90 percent may b e exp la ined by the comb ined e f fect of the r i s e i n net intere s t payment s , th e deter iorat ion of the group ' s nono i l terms o f trade , and the adverse change in th e group ' s o i l trade balanc e . 2 . F o r ins tanc e , th e 2 0 perc ent debt- serv i c e rat io sugges ted a s exte rna l indebtedne s s l imit by the Wor l d Bank wa s exceeded b y many countr i e s . 3 . The rescue package s tha t have emerged f rom such ag reemen ts h ave genera l ly included the re schedul ing of debt- service paymen t s , th e prov i s ion of f inanc ial a s s i s tanc e both by bank s and by o f f ic i a l ins t i tution s , and the adoption o f stab i l i z at ion prog rams by the debtor countrie s .
191 4 . The c a s e o f energy i s a good in s tanc e o f a stru c tural a d j u s tment . Ad j u stment to the h igher c o s t o f imported energy wi l l c erta inly requ ire inc rea s i ng the price to consumers and reduc ing somewhat the rate o f growth o f GDP . However , a ny attempt o f the country to ach ieve h igher rates o f g rowth wou l d r esul t in unsus ta inabl e balance-of -payments def ic it s , unl e s s the struc ture of the economy is adapted to the new pr ices through th e devel opment o f dome stic ene rgy sourc e s a n d a more e f f ic ient u s e of energy . 5 . According to some e s t imate s , a l though the f l ows o f d i rec t inve s tment to LDC s inc reased f rom U S $ 2 b i l l io n in 1 9 7 0 to about US $ 1 5 b i l l ion in 1 9 8 2 , they rema ined sma l l compared to the volume o f borrowing in the inter national f inanc i a l ma rket s . 6 . Obviou s l y , in the c a s e o f many l ow- inc ome countr i e s , sub stantial amounts o f f inan c i a l resources on conc e s s ional terms are requ i red . 7 . Th i s i s , with mino r mod i f ication s , the Lever pla n . Lord L ever sugg e s t s the c reat ion of a central agency that wou l d adv i s e each agency on the prov i s ion of f inanc ing to LDC s , rely ing l a rge ly o n the recommenda tions of the IMF . 8. I n f act , mos t o f the ma in countries have set up export credit agenc i e s . Each agency , a c t ing independen t l y , h a s supported i t s exporter s ' trade with in suranc e f a c i l i t i e s , pl a c ing l imit s on the amoun t s of c redit i nsured . B IB L I OGRAPHY A z a r , S . A . The I nvo lvement of the O i l Surp l u s Countr i e s in t h e I nternational F inanc ial a n d Trading Sy stem . S tudy o n the I nterna t ional F inancial and T rading System , C ommonwea l th S ec retaria t . London , March 1983 . Buira , A ri e l . The Ro l e of the IMF in the 1 9 8 0 ' s : Report to the G roup of Twent - F ou r . UNDP!UNCTAD P ro j ec t INT! 8 1 ! 0 4 6 . January 9 8 3 . " P rospects fo r P r iva te Inte rna tional F inanc ing to Developing Countr i e s . " Addr e s s del ivered to the I n s t itu t e on I n ternat ional F inanc e at the S outhern Method i s t Un iver s i ty , D a l l a s , T ex . , Novemb e r 1 9 8 2 . C l ine , W . R . I nte rna tional Debt and the S tab i l i ty of the Wor l d E c onomy . Wa sh ington , D . C . , 1 9 8 3 . Frank , C . R . Future F inanc ing o f the Capital Needs of S tudy on the I n terna t ional Develop ing Countrie s . F inanc i a l and Trad ing Sys tem , C ommonwe a l th Secretaria t . Londo n , March 1 9 8 3 . I nterna tiona l Monetary Fund . Wo rld Economic Out l ook : A Survey by the S t a f f of the International Monetary Fund . Wash ington , D . C . , 1 9 8 3 .
i
192 Kru l , N ic o l a s . The Debt P rob l em : A Sea rch for a New F inanc i a l Balanc e . Geneva , Apr i l 1 9 8 3 . Morgan Gua ranty T ru s t C ompany o f New York . " Global Debt : A s s e s sment and Long-Term S trategy . " Wor l d F inanc i a l Ma rket , June 1 9 8 3 . O ' B r ien , Richard . The Ro l e o f Commerc i a l Bank s in the I nternat iona l F inanc i al System : A Summary Report . S tudy on the I nternational F inanc ial and Trading Sy stem , Commonwea l th Secretariat . London , Apr i l 198 3 . Orga n i z at ion for Ec onomic Cooperation and Development . World E conomic Outlook , July 1 9 8 3 . peal try , Michael G . The P o l i c i e s o f I nternat ional Monetary Author i t i e s wi th Re spect to the I nter national Debt C redi t . Geneva , Apr i l 1 9 8 3 . S egre , C l audio . The External Cau s e s of the C r i s i s . Geneva , Apr i l 1 9 8 3 . S j a a s tad , Larry A . " The I nternational Debt Quagmire : To Whom Do We Owe I t ? " p r epared for the Leeds Castle Meeting , July 1 4 - 1 6 , 1 9 8 3 . Soros , George . The I nterna t ional Debt Prob l em : D iagno s i s and P rogno s i s . N ew York , Ju ly 1 9 8 3 . S treete n , P au l . D i rect P r ivate Fore ign I nve s tment , S tudy Transnational C o rporat ions and Deve lopment . on the I n terna tional F inanc ia l and Trading Sys tem , Commonwea l th S e cretaria t . London , March 1 9 8 3 . Suratga r , David . O i l Exporte r s a n d Wor l d F inanc ial Market s . S tudy on the I nternation a l F i nanc ial and T rading System , Commonwea l th S e c retariat . London , Apr i l 1 9 8 3 . Wor ld B ank . World Devel opment Report 1 9 8 3 . Wa sh ington , D.C . , 1984 .
8
The World Monetary System, the I nternational Busi ness Cycle, and the External Debt Crisis Jose Luis Feito
The international f inanc ial sy stem can be s een a s a set o f dev i c es for correct ing any eventual ma l func t ions o f the world economy , particularly tho s e rooted in the monetary s ide . The rat iona l e for international monetary agenc i e s i s to ensure that automa t i c and other bu i l t- in mechani sms operating within th e f inanc i a l sys tem wi l l re spond adequately t o pha s e s o f strain . I n th e pre s ence of pre s sures and d i f f icu l t i e s that threaten the system, international agenc i e s and arrangement s are suppo sed to generate appropriate s igna l s and carry out act ion s in order to make the sys tem react al ong d e s i red l ine s . Over the recent pa st the internat iona l f inanc ial system ha s been put to the t e s t . The a im o f th i s chapter i s to analy z e the stimu lu s- response pattern o f the inter national f inanc ial system over the recent yea r s in order to shed l ight on the adequacy o f present interna t ional monetary arrangemen t s to cope with widespread economic di sturbanc e s l ike the external debt c r i s i s and rec e s s ion currently pl agu ing the world economy . The overwhe lming presence o f ove r i ndebtedn e s s and depre s s ion should be seen a s a man i f e station of bu s i n e s s cyc l e phenomena . T h e ma in the s i s of th i s chapter is that the external debt c r i s i s i s a resu l t o f fundamental change s in the nature o f the international monetary me chanism, ma inly brought about by the emergence of wo rld f inanc ial intermed iat ion and rapid integration of ma j or capital markets in the late 1 9 6 0 s and early 1 9 7 0 s . The se change s , together with the cyc l ic instab i l i ty o f the u . s . economy , expo se the wo rld economy t o the sort of credit- induced bus ine s s cyc l e some national economi e s expe ri enc ed during t h e nineteenth century a n d t h e inter wa r period . These ide a s are deve loped in the f i r s t section , in wh ich the relation sh i p s between th e inter national bu s i n e s s cyc l e and the external debt c r i s i s are analyzed and some inferences to be drawn f rom th i s anal y s i s a r e pu t fo rward . One of the conc l u s ions of that section i s that interna t ional monetary po l icy shou ld aim not only at 193
194 fac i l itating the smooth tran s i t ion o f the wor ld economy to an equ i l ibrium po s i t ion but a l s o at ensuring the stab i l i ty of the wor l d f inan c i a l sys tem so tha t the probab i l i t i e s of another occurrence of worldwide economic depre s s ion and over i ndebtedn e s s are min imi z ed . The a rmory of interna tional monetary po l icy is not we l l equipped t o ach ieve the s e ends . I dea l l y , actions shou l d be tak e n s imu l taneou s l y i n tho s e two f ron t s . Reforms o f t h e international f inanc i a l system shou ld be in it ia ted by a l l owing international f i nanc i a l inst itutions to p l ay a more a c t ive r o l e in the c onduct o f international monetary po l i cy in current c i rcumstanc e s . By now it i s c l ear , however , that d i s cu s s ion on reform o f the internat iona l monetary system is a very s l ow pro c e s s going through a k ind o f stop-and-go cyc l e . Th erefore , it may be conveni ent to separate th e anal y s i s o f the scope f o r short-run actions wi thin the boundary of current interna tional arrangements ( covered in th e second s e c t i on ) , th e shortcoming s and l imitat ion s of pr ese n t internat ional monetary i n s t i tutions to cope with the current c r i s i s ( the th i rd section ) , and the needed reforms of the wor ld monetary mechan i sm f rom a l onger perspect ive ( the fourth sec t ion ) . F in a l l y , the l a s t section provides a summary o f t h e argument s and views expres sed i n the chapter . THE INTERNATI ONAL BUSINESS CYCLE AND THE EXTERNAL DEBT C RI S I S : AN INTERPRETAT ION Shou l d th ere be any doub t , the current wor l d economic rec e s s ion h a s o f f i c ia l ly b e e n cer t if ied by th e National Bureau o f Economic Re search a s the eighth of the p os twar period , mo re s e r ious than the 1 9 7 3 - 1 9 7 5 rece s s ion , s econd i n seve r i ty only to the s l ump o f th e 1 9 3 0 s . Al l the s e postwa r wo r l dwide economic depre s s ions have had i n c ommon that they have orig inated in the U n i ted S tates because o f the heavy we ight th i s economy h a s on wo rl d trade and , mo re impor tantly , on wor l d I n some instanc e s , a s in 1 9 7 3 f inanc ia l cond i t i on s . 1 9 7 5 , the s e depre s s ions may have been induc ed by d i s turbanc e s o u t s i d e t h e U ni ted S tate s , b u t they have b e e n reinforced and made wor ldwide by t h e re spon se o f the United States a nd other l a rge industrial coun t r i e s to th e s e d i s turbance s . By the same token , it is obviou s that pha s e s o f wo r ldwide growth have been set in mo t ion by th e func t i on ing at near ful l c apac ity o f the U . S . economic mach ine . The inten s ity and perva s ivene s s o f the current wor l d depre s s ion are f requent ly se en a s t h e resu l t o f t he mix o f economic po l i c ie s imp l emented in the united States to check the d r i f t towa rd greater inf lation and lower growth that ha s character i z ed the perf ormanc e of th i s economy ove r the l a s t decade . Tab l e 8 . 1 provides some
( 198 3 ) .
Wor ld Economic OUt look ,
Annua l Report ,
and O c c a s ional Paper no .
23,
-2 . 7 0.9 -3. 9 2.4 -6. 2 4. 3 -0. 3 4.6 -3 . 7 5.4
5.9 5.2
5.9 6.0
exc luding China
Internationa l Monetary Fund ,
we i ghted average o f nono i l LDC s ,
Sourc e :
C
-12 . 1 - 14 . 8 9.0
23 . 9 0.8 20 . 4 6.3 17 . 6 9. 0 19. 0 9.6 16 . 5
25 51
49 40
-4 . 7
25 19 . 0 8.7
95
-4 . 4
4.4 -1 . 7
10 . 6
165
0.5
4.2 1.9
14 . 0
160
-7. 5
1.9 -0. 4
11 . 4
125
2.7
1.3 2.8
10. 1
20 . 7
15 15 . 4 4.9
21 15 . 3 11 . 3
90
6.6
-0 . 2 5.0
7.2
13 . 3
68
13 . 3
-0 . 5 5.5
70
22. 8
-0. 2 5.4
5.3
3.9
-3 . 5
-2 . 6
-0. 7
-0 . 2
2.0
1.5
5.0
8.5
5.0
1982
7.3
1981
7.4
1 980
8.3
1979
8.2
1978
6. 2
1977
rate s ad j u sted by change s in GNP de f l ator Interest payme n t s and amortization a s percentage o f exports o f goods and s e rv i c e s
:Nomin a l
nono i l pr imary commodities Term s - o f - t rade change s from pre c e d ing year c Re a l GOP rate o f growth
Percentage chang e s i n export vo lumes Perc entage chang e s in prices of
in the B I S reporting area ( in bi l l ions of U . S . do l lars ) Of wh ich : external l ending to nonoi l LOSs b Debt- s e rv i c e ratio
Tota l f l ows of externa l lending
Impact on nono i l LOCs
Percentage change s in u . s . volume o f imports
u.s.
rate s r e a l short-term intere s t a rates u . s . real GNP rate of growth
Percentage changes in u . s . nominal s tock o f money ( M ) l Percentage changes in u . s . re al a s tock o f money ( M } l Channe l s of transmi s s ion u . s . nominal short- term interest
1976
The Intern ational Bu siness Cyc le and Nonoi l Deve loping Countries
Sour c e s o f cyc l ic a l d i s turbances
Tab l e 8 . 1
i-' \0 U1
196 quant itat ive indicators o f the ma j o r dome s t i c e f fec t s o f the s e po l ic i e s a s wel l a s the channe l s through wh ich they have been tran smitted to the re s t of the wor l d and the i r impact on nono i l develop ing countrie s . The tab l e i s intended to i l lu s trate the f o l l owing proce s s . The po l icy o f monetary re s traint that ha s been imp l emen ted i n the United S tates s ince 1 9 7 8 , coup led with a growing f i sc a l imbal a nc e , has l ed to a marked upsurge of nominal and real intere s t rates ( to wh ich other coun t r i e s have had to ad j u s t ) and gradually decl ining rates o f GNP growth . A s can be seen f rom the data in Tab l e 8 . 1 , the rate o f change of M l in real terms wa s negat ive for f our years in a row , cons iderab l y shrinking the real s tock o f money ( M l ) and l eading to real intere s t rate s that were extremely h i gh by h i storical s tandard s . The t ime pro f i l e of the sh i f t from nega t ive to po s itive real intere st rate s may we l l have been somewhat d i f f erent f rom that sugg e s ted by f igur e s in Tab l e 8 . 1 , wh ich dep i c t s real rate s s impl y by subtracting the GOP d e f l ator f rom nominal rate s . Expected rates o f in f l ation tend to be greater than recorded price increa s e s in the i n i t i a l s tages o f an i n f l a t ionary proce s s , whereas the oppo s ite is true for a de f l a t iona ry proce s s l ike the one init iated in 1 9 8 0 . I n any even t , th e h igh real intere s t rates brough t about by such a l iquidity squee z e have g iven r i s e t o a strong d i f f e rential f avorab l e t o a s se t s denominated in u . s . do l l ar s , wh ich have impo sed corre sponding f i nanc ia l t igh ten ing and increa s e s in intere s t rates in other c ountr i e s to prevent exc e s s ive capital out f l ows f rom tak ing p l ac e . Thu s , the exc e s s demand for money and corre sponding exc e s s supply o f goods and s e rvi ce s , pa rticu l arly tho s e who s e demand i s h ighly s e n s i t ive to chang e s in intere s t rate s , c au s ed by po l ic i e s of monetary re straint in th e United S tates have been immed iate ly para l l e l ed in other ma j or indu s t r i a l count r i e s and u l t imately in the rest of the wor l d . Add i t iona l l y , the fa l l ing rates of real GOP growth in the United States have reduced i t s volume of impor t s , thereby channe l ing d e f l a t ionary impu l s e s to the r e s t of the world through a reduced external demand . The s e e f f e c t s have been compounded b y the cyc l i c behavior o f the U . S . i ncome e l a s t i c ity t o import . Oue t o specu l a t ive inven tory cyc l e s and protec t i on i s t pre s sure s , import vo lume s tend to grow fa ster than output when real GOP is accel erating and to decrea s e f a s ter when i t is dec e l era t ing . Moreover , th e inf low of capital a s soc iated with the d i f f erential favorab l e to a s s e t s denominated in U . S . do l l a r s ha s g iven r i s e to a sharp appre c iat ion of th e do l l ar . The bene f i c i a l e f f e c t s for the r e s t of the world th at shou ld spr ing f rom the apprec iat ion of th e U . S . currency have been o f f set by th e cyc l i c behavior of impo rts ju s t mentioned . I ndeed , t h e appr e c i at ion of the do l l a r ha s been very harmful to count r i e s tha t have externa l debt and that import intermediate good s and raw
197 ma teri al s ( mo s t ly denominated i n u . s . do l l a r s ) , by s i zably rai s i ng the local cu rrency value of the i r fore ign l iab i l i t i e s and o f the ir mo s t inel a s t i c i tems in the import basket . The impac t on nono i 1 develo p ing countr i e s has been part icu l arl y severe , as can be inferred from T ab l e 8 . 1 . The rate o f growth o f the i r export proc eeds ha s f a l l en sharply a s a resu l t o f l ower unit pr i c e s and vo lume o f export s . They have undergone a marked deteriorat ion o f th eir terms o f t rade a n d have expe r ienced capital out f l ows that have been attracted by the j ump in the rate of return o f f i nanc ia l a s s e t s denominated in u . s . do l l a r s a n d a sub s tantial acc e l e ra t ion o f the speed with wh ich the debt charg e s p i l e up . Tho se deve l op ing countr i e s with a h eavy externa l debt have undergone n o t o n l y a s i z ab l e augmentation o f the debt burden but a l so the e f f e c t s o f decre a s e d international f l ows of credit s temming f rom the growing propen s ity of the bank s to reduce the i r ratio o f agg regate ex ternal a s sets to capital in general and the ir ratio of aggregate ex ternal a s s e t s to capital in debt- ridden economi e s in particu l a r . The ma in a im o f th i s sketch o f recent devel opments o f the evo l v ing world economic scene is to ident i f y the ma j o r d e f l a t ionary forces in th e internat iona l economy and the channe l s through wh ich they have been opera t ing . I n e s sence , the s e forces are the l iqu idity sque e z e and accompanying h igh real inter e s t rates induced by u . s . f inanc i al po l ic i e s , channe led to the r e s t of the wor l d through capital mark e t s a nd the f a l l in income a n d demand for foreign goods tran smi tted through th e ma rk e t s for goods and s erv ice s . The apprec iation o f the U . S . do l l a r , the standard of value o f the internat ional monetary sy stem , h a s tran smitted d e f l a t ionary impu l s e s th rough both channel s . The preceding account i s a rather s tandard anal y s i s - though p l a c i ng perhap s t o o h eavy empha s i s on the direction of cau s a l i ty runn ing f rom the monetary forc e s to the rea l s ide o f t h e economy- - o f the current wor l d economic c r � s � s . One o f the l imitations o f th i s approa ch , u s e fu l a s i t i s i n other respec t s , i s i t s concentration on exp l a in ing the recent downwa rd movement o f the international bu s i ne s s cyc l e , impl i c i t l y a s suming that the wo rld economy wa s in a stab l e s tate of near equ i l ibr ium at the beginn ing o f th e down swing in , say , 1 9 7 8 . The sett ing in mo tion of de f l at ionary forces and the ir propagat ion through th e world economy is f requent ly d e s c r ibed a s an ex erc i s e in compa rat ive static s by wh ich the current po s i t ion o f the wor ld economy is seen as the r e su l t o f chang e s in certain cau s a l va r iabl e s , such a s the rate o f real growth o f net pr ivate a s set s i n the uni ted States , or any other monetary aggregate start ing f rom a s tab l e equ i l ibrium s i tuation . Th i s ana lys i s c a r r i e s with it i t s own po l i cy recommendati on s . S ince the i n i t i a l po s it ion wa s one of
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acc eptab l e equ i l ibrium , and current cond i t ions point to the ex i stence o f exc e s s ive underemployment equi l ib r ium and f i nanc ial strains a l l over the world , the adequa te cour s e o f pol icy i s to reve r se the c au s a l variab l e s to to reduce the U . S . federal de f i c i t the ir original value s : a n d increa s e credit to the pr ivate sector , thereby attain ing a new equ i l ibrium compa rab l e to the i n i t i a l one in th e Un i ted S t a t e s a s we l l a s in t h e rest o f the wo r l d . The u s efulne s s and e l emen t s of tru th in th i s mode of analys i s and po l icy reco��endations should not b e denied . Neverthe l e s s , th ere i s a ne ed for supp l ementary exp l anations o f the weakne s s e s cu rrently p l aguing the wor l d economy and f undamental que stions of international monetary pol icy tha t cannot b e answered by u s ing th i s ana lytical f rame . The answe r s t o que s t ions r e l a t ing to the re l a tive s tab i l ity of th e new equ i l ibr ium ach i eved by pu rsuing the policy action s based on the forego ing analy s i s and to the cond itions tha t shou l d b e me t to prevent another pha se o f wor l d rec e s s ion and s evere f i nanc i al strains requ ire some knowl edge of the dynamic propert i e s o f the wor l d economic system . An attempt to furn i sh some e l ements out o f whi ch tentative an swers to the s e que st ions could b e g iven i s made in the fol lowing paragraph s . A Bu s in e s s Cyc l e V i ew o f Current S t ra in s i n th e I nternational F inancial Sys tem The dynamic propert i e s o f the wor l d economy can be a s c e rtained by u s i ng the same bu s ine s s cyc l e analyt ical apparatus app l i ed to the s tudy o f national economi e s . Spec i f ical l y , the sort of cyc l i c o s c i l lations to wh i ch the wo r l d economy i s now sub j ec t are b e s t analy z ed by ref erence to the sort of pro c e s s e s s tud ied by th e so c a l led monetary exp l anations o f the bu s ine s s cyc l e . 1 B e fore proceeding , th ere i s one que s t ion worthy o f some deta i l e d c o n s i derat ion regarding the ex tent of inter dependence needed among nat iona l economi e s , for the d i f f erent count r i e s of the wo rld are f o l l owing e s sentia l ly the same cycl i c path . I t shou l d be pointed ou t tha t , f o r the va l id i ty o f the v i ews and coro l l a r i e s drawn f rom see ing the d i f ferent economies of the world mov ing a round a c ommon bu s i n e s s cyc l e , it is not a nec e s s ary cond i t ion that goods and capital ma rkets are ful ly integrated and . rul ed by perfect arb i trage relationsh ips . For the va l id i ty o f tho s e cons ideration s , it i s suf f i c ient that the degree and nature o f interdependence among national economi e s be such tha t di s integrating dev i c e s l ike capital control s , f l ex ib l e exchang e rate s , or protect ion i sm e i ther have a very na rrow insulat ing capa c i ty or none a t a l l , the ir insulation e f fe c t s being rap idly o f f set and short l ived . A brief account of the ma in featur e s o f th i s interdependence wi l l su f f ice to show
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that th i s i s certainly the c a s e with the current s truc ture of th e wor l d economy . The Nature and Degree o f Worl d Economic I nterdependenc e The nature and intens ity of the internat ional l ink s binding the economic l i f e o f each country to tha t 9 f every oth e r prevent nationa l macroeconomic po l ic ie s , wi th the exception of thos e in the Uni ted s ta te s , f rom exert ing any systemat i c i nf luence on the internat iona l l y impo sed cyc l ic path . As i s wel l known , unti l recently internationa l trade in goods and s e rvic e s has been grow ing f a s ter than nationa l output , thereby increas ing the overal l exposure o f national mark e t s for goods and ser v i c e s to event s and pol ic i e s in other countr i e s . Over that period , convertib i l i ty among the ma in curren c i e s - a n d th rough them among t h e othe r , hanging , currenc ie s , the g radua l l i f t ing o f capital contro l s , and the emerg enc e of a powerful system of wo rld f inanc ial intermed iation have cons iderab ly increa sed the inter national mob i l i ty of capita l a s wel l a s the share of tradabl e f inan c i a l a s se t s in nat iona l s tocks o f capita l . The e f f i c i ency o f rema ining , or newly impo sed , capital contro l s ha s been eroded cons ide rab ly in the cou r s e o f t ime , mak ing it very d i f f icu l t t o contro l international movements o f capital to any s ignif icant degree . Many o f th e devic e s currently in place to control cap ital movement s were conce ived and impl emented wh en the stock o f capital wa s rather sma l l re l a t ive to no rma l condition s . On the whol e , current capita l - c ontro l mechan i sms w e r e des igned during the interwa r depre s s ion It and the period immed iately fol lowing World Wa r I I . wa s r e l a t ively ea s i er t o control capita l movements during the 1 9 5 0 s , in a world economy impoveri shed by the war , than i n suc c e s s ive periods where the norma l s tock - f l ow ratio between capital and income wa s res tored . The accumu l a t ion of capital al l over the wor l d resul t ing f rom the h igh ra t e s o f growth dur ing th e 1 9 6 0 s , together with the in teg ra t ion of ma j or capital marke t s , h a s made it incre a s ing l y d i f f i c u l t for rema i ning , o r newly e s tab l i shed contro l s , to prevent capital f rom mov ing into the f i nancial c enters o f f ering better pro spec t s through the many l eakag e s l e f t open by techno log ical advanc e s in commun ication s and transport systems , f inanc ial innova tion s , and mo re integra ted mark e t s for good s and s erv ic e s . I n re l a tion to the nature of th i s g rowing inter national interdependenc e , the r e l evant da ta are the increa s ing weight o f th e Uni ted S t a t e s in world produc tion o f internationa l l y traded goods and in internat iona l ly traded a s s e t s . Over the pa s t decade , the propen s i ty of the U . S . economy to import go o d s and non f a c tor s e rv i c e s ha s more than doub l ed , a r i s ing f rom o s c i l l a t ions a round a trend of about 4 percent to about 1 0 percen t , the
200
export prope n s i ty having f o l l owed a corre spond ing be havior . Mo re importantly , the ro l e played by U . S . do l l a r-denominated f inanc ial a s s e t s and l iab i l i t i e s in wor l d f inanc e , wh ich had inc rea sed continuou s l y s ince the inc eption o f the B retton Woods sys tem , ha s been drama t i c a l l y s trengthened wi th the recyc l ing proc e s s e s o f o i l surpl u s e s a n d devel opment o f interna tional bank ing and Eurocurrency mark e t s . The ma in imp l icat ion of th i s i s that a s a produc er of traded goods the u nited S ta t e s i s comparabl e in s i z e t o other ma j or economi e s , whe rea s i t s po s i t ion a s a pr i c e s e t t e r i n worl d f inanc i a l market i s , for a l l practical purpo se s , tha t o f a monopo l i s t . Thu s , for exampl e , th e impl ementat ion o f a pol icy o f monetary r e s traint in the United S ta t e s leads to h ighe r intere s t rates tha t a ttract capital i n f l ows f rom th e re s t o f the world . The s i z e of the U . S . capital ma rket is such tha t tho s e in f l ows of foreign sav ing s a re not l ikely to have any s ig n i f icant e f fect o n U . S . dome s t i c inter e s t rate s . C on s equen t l y , the behavior o f intere s t ra t e s in the Uni ted S tate s , and o n other a s s e t s denominated i n U . S . do l l a r s l inked to U . S . dome s t i c a s s e t s , are the resul t of e s sent i a l l y U . S . ec onomic pol ic i e s . 2 Th i s i s a ma j or departure from th e B r i t i sh- l ed wo r l d economy o f the nineteenth century and f i r s t decade s of the twent i e th , wh en f inanc ial condit ion s in Lombard S treet were h ighly s en s it ive t o external capital f l ows . It i s a l so a s ituation that violates c ru c i a l c onc l u s ions o f convent iona l balance- o f - payments theory based on such a wor l d . Perhaps th e ma j or impl ication i s the inab i l i ty o f a s y s tem o f f l exib l e exchang e rates to prov ide the non-U . S . wor l d wi th protection aga i n s t foreign d i s tu rbanc e s . A pol icy o f f inanc i a l re s traint in the United S tates wi l l commun icate i t s e f f e c t s t o the r e s t o f th e wo r l d th rough the rapidly c l ear ing c ap ital marke t s . The impact o f monetary contra c tion a n d the fa l l in externa l demand on the product ion l eve l s of tradab l e and nontradab l e good s in tho s e countr i e s wi l l be immediate , and th ere i s not much that exchang e rates can do to improve tha t s i tuation . They can c erta inly induce the proc e s s po inted ou t in Note 1 , but the impo rtance o f the s e e f fe c t s is re l a t ively neg l i g ib l e . F lexible exchange rate s , however , can have important insulat ing e f fec t s for individua l nation s if the re spon s e s o f d i f f erent count r i e s to U . S . po l i c ies dif f e r s ig n i f icantly . I t i s not probab l e , however , tha t there c a n be more than a f ew count r ies tha t manage to e scape f rom the U . S . - indu ced d e f l ationary impu l s e s a t the expen s e of o th er s , and in condi tion s of wo r l dwide rece s s ion s , i t is doubtful tha t the ¥ can do so at a l l f o r any s ig n i f icant period o f t ime .
201 The Moneta ry Mecha n i sm of the Expan s ion and Contrac t i on Proc e s s e s The ma in a im o f the se paragraph s is t o apply the monetary theo r i e s of bu s ine s s cyc l e s , phenomena developed by pre-Keyn es ian economi s t s , to the anal y s i s o f the wor l d economy . There i s a need to return to th i s th eoretica l approa ch becau s e , contra ry to s tandard static analy s i s , it l ink s the expans ion and e nsu ing contrac t ion pha s e s of an economy evo lv ing over t ime , and the r e l a t ionsh ips b etween real and monetary d i s equ i l ib r ia a re not as ea s i l y for gotten . Al though there are signi f icant d i f f erenc e s among the va rious the o r i e s of bu s i n e s s cyc l e s tha t place heavy empha s i s on monetary f a c tor s , and it is certainly d i f f i cul t t o put forward a presentat ion doing j u s t i c e t o them a l l , it i s po s s ib l e to synth e s i z e some common f ea ture s and g ive a s impl i f ied account of a bu s ine s s cyc l e induced by monetary forc e s . � Th i s is don e in the f o l l owing l in e s trying t o s in g l e o u t the ma in e l ements beh ind the up swing I n wha t f o l l ows , and th e downturn o f a cyc l ic movement . re ferenc e s to a money , capita l , or credit ma rke t shou l d be unders tood a s an ana l ogue for t h e set o f a l l depo s it tak ing and l e nd i ng banking act ivi t i e s that are made in do l l a r s and o ther interna t iona l r e se rve a s se t s . Add i t i ona l ly , no b reakdown o f the term struc ture of intere s t ra tes i s done . Therefore , references t o th e l ong - term rate o f intere s t shou ld be s een a s referring to th e natural or equ i l ib r ium ra te . Th i s rate , in tu rn , wou l d be th e one that , under g iven condit ion s , keeps th e rate of g rowth o f money income in pac e with that o f real ou tpu t and non in f l a t ionary expecta tions . The Expa n s ion Proc e s s A typ ical monetary cyc l e i s set in mot i on b y a growing di screpancy between f l ows of voluntary hoard ing and rates of c redit c reation . If unchecked , th i s d i s c repancy , whether i t i s origina l ly cau s ed by over exten s ion o f ' credit o r is the re sul t of ma intain ing rate s of credit wh i l e voluntary saving s f a l l , wi l l g enerate tendenc i e s l ead ing t o over inve stment and over indebtedn e s s s i tuation s . As suming tha t previou s rates o f g rowth o f c redit and f l ows o f monetary saving s were con s i s tent with f u l l empl oyment g rowth of output and non i n f l a t ionary expectation s , d i sequ i l ib r ium in th e money market w i l l cau s e nominal income to g row fa ster than out put volume s . Money rate s o f interest wi l l usua l ly f a l l or , in a n y event , r e a l rates of inte r e s t wi l l dec l ine in rel ation to the natural long-run rate , c re a t ing a premium f o r borrowe rs that further incre a s e s th eir demand for credit . During the s e in i t i a l stage s o f a proc e s s o f monetary overexpans ion , the total supply o f
202 c redit by banks i s h ighly e l a s t ic and can accommoda te the inc r e a s i ng demand o f borrowe r s without s ig n i f icantly eroding the d i f f erent ial between th e go ing real intere s t rate a n d the long - term one . Th i s proc e s s ha s a l so a counterpart on the rea l s ide o f the economy s ince th e rate o f intere s t not only regul a t e s mone tary phenomena but a l so inf luenc e s the a l location o f produc t ive fa ctor s to d i f ferent branch e s o f economic act ivi ty . As l ong a s monetary d i sequ i l ibrium pers i s t s , sector s where the capital con straint i s more b inding wil l tend to expand f a s te r , re l a t ive to trend s , than others . They wi l l absorb a greater share of the exc e s s supply o f bank c red i t s that have no c ounterpa rt in vOluntary hoarding but rather are backed by a rt i f i c i a l saving s coming ou t of the very monetary overexpan s ion . The s e s ec tor s , in greater need o f capital and mor e b en e f i t ed by the l ower ing of real intere s t ra tes and ava i lab i l ity of cred i t , wil l be prone to achieving f a s ter rat e s of growth rela t ive to other sectors than wou l d b e th e case in cond i t ions of mon etary equ i l ib r ium . Thu s , many inve stment pro j ec t s are l aunched , f inanced ou t of bank credit c reation in exc e s s of voluntary sav ing s , who s e v i ab i l i ty depend s o n the per s i stence o f d i sequ i l ibrium cond it ions in the money ma rket . Ma ny inve s tment s , not viab l e a t equ i l ibr ium real rates of intere s t , are undertaken on the expecta t ion s tha t current r e l a t ionships between f inanc ing conditions and i n f l a t ion w i l l pe r s i s t l ong enough to make them pro f itab l e . Ove r inve s tment and ma l inve s tment ph enomena , inve stmen t pro j ec t s who s e ma tur i ty and pro f i tab i l i ty are not compatib l e with equ i l ib r ium con ditions i n the money mark e t , a re thu s emerg ing . s tanda rd monetary theory of national economies u sua l l y neg l ec ts the ana l y s i s o f t h e e f fect s on the rela tive struc ture of s ec to r s o f the d i s tr ibut ion of an ex c e s s ive s tream o f money c reat ion , by cons ider ing them trans ient e f f ec t s . Ac cording to that theory , a l though the f i rs t impac t o f monetary d i s equ i l ib r ium may be un evenly d i s tributed , in t ime it wi l l b e proportionately shared by al l sector s o f the economy ; re l a t ive pric e s a r e thu s determined on ly b y rea l fa ctor s , monetary d i s turbances be ing ab l e only to produ ce tran s ient a l tera tion s o f the p r i c e st ruc ture . I n th e case of the wo r l d economy , however , exc e s s ive interna tional money c reation may l ead to the s truc ture o f relative prices or relative rates of g rowth o f count r ie s , wh ich can be approx ima ted by the s imi l e of secto r s in the preced ing l ine s , be ing d i s torted for pro longed period s . I t shoul d not be d if f icu lt to iden t i fy a cumu l a t ive proce s s o f monetary d i sequ i l ibr ium in the wor l d economy in the l a te 1 9 6 0 s and early 1 9 7 0 s and , aga in , in the mid- 1 9 7 0 s in b road con formity with that theore t i c a l pattern . The impa c t o f monetary overexpa n s ion in the United States dur i ng the l ate 1 9 6 0 s and early 1 9 7 0 s wa s largely channel ed to deve l oping countr i e s and wa s
203 perpetuated by the acce le rated devel opment o f Euro f inanc ing . Th i s development was i t s e l f a ccel e ra ted by the per s i stence of negat ive rea l rates of intere s t . Al though Eurocurrency mark e t s o f f ered greater nominal rat e s o f intere s t than o ther capital markets , tho s e rate s were not keep ing pace with inf lationary expectations . The degree to wh ich monetary d i sequ i l ibr ium cont inued to per s i s t dur i ng the f i r s t o i l shock i s d i f f ic u l t to a s s e s s . With the bene f i t o f h indsigh t , however , it could be said that credit c reation wa s a l l owed to f i nance greater current account de f ic it s o f nono i l countrie s , and greater increa s es in the p r ice o f o i l , than wou l d have been des irable f rom a l ong- term perspec t ive . The incent ive to overl end to devel op ing countr i e s wa s re inforced by the tendency of the i r export p r i c e s and export proceeds to inc f e a s e f a s t er than the pr ices o f other tradab l e goods and internat ional trade , respect ively . There a l so wa s an incentive to overborrow on the part o f producers of nontraded goods in some o f the se countr ie s . I n th o s e countr i e s where dome s t ic pol i c i e s were such that pr ice s o f n o n tradab l e go od s were expected t o r i s e f a s ter than the exchange rate plus the international rate o f intere s t , th ere wa s a premium for produc e r s o f n on traded goods to resort to externa l indebtedne s s - - a l l the more so , i f they were fac ing dome s t i c c redit o r . external resources The s e factors had a bearing on enl arg ing constraints . the a l ready h igh d i f ferent ia l between home and inter national real intere s t rat e s and induc ed comme r c i a l bank and pub l ic - sector ent i t i e s in some develop ing coun trie s to overborrow . The s e - d i f f erent ial e f f e c t s of a mon etary d i s equ i l ibr ium on dif ferent sectors h e lp t o exp l a in the d i s t r ibution of the debt prob l em among develop ing coun trie s as wel l as secto r i a l a spec t s with in a g iven country . For a g iven interna t ional nomina l rate o f interest the re w i l l be d i f f erent real rates of interest for d i f f erent borrowers , accord ing to the r e la t ive pace at wh ich the ir ea rning s a re expected t o r i s e , whereby dome stic f a c to r s may inf luence t h e degree o f wor ld monetary d i s equ i l ibr ium absorbed by the c ountry . As shown by the data in Tab l e 8 . 2 , the re sort to indebtedn e s s with th e inter nat i ona l cred i t sys tem ha s been much greater by devel op ing count r i e s in the Western Hemi sphere than in A s ia . Th i s has been due partly to d i f f erent structura l char a c te r i s t i c s and partly to d i f f e rent dome st ic po l icy re spon s e s between the two reg ions . For ins tanc e , economie s i n A s i a have u su a l ly a more developed long term f inanc i al segment in the i r capital market s . Additiona l ly , the i r pub l ic sectors have a ch i eved a more bal anced f i nanc ial performanc e , whe reby the degree of c redit rat i on ing o f the private sector wa s l ower than for count r i e s in the We stern H emi sphere . Rea l intere s t rate s , therefore , were genera l ly h i gher for devel o p ing countrie s in A s i a than in th e We stern H emi sphere dur ing the
C
7.6
30. 1
37 . 5
3.8
13 . 2
52 . 0
4.9
6.9
0.5
66 . 1
7.5
3.1
35. 4 7.7
84 . 4
2 04 . 1
1976
7. 3
51 . 2
6.6
5.5
31. 2 7.6
83 . 3
1 94 . 1
1977
5.6
42 . 4
7.9
5.0
9. 6
41 . 7
77 . 7
211.5
1978
�:
Interna tional Mone tary Fund ,
World Economi c Ou tl ook ,
1983 .
9. 8
49 . 6
3.3
4.5
40. 9 8.7
70. 2
192 . 9
1979
15. 9
58 . 2
3.4
6.0
35. 6 8.2
68 . 2
178. 4
1980
14 . 8
65 . 4
5.8
-0 . 1
41. 7 9. 2
72 . 5
207 . 4
1981
dol lar value o f G D P s over the
Inte rest and uti l i zation payme n t s a s percentages o f exports o f good s and s e rv i c e s
o f year- end debt to expor t s for indic ated year
8. 3
18 . 5
4.2
8.4
8.5
32 . 2
91 . 6
195 . 8
1975
Arithmetic ave rages o f country growth rate s we ighted b y the average U . S . previous yea r s d Geometric weighted averages o f country ind i c e s
c
: RatiO
LDCs in Asia ( ex c l ud ing China )
. d . Ch ang e s �n co n s umer pr�c e s LDCs i n We stern Hemi sphere
( ex c l uding Chin a )
LDC s in Asia
Hemisphere
Rea l GDP annua l chang e s LDC s in We s t e rn
Hemi sphere LDC s in Asia
27 . 9 7.8
81 . 0
b Deb t- s ervice ratio LDCs in We s te rn
163 . 4
Hemi sph ere
1974
LDC s in As ia
to exports of goods a and s e rvices LDCs in We stern
Average Rate o f Growth 1 968- 1 9 7 3
Aspec t s o f the External Debt Cyc l e in Selected Group s o f Developing Countries
Ratio o f external debt
Tab le 8 . 2
9.9
76 . 0
3.7
-1 . 5
54 . 0 9.8
80 . 9
245 . 6
1982
N o "'"
205 i n f l a t ionary expans ion proc e s s . Al th ough dome s t ic factor s are , of cour s e , important in determi n i ng the d i s tribut ional impact o f world monetary d i sequ i l ibr ium , it shoul d not be inf erred f rom th i s tha t adequate dome s t i c po l ic i e s cou l d have avoided , t o any s ignif icant degree , the current ex terna l debt c r i s i s in For one th ing , bank s were prone the We stern Hemisphere . to lend to the s e countr i e s tha t were growing very rapidly du r ing the l a te 1 9 6 0 s and early 1 9 7 0 s and , in f ac t , duri ng th e f i r s t ha l f o f the decade , a l though they were accumu l at ing inc rea sed inf l a t ionary pres sure s . It is easy to s tate , with the bene f i t o f h inds ight , tha t tho s e rates o f borrowing were exc e s s ive . I t wa s much more d i f f icul t to antic ipate a t the t ime the coming o f real po s i t ive intere st rates and , in fac t , nobody d id . Once we take account o f the f a c t tha t the future wa s unknown by the mid- 1 9 7 0 s , it mu s t be recogni z ed tha t it wa s n e i ther pol i t i c a l l y f ea s ib l e nor economi c a l l y e f f ic ient to ab stain f rom borrowing a t real intere st rates tha t , even a s suming dome s t ic d i sc ipl ine , were very l ow by h i stor ical s tandard s . The Contrac ti on Proce s s B u s i ne s s cyc l e theo r i s t s were particularly eager to show how a pro c e s s o f inf l ationary expa n s ion b rought about by monetary d i s equ i l ibr ium carried with it the seeds o f a cumu l a t ive proc e s s of rec e s s ion . Over indebtedn e s s and depr e s s ion phenomena were s een as having the i r orig i n s in previou s over inve s tment and i n f l a t ionary expan s ion , th e gravity o f the rec e s s ion b e ing r e l a ted to th e magn i tude o f the c au s a l in f l ationary d i sequi l ibr ium . S everal forc e s are set in mot ion by the proc e s s of growing monetary d i s eq u il ibrium, wh i ch a c t by arres ting the i n f l a t ionary growth o f real ou tput that accompan i e s th e expa n s ionary movement . There i s a l ea rn ing proc e s s b y wh ich savers antic ipate better th e e f f e c t s of credit expa n s ion on the purcha s ing power of the i r earnings so tha t they are l e s s wi l l ing to ho ld the i r sav ing s on f inanc i al a s s e t s with very n egat ive rates of intere st in succe s s ive s teps o f t h e expans ionary proce s s . When i n f l ationa ry expecta t ion s are very h igh r e l a t ive to the nominal rate o f intere s t , not only do savers tend to part with hold i ng s of f inanc ia l a s se t s but produc ers a l so u s e up idle balanc e s and reserv e s who s e opportun i ty c o s t i s v e r y h igh when r e a l i n t e r e s t ra t e s a re nega t ive . Thu s , a s i n f l a t i onary expec tations become emb edded in wea l th ho l ders , it i s increa s ing ly mo re d i f f icu l t for bank s to extend credit at rate s b e l ow expected i n f l a t ion , and th e relat ion sh i p between nominal intere s t ra t e s and p r i c e s tends to approach the l ong-term trend . A second force a t wo rk in check ing th e g rowth o f r e a l outpu t accompany ing a proc e s s of i n f l a t i on a ry income
206 expa n s ion relates to the r i s k component i n the rate o f intere s t . At any moment the marke t for loanab l e funds wi l l b e c l e a r ing by a s t ructure o f intere s t ra tes re f l ect ing the d i f f erent r i sk s egment s o f the market . Succ e s s ive l y g rea ter loans to the same borrower are not the s ame commodity , but d i f f erent one s each carrying marg i na l l y greater r i s k . Even a s suming an in f in i tel y e l a s t ic supply o f internat ional c redit for a cer t a in period , a g iven borrower wi l l no t face a c on s tant inte rest rate for inc reased amounts o f loan s . Regardle s s o f wha t may happen t o th e internation a l l y determined intere s t rate s , individua l borrowe r s wi l l genera l l y be faced with a gradua l ly more ine l a s tic supply o f loan s , The depending o n th e growth o f th e i r ou t s tanding debt . tran s i t ion f rom a r i sk - e l a s t i c to a r i sk- ine l a s t ic supply schedu l e o f c redit may o r may not b e a smooth one , . but soon er or l ater h eavy bor rowe r s wi l l face sub s tantial increa s e s in average intere s t ra te s , a s a re f l ect ion o f an inc rea s e in the r i s k component . On the o ther hand , bank s wi l l not merely attempt to earn greater intere s t ra t e s f o r thei r loans but wi l l a l so lower c redit expa n s ion in order to r e s tore the l oanab l e a s s e t s - to capital ratio tha t deter iorated dur ing the overl end ing I n so doing , they wi l l attemp t to reduce to an period . even greater extent the r i s k i e s t a s s e t s corre sponding to the mo s t h eavily indebted borrower . The s t ructure o f produc t ion wi l l move so a s to con form with the new cond itions in the money market . The re s torat ion o f natural l ong- term rate s of intere s t p l a c e s a h eavy burden o n tho s e sectors in need of capital who s e inc rea sed rate o f growth wa s cont ingent on the cont inuance o f mone tary d i s equ i l ibria and correspond ing cheap and abundant cred i t . S ome inve s tment pro j e c t s mu s t be l iquidated a n d othe r s s l owed down . Other sector s and a c t ivi t i e s th at , whi l e not exc e s s ively indebted , were dependent upon th e overbo rrowing and g rowth o f the f ormer secto r s are a l so undergo ing a s e r iou s squee z e o n the i r p ro f i tab i l i ty r e s u lt ing f rom the decrea sed demand f o r th e i r produc t s . A sub stantial part of the enla rgement in real outpu t bu i l t up dur ing th e up swing wi l l thereby be d e s troyed in the cou r s e of the ensu ing depre s s ion . It is not only that many inves tment s are l iquidated in an intermediate s tage , but that a share of i n s ta l l ed capac ity i s no l onger pro f itab l e at all s ince i t s marginal produc t doe s not cover c o s t s inc l u s ive of ex ternal debt s e rvice . A seconda ry depre s s ion might take place i f the f eedback e f f e c t s of ad j u s tmen t s in th e real s e c tor on the monetary s ide o f the economy are of s u f f i c ient inte n s ity . S ince th e expan s i on in many sector s wa s f inanced to a l arge extent by debt contrac tion rather than by saving s of producer s , share s , or long- term loan s , there i s a r i sk tha t debtors might f a i l to ful f i l l the i r obl igations , espec i a l l y i f the tran s i tion f rom nega t ive
207 to po s i t ive real intere s t rates has been too abrupt , and real intere st rates have oversho t . There i s the po s s i b i l i ty o f a n exp l o s ive debt cyc l e . Rea l debt s incre a s e with real intere s t rate s , a n d the i r growth tends to i n duce a further contraction o f credit b y bank s , wh ich in turn wi l l put add i t ional pre s sures on the debtor s to servi c e the i r obl igation s . 5 With the exception o f the proc e s s o f secondary depre s s ion , recent developments in the wor l d economy have been i n broad ac cord wi th the foregoing highly s imp l i f ied theore t i c a l pattern . However , over the per iod there were noncyc l i c events that shou ld be put into the picture to exp l a i n more adequately the s everity of the externa l debt c r i s i s . Above a l l , it mu s t be pointed out that current real intere s t rate s are a s far from equ i l ibr ium a s the negative rates preva i l ing during the 1 9 7 0 s . As a l ready mentioned , current real intere s t rates are the result o f a d i s to rted po l i cy m i x in the united S tates . T h e cyc l i c forc e s operati ng t o arre s t i n f l a t ionary g rowth and negative real intere st rates have been magn i f i ed by the s i z e and expectations on the U . S . pub l i c - sector de f i c i t . The U . S . economy , the richest in the wor ld , i s importing c ap i t a l f rom o the r countrie s , many of them deve lop ing one s , through s i z ab l e current account de f i c i t s to f i nance a large proportion o f i t s pub l i c - sector de f i c i t . The United States is rece iving cons iderab l e capital i n f l ows no t only directly f rom the rest o f the world but a l s o indirectly through the crowd ing-out e f fect in inter national and U . S . bank ing in f avor o f U . S . a s s e t s and secur i t i e s and aga inst a s s e t s in deve loping countrie s . Thi s l atter e f f ec t has been re inforced by f inanc i a l deregulation a n d i nnovation i n t h e U . S . capital market which have tended to reduce the degree o f f inanc i a l inter national intermediation through Eurocurrency marke t s . Thu s , the proc e s s o f contract ion and the appearance o f probl ems o f servic ing external debt have been accelerated and aggravated by tho s e deve lopments super impo sed on cyc l ic a l f actor s . The gravity o f the s i tuation c a l l s for act ion on a n international bas i s i n o r d e r to prevent t he onset o f a s econdary depre s s ion and eventual breakdown o f the inter nationa l monetary mechani sm . The f o l lowing sect ion con s iders the scope for action by internationa l monetary inst itutions to deal with the strains threatening the cohe s ivene s s of the world economic fabric . THE SCOPE FOR ACT I ON BY INTERNAT I ONAL FINANC IAL INSTITUT ION S I n t h e short run , there i s n o t much that inter national f i nanc i a l i n s t i tutions can do without appropriate po l ic i e s i n the large s t indu s t r i a l countri e s . A nec e s s ary cond i t ion for the global recovery o f the world economy
208
and a sat i s f actory solution to the externa l debt prob l em i s obviou s ly the sustainab i l ity o f the recent p i ckup in the u . s . economy . There seems to be general agreement that for thi s to happen a change in the current stance o f the po l icy mix , correct ing the trend toward greater budgetary d i sequ i l ibrium , is needed . A vigorous and stab l e economi c recovery wi l l requ ire stead i ly growing f l ows of pr ivate capital f ormation , wh i ch in turn c a l l f o r expectations o f moderate and reasonably stab l e p r i c e s f o r the s ervi c e s o f capita l . A U . S . economy that i s growing in the context of potent ial intere st rates c l o s e r to long-run value s wi l l exert a powerful and bene f i c i a l inf luence on deve lopment countr i e s and current externa l debt strains . A re storation of wor l d monetary equ i l ibr ium and long-term norma l rea l interest rate s wi l l ea s e the pressures to serve the volume o f out stand ing externa l debt tha t , for the mo st part , was contracted at f loating intere st rat e s . Even though spread s over the pr ime rate o f international l ending wou ld continue to be very high for debt-r idden countr i e s , the impact o f de c l ining real intere st rates and accompanying deve lopments in the rea l sector wi l l sub stant i a l ly improve the economic c l imate and entrepreneu r i a l expectations in such coun tries . Whereas the sustained recovery o f the u . s . economy i s certainly a nece s s ary condition for the stabi l i ty o f the f i nanc i a l system , it i s b y n o means a su f f i c ient one . Even if the recovery con s o l idates and a s trong non i n f l a t ionary growth can be susta ined , it wi l l render its e f fects on deve loping count r i e s on ly a f ter a certain lag . Whatever the l ength o f th i s lag may be , it should be kept in mind that the capa c i ty to ad j u st in many deve loping count r i e s i s rap idly reaching uns urpa s s ab l e l imi ts . Moreover , the deteriorated state o f conf idenc e in economic prospec t s throughout the wor l d i s not going to improve overnight , even i f d e f inite symptoms that the depre s s ion is over become appa rent . Therefore , the v i ta l ro le t o be p l ayed b y the internat iona l f inanc ial insti tu tions in genera l , and by the IMF in particular , ove r the period ahead can hardly be ove r e s t imated . The fol lowing paragraph s rev iew some po s s ible actions by internationa l f inanc i a l i n s t i tutions in rel at ion to the a d j u s tment proc e s s and international l iquidity c reation in the short run . The i r l imitations and shortcoming s in cop ing with the pres ent wor l d economi c c r i s i s are con s i dered in the next section . Ad j u s tment P roc e s s e s and The i r F i nanc ing One of the c r i t i c a l aspects o f the a d j u s tment pro c e s s is the viabi l i ty of the economi c programs that many debt-burdened count r i e s are currently imp l ement ing . The achi evement o f stab l e equ i l ibr ium cond i t ions in the
209
wo rld economy may we l l depend o n the suc c e s s o f the s e programs in attain ing sustainable b a l ance of payments structure s . As ana l y z ed in the section " The I nte rnat iona l Bus ine s s Cycle and the External Debt C r i s i s , " the s e count r i e s absorbed t h e l a rge st impact o f wor l d monetary d i sequ i l ibrium and are s u f f e r ing the grave st consequences o f monetary ad j u s tment in the large s t i ndu s t r i a l coun t r ie s . They are now forced to tran s fer a s ign i f icant propo rtion o f th e external re sourc e s they rece ived during the expan s ionary proce s s o f the wor ld economy . I f , how ever , they are requ ired to tran s f e r an unbea rab l e amount- the total tran s fer o f f i nanc i a l resourc e s be ing me a s ured by the d i f f erence between nominal rates o f interest attached to outs tanding debt and the proportion accounted for by new l ending over a corre spond ing period 6 - - the world economy could go into the s econdary depre s s ion phenomenon ana l y z ed in the previous sect ion . The I nternat ional Monetary Fund i s mon i toring and cof inanc ing many of the s e ad j u s tment proce s s e s . IMF lending to f i nance ad j u s tment prog rams is s imi l ar to di scount po l i cy by central bank s in that i t prov ides a certain amount o f cred i t cond i t ional upon the ob servance of certain ratios related to th e f inanc i a l performance of the borrower . Contrary to what happens in the c a s e o f a central bank , however , the amount o f l ending the IMF can extend i s not s ign i f i cant in relat ion to the d imen s ion s o f the balance-of-payments probl ems o f the s e countrie s ; n e i ther are the func t iona l characte r i s t i c s of the i n s t i tution su i ted to al l ow it to perform a s imi lar role in conditions o f wor l dwide economic d i s turbanc e s that are not o f a mi ld , temporary nature . The Fund ha s not the capac ity to act a s a l ender of l a s t resort to central bank s o f the wor l d , rap idly f a c i l i tat ing br idge f i nanc ing unt i l e i ther ad j u stment or negot iated l iqu i di ty provide s the needed externa l resource s . Thi s i s a ro l e th at has been p l ayed by the Bank for Internat ional Set t l ements to some extent . The rationa l e for the Fund in the se c i rcums tanc e s depends on i t s capa c i ty to channe l inter national l iqu idity f rom the wo rld bank ing sys tem to the In countri e s carry i ng out severe ad j u s tment proce s s e s . th i s respect , the ro l e o f the Fund in cutting the tendency toward s e l f-defeating economic behavior on the part of th e bank s th rough the ful l exerc i s e of its power s o f moral su as ion and i t s .p ivotal po s ition in coordinating central -bank actions has certainl y proved to be e s sentia l . The Fund ha s been ab l e to i nduce much greater f lows o f international c red i t toward economi e s mak ing sUbstant i a l ad j u s tment ef forts th an voluntary l ending wou ld have a l lowed . Having sa id th i s , there are some que stions to be r a i s ed in connect ion with the ro l e of th e Fund in the ad j u s tment proce s s . For i n s tance , it i s que s t ionab l e whether the pre s ent mix o f ad j u stment and f inanc ing i n many of the s e count r i e s i s adequate enough t o ach i eve bal ance-of -payments
210 equ i l ibrium wi thout inf l i ct i ng con s iderab l e damage o n the growth capac ity o r the s o c i a l fabric of the countries concerned . Another fundamental and re lated que s t ion to be addre s s ed i s whether the respon s e of the international f inanc i a l system mon itored by the Fund to the f i r s t stage o f the external debt c r i s i s cou ld be repeated , shou l d the t iming o f t h e recovery proc e s s in t he la rge st indu s t r i a l count r i e s fail to make viable the sort o f proc e s s toward external equ i l ibrium a s sumed b y current ad j u s tment programs . The only degree of f reedom l e f t to the Fund i n dea l ing with the prob lems invo lved in the s e que stions i s , a s mentioned , to a s s i s t i n the ad j u s tment of tho s e countr i e s in n e e d o f i t s resources a n d o f t h e pyramid o f private cred i t that may be b a s ed on them . The room for maneuver o f the Fund in this area , in turn , wi l l depend on its capac i ty to extend adequate amount s of resources to all countr i e s imp l ementing appropriate ad j us tment po l ic i e s . P r ivate bank s wi l l not e a s i l y increa s e or ma in tain the i r expo sure in devel oping countries if the I MF i t s e l f doe s not do the same . The cont inuou s pre s ence of the I MF in tho se count r i e s co u ld requ i r e chang e s in certain deeply rooted trad i t i o ns l ike the revo lving nature o f Fund re sourc e s and the reluctance to resort to external sourc e s of f i nance othe r than governments and central bank s . Prob l em o f the IMF Resource s T h e IMF quota sub scr iption s , on which i t s l ending capa c i ty has trad i t i ona l ly been based , were increa s ed by 4 7 . 5 percent f rom SOR6 1 b i l l ion to SOR9 0 b i l l ion ( f rom about U S $ 6 7 b i l l ion to U S $ 9 8 . 5 b i l l io n ) when the E ighth General Quota Review came into e f fect at the beginning of 1 9 8 4 . Mo s t countries rep re sented at the Execut ive Board o f the IMF are concerned that the s e re sources may prove inadequate to deal with th e problems po sed by current f inanc i a l strains . The s e fears have been reinforced by the events a s soci ated wi th the d i f f i cu l t i e s of some coun t r i e s in servic i ng the exte rna l debt and by the s i z ab l e increa s e in the demand for t h e Fund ' s re sourc e s . ? Addi t iona l ly , the poten tial impact o f increa sed quotas on the Fund ' s contr ibu tion to the ad j u stment proc e s s has been somewhat eroded by the conc l u s ions reached by the Interim Committee of th e Board o f Governo r s of th e I nternational Monetary Sys tem at the meet ing hel d on Septembe r 2 5 , 1 9 8 3 . At th i s meet ing th e dec i s ion wa s made to reduce the mu l t i p l i e r c o e f f i c ient appl ied to the quota of members to determine the max imum amount of Fund loans and break the level of acc e s s into two tranche s . The extent to wh ich th i s dec i s ion cou l d o f f s et the increased l ending power s of th e Fund invo lved in the augmentation of quota s wi l l depend on the interpretation o f the two- tier system o f acce s s to the resourc e s
211 e stab l i shed in the dec i s ion . Even i f the scheme i s app l i ed with f l ex ib i l ity , the Fund cou l d exper ience an exce s s demand for its r e s ourc e s , s ince many countries not h i therto invo lved with i t may requ e s t f i nanc ial a s s i stance i n the per iod ahe ad , a s the pu l s e o f the recovery doe s not s eem to be f i rm enough . It wi l l then be nec e s sary to resort to external s ources of f inance oth e r than quota s . Borrowing by the Fund f rom government s and o f f i c i a l i n s t itution s i s a t ime-consuming proce s s , and appa rently i t i s unable to cover the f inanc i a l needs o f the i n s t itution in present c i rcums tances of the world economy . There f o re , the Fund shou ld borrow f rom p r ivate f inanc ial market s i n amoun t s and with the matur ity di ctated by the evo lving wo rld economic s i tuation . The Fund ' s borrowing f rom pr ivate capital marke t s is l iable to cause a crowd ing out o f internal a s sets that are not now ava i l ab l e for deve loping count r i e s . Th i s is a more de s i rab l e devel opment in the p re s ent j uncture of inter national cap ita l market s , character i z ed by a con s iderable dec l i ne in th e d e s ired external a s set-to- capital ratio s . The Fund should mak e an attempt to s eek the wide s t po s s ib l e spread o f matur i t i e s and t o cover mo s t s egments o f th e international capital market s . Idea l ly , it shou ld borrow e i ther in SORs or i n the currenc i e s that compo s e i t s b a sk et . The pre s ence o f the Fund in private capital market s i s fu l l y j u s t i f ied on t h e grounds o f short- run con s ider ations and l onger- term prospe c t s . The uncerta int i e s surround ing t h e proce s s o f trans it io n toward viab l e external debt structures may g ive r i s e t o a sudden need for the Fund to have sub stant i a l re sourc e s at i t s di spo s a l , shou l d a ma j o r unexpected deve lopment a r i s e e i ther on t h e part o f the bank s or o f the heav i l y in debted borrowing countrie s . F rom a l onger- term perspec tive , the wide spread pres enc e o f the Fund and the SORs in the markets could contribute to the ma rch of th e i n s t i tut ion into a central bank a l ong l in es con s idered in the next s e ct ion . The SOR A l l ocations Anoth er area in wh ich there i s scope for further act ion by the Fund i s the i s suance o f internat iona l ly contro l l ed l iqu id ity through SOR a l location s . The Fourth B a s i c P e r iod ( each ba s i c period be ing the t ime unit dur ing wh ich c reat ion of SORs is cons idered ) started in 1 9 8 2 without any prov i s ion for a l l oc a t ion . As a resu l t o f the voting s t ructure o f th e Fund , propo s a l s f o r a n S O R al locat ion have n o t y e t obtained the neces sary ma j o rity . 8 A l l the requ i r ements for an SOR a l location cons idered i n th e Art ic l e s o f Ag reement of t he F un d wou ld appear to indicate cont i nuou s a l locat ion o f SORs over t ime s o a s to convert th i s into the centerpiece of the
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internat ional monetary sys tem . F rom the inc ept ion o f the SOR scheme it wa s c l ear that a l location o f SORs shou ld be cons idered a s an instrument th at wou l d a l l ow the share o f internat ional reserves accounted for by SORs to grow over t ime . The development o f international bank ing and the g rowth o f international l iqu idity over the per iod l ed to que stions about the viab i l ity o f the SOR pro j ect . Al though not o f f ic i a l l y and openl y recogn i z ed , the sort o f interna tional monetary sys tem centered on the SO R , wh ich commanded support by t h e ma j or ity o f Fund memb e r s in t h e pa s t , i s no more th e longer-term ob j ec t ive into wh ich international monetary arrangements shou ld converge . Even though i t i s c lear th at the overa l l commi tment to promote the SOR as a princ ipa l r e s erve a s s e t o f the intern a t ional monetary sys tem doe s not command the wide spread ma j or i ty tha t i t onc e did , i t i s paradox ical tha t the scheme h a s been que st ioned when it i s mo st needed f rom the s tandpo int o f its short- run potent i a l i t ie s . As ana l y z ed in th e previous s e c t ion , the mechani sm for the generat ion o f international l iquidity i s sub j ec t to erratic f l uctuat i on s whe reby a per iod o f overexpans ion is fo l l owed by a ph a s e o f exc e s s ive contra c t ion . The f a l l i n , or the absence o f , importance of the SDR h a s prevented i t f rom p l ay ing a n y s i g n i f icant role in ch eck ing the expan s ion o r contraction o f l iqu idity . As for the contract ionary pha s e current ly go ing on , a l though th e range o f a l locations contemp l ated in various me etings o f t h e interim committee wou ld n o t have corrected the s i tuation of international l iqu i d i ty in any fundamental s en s e , g iven th e n e g l i g ib l e proportion o f internationa l r e s e rves a c c ounted for by SORs , it wou l d have a f fo rded some re l i e f and strengthened conf idence in the ex i s tence o f a valve through wh ich the IMF cou ld exert the ro l e o f l ender of l a s t re sort t o the internationa l f i nanc i a l system . Therefore , a l location of S O R s shou ld be re sumed in the short run , a l though in the longer run the attitude o f some national auth o r i t i e s to th e r e l evant sections of the Artic l e s o f Agreement o f the IMF , in accordance with wh ich the SOR would be made the princ ipal reserve a s s et in the system , mu st b e c l ari f i ed . One o f the prob l ems rel ated to the c reat ion o f SORs i s that the a l l ocat ion procedure tends to put more SORs in the hands o f thos e that need them l e s s . The d i s t r i but ion o f uncondi tional l iqu idity in t h e form o f SORs i s not rel ated to the r e l a t ive reserve a s set needs of countr i e s , at l e a s t no t in th e f i r s t impact , but t o th e i r relat ive quota in the IMF . I t wou l d , th erefore , be convenient to conce ive scheme s so a s to red irect c reated res e rve s through SOR a l locat ion s to the count r i e s in re l a tive ly greater need o f internatio nal l iqui d i ty , wh ich in any c a s e wou l d rece ive some re l i e f by the SORs directly a l l ocated to them . One po s s i b i l ity wou l d b e to reach a compromi s e for a l oan to the Fund on the part of tho se countr i e s that wou ld r e ce ive th e larger share in
213 SDR a l location s . B y th i s mean s , SDRs wou l d b e trans f erred to the General Resourc e s Account o f the Fund and wou l d be ava i lable to increa s e the f inanc ing to coun t r ies carrying out a d j u s tment p roc e s s e s . 9 As c an be inf erred f rom the forego ing cons ideration s , the room for maneuver o f international monetary inst i tu tions i n dea l ing with the current monetary c r i s i s is rather narrow . I n the next section , some po s s ib l e exp l anation s a r e g iven o f the reasons behind th i s l imited c apac ity o f the s e inst itutions tha t are .suppo sed to be the guard ians of the international monetary system in prevent ing and cop ing wi th the externa l debt c r i s i s . SHORTCOMINGS AND L IMITAT I ON S OF INTERNAT I ONAL F I NANC I AL INST I TUTIONS Th e fundamental ax iom upon wh ich the B re tton Woods system wa s bui l t wa s the c ont inuous exi stence o f con ditions o f approx imate equ i l ibr ium in the wor l d . The IMF , in particu l ar , wa s d e s igned to ope rate with in the context o f a wor l d moving a l ong a n equ i l ibrium path . I t wa s conc e ived to support a wor l d economic sy s tem in equ i l ibr ium , the foundation s o f wh ich wer e to be e stab l i shed by mea n s a n d actions beyond t h e s c o p e o f the Fund . T h e ma j or po st wa r economie s were brought into the equ i l ibrium zone by direct grant s and loans f rom the United States to the European countries tha t , by then , were the ma in capital importers in the worl d . Once the s e actions out s ide the Fund were impl emented and took e f fect , that agency wa s cons idered re spon s i b l e for providing the nec e s s a ry gu idanc e and inte rna tional l iquidity to correct minor devi at ion s a r i s ing in the economic performanc e o f a f ew count r i e s and tha t o f the rest o f the wor l d f o l l owing an equ i l ibr ium pa th . It wa s bel ieved that the commi tment to ful l employment in the l arge st indu s t r i a l i z ed count r i e s a l ong with f ine tun ing pol ic i e s wou ld guarantee the ach ievement o f adequate and stab l e rates o f growth for the world economy a s a who l e . Thi s view wa s f u l l y embod ied in t h e d e s ign o f t h e funct ional f eatures and general purpo s e s of the IMF . I n a wor l d in wh ich overa l l depr e s s ion or inf l ation wa s ru l ed out , instanc e s o f d i s equ i l ib r ium were con temp l a ted as d i spa r i t i e s between the level s of c o s t s , income s , and prices between one country and the r e s t o f the wor ld . Accord ing to t h e ru l e s a n d regu l ations o f the IMF , tha t country could f i nance i t s extern a l d i s equ i l ibr ium by drawing f rom the institution i f the factors l e ading to the imbalance were of a temporary and sel f -correcting nature . If the d i s equ i l ibr ium wa s j udged to be " fundament al , " the only prec i s e def inition for th i s b e ing t o cons ider i t non- s e l f - revers ing with i n a rel a tiv el y s ho rt per iod o f t ime , t h e country wa s a sked t o deva lue and impl ement a f inanc ial package a s a prerequ i s it e
214 to draw f rom the Fund . A non- s e l f- reve r s ing fundamental equ i l ibr ium wa s thought to be amenab l e to short- run treatment . The mix of expenditure- cut a nd expend iture switching pol i c i e s o f the Fund ' s programs woul d b ring the country back in l ine with internat ional equ i l ibr ium con ditions i n a short per iod of t ime , a l lowing the prompt repayment o f the tempo rary c redit extended by the Fund . The f i nanc ial r e s ou r ce s o f thi s in s t itution were thu s s een a s a revo lving fund , drawings from wh ich were to be repaid after the relat ive ly short period ne eded to correct minor d i s equ i l ibria . I t i s important to rea l i z e tha t in the pre s ence o f a worldwide cyc l ic depr e s s ion o f a c ertain l e ng th a n d a g iven nature and degree o f wor l d economic interdependenc e , th i s s cheme break s down compl etely . I n the face o f a worldwide rece s s ion or ig inat ing in one or more l a rge indu s t r i a l countr i e s , s imu ltaneou s e f forts by other coun t r i e s to correct extern a l imba lanc e s th rough dome s t i c de f la tion a n d devaluation cou l d lead to further f al l s i n the i r export proceed s , thereby agg ravat ing t h e s ituation and plac ing the who l e burden o f ad j u s tment on th e income mechan i sm operat ing th rough the import s ide . More impo rtantly , i f worldwide depre s s ions are cau sed by in f l at ionary overexpan s ion , what i s needed then is to curb exc e s s ive mone tary growth in the largest indu s tria l i z ed countri e s . The IMF not on l y l a cks the mean s to ach i eve th i s end , but it a l so requ i r e s a completely d i f f erent conceptu a l appa ratu s . The bu i l t- in contradic tions o f th e Bretton Woods s y s tem tha t u l t imately l ed to i t s breakdown are we l l known , and ther e is no need to dwe l l upon them furthe r . What i s l e s s f requently tak en into accoun t , however , is the bear ing th at th e a s sumption o f a wor l d economy smooth l y evo lving around an equ i l ibrium path ha s on th e e f f ec t ive func tion ing of th e internat ional monetary s y stem . F rom the beginning of the B retton Wood s negot iations there were two d i s t inct views a s regards the inst itutional structure needed to suppo rt the inter the Keyne s i an view of a world na t ional monetary s y s t em : cent ra l bank and the U . S . view o f a stabi l i z ation fund . I f the worl d economy wa s supposed to move a l ong a path of s tab l e equ i l ibr ium , there was obviou s l y no need for a wor l d central bank u s ing wha tever a s sets it might have to prevent ma j or departure s f rom equ i l ibrium . A l l tha t wa s needed wa s the sort of stab i l i z ation fund actua l l y ma j or brought into b e i ng . However , wo r ldwide cyc l ic d i s equ i l ibria c a l l for an interna t ional agency endowed with the powe r s and mean s to s tabi l i z e the wor l d credit cyc l e . Only i f th e IMF we re redes igned a round the image o f a centra l bank cou l d it b e in a p o s i t ion to carry out one j ob o f ensur ing a path o f stab l e growth for the wo rld economy . T h e s e shortcoming s and l imitations o f the Bretton Wood s i n s t itutional net did not pa s s unnoticed when the sy stem wa s init iated and , indeed , orig inated s ome
215 propo s a l s for a l ternative international f inanc ial arrang ements . For ins tance , in Jacob Viner 1 0 there can be f ound no le s s than f ive e s says , dated 1 9 4 5 - 1 9 4 7 , con ta ining h i s propo s a l for a countercyc l ic international lending agency a imed at s tab i l i z ing empl oyment throughout the wor l d . The central theme o f thi s propo s a l wa s the need for a s et of internat iona l agenc i e s that embodied the re spon s ib i l i ty o f the l arge s t i ndu s t r ia l i z e d count r i e s for s tab l e wor l d economi c growth , inc lud ing tha t in the backwa rd regions of the wo r l d . The ma in long - run opera tiona l p r i nc iple wa s the apparently s impl e idea of c o l l ec t ing funds at t ime s of bu s ine s s expan s ion and l end ing them a t t ime s o f economic pres sure s . For short- run d i sequ i l ib r i a s t emming from a d i s torted wor l d d i s tr ibu t ion o f payment imb a l anc e s , compu l so ry arrangement s were env i s aged by wh i ch external c redit wa s to b e extended f rom surplu s count r i e s with r e s e rve currenc i e s to tho s e o th e r s who s e shortage s o f interna t ional res erv e s and l iqu idity were related to the forme r s ' surplu s . S imilar scheme s were put fo rward by two United Nations report s , N a t i onal and I nternat ional Mea sures for F u l l Em 1 0 men t 1 9 4 9 ) and Mea sures for International Economic Stab i l ity ( 1951) . I t i s intere s t ing to note that the l atter report deemed it nec e s s a ry to carry out far- reach ing chang e s in ex i s t ing interna tional arrangements al ong tho s e l i n e s even though th e wor ld economy f o l l owed an equ i l ibr ium pa th . It wa s b e l i eved by the autho r s of th e report tha t the cyc l ic in stab i l i ty o f the U . S . economy , even i f not depa rting s ig n i f icantly f rom the equ i l ibr ium path , might g ive r i s e to exc e s s ively d i s tortive repe rcu s s ion s for deve loping count rie s . I t mu s t be accepted that any ser iou s pro j ec t o f interna t ional monetary reform mus t come t o terms with the prob l em o f s tab i l i z ing the wor ld credit cyc l e and avo id ing ma j o r d i s ruptions o f an e s sent i a l ly monetary o r ig i n . I nternational monetary po l icy i s the t a sk of inter national monetary agenc ie s . In a way , i t wou l d not b e an exagg eration to say tha t the s everity o f the current c r i s i s o f the wor l d economy i s partly due to the per s i s tence o f the ins t itutional t i s su e , with broadly the s ame operational f eature s , o f the B retton Wood s system even though the ba s ic a s sumptions that made that s y s tem viabl e no longer ex i s t . A cruc ial opportun i ty to funda ment a l ly correct th e s y s tem and adopt it to the changed s t ructure and behavioral feature s of the wor l d economy wa s m i s s ed during the d i s cu s s ions on world monetary For a number of rea s on s reform du ring the early 1 9 7 0 s . tho s e attempt s were frus trated . F i r s t , there wa s the reluc tance of count r i e s to accept constraints on the conduct of the ir monetary po l i c i e s in th e short run that are impl i c i t in any se riou s pro j ec t o f a reformed monetary s ystem , and , s econd , the bel i e f in the insu lat ing prope r t i e s o f a sy s tem o f f l ex ib l e exchang e rate s . The nonre form o f th e interna tional monetary s y s tem ha s
216 certainly not been without c o s t for the wor l d economy . As J . Wi l l iamson has put i t , " And so the wor l d ended by gett ing ex actly what i s impl ied by thos e attitude s - - a non sys tem with no coherent mecha n i sm for monetary coordina tion but relying instead on ma rk e t s to reconc i l e the un coordinated . We are sti l l l earn ing how h igh a price in terms o f economi c e f f ic i ency ha s been paid for the tr iumph of monetary nationa l i sm . " l l THE WORLD MONETARY SYSTEM AND THE INTERNATI ONAL BUSINESS CYCLE : A LONGER V I EW The v i ew tha t th e prof it mot ive , i f wo rk ing a lone , cannot l ead to an optimal s tructure o f the money ma rk e t s h a s l ong b e e n shared by mo s t economi s t s . Theoret ical cons idera tions a s we l l a s h i storical experienc e s sugg e s t that i f l e f t unchecked competit ion i n the s e marke t s wi l l tend t o break down any monetary s tandard . Thu s , a role for government in monetary and bank ing a rrangement s ha s been accepted by economi s t s of a l l schoo l s . E ither a commodity s tandard or a f iduc iary s tanda rd , i f l e f t to private i n i t i a t ive , wou ld be i nherent ly unstab l e and eventua l ly break down . The ma intenance of a commodity standard in a growing economy with price stab i l ity re qu ir e s a cons iderab l e amount of real re sourc e s to produce the des ired acc retion s to the s tock o f the monetary commod i ty . The u s e o f a re l a t ive ly sub s tant ial volume of rea l resourc e s devoted to thi s purpo s e , together w it h the great d i f f ic ulty had by produc e r s o f the monetary commodity to match the demand for it , e s tab l i sh e s .s trong incentives to f ind cheaper way s of providing the exchange medium . F iduc i a ry e l emen t s are thu s introduced into the monetary system . I f the government does not intervene a t th i s stage , many individua l i s suers wi l l be encouraged to i s su e additional amoun t s o f f iduc iary currency a s l ong a s i t s c o s t o f produc t ion i s lowe r than i t s purch a s ing power , whereby there w i l l b e a tendency to drive the monetary commodity out o f c i rcu l a t ion . Add i t iona l ly , it wou l d be d i f f icult to prevent over i s sue o f the f iduc iary commodity by individua l producer s , and eventua l l y a f a i lure o f some produc er to ful f i l l i t s promi s e s to pay wi l l tak e place . Because of the pe rva s ive and etherea l nature of money , the re i s a r i sk for a chain reac tion a s s o c i a ted with the f a ilure of individual produc ers . Even if the conse quenc e s o f eventua l f a i lu r e s on the part o f individual producers did not l ead to the breakdown o f the system, the i s suanc e o f th e f iduc iary med ium wou l d be sub j ect to c o s t ly errati c o s c i l l at i on s . The government ha s , th erefore , a role to ful f i l l in the contro l and expan s ion o f monetary and bank ing a rra ngement s sett ing bounda r i e s t o t h e o s c i l l at ion o f f iduc iar ¥ media induced b y the work ing of the pro f i t mot ive . l
217 The que s t ion a r i s e s a s to whether th i s reason ing i s a l s o app l i c ab l e t o th e argument in f avo r of a super national central bank superv i s ing nationa l bank ing and monetary arrangements . Caut ion shou l d be exerc i s ed in drawing too stra igh t fo rward a para l l e l b etween nat ion a l a n d wor l d monetary arrangements . I t i s d if f icul t , how eve r , not to think that the interna t ional monetary system ha s over t ime been sub j ect to a dynamic instab i l ity of a nature e s sent ial ly ident ical to that ru l ing in purely pr ivate moneta ry systems . The so-ca l l ed gold standa rd , wh i ch was o f course a mixed commodity- - f ia t money system , b roke down because o f the inab i l ity o f government s to control the ratio of gold to internationa l ly acc epted f iduc iary media d e sp ite the ca l l s , on the part o f many economi s t s , fo r a wor l d c entral bank - l ike in st itution to manage that ratio . 1 3 The go l d exchange s tandard o f t h e Bretton Wood s sys tem cea sed to ex i s t becau s e o f over i s sue o f the internat iona l f iduc iary money . The f iduc ia ry do l la r standard has certa inly been sub j ec t to epi sodes of over i s sue by the ma in produc ers o f th e inter national medium o f exchang e , with c o s t ly con s equen c e s for the wor l d economy . I t i s true that the ex i stenc e o f central bank s at t h e nationa l level wou l d seem t o b e su f f ic ient to prevent a wide spread f a i lure a nd eventua l breakdown o f the wor l d monetary sys tem . I n any event , the con s equenc e s o f over i s su e c ou l d s t i l l be very damag ing for th e wo rld economy and particu l arly for tho s e countr i e s with a lower share o f t h e wea l th o f th e wor l d . There i s no me cha n i sm i n the do l lar o r mu l t ip l e - r e serve inter national s tandard to prevent proc e s s e s of cumu l a t ive monetary d i s equ i l ibrium f rom happen ing a l ong with the accompanying phenomena of ove r indebtedne s s , over inve s t ment , and ma l inve s tment and the ensu ing overk i l l ing a d j u s tment e f fort s . As suming that the shor t- term probl em o f atta i n ing monetary equ i l ibrium in the Uni ted S tates and the wor l d ca n be s o lved , the long- run que s t ion o f what shou l d be done to prevent the se expe r ie nc e s fr om happen ing again mu st be addre s s ed . The only e f f ic i ent correc t ive to dea l with d e f ic ienc i e s in monetary arrangement s a r i s ing f rom the tendency o f indiv idua l ent i t i e s , be they commerc ial bank s in a nat ional monetary sys tem or res erve currency count r i e s i n a wo rld f i nan c i a l system , to over is sue f rom t ime to time is to ensure the impo s i t ion of c e i l ing s and f loors on the credit cyc l e by a superior autho r ity . C ertainly the f a c t tha t po l i t i c a l interdependence and coopera tion have not kept pace with th e g rowth of economic interdependenc e mu st be reckoned with . After a l l , the B retton Woods i n s t i tutions we now have were conc e ived and made po s s ib l e a s a re sult of Wor l d War I I . I t cou l d then be tha t there i s no scope for e f f e c t ive internat ional monetary scheme s , unl e s s some ma j or d i s ruptions o f the economic fabric o f the wor l d take pla c e . Th e po s s ib i l i ty may a r i s e , the refore , tha t
218 opt ima l monetary ar rangement s for th e world are not pol i t i c a l l y f ea s ib l e yet . Th i s , however , i s not for th e I f suboptima l pro j ec t s are pu t economi s t to dec ide . forwa rd w i th a view to th e po l i t i c a l constraints , the f inal outcome of the ir d i sc u s s ion wou l d b e a mo re in adequate s ys tem than wou l d o therwi s e b e produc ed . With th e s e cons idera tions in mind , it might not b e al together u s el e s s to rev i ew some e l ement s o f the th eory of a world centra l bank . One o f the mo st articul ated th eoret ical approaches to a world central bank can b e found in the s econd vo lume of J . M . Keyn e s ' s A Trea t i s e on Money . Writ ing with in the cont ex t o f the interwar r e s tored gold s tandard , Keyne s propo sed a scheme to ensure the v iab i l i ty o f the int erna t ional gold standard a nd make it compatib l e with stab i l i ty o f p r i c e s and income s throughou t the wor l d . I t may be u s eful to l ook into the s e propo s a l s with some de t a i l once aga in s ince , a l though they were formu l a ted with the interna t ional gold s tandard in mind , they are no l e s s val id for an interna t ional f iduc iary s tandard . 1 4 At the t ime of wr i t ing the Treat i s e , Keyne s pl a ced heavy empha s i s on the role o f monetary f actors beh ind the trade cyc l e and th e importance and e f f ec t ivene s s of For the very open mone tary po l icy in stab i l i z ing i t . B r i t i sh ec onomy i t wa s not po s s ibl e , howeve r , to control th e growth o f the dome st i c s tock o f money if th e extern a l sources o f i ts v i ab i l ity we r e not l ikewi s e contro l led . Th i s l e d Keyn e s to tac k l e the i s su e of needed monetary management at the supernat ional l eve l . Specu l a t ing on th e des irab l e and f ea s ib le mon etary a rrangements for the wo rl d economy , Keynes came to the conc l us ion tha t the c reat ion of a superna tional c entral bank wa s needed to c arry out an internat i ona l monetary po l icy a imed at stab i l i z ing the long - run value of gold and mi n imi z ing short- run f luc tua tion s . I am di sposed to conc lude , there fore , that i f t h e var iou s d i f f icu l t i e s in th e way of an int er na t iona l ly managed gold s tanda rd cou l d be over c ome within a re a sonab l e period of t ime , th en the b e s t prac t i c a l ob j e c t ive might be the managemen t of the value of g o ld by a Super nationa l Au tho rity , with a number of national monetary sys tem c l u s ter ing a round it , each with a di sc retion to vary the va lue of i t s local money in terms o f gold with in a range o f , say , The u l t ima te probl em before 2 percent 1 5 u s i s , therefore , the evolut ion o f a mea n s o f manag ing the value o f g o l d i t s e l f through the agenc ¥ of some k ind of supernational i n s t i tu t ion . 6 •
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Having e s tab l i shed the need for a " superna tion� l " . inst itution re spon s ib l e for the management of 1nternat 10na 1
219 monetary pol icy , h e then se t ou t t o ana l y z e th e ends and means o f interna t iona l monetary management . I n K eyne s ' s view , interna t ional mone tary pol icy shou l d be so managed as to stab i l i z e the long-period trend o f the value of gold in terms o f an index o f who l e s a l e produc t s inter nationa l l y traded , which Keyne s cal l ed th e internat ional tabu lar s tanda rd . 1 7 S ome of th e prope r t i e s Keyn e s a s so c iated with th i s s tandard are particu l a r l y rel evant for today ' s inter nationa l moneta ry d i s e a s e . S inc e p r i c e s o f commo d i t i e s a n d who l e s a l e produ c t s a re l ikely t o f a l l re l a t ive to the price of s e rv i c e s with the pac e of techno l og ic a l advance , s tab i l ity o f the v a l u e o f nat ional moneys in terms o f the tabu lar or who l e s a l e s tandard w i l l imply a downwa rd tendency o f the purcha s ing power o f nat ional moneys in terms o f con sumpt ion o r reta i l good s . N a t iona l s truc tu r e s o f prices evo lving a long such a long- term path were cons idered by Keyne s to b e mo s t e f f i c ient . According to h im , such an upward trend in the co s t o f l iving induced by t h e stab i l i ty of the tabul a r s tandard wou l d fit in with the exogenou sly g iven tendency o f nomina l income s t o r i s e , thereby prevent ing the short- run d i s equ i l ibrium s temming f rom increa s e s in nomina l earn ing s unmatched by corre sponding movements in pric e s of f ina l good s . I n a s s e s s ing th i s view , the c i rcums tanc e s that surrounded the appearanc e o f K eyne s ' s A Treat i se on Money in 1 9 3 0 shou l d b e taken into cons iderat i on . K eyne s had in mind a proc e s s o f de f la t ion that had a particu l a rly damaging impa c t on tho se ind iv idua l s and enterpr i s e s that h a d c ontracted debt obl igations at a f ixed intere s t rate and were fac ing a g rowing burden t o s ervice the debt . The s e obl igations eventua l l y proved to be un bearab l e . A s he sa id , I th ink it i s de s irab l e that ob l i ga tions . a r i s i ng out o f pas t borrowing , of wh ich Nationa l Deb t s a r e the mo s t importa n t , shou l d , a s t ime goes on , g radua l ly command l e s s and l e s s of human e f fort and o f the r e su l t s o f human e f fort � that prog re s s should loo sen the grip o f the dead hand � that th e dead hand shou ld not be a l l owed to g ra sp the f ru i t s of improvement s made l ong a f ter th e l ive body wh ich once directed it h a s pa s s ed away . I 8 A second property o f th i s interna t ional mone tary sys tem wou l d b e , in Keynes ' s opinion , i t s s tab i l i z ing e f f ec t s on short- term bu s ine s s f luc tuation s . Bu s ine s s cyc l e s we re seen b y K eyn e s a s e s sentia l l y the resu l t o f erratic b ehavior o f c redit lead ing to inve s tment d i s equ i l ibria tha t ref l ected rapidly on the whol e s a l e index ( note tha t th i s wa s a l so wr itten before h i s 1 9 3 5 General Theory ) . Therefore , th e pur su it o f a s tab l e tabu lar
220 s tandard , with i t s need to concentrate on the behavior o f who l e s a l e p r i c e s and the i r determinan t s , invo lved c l o s e a t tention to inve s tment phenomena b y th e nat iona l and supernational author i t ie s . As for the methods a nd contro l procedu r e s of inter na tional monetary po l ic y , Keyn e s advocated th e regu l a t ion of th e amount of gold put in a c t ive c i rculation in the national s ystems - -depending on the rela tive scarc i ty or abundance o f the meta l - -and the management of an inter nationa l f i duciary a s se t c reated through the opera t ions of the superna tional c entral bank with t h e c entral bank s of th e wo rld . The l iabi l it i e s o f th i s institution wou l d con s i s t o f depo s i t s by c entral bank s-- supernationa l bank mon ey ( SBM) in Keyne s ' s termino l ogy-- ful l y convertib l e into g o l d o r nat iona l moneys a t f ixed rates a l l owing for a d i f ference o f 2 percent between th e buying and the s e l l ing p ric e . Ideal ly , national money s shou ld only b e c a shab l e i n terms o f SBM , th ereby moving towa rd a f u l l gol d- SBM interna t ional standard . T h e superna t ional c entra l bank shou ld b e a l l owed to extend loans to nationa l c entral bank s a t a managed d i s count rate , the max imum amount of the loan ( the d i s c ount quota ) b e ing a factor o f the bank ' s depo s i t s in the sup erna tional bank . Th e superna tional central bank shou ld a l so be endowed so a s to ef fect open-ma rket ope rat ion s in ma rkets for d i f f er ent nat iona l secu r i t ie s . As ment ioned earl ier , the ma in a ims o f th i s supe rnat iona l bank wou ld be to stab i l i z e th e long- term va lue o f gold o r SBM i n terms o f a tabu l a r s tandard whi l e avo iding wor ldwide economic d i s turba n c e s in th e s h o r t run . To th i s end , th e bank wou ld be endowed with th e powe rs to impl ement d i s count rate , di scount quota , and open-market po l i c ie s . There are certainly many que s t ionab l e a spec t s with in th is sch eme . One ins tance is the monetary rol e of gol d . Gold is no t , howeve r , a vital piece of the Keyne s internat iona l tabu l a r s tanda rd . The presence o f gold in the Keyn es scheme i s due to h i s e f fort to advanc e a proposal of international monetary management to save the gold s tandard and to prevent th e d i s equil ibrat ing e f fect s o f th e breakdown o f any standard . There i s a trade -o f f , though i t may b e rel atively short- l ived , between gold and a wo rld central bank . In the B retton Woods sys tem gold s t i l l had the very po s i tive role o f impo s ing a d i s c ipl ine on th e i s suance o f f iduc i a ry money by the count r ies who s e currenc i e s were u s ed a s internat iona l reserve a s s e t s . I ndeed , the Bretton Woods sys tem broke down a s soon a s exc e s s ive c reat ion o f f iduc iary money , e i ther by monetary pol icy in th e Uni ted s ta t e s or by pa s s ive a s s i stance by U . s . monetary pol ic i e s to monetary demands orig inated abroad , took plac e . If th ere ex i s ted an interna t ional monetary inst itution endowed with the power s o f a central bank and embodied with a commitment to long- run price stab i l ity there wou ld be no need for any monetary commodity to check exc e s s ive growth o f f iat money . That
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could b e done by such a n in st itution . Anoth er que s t ionab l e point is tha t a stab l e tabul a r s tandard a s advocated b y Keyne s cou l d have unde s i rable d i s t r ibut i ona l e f f ect s on developing c ountries or cou l d f a i l t o stab i l i z e national p r i c e l evel s . Onc e i t i s accepted tha t interna t ional monetary pol icy shou l d be concerned with stab i l i z ing an index o f tradab l e good s , there i s the po s s ib i l i ty o f choo s ing a ba sket that coul d have des irab l e d i stribut iona l consequenc e s . Addit iona l l y , the ba sket could be sub j ect t o minor mod i f ications f rom t ime to t ime to a s sure i t s e f f ec tivene s s . Another po s s ib l e shortcoming of the scheme i s i t s rel iance o n t h e e f f e c t ivene s s o f monetary pol icy at the interna t ional l evel . I n any scheme invo lving a super national central bank the monetary l iab i l i t i e s o f such an i n s t i tut ion w i l l be largely c reated by monetary develop ment s in the l a rg e s t indu s tr ia l coun t r i e s a c counting for th e grea t e s t share of internat iona l secur i t i e s ma rk e t s . I t i s arguab l e , therefore , a s t o whe ther intern ational monetary po l icy cou l d do wha t national monetary po l i cy c annot do , that is to say , a monetary pol i cy a imed at stab i l i z ing th e l ong- run purch a s ing power of a b a sket o f. tradab l e goods wi l l not nece s sa r il y cu sh ion short- run f l uc tuation s around trend . As it happens a t th e na t ional l evel , it wou l d not b e ea sy for interna t ional monetary author i t i e s to d i s t ingu i sh between temporary devel opments cons i stent with and nec e s sary for money market equ i l ibrium and the onset o f an infl a t ionary proc e s s . A s i s the c a s e with national economi e s , it wou l d b e d i f f ic u l t to interpret monetary data and fol l ow up the movements o f the demand for money . Moreover , any program for international monetary po l i cy wou l d b e sub j ect to the same ob j ec t ions as tho s e again s t nat iona l monetary pol i c i e s that point to the di f f icul t i e s o f choo s ing the opt ima l monetary aggregate for int ermediate var i ab l e s who s e behavior i s l inked t o that o f pr i c e s a n d the con tro l var iab l e through whi ch th e intermediate monetary aggregates should be mon i tored . In response to the se ob j ections it mus t be reca l led that th e main obj ective o f an international wo r l d central bank is to prevent ma j or d i s equ i l ibria in the wo r l d economy f rom happen ing . Short- run f ine tuning may certainly no t be e f f e c t ive and perhap s shoul d not b e sought . A s a l ready s ta ted , there i s not much d i sagree ment among economi s t s as to the need for a nationa l c entral bank . There i s no agreement at a l l on the opt ima l degree of monetary a c t iv i sm . S t i l l i t wou l d b e po s s ib l e to des ign l ong- run moneta ry ru l e s t h a t wou ld ensure the prevention o f worldwide depre s s ion and ma j or i n f l a t ionary proce s s e s . I n spite of the po s s ib l e drawback s tha t s tand in th e way o f an inte rnationa l wo rld bank , it wou l d seem that the advantag e s are s t i l l greater and tha t pro f itab l e a c t i o n cannot go unexplo ited fo r very l ong . I t shou l d be
222 noted tha t i t took more th an two c entur i e s to introduc e central bank ing i n s t itut ions in nati ona l economi e s . The world economy took a ma j or s tep in tha t direc t ion with the inception o f the SDR scheme in 1 9 6 9 . The princ ipl e s embodied i n tha t scheme a r e s t i l l va l id a n d the conver s ion o f th e Fund into a central bank al ong the l in e s envi saged in it shoul d be a c c e l e ra ted . P erhap s the ma j or short coming o f th e SDR wa s the bel i e f tha t the func tions of money are s eparab l e and tha t an int erna tional money can The SDR wa s thu s c reated a s an be c reated in s tage s . internationa l r e s e rve a s se t withou t practical scope for its be ing u sed as an interna t ional means o f payment and e f f ec tively ful f i l l ing th e accompanying funct i on of s tandard o f value . Th i s proved to be incorre c t , and the ro l e played by the SDR a s an international re s e rve a s set h a s been neg l ig ibl e i f not n i l . Th i s ha s been due partly to the reduced magnitude o f al location s . But a l locations are , in turn , con s tra ined by the l imited u s e of th e SDR . A more e f f ec t ive reform o f the Fund in terms of a central bank shou ld turn th e SDR i nto a monetary a s se t , thu s secu r i ng i t s ful l convertib i l i ty into other monetary a s s e t s by e i th e r pub l ic or pr ivate agents and encouraging i t s presence into e f f ec t ive mon eta ry c i rcu l a t ion . 1 9 SUMMARY AND CONCLUS IONS One of th e ma in theme s o f th i s chapter is that g iven the n atu r e o f wo rld interdependence and ex i s ting mechani sms for the generat ion and wor ld d i s t r ibution o f interna ti onal l iquidity , t h e international economy i s aga in sub j ect t o cyc l i c o s c i l l a t ions o f cons iderab l e ampl itude a n d eventual ly of a n exp l o s ive character . The evolution o f the deve l op ing count r i e s wi l l be particu larly a f f ec ted by th e s e erratic fluctuation s . A s in the p a s t , movemen t s o f indu s tr ial p r ic e s wi l l b e accompa n i ed by much w id e r movements o f pr ima ry- product pric e s in th e same d i rection , wh ereby the terms o f trade wi l l work to magnify the bu s ine s s cyc l e of pr ima ry produc ing countri e s . Moreover , th e procyc l ic behavior of protec tion i s t barrie r s , grants and o f f ic ial aid, f l ows of conc e s s ional f i na nce , and pr iva te inve s tment w i l l al so contr ibu te to inten s i fy the cycl ic swing in develop ing coun t r i e s . More importantly , g iven the behavioral pa ttern of interna tional capital marke t s c on s o l i da ted over the pa s t t e n yea r s , exc e s s ive inter nat ional credit wil l tend to be moved into develop ing countr i e s i n time s of expa n s iona ry monetary po l i c i e s in th e l a rg e s t indu s tr ia l c ountri e s and out o f them in pha s e s o f monetary contraction . Monetary d i s equ i l ib ria wi l l induce ma lad j u s tments in the rea l sec tor and s e t in mot ion sel f- revers ing forces whereby a per iod of world monetary overexpans ion and overindebtedne s s wi l l be f o l l owed by wor l d moneta ry contra c t ion and w i l l impo s e
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a h ighly exac ting tran s f er e f fort on developing coun t r i e s . G iven the nature and degree o f wor l d economi c interdependenc e , external debt c r i s i s and wor l dwide depre s s ion may wel l prove to b e a recurrent event f o l l owing pha s e s o f exc e s s ive monetary growth . The current ex terna l debt c r i s i s and wo rld de pre s s ion , the refore , mu st b e seen a s a resu l t o f the proc e s s o f exc e s s ive world mone tary expa n s ion that took place dur ing d i f f erent interva l s o f th e 1 9 7 0 s . Tho se who b l ame some develop ing countries for the i r over indebtedn e s s and encourage too st rong adj u s tment e f for t s for the s e coun t r i e s a s a sort o f pu rga t ive proce s s , neg l e c t the f act that thi s prob l em wa s caused by mone tary overexpans ion in th e u . s . economy and other f inanc ial c enters o f the wor l d . The world economy i s s t i l l in a trial period a s it make s i t s way toward the attainment o f su sta inab l e and stab l e g rowth . Even if th i s s i tuation is ach i eved with out f u rth er setback s , the ad j u stment c o s t s o f th i s proc e s s f o r the wo rld have a l ready been very h igh . The produc tive capac ity o f mo s t countries has been heavi l y damaged and , in the b e s t o f scena r i o s , it w i l l take time to cure the i l l s of the wor ld economi c o rgani sm . There is no sa fe gua rd a t al l in present international monetary a rrange men t s to prevent tha t f rom happen ing aga i n . P r e s ent interna t ional monetary i n s t i tut ions were conce ived for a wor l d economy not depar t ing s ig n i f icantly f rom cond i t ions o f equ i l ib r ium . They are not equ ipped for prevent ing th e on set o f a cumu l a t ive inf l a t ionary pro c e s s or rec e s s ion and secondary depre s s ion phenomena l ike tho s e expe r ienced by the wo r l d du r ing the nineteenth century and th e inter war period . B u s i n e s s cyc l e s of a c erta in ampl i tude are inherent and needed fo r the e f f ec t ive working o f ma rke t s . F l uctuations tha t run the r i sk o f setting in mo tion a proc e s s o f cumu l a t ive d i s equ i l ib r ium a re neither nece s s a ry nor unavoidab l e . Economi s t s have devo ted spec ial attention to the s e ma tters for a long t ime and deve loped theoretic a l and prac t ic a l p rinc ipl e s to dea l with cyc l i c ph enomena . T h e appropriate mechan i sm t o cope with the se aspects for improving the function ing of the economi c sy stem over time i s a centra l bank . Th i s i s a s appl icable to nationa l ec onomic systems a s to the wor l d economy . D i scu s s ions on th e reform o f the interna t ional monetary sys tem are again b e ing l aunched . Any sch eme for inter nat ional mon etary a rrangements mu st come to terms with th e need to s tab i l i z e the wo rld bu s i ne s s cyc l e . It is d i f f icu l t t o see how th i s cou l d b e done withou t a c entral bank- l ike interna tiona l in s t i tution . NOTES 1 . B u s i n e s s cyc l e l i terature went out o f fa shion wi th the Keyne s ian revo lution and further development of
224 Keyne s ian economi c s and i s now coming back with the rat iona l - expectations approach to macroeconomi c s , though in a rather narrow form . A s it happened with Keyne s ian economi c s , a d i s t inc t ion shou l d be made b e tween the a s sumpt ions u sed and th e pol icy imp l ications drawn by authors of th e rationa l - expectations schoo l and the u s e ful ins igh t s into cyc l ic phenomena some o f the s e th eore ti ca l cons tru c ts may provide . Th i s d i s t inc tion i s made expl i c i t in Luc a s ( 1 9 7 7 ) . Perhaps the ma in me s sage of th i s l i te ra tur e is the need to recover the u s e of a busine s s cyc l e , a comp l e te o s c i l l ation , a s the reference unit o f macroeconomic analy s i s . For bib l iographic a l sourc e s o f monetary theories o f t h e bu s ine s s cyc l e , see Note 4 . 2 . There wou l d b e some repercu s s ive ef f e c t s of the U . S . moneta ry r e s tra int tha t , operat ing through the mark et for tradab l e good s , cou l d a f fe c t somewhat the init i a l upsurge in U . S . intere s t rate s . The interest rate impact o f th e U . S . l iqu idity squ e e z e wou l d decrea s e world income and U . S . exports , whe reby U . S . income wou l d be a f f ec ted b y an order o f magnitude g iven b y the relevant Keyne s ian mu l tipl ier . Add i t ional ly , i f h igher intere s t ra t e s i n the United States a re accompanied b y a n appr ec iat ion o f the real exchange rate of the do l l a r , the s e e f fects cou l d be reinforced by a reduct ion o f tradab l e goods sha r e s in output . The f a l l i n income , in turn , wou l d induce a l owe r demand for real balanc e s and corre sponding downwa rd pres sure s o n intere s t rate s . 3 . There a re o th e r f a c tor s , deriving from the perva s ive presence of th e U . S . dol l a r in the wo rld mone ta ry scene , tha t h e l p to nu l l ify th e in sulating properties o f exchange rate s . For instanc e , the fa ct tha t a l arge s h a r e o f th e exte rna l d e b t o f coun t r i e s is denominated in U . S . dol l a r s and i s no t forwa rd covered mean s tha t an apprecia tion o f the U . S . do l l ar v i s - a - v i s th e currency o f th e c ountry concerned wi l l generate wea l th e f f ec t s o f a depre s s ive impac t on dome s t i c produc e r s . S im i l a r e f f ec t s s tem f rom the inc rea s e in th e local cu rrency value o f o i l and other U . S . do l lar denominated and h igh ly inelastic impo rts a s soc ia ted with an appre c i a t i on o f th e U . S . currency . On th e s e que s t ion s , see Dornbu sch ( 1 9 8 3 ) . 4 . The s tandard refe rence to the s e and other theor i e s of the bu s in e s s cyc l e is s ti l l Haberler ( 1 9 3 9 ) . Th e ma in work s f rom which the vi ew s put forwa rd in th i s sect ion a r e drawn a r e K eyn e s ( 1 9 3 0 ) ; Hawtrey ( 1 9 2 8 , 1 9 3 2 ) : Hayek ( 1 9 3 3 ) ; and F i sh e r ( 1 9 3 3 ) . 5 . A debt-de f l a t i on th eory of great depr e s s ion s i s ( 1933) . F i sher a t t r ibuted put f o rward b y F i sher a c entral ro l e to ove r indeb tedne s s in induc ing s econdary rece s s ions and d e fla t ion , wh ich u l t imately led to a great depre s s ion : " The very ef fort of individua l s to l e s sen the i r burden o f deb t s inc rea s e s it , becau s e of th e ma s s e f fect o f th e s tampede to l iquidate in swe l l ing each
225 do l l a r owed . . [ Th i s ] i s the secret o f mo s t , i f not th e more debtor s pay , the mor e a l l , great depre s s ions : they owe . The more th e economic b o a t t ip s , t h e more it tends to tip . I t i s not tending t o r ight i t s el f , but is caps i z ing . " F i s her ( 1 9 3 3 , 3 4 4 ) . 6 . Th i s i s the relationsh i p e�hodied in Doma r ' s f ormu l a (D omar , 1 9 5 0 ) . I n th i s r e spec t , i t shou l d b e noted tha t the rate o f growth o f new lending to nono i l LDC s wa s o f the order o f 7 percent i n 1 9 8 2 , wherea s the average annual intere s t rate wa s o f about 1 4 . 1 percent ( L IBOR plu s 1 percen t ) for that year . For 1 9 8 3 , net new l ending wa s e s timated to be o f the order of 5 percen t , wherea s average inte r e s t rates were not expected t o f a l l s ign i f icantl y . The order o f magnitude of th e tran s f e r of resou r c e s impl i ed by tho s e f igu r e s may we l l prove to b e un sustainab l e , espec i a l l y i f account i s taken tha t the tran s f e r e f fort i s not unif ormly d i s tributed among LDC s . 7. On the same date that the inc rea s e in quota s corre sponding to the E ighth Gene ra l Review wa s agreed ( January 1 8 , 1 9 8 3 ) , the G roup of Ten ( G- l O ) l ead ing c ount r i e s and Swi t z er l and agreed to inc rea s e the i r commi t ments to supply l in e s o f c redit through th e General Agreement to Borrow f rom SDR6 . 4 b i l l ion to SDR1 7 b i l l ion ( f rom about US $ 6 . 7 b i l l ion to U S $ 1 6 . 2 b i l l io n ) . GAB re sourc e s would potent i a l l y be ava i lable for the IMF to l end to a l l i t s membe r s ( not only-- a s h itherto-- to the G- l O countrie s ) i f certain condit ions were me t . The s e commitments , l ike the quota increa s e t o augment re sourc e s ava i l ab l e f o r the Fund , had t o obtain pari iamentary approval before b e ing made ava i l ab l e at the beginning of 1 9 8 4 . 8 . According to current regu lations governing the i s suance of SDRs , a dec i s ion to a l locate SDRs c annot be taken without the pos it ive vote o f the United State s . 9 . The poten t ia l r o le o f the other f inanc ia l i n s t i tutions in t h e short run has b e e n somewhat downpl ayed by even t s in rel ation to tha t of the Fund . F rom a medium term per spect ive , there i s no que st ion that a l arge and e f fe c t ive world bank is e s sential if the needs of developing countries for l ong- term cap i ta l are to be met . An area o f expan s ion for th e in st itu t ion wou ld be i t s l ending l in es on terms that cover the c o s t of i t s f inanc ial resourc e s ra i s ed in private markets . I n the near future it wi l l be conven ient to ra i s e l a rger amounts o f fund s in th e s e markets in o rder to expand the l end ing f l ows to develop ing countrie s . There i s a mul tipl ier e f fect a s soc iated with th i s increa s ed le nd ing through the pol icy o f induc ing private bank s to prov ide c of inanc ing of Worl d B ank pro j ects . Th i s increa s ed l end ing a c t ivity o f the World Bank wou ld have a s tab i l i z ing e f fect o n the supply of l ong- term capital to developing countri e s . F rom the standpo int o f the poorer reg ion in the inter national commun i ty , an i s sue tha t des e rves serious and u rgent cons ideration i s the rep l e n i shment of the •
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226 I nternational D evel opment A s soc iat ion , the s o f t long- term window o f the Wor ld Bank . The importance o f th i s agency in f inanc ing pro j ec t s a imed at c reat ing the potential to cover the ba s ic need s of poo rer countries cannot be empha s i z ed enough . 1 0 . Viner ( 1 9 5 1 ) . 1 1 . W i l l iamson ( 1 9 8 2 ) . Th i s i s the c l a s s i c argument for a government 12. contro l l ed central bank as devel oped in F r iedman ( 1 9 5 9 ) . 13 . S e e , in thi s respec t , C a s s e l ( 1 9 3 6 ) and K eyne s (1930) 14 . I ndeed , K eyne s ' s plan to th e Bretton Woods Conf erenc e wa s ful ly ba s ed on th e th eoretical under pinnings e l aborated in the trea t i s e . 1 5 . K eynes ( 1 9 3 0 , 3 3 8 ) . 16. Keynes ( 1 9 3 0 , 3 8 8 ) . 1 7 . Character i s t i c a l l y , Keyn e s cho s e to inc l ude tho s e goo ds f o r wh ich adequate s t a t i s t i c a l informa t ion wa s ava i l ab l e . Thu s , K eyne s ' s tabu l a r s tandard comp r i s e d the s ix ty- two commod i t i e s inc luded in th e produc tion index calcul ated by th e Economic and F inanc i a l S ection of the L eague of Nation s . See Keyne s ( 1 9 3 0 , 3 9 1 ) . 1 8 . Keynes ( 1 9 3 0 , 3 9 3 ) . I n i ti a l steps to reform the Fund a l ong the s e 19 . l in e s have been advoc a ted by , among other s , Pol ak ( 1 9 7 4 ) . •
B IBL IOGRAPHY B runner , K . , and Me l t z er , A . , eds . S tab i l i z a t ion o f th e Dome s t i c and I n ternat iona l Economy , vo l . 5 o f Carn eg ie-Roche ster S e r i e s on Pub l i c Pol icy . North-H o l l and , 1 9 7 7 . Ca s sel , Gustav . The Down f a l l o f the Gold S tandard . London , 1 9 3 6 . " Fo re ign I nve s tmen t s and the Balanc e o f Doma r , Evsey D . Payment s . " American Economic Review . December 1 9 5 0 . Dornbu s ch , R . " F l ex ib l e Exchang e Ra tes and I nter dependenc e . " IMF S ta f f Paper s , vol . 3 0 , no . 1 ( 1 9 8 3 ) . F i sher , I rving . Booms and Dep r e s s ion s . London , 1 9 3 3 . " The Debt- D e f lat ion Theory o f Great Depre s s ion s . " Econometrica , vol . 1 , no . 4 ( 1 9 3 3 ) . F r iedman , M i l ton . A P rogram for Mon etary S tab i l i ty . New York , 1 9 5 9 . P ro sperity and Depre s s ion . Haberl e r , Go ttfried . C amb r idge , Ma s s . , 1 9 3 9 . Hawtrey , R . G . Currency and C red i t . London , 1 9 2 8 . The Art of Centra l Banking . London , 1 9 3 2 . H ayek , F . A . von . Mon etary Theory and the T rade Cycl e . London , 1 9 3 3 . K eyne s , J . M . A Trea t i s e on Money , vo l . 2 . London , 1 9 3 0 .
227 Luca s , R . " Understand ing Bu s in e s s Cyc l e s . " I n S tab i l i zat ion o f the Dome s tic and I nterna t ional Economy , ed i ted by K . B runner and A. Mel t z e r . North-Ho l land , 1 9 7 7 . P o l ak , J . J . Though t s on a n I nternational Monetary Fund B a sed Fully on the SDR . p amph l e t S e r i e s no . 2 8 , 1974 . U n ited Nation s . Nat ional and I nternational Mea sures for Full Emp l oyment . 1 9 4 9 . Mea sures for I nternational Economic Stab i l i ty . 1 9 5 4 . Viner , Jacob . I nternational Economic s : S tudie s . G l encoe , I l l . , 1 9 5 1 . W i l l i amson , J . The Lending P o l i c i e s o f the I ntern a t iona l Monetary Fund . wa shingto n , D . C . , 1 9 8 2 . ___
Part 2 Case Stud ies
9
Argenti na' s Foreign Debt: Its Origi n and Conseq uences Marcelo Diamond Daniel Naszewski
INTRODUCT I ON On F ebruary 2 , 1 9 8 1 , l e s s than two month s prior to Gene r a l Roberto Viola ' s takeover from h i s predec e s sor , General Jorge Vide l a , a 1 0 perc ent deva luation o f the peso occurred that wa s to in itiate a dramatic change in Argentina ' s economic s i tuation . The e f f ec t of th i s apparently ins ign i f icant deva lua tion wa s s imi lar to that of a crack in .a retain ing wal l : I n the two month s that fo l lowed , intere st rates ro se sharply , reach ing unu su a l ly h i gh real l eve l s , even for Argent ina ; f i nanc ial panic ensued a s foreign sho rt-term cred i t agreements were not renewed and the f l igh t o f private capital increa s ed . Owing t o th i s s i tuation , the new ec onomic team , led by Lorenzo S igaut , wa s forced to undertake another deva luation o f 3 0 percent with wh ich the retain ing wa l l gave way onc e and for a l l . A min ideva luat ion po l icy , wh ich unt i l Feb ruary 4 o f the s ame y e a r h a d b e e n undertaken in accordance with a tab l e announc ing the month ly r i s e in the price o f the do l l a r at decrea s ing rates systema t i c a l l y lower th an the month ly real rate o f inf l at ion actua l ly reg i s tered , gave ri se to several consecutive max ideva lua tions . Thu s , al though dur i ng the twelve month s prior to th i s the peso had been deva lued 2 2 . 6 percent , in the course of the fol l owing year- -when the c r i s i s occurred- - the price o f the do l l ar rose 3 9 0 percent ( 4 . 9 time s ) . I n f l a t ion , wh ich in January 1 9 8 1 had f a l len to a rate of 8 4 percent per annum , rose sha rply again reaching 1 4 6 perc ent du r ing the f o l l owing twe lve month s . I ntere s t rate s that had a l ready been po s i t ive in rea l terms for a number o f years ( a l though not to the extent that they were to regi ster l a ter ) rose sharply in nomi nal as wel l a s rea l terms . All activity suddenly s l owed down , and in a period o f a f ew week s , one of the deepe st rece s s i ons of the century occurred . Thu s , the gro ss dome stic product along with dome s t i c con sumption f e l l sharply , a s can be seen from the data in T ab l e 9 . 1 . 231
232 Table 9 . 1
Argentina :
GDP and Consumption ( mi l l ion s of pesos
at 1970 market pri c e s ) QUarterly Deve l opment 1980 III IV 1981 I II III IV 198 2 I II III IV Source :
GDP
Con sumption
1 1 4 . 376 1 1 5 . 689
90 . 180 9 3 . 086
109 . 638 1 09 . 7 1 1 102 . 215 100 . 64 9
98 . 9 7 7 89 . 2 2 9 7 9 . 971 79 . 0 7 0
101 . 919 98 . 2 2 0 98 . 4 9 1 9 9 . 794
8 5 . 096 7 6 . 297 75 . 851 76 . 605
B anco Centra l de la RepUb l i c a Argentina .
Having s l owly recuperated f rom the l o s s o f earning power o f 1 9 7 6 and 1 9 7 7 , rea l wages f e l l sharply , and the ba s i c wag e dec rea sed 1 4 percent in real terms in four month s . A s l ight recovery occu rred in th e f o l l owing month s but wag e s f e l l even f a rther with the ensu ing change in government and th e r i s e o f General Leopo l do Ga l t i e r i t o power a t t h e e n d o f 1 9 8 1 . Thu s , by June 1 9 8 2 , the agreed b a s i c wage had f a l l e n 2 1 percent in real terms in r e l a t ion to January 1 9 8 1 , wh ich co incides with the fa l l i n consumption shown i n Tab l e 9 . 1 . A l ready weakened by the po l i cy of economic openne s s introduced in the previou s admin i s trat ion and by the s i z e of the debts th e pr ivate enterp r i s e s were obl iged to a s sume together with the h igh real intere s t rates they had to pay , bu s ine s s e s su f f e red anoth er s e riou s setback a s a resu l t o f the rec e s s ion and the con s equent f a l l in the demand and pro f i tab i l i ty ma rg ins . For the educated midd l e c l a s s , the days of " ea sy money" l we re over . For exampl e , the a ir l ines th at in previou s month s had transported hundreds o f thou sands of Argent ine tour i s t s abroad and who se a ircra ft wou ld return l oaded to the b r im with purcha se s , we re obl iged to sus pend servi c e s on a l a rge s c a l e due to the reduction in the numb e r of pa s senger s . As f a r a s the s i tua t i on in the fore ign sector wa s conc erned , internat ional r e s erve s dropped cons iderab l y , and wi thout previou s notic e , Argentina s l owly l apsed into a pa r t i a l suspens ion o f payments o f its fore ign debt . F ina l l y , a s t ime went by , it became known by word of mouth that during the period f rom 1 9 7 6 to 1 9 8 2 the country ' s foreign debt had r i sen to U S $ 3 0 b i l l io n , a f igure equiva l ent to f ive years ' expo rts . Very s l owly the
233 country became aware o f the burden that th i s mortgage , wh ich in intere s t a l one woul d ab sorb near ly 5 0 percent o f Argent ina ' s annua l revenue f rom export s , meant f o r the economic future of the c ountry . At the same t ime there wa s added concern a s to the reasons for th i s indebtedne s s and its eventua l outcome . I t wa s logical to suppo se that the g rowth in the foreign deb t , wh ich wa s incurred b a s i ca l ly a s f rom 1 9 7 8 , wou l d have bee n accompan i ed b y a para l l e l inc re a s e in produc t ive inve s tment and the country ' s economic act ivity . Thi s , I n s tead o f growing , the however , wa s not the c a s e . economy shrank , as can be observed in the f igures in Table 9 . 2 f o r the g ro s s dome s t i c produc t , wh ich in 1 9 8 2 rema ined a t the same l evel i t had reached i n 1 9 7 3 and 1974 . In d e s c r ibing th i s s ituation , the Argentine economi s t Al do F e r r e r pointed ou t a t t h e e n d o f 1 9 8 2 that " f rom 1 9 7 6 to 1 9 8 2 , the increa s e in the fore ign debt to more than U S $ 3 0 b i l l ion h a s been accompan ied by the d e struc tion of dome stic capital by more than U S $ 6 0 b i l l ion . Th i s e s t ima te does not inc lude l o s s e s in human re sourc e s a s a consequence o f the brain dra in . ,, 2 Tab le 9 . 2 Argentina : Gross Domestic Product ( mi l l ions of pesos at 1970 market pri ces )
Source :
86 . 9 7 0 1970 91 . 221 1971 92 . 882 1972 9 6 . 198 1973 102 . 1 36 1974 101 . 287 1975 1976 1 00 . 8 1 5 1977 107 . 3 1 0 1978 103 . 61 0 1979 ' 110. 979 i1 2 . 194 1980 1981 105 . 553 1982 99. 581 Banco Centra l de l a RepUb l i c a Argentina .
The purpose o f th i s chapter i s to ana l y z e the comp l ex sub j ect o f Argentina ' s foreign debt and to pro vide an answe r to a number of que r i e s conc e rn ing it . For examp l e : What were the c au s e s o f the indebtedne s s ? Why did i t have a destru c t ive e f f ec t o n nat iona l produc t ive capac ity ? In what way wa s fore ign indebted ne s s related to wo r s ening i n f l a t ion , the fa l l in real wage s , and rece s s ion ? How were the attempt s to re negotiate the foreign debt with the IMF and the pr iva te international bank s conducted as f rom 1 9 8 2 ? I s Argentina faced with a qua l i ta t ive change in i t s typ i c a l l y o s c i l l atory cyc l e characte r i z ed b y periodic c r i s e s in i t s balanc e o f payment s ? O r , on the other hand , a re we
234
dea l ing with a new pha s e o f th e same cyc l e , pe rhaps dra st i c a l l y acc entuated for various rea son s , such a s the interna tional f inanc ial s i tuation tha t h a s pr eva i l ed s ince the o i l c r i s i s ? How shou l d Argentina face i t s indebted ne s s ? A nd l a s t ly : Wha t w i l l b e the consequen c e s for the economic future of the c ountry ? I n order to answer the s e queries we wi l l f i r s t attempt t o b r ing t o l ight the reasons why Argentina ( and other c ountr i e s in a s imi lar po s i t io n) are faced with a cr i s i s that cannot be c l a s s i f i ed in our opinion a s a momentary l ack o f l iqu id ity but rather a s a c a s e o f s truc tu r al inso lvency i n i t s fore ign sector . Late r , we wi l l ana l y z e th e proc e s s tha t f ed fore ign indebtedn e s s f rom 1 9 7 6 onward a n d acc entuated i t a s f rom 1 9 7 8 , a t the same t ime provok ing the unprec edented des truct ion o f Argentina ' s economic system . Third , w e wi l l examine the coming s and go ings of the country ' s economic po l i c i e s app l ied s i nce the beg inn i ng o f 1 9 8 1 , when the pre s ent g l oba l nat iona l ec onomi c c r i s i s began to deve l op . In th i s contex t , an exp l anation wi l l be given o f t h e way in wh ich nego t iat ions to r e f inance the foreign debt we re undertaken a s f rom the latter month s of 1 9 8 2 . Thu s , we wi l l show tha t despite the unprec edented sever i ty of the s ituat ion , indebtedne s s , inf l a tion , the fa l l in rea l wag e s , and rece s s ion are typica l of a bal ance o f -payments c r i s i s o f the k ind periodic a l ly su f f ered by Argentina ( and the ma j or i ty o f the count r i e s that export pr ima ry produc t s and that are undergo ing the proc e s s of indu s tr ia l i z a t ion ) and indeed are an integral part o f the o sc i l la tory movement that ha s a f f ec ted the country ' s po l i t i c a l and economi c l i f e dur ing the l a s t f ew decade s . At the same t ime , however , we wi l l attempt to show that the unprecedented magn i tude of the c r i s i s in the extern al s e c tor of Argentina ' s economy inva l ida t e s pa s t ex trapo l a t ions that pred icted an automa t i c recupera t ion and that the seve r i ty o f the phenomenon in i t s e l f l eads o n e t o bel ieve tha t th i s t ime i t wi l l b e much more d i f f i c u l t to overcome . ARGENT I NA ' S STRUCTURAL TENDENCY TOWARD D I SEQU IL IBRI UM IN THE EXTERNAL SECTOR Concern du e to the mag n i tude of wor l dwide fore ign indebtedn e s s , and th e indebtedne s s of count r i e s at an intermediate s tag e o f the i r indu s t r ial i z a t ion proc e s s ( l ike Argent ina , f o r examp l e ) , wou ld tend t o make the phenomenon of ex terna l debt seem l ik e a new and unheard o f occurrence produced as a result of the international economic c ri s i s tha t began with the oil c r i s i s or with the recent change in direc tion o f the U . S . economi c po l i cy towa rd a more orthodox monetary one . However , the growth in th e fore ign debt of the se count r i e s h a s been a con t inuou s proc e s s during th e l a s t f ew decade s . I n fact ,
235 i t c an b e seen f rom the data i n Tab l e 9 . 3 that , i n the c a s e o f Arg entina , the foreign debt had been unde rgo ing susta ined growth ( al though not a t the rate of recent yea rs ) s ince wel l before the 1 9 7 0 s . The same may be s a i d o f t h e fore ign debt o f o ther count r i e s w i t h s im i l a r produc t ive s tru cture s . Why did thi s fore ign indebtedne s s occur in Argent ina ? The prob l em h a s i t s origins in the pecul iar character i st i c s o f its economic system . Argent ina bel ongs to a g roup o f countr i e s that are at an intermediate stage in the i r indu s trial i z at ion proce s s and tha t export pr imary produc t s . All of the s e countrie s po s s e s s a fundamental cha racte r i s t i c tha t the tex tbook s a lway s fail to mention : the p r e s ence o f two b a s i c a l l y d i s t inc t sector s . One i s the pr ima ry sector ( in Argentina ' s c a s e it i s farming � in Vene zue l a , the petrol eum indu s try � in B r a z i l , c o f f ee � and so o n ) , and the other i s the indu s t r i a l s ec tor . The pr imary s ector i s h ighly produc t ive o r " e f f ic ient , " thank s to bount i ful natural re sou r c e s such a s rich mineral depo s its , a benevo l ent c l ima te , or , in Arg ent ina ' s c a s e , the f e rt i l e l and o f the " pampa . " A d i f f eren t s i tuation i s pres ent in the indu s t r i a l s ector where pro duc ti v i ty does not depend on natural resou r c e s but is a d i rect function o f the l evel o f devel opment and matu r i ty o f the indu str i a l system . C ount r i e s a t the beg i nn ing o f the indu s t r ia l i z at ion pro c e s s general ly have a h ighly produc t ive pr imary sector and an i ndu st r i a l sector who se r e l at ive productivity s tay s behind . Under the se cond i t i ons th e indu s t r i a l s ec to r cannot compete internat iona l ly with t h e indu s t r i e s o f the mo re devel oped countrie s . However , th i s non compe t i t ivene s s is not due to in suf f ic ient indu s t r i a l produ c t iv i ty , mea sured in a b s o l u t e terms , b u t rather t o i t s relat ively low product iv i ty in r e l a t ion to the pr imary sector . I ndu s tria l p r i c e s expre s s ed in dol l a r s wi l l a lway s depend on dome s t i c p r i c e s and t h e country ' s current exchange rate s , which in turn tran s late the dome s t i c pr ic e s into interna t ional terms . However , thi s exchange rate i s set prec i s ely on a s c a l e neces sary to pl a ce the p r i c e s o f wha t is produ c ed in the coun try on an inter nat ional l evel . No matter how i ne f f ic ient a country may be ( a s were T a iwan and Korea when they s tarted out ) , they can a lway s be internation a l ly compe t i t ive if the appro priate exchang e rate is appl ied . The i r l ow over a l l e f f ic iency wi l l be the rea son b eh ind a l ow s tandard of l iving but wil l never prevent them f rom compet ing on the wor l d market . Th i s adapta t ion mechan i sm for the exchang e rate c e a s e s to f unc tion in pr ima ry export ing countr i e s in the proc e s s of indu s t r ia l i z ation , because the i r exchange rate is not set on the ba s i s o f the parity of the in dustri al secto r , but rather on tha t o f the pr imary sector , wh ich h a s tradit iona l l y been the one to export . Thus , in Arg ent ina the exchang e rate i s s e t at a level
236 Tab l e 9 . 3 Argentina : curren t u . s . dol lars )
1958 1963 1964 1965 1 96 6 1967 1968
b
Growth of Foreign Debt Fore ign Debt 1 , 00 0
1 , 848 6 , 278 5 , 3 90 4 , 801 4 , 664 4 , 622 4 , 787
3 , 231 3 , 876 4 , 356 5 , 900 6 , 400 8 , 100 7 , 875 8 , 900
5 , 305 6 , 14 3 6 , 681 8 , 664 8 , 312 8 , 852 7, 875 8 , 509
9 , 678 12 , 500 1 9 , 034 27 , 162
8 , 719 10, 443 14 , 1 3 1 1 7 , 684 2 1 , 296 2 2 , 639
1975 1976
1979 1980 1981 1982
Foreign Debta
3 , 390 2 , 916 2 , 650 2 , 66 3 2 , 64 4 2 , 805
1969 1970 1971 197 2 1 97 3 1974
1977 1978
( mi l l ions of
3 5 , 671 38, 736
Note :
D i s agreement ex i s t s in the data provided b y the Banco de 1a RepUblica Argentina ( BCRA) depending on the period in que stion , becaus e on some occasions the short-term debt is taken into account , and on others it i s not . Therefore , the figures shown in thi s tab l e shoul d be cons idered as an approx imate e s t imate
Cintra 1
only . a b
De f1ated by the u . s . whol e s a l e pri c e index , ba s i s 1 9 7 5= 1 0 0 Estimate b a s e d on data provided by the BCRA
i
Sourc e : BCRA , Series e s tad sticos sobre compromi sos f inanc ieros externos y balances de pagos de 1a RepUblica Argentina ; othe r reports ; and personal res earch .
tha t a l l ows wh eat and mea t to be exported comfortab l y . In other word s , Argentina ha s a " pampan " do l l ar tha t i s inadequate f o r the l evel o f indu s t r i a l productivity atta ined . 3 Therefore , f o r prices to be competitive on the inte rna t ional ma rke t , indu s t ry in the develop ing coun t r i e s needs a protect ive ta r i f f barrier . It wa s behind th i s protect ive wal l that indu s t r i a l i z a t ion began in Argentina and in a l l the o ther pr ima ry export ing coun I f we go back to th e l a s t t r i e s ment ioned ear l ier . c entury , w e can s e e that indu s t r ia l i z at ion i n the Uni ted s tate s and Germany and the introduction o f the s e two count r i e s into a wor l d ma rket dominated by Great B r itain
237 a l so began in th i s way . I t i s important to point ou t that th i s protect ive tar i f f i s in no way indicative of indu s t r i a l " ine f f i c i ency . " Wha t the s e tar i f f s do , in fact , i s to create a system o f mul tiple exchange rates a t a pa r i ty appropriate to the indu s t r i a l produ c t ivity atta ined by a country at a g iven s tage o f development . Through indu s t r ia l i zat ion , takeof f i s ach i eved , a l ong with a g rea t e r u t i l i zation o f l abor . But at the same t ime , a pe r s i s tent def ic i t in the fore ign s ector a r i se s . The prob l em s tems f rom the pecul iaritie s of the produc t ive s tructure tha t ha s emerged , charact er i z ed by an indu strial se cto r that works a t h i gher than inter national p r i c e s and a p r imary se cto r wo rking at inter nat ional p r ic e s . I n wha t i s ref erred to as an imba l anced produc t ive s tructure , becau se its prices are h igher , indu s t ry doe s no t export unl e s s there i s an adequate syst em o f compensatory incent ive s . Furthermore , a s indu s try g rows i t wi l l requ i r e an ever- increa s ing amount o f fore ign exchange for importing raw mat e r ia l s , intermediate produc t s , a nd capital good s . By not expor t ing , indu st ry l eave s the generat ion o f foreign exchang e t o the prima ry sector , who s e g rowth i s much s l ower than that o f indu st ry . At th e in i t i a t ion o f indu s t r ia l i z a tion , import sUb s t i tution economi z e s on foreign exchange . H owever , the sub s t i tution proc e s s become s mo r e and more s l ugg i sh , and at some s tage the saving s made on fore ign exchange are i n su f f ic ient to cope with indu s try ' s g rowing need for the same . Th erefore , a mixed product ive s tructure emerge s compo sed o f two secto r s . The indu s trial sector creates j ob s and g rows rapidl y . A s it g rows it requ i r e s more and more fore ign exchange to suppl y i ts raw ma teria l s and The oth e r i s the p r imary sector tha t , capital good s . becau se of i t s s lower rate o f g rowth , f inds i t more and more di f f icu l t to suppl y the fore ign currency needed by the indu strial secto r . S ooner or later the reserves o f fore ign exchange are exhau s ted , a n d the country i s unab l e t o pay i t s foreign debt a n d to acquire the raw ma ter ia l s and the intermediate and capital goods i t needs to con tinue its economic a c t iv i ty . To avo id the pa ra l y s i s of produc tion , the gove rnment reso rts to foreign capital a nd c red i t . Contrary to what i s a s sume d , the se funds are sought not to compl ement national saving s but to avo id a c r i s i s in the balance of payments , in the sense tha t they enter the country a s f o re ign exchang e . However , a s fore ign indebtedn e s s i s ma inly incurred t o f inanc e expend i ture i n fore ign currency , we are deal ing with a p a l l iative mea sure tha t mere l y prol ong s the prob l em and at the same t ime wor s e n s it a s t h e f o re ign d e b t a n d t h e inter e s t s e rv i c e s increa s e . Thu s , the need a r i s e s for even l arg e r contr ibut ion s in order to ma inta in an equ i l ibrium . The resul t ing accumu l a t ive foreign indebtedn e s s a lway s end s in a new c r i s i s in the balance o f payments even more s e r iou s than the
238 one i t wa s hoped to avo i d . Th i s i s the fundamental prob l em of a l l unbal anced produc t ive s tru c tur e s , not only in Argentina but a l so in Chil e , C o l omb ia , B ra z il , and so on : devel opment in a s i tuation where two d i f f erent sectors ex i s t , a pr imary sector work ing with international p r i ces and an indu s t ria l secto r working with h ighe r than internat ional pric e s ; th e impo s s ib i l i ty o f exporting on the part of the indu s t r i a l s ec to r ; a hi gher r a t e o f growth in thi s sector than i n the pr ima ry one ; the cons equent d i sparity between the consumption of foreign exchange and the abi l i ty to pro duc e i t , and a recurrent tendency to d i s equ il ibr ium on the pa rt of th e exte rna l secto r . The tendency to pa l l ia t e th i s imba l ance in Argentina by means o f fore i gn loans ha s , i n the l a s t two decade s , l e d to a n accumu l a t ive and permanent growth in the f o r e ign debt and periodic c r i s e s F rom the t ime the s e c r i s e s in the balance o f payment s . have occurred , there have been many other upset s , such a s huge devalua tion s , increased strugg l e s f o r h igher inc ome , hyper inf l a t ion , and o s c i l l a t ing pol i tical chang e s . � Orthodox S tab i l i za t ion Programs :
Pha se One
In Arg ent ina , th e u sual way o f conf ront ing c r i s e s in the b a l ance of payments , and one that h a s tradit iona l ly been a pproved o f both a t the dome s t i c l evel and inter nationa l l y , c o incides with th e stab i l i z a t ion plans recommended by the IMF . The initial mea sure i s a lways a deva luat i on o f c on s iderab l e proportions tha t , it i s suppo sed , wi l l b e a n inc entive t o expo rt and t o ca rry out import sUb s t itution in dome s t i c produc tion . Howeve r , cons ider ing tha t i n Argent ina the h igh p r i c e s o f manu f ac tures prevent the indu s t r i a l sector f rom exporting ( except in c a s e s where th ere are spe c i a l incentive s ) and tha t i n general imports are ind i spen sab l e products e s sent ial f o r continued produ c t ive a c t iv ity , th e ma in s t imu l a t ing e f fect o f a deva lu a t ion l ie s in its ab i l i ty to mot iva te f a rming produc tion and expor t s . However , a s th i s e f f e c t takes some t ime even i n the mo s t favorab l e c a s e s , i t become s neces sary t o resort t o a bal anc ing mechani sm in the externa l se ctor . Th i s mechan i sm i s p rovided b y the rec e s s i on and induced b y the deva luat ion itsel f . To beg in wi th , the deva luat ion ra i s e s the pr i c e s o f exportab le f a rming produc t s a n d imported produc t s , to g e ther with other c o s t s and pric e s . I n th i s way rea l wage s are deprecia ted and revenue i s tran s f erred f rom the c ity to the country s ide and f rom the indu s trial s a l a ried secto r to the rural landowne r s , thu s reduc ing the buy ing power o f the work ing c l a s s and l ower ing overa l l demand . Furthermore , the government del iberately r e s t r i c t s money i s sue and t h e ava i l ab i l i ty o f c red i t , thu s creating monetary i l l iquidity . As a resul t , there i s a r i s e in
239 inter e s t rate s and once more the demand fa l l s . In th i s way , rec e s s ion , wh ich ha s a l r eady been induced b y the deva l ua t i on , is reinforced even more . Facto r i e s come to a s tand s t i l l , the need for the importa tion of raw mater ia l s and capital goods is reduced , and the ex ternal sector tend s towa rd a l ow- l evel equ i l ibrium a s a result o f th e overa l l reduction in th e l evel of economic a c t iv i ty and income . Th i s rece s s ion h a s a l so a second ob j ec t ive : to a s sure cont inued incentives for f arming produ c t ion . For th e s e incentives to b e ma inta ined and to bear f ru i t , it i s n ec es s ary that the farming sector retain the relat ive price advantages obta ined as a resul t o f the deva lua t ion . At the s ame t ime , for th i s to occu r , real wage s mu st not be a l l owed to recupe rate to the i r previou s l evel . And to k e ep real wage s l ow , the rec e s s ion mu s t nec e s sa r i l y continue . F inal l y , the th i rd ob j ec t ive of monetary res traint and the consequent rise 1n dome st i c intere s t rates i s the creat ion of incent ive s for the ma s s ive entry of fore ign capita l . In conclu s ion , the balanc ing e f fect o f s tab i l i z a t ion plans on the external sector occurs in the short run th rough th e redu c t i on in imports and th e f l ow of capital f rom abroad and in the l ong run through the s t imu l a t ion o f the f a rming s e c tor by chang e s in r e l a t ive p r i c e s in favor o f the same . The common denominator o f the s e th ree factors i s tha t they a l l depend o n the cont inu ing rece s s ive dome s t i c cond i t ion s . The rec e s s ive nature o f stab i l i za tion plans i s th e cause of the d i f f i cu l t i e s that the s e same plans fac e . Owing to soc ial pres sure , on one hand , and the technical d i f f icu l t i e s o f ma inta ining the nec e s sa ry monetary res tra int , on th e other , the government- - e i ther vol un ta r i l y or involunta r i l y- - ends up tak ing a numb e r o f rea c t ivat ing mea sure s . S a l a r i ed worke r s beg in to apply pre s su r e in an attempt to r e store the i r level o f income . The same occu r s in the indu strial sector . The spira l o f c o s t s a n d p r i c e s i n i t ia ted b y the deva l ua t ion i s thu s compl ete . The ba lanc ing e f f e c t o f the stabi l i z ing p l an for th e ex ternal secto r d i sa ppea r s . To resto re it the government is forced to deva luate again , unl ea sh ing another i n f l a t i onary sp i ra l . In th i s way , highly virul ent ou tbreak s o f a spec ial type o f in f l a t ion occur tha t are typ ical o f Argent ina and other pr imary export ing c oun t r i e s in th e proc e s s o f indu s tria l i z a t ion tha t o n e o f the authors ( D iamon d ) c a l l ed el sewhere exchange rate inf l a tion . 5 Genera l ly speaking , the inf l a tion in Argentina ha s been attr ibutab l e to d i f f erent c a u s e s and , at d i f f erent s tages in i ts hi story , has had di f f erent driving forc e s . However , th e mo st virul ent outbreaks have been der ived prec i sely f rom th e a ttempts to solve the probl em of the externa l sector by mean s o f h eavy deva luations and the
240 consequent tran s f e r o f income to the farming s ector . As res i s tance is met f rom the other sector s , th i s procedure l e ad s to long periods o f st rugg l e for higher income , giving r i s e to rather vio l ent i n f l a t ionary phenomena that are very d i f f icu l t to suppre s s . The mo s t virul ent in f l ation experienced in Argentina took place in 1 9 5 9 , 1 9 6 2 , 1 9 7 1 - 7 2 , 1 9 7 5 , and 1 9 8 1 , a f te r very heavy deva luations that had been provoked by c r i s e s in the bal ance o f pay I n each c a s e , th i s was r e l ated to the a f oremen ment s . t ioned exchange- rate i n f l ation . I n order to contain thi s type o f spiral , the government is f i n a l l y forced to d e l ay the rate of the deva luation in r e l a t ion to dome s t i c pric e s , thu s a l l owing a s l ow recuperation of income in the s a l aried indu s t r i a l secto r a n d a l lowing reactivation to be e s tabl i shed . How eve r , as the economy becomes react ivated , there is an increase in imports . Moreover , as the exchange rate i s held back once more , the f a rming s ector begins t o l o s e i t s price advantage obtained through the initial deva luation . The only bal anc ing mechan i sm that rema i n s in the externa l s ector , in princ i p l e , i s the entry o f capital and loans f rom abroad . Thu s , soone r o r later , the s e stab i l i z ation plans move f rom the f i r s t h i ghly rece s s ive s tage to a second l e s s rece s s ive - - o r even exten s ive - - s tage , based on foreign indebtedne s s . S tab i l i z at ion P rograms :
Pha s e Two
To obta in the fore ign loans needed by the country , the government usua l ly re sorts to induc ing pub l i c and private companies to become indebted in foreign currency by means of attractive incent ive s . I n the f i r s t pha s e of the stab i l i zat ion programs , th i s maneuver is achi eved by increas ing the dome s t i c rates o f intere s t , wh ich rend e r s foreign cred i t s more advantageou s . However , th i s procedure i s incompat ible with the economic react ivation that is hoped to be achi eved in the second pha s e of the plans , for if the intere s t rat e s are high in real terms , the rec e s s ion wi l l cont inue . The solut ion to the di l emma l i e s in ho lding back deva luat ion in r e l a t ion to dome s t i c c o s t s toward the end o f the f i r s t stage o f the s tabi l i z ation programs . The cons equent delay in the ad j u s tment o f the exchange rate has a h ighly s t imu l a t ing e f f ect on the entry o f foreign capita l . Norma l ly it i s thought tha t incent ive s di rected toward foreign indebtedne s s are achieved by high real intere s t rate s , taken a s the d i f f erence between nominal rate s and i n f l ation . But th i s i s not quite true : What are important are the nominal dome s t i c rate s , on one hand , and the intere s t rate for do l l a rs abroad p l u s the deva luation rate , on the other . I t i s suf f i c ient that there be a permanent ho lding back of deva luation in relat ion to dome s t i c i n f l at ion for foreign borrowing to
241 inc r e a s e considerably , even where real inter e s t rates are low o r even negat ive . I t would therefore seem that a cont inued delay in ad j u s t ing the exchange rate would be the ideal remedy for external d i s equ i l ibr ium , that i s , the abi l i ty to attract credit f rom abroad with no , o r relatively f ew , rece s s ive cons equenc e s . In order to continue bene f i t ing f rom thi s e f fect , once the pos tponement o f the ad j us tment o f the exchange rate has begun dur ing the tran s i t ion f rom pha s e o n e to pha s e two , t h e government o f ten tends t o perpetuate I n other word s , a rate of deva luation that i s s l ower it . than that of inf lation is adopted . Thi s technique encourage s , in fact , the entry o f fore ign capit a l wi thout the need for rece s s ion . But at the s ame t ime , it initiates a vicious c i r c l e o f indebtedne s s that wi l l inevitably lead t o the f inal f a l l . F ir s t , a s t ime goes by , the initial structura l external de f ic i t grows , a n d w i t h i t th e indebtedne s s nece s s ary to compensate it . Then , there i s the interest that increa s e s the original de f i c it , mak ing i t nece s sary to incur even greater loans in order to service the debt . S econd , the po stponement in th e ad j us tment to the exchang e rate inhibits exports even further and encourages import s , thu s increas ingly deteriorating the trade balance and aggravating the i n i t i a l externa l d e f i c i t . Once initiated , thi s proc e s s of accumulative in debtedne s s i s very hard to curb . The longer it goes on the greater the accumu l a ted d i s equ i l ibr ium in the external sector and the need for new loans . The greater the need for the s e loans the more urgent it is to acquire compen s atory capital and there fore to ho ld back the exchange rate ad j u s tment in o rder to ma intain the incentives that encourage the entry of such capital . On the other hand , according to the trad i t ional orthodox ideas that inspire the se plans , the ma in cause o f the who l e prob l em o f the countries l ike Argent ina i s the i r exc e s s ive protectioni sm and the devel opment o f presumably ine f f ic ient indu s t r i e s . Thus , wh i l e being momentar i ly in po s s e s s ion o f an abundant supp ly o f fore ign exchange due to the entry o f capita l , the country i s faced with cons iderab l e pres sure t o open u p i t s economy . As a r e su l t , the degree o f protection i s reduced al ong wi th the occas ional d i f ferential incent ive s for indu s t r ial export s . Al though the se measures are des igned to i n crea s e indu s t r i a l e f f i c iency , in fact they have the oppo s i te e f fect . They incre a s e impor t s even more and exports decre as e , wh ich reinforces the e f f e c t s achi eved by the po s tponement of the exchange rate ad j u s tment s . The degree o f indu s t r i a l integration fa l l s , who l e sectors o f activity d i s appear , and the product ive apparatus is impa ired . I n genera l , the current account balance o f payment s become s more and more unstab l e , and the foreign indebtedn e s s requ ired to compensate thi s i s greater than what wou l d have been needed had the po l icy o f e conomi c
242 openne s s not been emp l oyed . L a s t l y , in the advanced stage s o f thi s pha se of orthodox stab i l i z a tion plans , t h e s i tuation wor s en s a s a result o f the growing number o f peop l e who begin trans f e rring the i r saving s abroad to protect themselves aga inst an inev itable deva luation . As th i s f l ight o f capital mu s t a l so be compen sated , the country mu s t become more indebted . Thu s , pres sure i s exerted ma inly on the companies in the pub l i c sector to obtain foreign currency by becoming indebted . F inal ly , the who l e proce s s exp lodes , the chain o f indebtedne s s i s broken , and the magni tude of the accumu l ated externa l de f i c i t become s apparent , re f lected in the total indebtedne s s , unlea shing an even more s e r iou s c r i s i s in the balance o f payments than the one that initiated the s tabi l i z ing po l i cy to begin with . Oc c as iona l ly events occur d i f ferently . When the rec overy of exchange r e s erve s dur ing the f i r s t pha s e coincides with a favorab l e change in the terms o f trade and with the coming i nto powe r of a popu l i s t party , cond i t ions are created that favor an expan s ive pha s e that l a s t s o n l y a s long a s t h e international res erves last . On the other hand , it mus t be added that during thi s who l e proc e s s , stati s t i c s show that there are two factors that are norma l ly c l a s s i f ied a s dec i s ive in the deterior ation proce s s o f the externa l s ector in count r i e s l ike Argentina , but that do not appear to be s ign i f icantly rel evant . F i r s t , the we l l - known secular deterioration in the terms o f trade cannot be proved with any c erta inty ( a t l e a s t in the c a s e o f Argentina ) , al though what can in fact be ob s e rved is that , on a number of occa s ions , the terms o f trade have been f avo rab l e for the country , as in 1 9 7 9 - 8 0 , for examp l e . However , due to a l a ck o f awarene s s o f the foreign l imitations d e s c r ibed , the governments have neve r taken advantage of the s e s i tuations to compensate for future deteriorat ion . Second , remi ttanc e s for roya l t i e s , dividend s , and techno logy payments taken out by transnational compan i e s for th e i r h e a d o f f i c e s are n o t o f a su f f i c iently s i gn i f ic ant magni tude to exp l a i n the recurrent c r 1 S 1 S in th e bal ance o f payments f ac ed by Argentina and a l l in all appear to be a l e s ser contr ibuting facto r . THE ERA OF MART INE Z DE HO Z What h a s occurred in Argentina since 1 9 7 6 coincides exactly with the outl ine d e s c r ibed . Al though Argentina ' s current foreign debt wou l d appear to be partly due to the accumu l at ive indebtedne s s of three decade s , the greater part wa s incurred under Minister of F inance Jose Mart inez de Ho z , who held that po s t between Apr i l 2 , 1 9 7 6 , and March 2 9 , 1 9 8 1 . Mo re prec i sely , 6 4 . 4 percent
243 o f the foreign debt by the end o f 1 9 8 0 ( three month s before Martine z de H o z l e f t h i s j ob ) wa s incurred f rom 1 9 7 8 to 1 9 8 0 ( s ee Tab l e 9 . 3 ) . Apart f rom th i s , the subs equent increa s e in indebtedn e s s is a l s o attributab l e t o h i s admini stration , becau s e Martine z d e HO z ' s succ e s sors had no a l ternative but to po s tpone pa yments and al low the debt to increa se even i f th i s wa s only through the capita l i z a tion o f interest that wa s impo s s ib l e t o pay . Two c l early d i f ferentiated stage s can be ident i f ied within the Mart ine z de H o z management o f Argent ine fi nance s . The f i r s t extended unt i l the middl e o f 1 9 7 8 , wh ich more or l e s s corre spond s to the desc ription o f pha s e o n e o f the stab i l i z ation plans . The second , comp l eted with h i s departure f rom the government in March 1 9 8 1 , evo lved accord ing to the indications for the usual second phas e of the s e p la n s corre sponding to the po l icy of accumu l ated indebtedne s s . I t wa s within thi s period that the rapid growth in th e fore ign debt occurred . The f i r s t pha s e o f the s tabi l i z ing plan arose in re sponse to the grave ba1anc e - o f - payments c r i s i s o f 1 9 7 5 . I t s equ i l ibrating e f fect wa s very rapid , and by 1 9 7 6 a marked recovery cou l d a l ready b e ob s e rved i n the b a 1 ance-of-payments current account . F rom then on , unt i l 1 9 7 8 , a growing current account surplus w a s regi s tered . The foreign debt ro se to US $ 4 . 6 b i l l ion dur ing th i s period , i f the who l e o f 1 9 7 8 i s inc luded i n thi s e s t i mate , a n d t o US $ 1 . 8 b i l l ion i f 1 9 7 6 a n d 1 9 7 7 only a r e Th i s i s a smal l f igure i f cons idered tak en i n t o account . in the l igh t o f later event s . Furthermore , th i s inc r e a s e in t h e debt wa s compen sated b y a s imu l taneou s r i s e in international r e se rve s o f nearly US $ 3 . 4 b i l l ion , to th e extent that the Martine z de H o z admini s tration began 1 9 7 8 wi th a surp l u s in the external s ector . The economic c o s t s o f th i s recovery were cons ider abl e . F i r s t o f a l l , there wa s the usual rece s s ionary ef fect . Therefore , apart f rom a b r i e f period o f economi c expans ion in the f i r s t ha l f of 1 9 7 7 , dur ing the f i r s t three yea r s o f t h e per iod there wa s virtual stagnation in the gro s s dome s t i c produc t . There wa s a l so a s l ow drop in the contribution o f indu s t ry to the GDP , wh ich f e l l f rom 2 8 . 2 percent i n 1 9 7 4 to 2 5 . 3 percent in 1 9 7 8 and continued t o f a l l unt i l i t reached 2 2 . 4 percent in 1 9 8 2 . 6 Another s ign i f icant occurrence wa s the growth in the part i c ipation of the s e rvic e s sector in the GDP , as a resu l t o f the expa n s ion in the f inance sub sec tor . The second adve r s e co n sequence wa s that the e l iminat ion o f the d i s equ i l ibr ium in th e externa l s ecto r took p l a c e at t h e c o s t o f a dramatic f a l l in r e a l wage s . Thu s , th e s a l a r ied sector ' s partic ipation in income f e l l f rom 4 5 percent in 1 9 7 5 to about 3 5 percent i n the f o l l owing three year s . The decrea s e in real wag e s in 1 9 7 6 ma y be e s t imated a t a b o u t 4 0 p e r c e n t . 7
244 T h e th i rd adve r s e c o n s eq u e n c e o f th i s po l i cy wa s t h e c o n t i nu e d h i gh r a t e o f i n f l a t i o n th a t rema i n e d a t a round H owever , i t 1 7 0 p e r c e nt per a nnum du r i ng 1 9 7 7 and 1 9 7 8 . d i d n o t reach t h e unprecedented 4 3 3 perc ent reg i s tered in 1 9 7 6 a s a r e s u l t o f t h e t yp i c a l l y i n f l a t i o n a ry s p i r a l t h a t o c c u r r e d a f te r t h e g r e a t deva l u a t i on s , i n wh i c h t h e d i f f e r e n t s e c t o r s s t r u g g l e d t o r e c u p e r a t e th e i r s h a r e o f i n c ome . I n o r d e r to c u rb th i s i n f l a t i o n a ry p r o c e s s , th e gove rnme n t r e s o r t ed to a numb e r o f mea s u r e s w i thout suc c e s s . In 1 9 7 6 , du r i n g t h e f i r s t p h a s e , wa g e f r e e z e s we re impo s e d . B u t a s t h e e c o n omy b e c ame r e a c t iv a t ed , wage c o n t ro l s w e r e e x c e e d e d in wh a t w e r e euphemi s t i c a l l y c a l l e d wage s l i d e s . I n 1 9 7 9 , p r i c e c o n t ro l s w e r e imp l eme n t e d b u t w e r e a l s o o v e r r u n . F in a l l y , i n the s e c ond h a l f o f 1 9 7 7 , t h e g o v e r nme n t a pp l i e d even h e a v i e r mo n e t a ry re s t r a i nt s , c a u s i n g a s p e c t a c u l a r r i s e i n i n t e r e s t r a t e s o n s h o r t - t e rm l o a n s , wh i c h rema i n e d a t a p o s i t i ve mo nth l y r e a l r a t e o f about 4 to 6 p e r c e n t f o r s e v e r a l mo n th s . Th i s p r o du c e d a f a l l i n t h e GDP o f n o l e s s t h a n 1 1 . 6 p e r c e n t f rom t h e th i rd q u a r t e r o f 1 9 7 7 t o th e f i r s t qua r t e r o f 1 9 7 8 .
The
1978
Change
in Cour s e
A f t e r two y e a r s o f t h e M a r t i n e z d e H o z admi n i s t r a t i o n , t h e gove rnme n t ' s e c o n om i c t e am wa s i n s e r i o u s I t s ob j e c t i ve to b a l a nc e t h e e x t e r n a l s e c t o r t r o ub l e . h a d b e e n a c h i ev e d , b u t a t t h e c o s t o f a n a c u t e p r ob l em c h a r a c t e r i s t i c o f r e c e s s i v e s t a b i l i z a t i on p r o g r ams . S ev e r a l y e a r s o f v e ry impove r i s h e d r e a l wa g e s e n s u e d , tog e t h e r w i th o v e ra l l e c o n om i c s t a g n a t i o n , m a r k e d c o n f l i c t s b e tw e e n t h e d i f f e r e n t e c onomic s e c t o r s i n t h e s t rug g l e f o r h i gh e r i n c ome s and the c on s e q u e n t i n f l a t i o n o f 1 7 0 p e r c e n t p e r a nnum . T h e c o n s e c u t ive r e s t r a i n t mea s u r e s app l i e d t o t h e d i s t i n c t s e c t o r s to c u r b t h e i n f l a t i o n a ry s p i r a l - - wa g e a n d p r i c e c o n t ro l s and h e avy r e c e s s i o n - - h a d exhau s t e d th e i r e f f e c t . I n t h e f i r s t h a l f o f 1 9 7 8 , a s a r e s u l t o f th i s s i tua t i o n and o f p o l i t i c a l p r e s s u r e t o i n c r e a s e r e a l wa g e s a n d r e a c t iv a t e th e e c o nomy , th e Ma r t i n e z d e H o z adm i n i s t r a t i o n u n d e rwent a s ub s t a n t i a l c h a n g e . A p r e p a r a t o r y me a s u r e t h a t h a d b e e n und e r t ak e n in pha s e o n e , c o n s i s t i ng o f a n o v e r a l l r e du c t i o n i n imp o r t t a r i f f s , h a d b e e n i n te n d e d t o b e a g r a du a l re f o rm b u t i n a c t u a l f a c t t u r n e d o u t t o b e r a t h e r h a s ty . Th i s wa s b r ough t about f o r two r e a s o n s . F i r s t , th e r e f o rm c o n s i s t ed o f a p a r t i cu l a r l y e x a gg e r a t e d d i a g no s i s o f A r g e n t i n a ' s i l l s , c o n t emp l a t e d i n t e rms o f indu s t r i a l in e f f i c i e n c y , wh i c h c o u l d b e r emed i e d through i n t e r n a t i o n a l c ompe t i t i o n . S e c o n d , i t wa s i n t ended t h a t th i s f o r e i g n c ompet i t i o n b e u s e d t o f i gh t i n f l a t i o n .
245
I n m i d - 1 9 7 8 , the gove rnme n t made th e c ru c i a l d e c i s i o n t o h o l d b a c k d ev a l u a t i o n a n d t a x i n c r e a s e s i n th e pub l i c s e c t o r i n r e l a t i o n t o dome s t i c c o s t s , a n d thu s b e g a n wha t w e have c a l l ed pha s e two o f t h e s t ab i l i z a t i on p l a n s . Toward th e end o f 1 9 7 8 , t h e p l an wa s mo d i f i e d w i t h t h e a dd i t i on o f a s c h e du l e , o r r a t h e r a n exp l i c i t p r o g ram , a c c o r d i ng to wh i c h t h e g o v e rnme n t p romi s e d to unde r t a k e f u t u r e de v a l u a t i o n s a t p r e d e t e rm i n e d and d e c r e a s i n g Th i s wa s j u s t i f i e d by t h e n e e d to i n c r e a s i n g l y rate s . suppo r t i n t e r n a t i o n a l comp e t i t i o n and i n v o l v e d a doub l e b a l a nc e - o f - payme n t s o b j e c t iv e f rom t h e mo n e t a ry p o i n t o f to i n t e n s i f y th e p r e s umed e f f i c i e n c y me a s u r e o f v i ew : t a r i f f r e d u c t io n , o n o n e h a n d , and t o c u rb th e r i s e i n dome s t i c pr i c e s , o n t h e o th e r , thu s provok i n g a s l ow d e s c en t in th e r a t e o f i n f l a t i on u n t i l th e p r o grammed d e c r e a s e d rate of i n f l a t i o n wa s r e a c h e d . U n f o rtun a t e l y , t h e p l a n h a d b e e n i n s p i r e d by a pa r t i cu l a r l y s imp l i s t i c v i ew o f the A r g e n t i n e e c o n omy . To b e g i n wi th , even w i t h t h e r e du c t i o n in t a r i f f s , o n l y a sma l l p a r t o f t h e e c on omy wa s expo s e d to f o r e i g n c ompe t i t i on . N e i th e r s e rv i c e s , t h e l i b e r a l p r o f e s s i o n s , n o r t h e c o n s truc t i o n a n d f o o d s tu f f s i n du s t r i e s w e r e exp o s e d to c omm er c i a l a n d f i n a n c i a l i n t e rmed i a t i o n . About h a l f o f t h e i n du s t r i a l s e c t o r wa s l e f t unexpo s e d du e to t h e e x i s t en c e o f c e r t a i n i n h e r e n t l y p r o t e c t i v e privi lege s : h i gh t r a n s p o r t c o s t s , d i f f i c u l t i e s i n pa c k a g i ng , t h e p e r i s h ab l e n a t u r e o f c e r t a i n g o od s , r e s t r i c t i ve a dmi n i s t ra t iv e a n d h ea l th r e gu l a t i o n s , a n d t h e n e e d f o r s u pp l i e s i n c l o s e p r ox imi ty i n o r d e r to produce c u s t om o rd e r s , t o p r o du c e p a r t s a n d s p a r e p a r t s f o r c e r t a i n dome s t i c i n du s t r i a l mo d e l s , a n d to c a rry o u t ma i n t e n a n c e . L a s t l y , t r a d i t i o n a l f a rm i n g a c t i v i t i e s , a l though in p r i n c i p l e expo s e d to f o r e i g n c omp e t i t i o n , we r e f a c e d w i th a ma rk e d r i s e i n i n t e rn a t i o n a l p r i c e s , wh i ch n eu t r a l i z e d any c u rb i n g e f f e c t t h a t t h e po s t p o n eme n t o f th e e x ch a n g e - r a t e a d j u s tment m i g h t h ave h a d o n dome s t i c p r i c e s . A l l in a l l , f o r e i g n comp e t i t i o n a f f e c t e d o n l y the expo s e d p a r t of i ndu s t ry , wh e r e a s t h e p r i c e s i n t h e non ex p o s e d s e c t o r c o n t i nu e d t o r i s e a t a mu ch f a s t e r r a t e t h a n t h a t o f th e d ev a l u a t i o n a s th e r e wa s n o t h i n g t o c u rb them . A s th i s s e c t o r e x e r t e d p r e s s u r e on t h e l a b o r mark e t , i t a l s o b ro u g h t a b o u t wa g e i n c r e a s e s f a r g r e a t e r tha n th e r a t e o f d e v a l u a t i on . M e a nwh i l e , t h e expo s ed s e c to r , wh o s e p r i c e s we r e r e s t r i c t e d to t h e r a t e o f deval u a t i on , wa s u n d e r p r e s s u r e b e c a u s e o f the i n c r e a s e d c o s t s o f inpu t s b o u g h t f rom th e u n e x p o s e d s e c t o r : s e rv i c e s and l ab o r . T h e re su l t wa s a r a t e o f i n f l a t i o n s e ve r a l p o i n t s Th i s r a t e wa s n o t u n i f orm above th a t o f deva l ua t i o n . b e c au s e the i n c r e a s e s i n t h e u n ex p o s e d s e c t o r w e r e v e ry mu c h h ig h e r than t h e ave r a g e r a t e o f i n f l a t i on , a n d the i n c r e a s e s i n t h e expo s e d s e c to r w e r e v e ry mu c h l ower .
246 The expected convergence did not occur and the ad j u s t ment o f ex change rate continued to be po s tponed . The consequenc e s o f th i s a ccumu l ated lack o f protection were ve ry seriou s . In 1 9 7 8 , no p roduc t ive ac t ivity worked with pro f i t margins wide enough to r e s i s t two years of increa s e s o f c o s t s o f s evera l po ints per month tha t cou l d n o t b e tran s f e rred on t o p r i c e s . Con s equent ly , the pro f i t s of a c t ivi t i e s directly expo sed to inf l a t ion dropped unt i l they were eventua l l y converted into l o s s e s . The f inal stage o f the proc e s s wa s ma s s ive decap i ta l i z a tion . Many produ ct ion l in e s were abandoned , and manu factu ring plants c l o sed down or even went bank rupt . The shutdown proc e s s has not extended even mor e becau s e of th e extremel y h igh c o s t and i rreve r s ible nature o f c lo s ing down a manu factur ing p l ant . Th i s h a s led many bu s ine s s e s to o p t t o cont inue accumu l a t ing the i r l o s s e s rather than pay ing o f f emp l oye e s , in the hop e s that the s i tuat ion woul d improve . The c ounterpart o f the sector i a l deterioration d e s c r ibed wa s to be seen a t a more genera l level in the g rowing de f ic i t in the b a l ance of payment s on current account , due to the continued increa s e in import s , tou r i s t spend i ng abroad , the ma s s ive f l ight of capit a l towa rd the en d o f th e period , a n d a r el a t ivel y lower ra t e o f growth in export s . Th i s de f i c i t was c ompensated for by short- term loans , the i ndebtedne s s o f pub l i c and pr ivate bus ine s se s , and the entry o f foreign funds f o r depos i t in Argent ine currency in the dome s t i c bank ing system . The incent ive wa s provided by a comb ination of moderately po s it ive rea l rates o f intere s t and the unrea l i s t i c rat e s o f exchange . Thu s , the invi s i b l e s in the b a l ance of payment s - -non compen satory capital entry- -began to g row . In th i s way the balance of payments ma inta ined i t s equ i l ib r ium f rom the po int of v i ew of the g rowing nat ional re s erve s and the l a rge amounts o f fore ign currency ava i l ab l e for impor t s , trips abroad , and other transactions . The rapid growth of the foreign debt went unno t i c ed a t that t ime becau s e of the de l ay in the e l aborat ion and pub l i ca t ion o f the corre spond ing stat i s t i c s and the ine f f ic ient meth od u sed by the Banco C entral to c arry out tha t j ob . The s tudy undertaken by Antonio Lope z , S b a s ed on the o f f ic i a l f igu res supp l i e d by the Banco Centra l , r e f l e c t s t h e c o u r s e o f t h e bal anc e o f payments f rom 1 9 7 6 t o 1 9 8 1 through the di saggregation o f data . Th i s permit s iden t i f icat ion o f the negative r e s u l t s o f th e comb ination o f tar i f f and exchange- rate p o l i c i e s f o l l owed after the change o f cour s e
in
1978 .
If
one
f o l l ow s
the p a t h o f
th e
fore ign debt a s it appears in Tab l e 9 . 4 , one can see that in the tr iennium o f 1 9 7 6 - 1 9 7 8 , there wa s an inc r e a s e in the debt o f only U 5 $ 1 . 4 3 8 b i l l ion a s oppo sed to the U 5 $ 1 8 . 5 9 4 b i l l ion tha t ac cumu l a ted during the t r i enn ium of 1 9 7 9 - 1 9 8 1 . 9 Because du r i ng mo s t of the s econd tri enn ium the interna tiona l p r i c e s for produc t s exported
-191 . 4 992 . 9
Roy a l t i e s
S e rv i c e s
P ro f i t s and d iv idends
Intere s t
5.
6.
-511 . 6
- 74 . 1
Stat i s t i c a l errors and omi s s ions
Accumu l a ted r e s u l t for the balance
10.
11 .
�:
-593 . 4
3 , 257 . 1
20 , 03 2 . 4
- 2 19 . 6
- 16 , 5 5 5 . 7
-372 . 5
-285 . 4
-9, 651 . 3
133 . 7
- 5 , 64 4 . 8
- 2 , 258 . 1
3 , 54 1 . 8
- 7 84 . 8
-4 , 4 6 6 . 7
3 , 23 2 . 4
1976/1981
Total
dol lars )
the negat ive ind i c ate decrease s .
the negative to out f l ow .
- 2 , 1 60 . 2
1 8 , 5 94 . 4
- 7 46 . 9
- 2 0 , 0 07 . 7
- 2 98 . 4
-444 . 3
- 9 , 24 5 . 4
35. 5
- 4 , 4 04 . 6
-1 , 746 . 5
2 , 548 . 9
Antonio L opez , based on Banco Centra l de 1 a RepUb l i c a Argentina f i gures .
( 14 ) :
through
(1)
The pos i tive f i gure s refer to incre a s e s i n reserve s ;
Note :
5 , 417 . 3
1 , 43 8 . 0
527 . 3
- 1 , 7 06 . 8 -4 , 1 52 . 7
The po s i tive figures refer to fore i gn currency i n f low ,
Accumu l a ted var i ation in international
14 .
(13) :
Accumu l ated increase in the foreign debt
13 .
r e s e rv e s
Export f i nanc ing
12 .
3 , 452 . 0
1 58 . 9
o f payments
-405 . 9
Ad j us tments due to change s i n par i ty of the do l la r or other currency
9.
98 . 2 (net)
Uni l ateral trans fers
Non - d i s aggregated capital out f l ow
8.
-1 , 240 . 2
7.
( ne t )
( ne t )
- 3 14 . 0
4 , 93 9 . 2
4.
(net)
3.
trave l and expenses
Touri sm :
2.
1976/1978
1 9 7 9/ 1 9 8 1
( in mi l l ions of current u . s .
Triennium
Balance of Payments for the 1 9 7 6 - 1 9 8 1 Period
Trade balance
Argentina :
1.
Tab l e 9 . 4
t.) ",. 'I
248 by Argent ina , ma inly meat and gra i n , rema ined a t h igh real l eve l s , the deterioration in the trade bal anc e over th i s period wa s not wor s e . The pre sence o f a negat ive bal ance despite the h igh p r i c e s of Argent ine exports can be exp l a ined by several concurrent devel opmen t s . F i r s t , th ere wa s the sharp inc rea s e i n impo rt s , wh ich t r ip l ed f rom 1 9 7 8 to 1 9 8 0 ( an Th i s wa s increa s e of 1 7 5 percent in current do l l a rs ) . due ma inly to the importation o f unnec e s s ary or luxury con sumptive goods . Thu s , for exampl e , consumer goods , almo s t al l o f wh i ch face a compet i t ive national ma rket in the case o f Argentina , went f rom 2 . 2 percent o f total exports in 1 9 7 6 to 1 7 . 6 perc ent in 1 9 8 0 . A s imi l a r phenomenon occurred in intermediate and capital -goods sector s , where the increa s e wa s ac counted for by products S econd , expendi ture tha t had rep l a c ed local produc tion . on tour i sm abroad wa s unprec edented , go ing f rom US $ 3 1 4 mi l l ion i n the 1 9 7 6 - 1 9 7 8 t r ienn ium t o US $ 4 . 2 b i l l ion du r ing 1 9 7 8 - 1 9 8 1 . Th i rd , there wa s a sharp increa s e in the area of " nonindividu a l capital out f l ow , " wh i ch accounted for th e tota l sum o f US $ 9 . 2 b i l l ion in invest ments and f inanc i a l remi ttanc e s abroad , made pos s i b l e by the ab solutely free exchange that preva i l ed up unt i l the l a s t f ew month s of 1 9 8 1 . The increa s e in expor t s wa s much l e s s than th e in crease in the expenditure o f fo r e ign exchange . The po s i t ive e f f ect of the h igh international p r i c e s obtained for traditional expo r t s wa s counterac ted by the delays in the ad j u stment o f the rate o f exchange . As regards nontradit iona l export s , owing to th i s delay and the re duct ion in a number o f incentives for the sake of " e f f ic iency , " both indu st r i a l a n d agro- indu s t r i a l exports s l owly came to a s tand s t i l l . The f l ow o f short-term c redit to pr ivate and s tate bu s i ne s s e s , who se fore ign indebtedn e s s wa s encouraged to cover the g rowing fore ign de f ic it on current accoun t , wa s re spon s ib l e f o r the h igh increa se i n inter e s t pay ments of U S $ 1 . 2 b i l l ion in the f i r s t tr ienn ium of the pol i ti c al admi n i s tration to US $ 4 . 4 b i l l ion in th e s econd . The f igu res for the u s e s o f foreign exchange are even mo re dramatic i f one con s iders that the total for eign debt , cons idered correc t by the Banco C entral and ba sed upon i t s survey s on the f inal s tock s o f the debt , is US $ 7 . 7 b i l l ion h igher than the previous f igur e s b a s e d o n th e balance-of-payments reg i s ter s . Th i s mean s that t h e outflow o f fo r e ign currency over th i s period , shown in the accounts o f the bal ance o f payment s , i s a l so unde r e s t imated by US $ 7 . 7 b i l l ion . I f th i s f igure i s compared wi th e s t imates based o n the observa tion of rea l ity , one may a s sume that th i s add itional out f l ow wa s partly due to increa s ed outf l ow o f capita l , partly to increased spending on the part o f tour i s t s go ing abroad , and partly to h i gher intere s t rate s .
249 T o sum up , Argentina ' s indebtedn e s s a ro s e a s a re su l t o f increased import s , inc rea s ed tou r i sm , th e f l ight of cap ital , and intere s t servic e . I n a number o f o th e r count r i e s ( such a s B ra z i l , for exampl e ) , mo s t o f the indebtedne s s wa s pro duced by the deter ioration in the terms o f trade resul t ing f rom the r i s e in o i l p r ic e s . In Argent ina , however , a country tha t imports vi rtua l l y n o o i l a n d en j oyed h igh p r i c e s f o r i t s f a rming produc t s during t h e Mar t i n e z de H o z per iod j u s t ana ly z ed , the terms o f t rade we re rather f avo rab l e . For th i s rea son , Argentina ' s fo r eign debt i s l e s s attributab l e t o the adverse internat ional s i tuat ion than is tha t of other countrie s . Th i s is so only in the sense that the deterioration in the terms o f trade in the years f o l l owing the demi s e o f the Martinez de Hoz admini s tra tion wa s f e l t with the fa l l in nontraditional expo r t s , wh ich wa s not attributab l e to the reduc tion in dome s t ic incentive s , but rather to the c l osure o f ma rke t s and incre a s ed protec t i on i sm on a wor l d sca l e . Al so , the r i s e in worl d real intere st ra t e s c au s ed an inc rea se i n the c o s t o f s ervi c i ng the debt as f rom 1 9 8 0 . N e i ther can i t b e a rgued that Argent ina became in debted in order to g row o r to increa se its produc tive ef f ic i ency . On the contrary , Argentina became indebted to f inance with foreign currency a pol icy of economic openne s s that resul ted in the ma s s ive des truc tion o f i t s produc tive capac ity a n d the d i s integration o f i t s indu s trial produc t ion , a huge techno l og i c a l s tep backwa rd owing to the c l o s i ng down o f indu s t r i a l l aborato r ie s , de s ign depa rtments , and so o n : a ma s s ive desub s t i tut ion of impo rt s ; and th e l o s s of f o r e ign ma rket s for its export s . In short , th i s p o l i cy on the who l e l ed to a general ec onomic cri s i s and an unprec edented s etback in product ion and the l iving s tandard s . The ma i n e f fect o f the internationa l s i tuation on the Argentine c r i s i s wa s more ind i rec t . On one hand , the a lmo s t unl imited ava i l ab i l i ty of c redit f rom international bank s made it ea s i er to become indebted and encouraged irre spon s ib l e behavior on the part o f the local auth o r i t i e s . On th e o ther hand , t h e wor l dwide spread of ortho dox doc tri n e s in g enera l , particu larly the f inanc ia l approach to the b a l ance- o f -payments prob l ems , had a dra s t i c impac t on South America . I t permi tted the inter national bank s to rationa l i z e and j u s t i f y the ma s s ive recyc l ing o f funds at the i r d i sposa l , thu s o f f e r ing interna tiona l re spectab i l i ty to the promoters of Argent ine dome stic orthodoxy . The End o f a D ream By 1 9 8 0 it began to b e obvious tha t the Ma rtine z de H o z admi n i s trat ion wa s leading th e economy into a
250 bl ind a l l ey . I f the rate o f deva luation were to inc r ea s e in o rder to s e t the Argentine currency at a l evel that woul d c ounteract the deteriora t ion in the balance of payments , i t would immediately curb the inflow o f short term foreign capita l , provoke i t s ma s s ive exodu s , and make the c r i s i s in the ex ternal sector even more ma rked . I f th e currency were to be deva l ued sharply , it wou l d provoke the tran s fer o f income t o t h e agro-export ing secto r , an e f f ec t typica l of stab i l i z a tion plans tha t , to work , mu s t be accompanied by a po l icy o f monetary restraint and ren ewed rece s s ion . If the exchange-rate ad j u stment d e l ay were to continu e , capi tal wou ld cont inue to f l ow into the c ountry but at th e expen s e of a g rowing deterior a t i on in th e d i f f erent sectors in the country , due to c ompet ition f rom imported produc t s and the in c r e a s ed d i f f icul ty in expor t i ng . Th i s , in turn , wou l d accentuate even more the d i s eq u i l ibr ium in t h e b a l a n c e o f paymen t s on current ac count . Furthermor e , a s the dome s t ic inter e s t rate s wer e l inked to t h e expected future movements in t h e r a t e of exchang e , the adver s e expectations c au s ed by the po s tpone ment in th e ad j u s tmen t s to the rate o f exchange cau s ed the intere s t rates to rema in very h igh . Thu s , th e unsus tainab l e f inanc ial costs incurred by the country ' s produ c t ive s e c to r were acc entuated . I n short , the economic pol icy moved towa rd a deadend and th erefore posed a d i l emma in wh ich every a l terna t ive wou l d be d i s a s trou s . Towa rd the midd l e o f 1 9 8 0 , one of the autho r s wrote , f rom a gene ral point o f v i ew , the s ituation s t i l l rema in s unso lved . The triple d i l emma caused by th e need to put an end to the po s t ponement o f the exchange rate ad j u s tment , to continue to encourage fore ign inve stment and ma intain a rea sonabl e l evel o f activity i s s t i l l eviden t . Any two o f the s e three ob j ectives may b e e a s i l y achi eved . But to ach i eve a l l three a t the same t ime wou l d be ex treme ly d i f f icul t , particularly within the f ramework of the s e l f - re s traint mea sures imposed by the p r e s ent government . A cha in i s only a s s trong a s i t s weake s t l ink . T h e p o s tponement o f the ad j u s tment in the exchange rate wi l l have to be s topped eventua l l y , the incentives for foreign inve st ment mu s t be ma intained , and therefore the only ad j u s tabl e va r i a b l e that rema i n s i s th e l evel o f a c t iv i ty . Sooner or later the proc e s s wi l l l ead inev itably t o renewed rec e s s ion , th e s eve r i ty o f wh ich wi l l depend on the f l ex ib i l i ty of the economic mea sure s ' to be employed f rom now on . 1 0
251 Unfortunately , the f l ex ib l e u s e o f economic mea sures did not occur . The only defense mechani sm ava i l ab l e in the f ace o f the balance-of -payments prob l em wa s the monetary po l icy to be app l i e d to the s i tuation in the external secto r . S o , in th e l ight o f th e ever- increas ing skeptic i sm as to the continu i ng o f the current proc e s s , the demand for funds ( ne c e s sary to settle fore ign debts ) in the local f inanc i a l marke t grew mor e and more , caus ing the real inte r e s t rates pa id and c o l l e cted by the f inanc e sy stem to increase cont inua l l y . In December 1 9 8 0 , th ree month s prior to the ch ang e in the Min i s try of F inance admini s tra t ion , the current intere s t wa s at a monthly rate o f 7 percent . Tak ing into account a monthly rate of inf l ation o f nea rly 4 percent , tha t rate wa s equiva l ent in real terms to 3 pe rc ent per month accumulat ive , or 4 2 percent per annum . G iven the low rate o f deva luation at that t ime , th i s intere s t rate meant about 5 percent inte r e s t per month for the do l l ar- - in other word s , about 8 0 percent pro f i t for inve s tmen t s made in do l l a r s . In F eb ruary 1 9 8 1 , the monthly current inter e s t ra te r o s e to a nominal 9 percent . I n a desperate attempt to f ind a way out , Ma rtinez de Hoz deva l u ed the peso 10 per c ent j u s t two month s prior to the end o f his term . Th i s turned out t o b e a d i sa s trous mea sure , f o r al though the magnitude o f the deva luation wa s insu f f ic ient to calm apprehen s io n , the mere fact tha t th ere had been a de va luation tha t had viola ted the commitments a s sumed with the devaluations schedu l e pub l i shed ea r l i er impl ied a death b l ow to the hou se o f cards on which the Ma rtine z de H o z po l icy wa s bu i l t . Dur ing the l a s t two month s of h i s f inanc ial admin i stration , t h e ten s ion in t h e money market g rew more and more , and current rates of intere s t ro s e t o around 1 6 percent p e r month f o r the lead ing compan i e s . THE NEW CRI S I S IN THE BALANC E OF PAYMENT S The r i s e to power of Lorenzo S igaut occurred in the mid s t o f a viol ent s l ide in the exchang e rate . Th i s apparently con j unctural movement r e f l ected a s e rious c r i s i s in the b a l ance o f payment s , a d i s integrated f inanc ial sy stem, and a s tagnant , partly des t royed system of produc t ion . Added to thi s c r it i ca l dome stic in heritance the re wa s the agg ravat ion of the international s i tuat ion : the worl dwide r i s e in real intere s t rate s , the wor s en ing interna tional rec e s s ion , and the fal l in the pric e s for Argentine export s . L a s tl y , the ease with wh ich internationa l c redit had been made ava i l a b l e ( s ince th e oil c r i s i s ) a l so began to dimin i sh a s the inter national bank ing sys t em began to rea l i z e tha t the deb t s o f t h e develop ing countrie s were f a r greater than th e i r capa c i ty to pay . I n other word s , the inc rea sed d i f f icul ty
252 in obtain ing c redit when i t wa s most needed wa s added to the other probl ems the new min i ster o f f inance had to face . The f i r s t mea sure undertaken by the Min i s t ry o f F inance under t h e new head was a deva lua t ion o f 3 0 per c ent . After th i s inevitabl e deva luation , there were two po s s ib l e cour s e s to f o l l ow . The f i r s t wa s to introduce once more an o r thodox s tab i l i z a tio n prog ram , th i s t ime even more s evere than the one in 1 9 7 6 and a s suming the consequenc e s of the rece s s ion as we l l as the drop in real wag e s tha t i t impl ied . The other a l ternat ive wa s to attempt to so lve th e externa l - sector de f i c i t by avo id ing , or at l e a s t at tenua t ing a s much a s po s s ib l e , the se rec e s s ive and reg re s s ive e f f e ct s . Howeve r , the e l e c t ion of th i s s ec ond cou r s e o f action impl ied renounc ing th e ba l anc ing ef fect o f the rec e s s ion on the externa l sec to r a n d made it e s sential to sub s t i tute for th i s o ther equ iva l ent mea sures c apab l e o f s t imul a t ing in a more d i rect way the genera t ion and saving o f foreign exchange . In actual fact , a s we wi l l s e e , it became nec e s s ary to become h ighly s e l e c t ive in import sub s t itution , and the min i s try , in g i ving i t s a c t ive support , had to provide def inite incentives to encourage the exportation of indu s trial good s , e s tab l i sh ma rginal incentives to inc r ea s e f a rming produc tion , and , f inal l y , e s tabl i sh some sort o f control over the exchange-rate sys tem or at l ea s t a dual rate of exchange , one for f inanc i a l tran s a c t i on s a n d o n e for trade . The new f inanc i a l admin i s tration took a very in coherent cour s e . Wh i l e f o l l owing the orthodox po l icy , no t only did it avo id tak ing any direct action in the exte rna l s ector , bu t at the h e ight of the c r i s i s and f o l l owing the step s of the Mart inez de Hoz admini s tra tion , it a l so proceeded to impl ement e f f i c iency mea sure s . Thu s , the deva luat ion wa s accompanied by a reduction in import ta r i f f s and tax re funds for export s , wh ich partly counteracted the e f fect o f the mea sure . Th i s , a l ong with the tremendou s inertia that ex i s ted in trad i t ional ex ports and import s ( in the latter c a s e becau s e of the l a rge number o f bind ing contra c t s taken out by impo rte r s through i rrevocab l e l e t t e r s o f c redi t ) , prevented exports f rom increa s ing with any c e l e r ity and f a i l e d to inh ib i t imports , thu s ma intain ing the d i s equ i l ibr ium in the b a l ance of trade . However , in contra st to the gove rnment ' s orthodox treatment of the exchange and taxation mea sure s , it adopted a lenient attitude toward wage increa s e s and l iqu i d i ty , wh ich counteracted the re d i s t r ibut ive and rece s s ive e f fects of the devaluation . Consequ ent l y , a gal loping " exchange- rate infl a t ion " such a s that desc r ibed ea r l ier wa s unlea shed at a rate almo s t doub l e tha t o f the i n f l ation that had ex i s ted prior to March 1 9 8 1 . The rapid r i s e in dome s t i c c o s t s and p r i c e s in response to the deva luations foretold the need for
253 further deva luation s . P e s s imi s t i c expe c tations regarding future exchange- rate stab i l ity su stained the he avy demand for fore i gn cu rrency for settl ing loan s , thu s contribut ing to the f l ight of capita l . In re spon s e to the con t inued fore ign- exchang e d i s equi l ib irum , in May 1 9 8 1 the current intere st rat e s rema ined at 12 percent per month ( approx imately 4 percent in real terms ) . At the beg inning o f June , another devaluation o f 3 0 percent wa s inevitab l e and provided n ew impetu s to exchange- rate- induced i n f l ation . At the end of June , the demand coming f rom the f inanc i a l s ector made another deva luation o f 3 0 percent nec e s sary . A l l in a l l , in the f i r st s ix month s o f the c r i s i s , the accumu l a ted deva lua tion o f the peso aga i n s t the commer c i a l do l l ar reached 1 2 5 percent , and the deva luation in the case o f the f inan c i a l do l l a r wa s about 2 2 8 percent . Dur ing tha t s ame h a l f o f the year , in f la t ion reached 6 0 percent compared to th e rate of 3 5 percent for the previou s s ix-month period . I n f l a tion wa s not a s h igh as it might have been , be cause with the th i rd deva luation the government f ina l ly author i z ed a doub l e par i ty o f the exchange market and e s t ab l i shed a f inanc ial do l lar that f l uc tuated f reel y and a c ommerc i a l dol la r set at a lower rate that requ i red periodic ad j u stment depending on the rate of inf l a tion . The a im o f th i s mea sure , which wou l d have he lped to control the c r i s i s i f it had been appl ied f rom the s ta�t , wa s to d i s sociate a s fa r a s po s s ib l e dome s t i c c o s t s and p r i c e s and the deva luations produced by the f i nanc ial imb a l anc e . I t i s important to keep in mind that the great demand in the f inanc i a l exchange market wa s due to the fact that only part of the ac cumu l a ted short- term for eign debt wa s payab l e on demand . I n fac t , one of th e mo s t important mea sure s adopt ed wa s that o f heav i ly sub s id i z ed exchange in surance fo r tho s e with deb t s in dol l ar s , on the condition that loans b e renewed for a period of no l e s s than a year . A s a r e su l t o f th i s mea sure , th e government managed to pos tpone a short- term debt of about US $ 5 b i l l ion unti l the second ha l f o f 1 9 8 2 . When S igaut wa s replaced by Rob erto Al emann with General G a l t i e r i ' s takeover f rom P r e s ident Vio l a , a change took place : A much more coherent o rthodox and rec e s s ive stab i l i z at ion p l an wa s adopted . Thu s , th e exchange ma rket wa s uni ted once more , wh ich imp l ied a deva luat ion o f 3 0 percent in the commercial rate o f exchange . At th e same t ime , a new " e f f ic iency" reduct ion in the non tradit ional export incentive s , in keeping with th i s o rthodox ap p roach , wa s undertaken . There wa s an inc r e a s e in value-added taxe s ; t h e nontaxab l e income f loor wa s f r o z e n ; and the money c i rcu l a t ion ( M l ) wa s reduced by 2 0 . 8 percent in nominal terms f rom January to March 1 9 8 2 . Wage s were f ro z en in the pub l ic sector , a long with r e t i rement f unds and pen s ion s , and wage incre a s e s in the
254 pr ivate secto r were d i scouraged . The rec e s s ion wo r s ened and dome s t i c con sumption f e l l 1 0 . 6 percent between the f ir s t and s econd quarter o f 1 9 8 2 . The rea l wage s o f the private sector , wh ich in Decemb e r 1 9 8 1 were 2 0 percent b e l ow the ave rage for 1 9 7 0- 1 9 7 5 , were reduced a furthe r 1 5 percen t in the f i r s t quarter o f 1 9 8 2 , wh i l e the remunerations in th e pub l ic sector f e l l about 2 2 percent in rea l terms . 1 1 Despite the fact that export s decreased a s a r e s u l t o f t h e f a l l in internat iona l p r i ce s for f a rm produc t s , the s i tuation in the external se cto r improved a s a result of a con s iderab l e decrea s e in impo r t s . The rec e s s ion caused the s e to drop during the f i r s t quarter of the year to al mo s t h a l f that o f the same per iod of 1 9 8 1 . The entry of new capital a l s o contr ibuted to th i s s ituation , reaching a pos i t ive balance o f U S $ 4 5 0 mi l l ion in the f i r s t quarter o f 1 9 8 2 . 1 2 H owever , the improvement ga ined at the expen s e o f the rec e s s ion by no means imp l ied tha t it wou ld be po s s ib l e to pay the foreign pub l i c debt that , with amo r t i z at ions and intere s t to be paid tha t year , reached th e sum of US $ 1 2 to 1 5 b i l l ion . With th i s i t wa s c l ea r tha t i t wa s absolutely e s sent ial for tal k s to be commenced regarding th e ref inanc ing of the debt . However , on Apr i l 2 , 1 9 8 2 , the armed conf l i ct with Great B r ita in arose and had s e r ious repercu s s ions on the c r i s i s in the externa l secto r . To beg in with , it led to the suspens ion of payments to B r i t i sh bank s . Th i s mea sure , taken i n r epr i s a l for the block ing o f Argent ine funds in the Uni ted K ingdom , a l so reduced the short-term inflow o f foreign capi tal to z ero . I n the face of the emergency , contro l o f th e rate o f exchange wa s intro duced . Con s iderab l e delays in the se t t l ement o f Argen tina ' s deb t s that had a r i sen f rom impo rts were produc ed . Unpa id l etters o f c redit began to accumulate . Importer s began to have more and mo re d i f f icu l ty in obta in ing fore ign c r edit . During th i s period the informat ion ava i l ab l e con c e rn ing Argentina ' s po s i t ion on its fore ign debt wa s very confused and some t ime s even contradictory . According to foreign newspapers at that t ime , the country f a i l ed to pay part o f i t s foreign ob l igations in order to cover the intere s t s a l one , wh ich i t al so paid late . Neverthe l e s s , the syndica ted deb t s du e to B riti sh bank s cont inued to be paid , a l though perhap s wi th s ome delay and only pa rtia l ly . The pol icy wa s that the amounts to be paid to the s e bank s b e depo s i ted in the New York branch o f the Banco de la Nac iOn Argentina , the non- B r i t i sh bank s be ing pa id accord ing to the perc entage o f the ir partic ipation in the s e syndi cated credi t s . Apparently the a im wa s to show the internat i onal b ank s that it wa s Arg entina ' s intention to pay i t s deb t s a t a l l c o s t and th at i t did in fact have the money to pay th e B r i t i sh bank s . The b l ock ing o f payments to Great B ritain caused an ini tial con f l i c t between Argentina and foreign bank s becau s e the
255 l atter , th rough a n agreement to share l o s s e s and ga ins with the B r i t i sh bank s , a l so sha r ed the payment s by Arg ent ina , and it wa s the ir intention that the s e funds be refunded . On May 1 8 , 1 9 8 2 , an artic l e in the New York T ime s pub l i shed dec l a rations made by new Min i s ter o f F inance Roberto Al emann to the e f f e c t that Arg ent ina intended to sub st itute a med ium- term debt for its short- term matu r i ty deb t s o f U S $ 3 . 5 b i l l ion . The artic l e gave the impre s s ion that the s e deb t s were in fact ref inanced . Dur ing the s ame period , Al emann made pub l ic the a s su rance s made by the U . S . bank e r s that they wou ld cont inue to ref inance Argen tina with short- term c re d i t unt i l the end o f the wa r in the S outh Atlantic . L a s t l y , in Wa l l S treet Journa l , on June 2 1 , 1 9 8 2 , the opinion wa s tha t " technica l ly Argentina h a s s u spended payment s . " The pol i t i c a l c r i s i s tha t a r o s e a s a r e s u l t of the mi l i tary defeat tha t culminated in the f a l l of G a l t i e r i p u t an e n d to t h e management o f the Min i s t ry o f F inance by Al emann . At tha t moment , in the second quarter of 1 9 8 2 , the c ountry ' s GOP s tood a s l ow as that o f 1 9 7 3 , and the GOP per capita wa s 12 percent l ower than tha t in 1973 . The s i tuat ion wa s charac t e r i z e d by very low wag e s , h igh unempl oyment , the l ar ge st foreign debt in the country ' s h i story , a n eg a t ive balance on current account despite the heavy rec e s s ion , and huge pr ivate bu s ine s s indebtedne s s . An Attempt to Change C ou r s e Dur ing t h e f ir s t f ew day s o f J u l y 1 9 8 2 , J o s � Mar i a Dagnino P a s tore became the new min i ster of f inance , and the young economi s t D omingo Cava l l o took control of the Banco C entra l . I n the f o l l owing month s , the latter wa s to wi e l d a lmo s t a s much power a s the min i s ter h ims e l f . On the i n i t i a t ive of Cava l l o , the f i r s t a ttempt to under take a drastic change in the cou r s e of th e economi c pol i cy wa s made . The p r io r i t i e s we re to rea c t iva te the pro duc t ive capac i ty and to re f inance and settle the h igh bu s in e s s l iab i l i t i e s that we re impo s s ib l e to pay and that accumu l a ted dur ing the prog re s s ive indebtedn e s s incurred by th e p rivate secto r dur ing th e c r i s i s . To ach i eve the react iva t ion o f the economy and the s e t t l emen t of deb t s , a f inanc ial re form wa s introduced that inc l uded a cons iderab l e reduc tion in th e intere s t ra t e s p a i d on short- term depo s i t s b y the bank s ( to nega t ive real l evel s ) . I t a l so inc luded g rant ing a certain amount of preferent i a l c redit to the pr ivate sector at the s e l owered intere s t rate s . At the same t ime , the r e f inanc ing of bu s ine s s l iab i l i t i e s wa s under taken a l s o a t the s e preferen t i a l rate s , in p e s o s as we l l a s in f o r e ig n currency .
256 Th e s e mea sures were accompan i ed by a number o f steps des igned to a l l eviate the s i tuation in th e external sec tor and a l l ow the intended economic expa n s ion . The mea sures introduc ed inc luded another change in the dua l exchange rate : a devaluation o f nearly 3 0 perc ent in the c ommerc ial exchange rate , tempe red by s ome retentions o f fore ign exchange enter ing for traditiona l expor t s , together with the e s tab l i sh ing o f a f loating f inanc ia l and serv i c e s exchange-rate market . At the same t ime , to re l i eve the burden o f the heavy demand on the f inanc ial market , the Banco C entral r e e s tab l i shed exchange in suranc e f o r credit tha t wa s t o b e renewed f o r more than one year and a l so author i z ed " swap s . " The settl ement o f overdue fore ign debts through governmental f o re ign- exchang e bonds provided for th i s purpo s e by the Banco C entral a t a sub s idi z ed exchange rate wa s a l s o authori z ed . La s tly , the d i spo s a l o n the f inanc i a l ma rket o f part o f the fore ign currency ob tained a s payment for indu s t r i a l exports wa s approved . As regards the dome s t i c ma rke t , the redu c t ion in th e ra t e s o f inte r e s t wa s re spon s i b l e for some sav ing s be ing u s ed in the acqui s i t ion o f good s . Th i s e f f e c tivel y reac t ivated the economy . Unfortuna tely , it a l so channeled a cons iderab l e part of the funds into the exchange mark et , e ither d i rectly or indirec tly . The immed iate impact wa s man i f e sted by the rapidly broadening gap between th e f inanc i a l do l l a r and th e c ommer c i a l dol l a r , to the extent that in a very short t ime the d i f f e renc e between the two wa s 7 5 percent . Meanwh i l e , the deva l ua t ion o f the commerc i a l do l l a r , a long with the r i s e i n the f inanc i a l and servic e s dol l a r ( du e t o i t s impac t o n transpor t , interest payment s , and s o o n ) , produced s evere inf l ation that rose to around 1 5 percent per month . Owing to the progre s s ive reduc tion in l iqu idity due to in fl ation and to the prog re s s ive shr inkage in the preferen t i a l c red i t , the initial re a c t iva t ing e f f e c t wa s s l owly l o s t . As f a r a s the other ob j ec t ive i s conc erned- - the s e ttl ement o f th e priva t e - s e c tor debt-- th i s wa s ach i eved by a heavy tran s f er o f revenue to the indebted sec tor a t nega t ive real intere st rate s . Without go ing into an ana l y s i s of the c o s t s and b en e f i t s of th i s tran s f e r to the ec onomy as a whol e , it undoub tedly made po s s ib l e the surviva l of a great numb er of enterpr i s e s tha t , under the p reviou s condition s , had been d e s t ined to di sappea r . The Dagnino P a s tor e-Cava l l o exper iment wa s cut short by the r e s igna t ion o f Dagn ino P a s tore and th e el imina t ion of both o f f i c i a l s j u s t a f ew days before the annua l a s s emb ly o f the I MF and the Wor l d Bank , wh ich took p l a c e in Toronto in s eptember 1 9 8 2 .
257 REF INANC ING Dagnino P a s tore wa s rep l a c ed by Jorge Wehb e , who a s sumed o f f i c e in the mid s t of to tal pol itical deb i l i ta t i on o f the a rmed forces a nd a st rong f ight o f many c i v i l ian s ec to r s for par t i c ipation in the severely d imin i shed income resul t ing f rom the continual rec e s s ive po l ic ie s imp l emented to stab i l i z e the ex ternal s e c tor and curb inf l a t ion . Wehbe a l so f a c ed the ta sk of initiat ing forma l renegotiat ion of the fore ign deb t . Up until tha t moment , the dramatic prob l em of the debt h a d never rea l ly been conf ronted . The country ' s react ion wa s l imited , on one hand , to the encouragement of a l l po s s ib l e mea n s o f pos tponi ng payment s o r t o mea sures tha t would attract more short- term cap i ta l , a lmo s t without heed to it s co s t . Thu s , the Argentine government , wh ich for the sake of pre sumed increased e f f ic iency s c r imped on tax resou r c e s for year s when in f a c t moderate s t a t e support th rough the r ight channe l s woul d have been suf f i c ient to obtain foreign exchang e a t rea sonab l e terms , wa s forced to incur mon s trou s expenditure merely to po s tpone matu r i t ie s . O n th e o ther hand , i n many instan c e s Argentina s imply suspended payment s on i t s debts withou t go ing into any f o rma l renegotia tion . Th i s prove rb i a l attitude of h i d ing one ' s head in the sand to avo id fac ing a prob l em wa s due to the po l it ica l ly de l icate nature o f everyth ing rel ated to the fore ign deb t . F i r s t , the fact tha t th e debt had been acqu i r ed to f inance destru c t ive e f f ic iency pol i c ie s , a l ong wi th the squandering of f o r e ign cu rrency , c reated s t rong r e s i s tanc e to any o f f i c i a l d i s cu s s ion related to paymen t s , f o r to admi t pub l icly tha t debt payments were overdue wou l d have b een con s idered a conf i rma t ion o f the in adequacy of the pol icy tha t had l ed to the indebtedne s s . S econd , the inexact account o f the fore ign debt on the part o f the Banco C entra l , and the fact that the f igures taken f rom survey s did not co inc ide with the ba l ance- o f - payments reg i ster s , created doub t s as to the real magnitude of the debt and a l so the l e g i t imacy of the f igu re s supposed to be owed by the pr iva te sector . The th i rd po l i tical ob sta c l e took the form o f r e s i stance t o th e intervention o f the I nterna t ional Monetary Fund in the renegotiations , a cond i t ion tha t is usua l ly i n s i s ted upon by fore ign bank s . Through Argent ina ' s repeated experience in agreement s with the Fund ( n ine standby agreements have b een sub sc r ibed to in the course of the c ountry ' s h i s tory ) , there wa s amp l e knowledge o f the rec e s s ive conditions b rough t about the the same , wh ich f o s tered the strong pol itical r e s i s tance to any commitments b e ing made with that in s t i tution . Th e l a s t pol i t i c a l ob sta c l e wa s th e a rmed di spute wi th the Uni ted K ingdom . Wh i l e the conf l ic t cont inued it made a l l open ta l k s regarding the debt impo s s ib l e .
258 Even wh en i t wa s over , i t made d i s cu s s ion d i f f icul t be cau s e the p riva t e interna t iona l bank ing ins t i tution s , a s a prerequ i s ite f o r any negotiat ion , in s i s ted tha t the r e be a forma l dec l a ra t ion o n the c e s sa tion o f h os t i l i t i e s and the l i f t ing of economic sanc tion s again s t B r i t i sh bu s in e s s - -onc e aga in a very del icate pol i t ic a l i s su e . However , the delay in payments cont inue d , and a s more deb t s ma tured , forma l negotiat ion became inev i tab l e . S o Wehbe decided to take a dvantage o f h i s v i s it to th e Toronto IMF annua l mee ting to begin the f i r s t expl i c i t tal k s with the interna tional bank s a n d the IMF conc e rn ing the renegot iation s . The f i r s t s tep taken by the Argentine government wa s to ful f i l l the bank ing in s t i tution s ' prerequ i s it e regard ing the termina t ion o f h o s t i l i t i e s w i th Great B r i ta in . Neverthel e s s , due to the rea sons a l r ea dy mentioned , the pol i t ica l a tmo sphere a s rega rds th e prob l em o f th e debt continued to be h ighly expl o s ive . It is for th i s rea son tha t all negotiations f rom S eptember 1 9 8 2 onwa rd have been undertaken in a h igh ly r e s e rved manner . The terms , amount , and conditions o f the renova t ion s � the talk s with the IMF � the a l terna tive s � and so on have b een surrounded by an aura of my s tery . I n forma tion ha s been f ragmentary , and in order to reco n s t ruc t the who l e p i c ture , it i s of ten nec e s sary t o resort t o inf ormat ion provided b y the interna tional pre s s and to work with a number of con j ec tu re s . Th e f o l l owing i s an attempt to exp l a in the ou t come of the recon s t ru c t i on of tha t s tage of negotia t ions . Th e N egotia t ions I n g enera l , four d i f f erent c ou r s e s o f a c t ion can be d i f f erentia ted in the ta lk s . The f i r s t wa s the neg ot ia t ion o f a s tandby credit with the Fund , granted not s o much beca u s e o f t h e magnitude o f th e deb t bu t rath e r b ecau s e i t meant t h e green l ight--a k ind o f g o o d c onduc t c e r t i f icate f o r the country-- th a t opened up the way to re f inanc ing by the pr ivate bank s . The second a spect c onc e rned rel atively sma l l aux i l i a ry c redit f r om pr iva te bank s , d e s t ined to f inanc e int e r e s t payments wh i l e negot ia t ions regard ing th e princ i pa l of the deb t con t inued . The th ird a spec t wa s the negotiat ion of the deb t o f th e c ompa n i e s o f th e pub l ic sector with th e inter nat ional bank s . The fourth aspect wa s the renewed pos tponement o f payments on a l l short- term revolving c r ed i t of the priva t e s ec tor ob tained through " swap s " o r a s a r e su l t o f succ e s s ive pos tponement s obta ined s ince 1 9 8 1 with exchange insuranc e . The tal k s with the Fund we re undertaken in accord ance with the e s tab l i shed no rms and with th e u tmo s t d i s c retion up t o th e point a t wh ich the Memorandum o f Agreemen t ma de with the Fund ( s igned on January 7 , 1 9 8 3 )
259 wa s pub l i shed o n March 1 1 , 1 9 8 3, b y L a P rensa , a da i l y n ewspaper i n Buenos A i r e s , a l ong wi th an a r t i c l e entitl ed " Ob j e c t ive s and S trategy for Economic Recovery . " The c ondi tions set by thi s agreement were o f three k ind s . The f i r s t ref erred to the ta rg e t s of the externa l s ector . Def i n i te l imits were e s tabl i shed f o r the def i c i t in th e b a l anc e of paymen ts mea sured in terms of chang e s in net interna t iona l res erve s , wh ich up unti l 1 9 8 4 were not to f a l l more than US $ 5 b i l l ion . The acceptab le d e l ays in fore ign payments were def ined and the s e t t l ement s were to b e made before June 3 0 , 1 9 8 3 . The second type of cond i t ions covered the mea sures introduced to reduce overa l l demand . I n th i s ca s e , the pub l ic- s ec to r de f ic i t and mone ta ry expa n s ion were strictly l imited , i f annual inf l a tion wa s not to exceed 1 6 0 per c ent . B a sed on th i s a s s ump t ion and u s ing re st rict iv e c r iteria , the permitted mone tary expa ns ion wa s c a l c u l a ted . La stly , the th ird k ind of condi tions re ferred to th e el imination of l imiting mea sures rela ted to the extern a l sector . Thu s , Argentina agreed to impo s e no new restrictions on impor t s and to prog r e s s ively do away with the ex i s t ing one s . E s sentia l l y i t wa s agreed to resc ind the dec i s ion tha t prevented payments to b e made for imports before 1 8 0 day s . Another agreement involved n ew steps toward a l ib e ra l i z a t ion and un i f ica t ion o f the exchang e sys tem , wh ich wou l d reve r s e the dua l par i ty of the exchange rate and the r e s t r ic t ions e stab l i shed dur ing the Dagnino P a s to re-Cava l l o term . Al s o , withou t a s suming any other c ommitment in th i s c a s e , Argent ina agreed to review i t s sy s tem of export incen tive s . A f ina l rath e r decorative ingred ien t , related t o the sub s tantive mea Sure s p1:opo sed , wa s th e man i f e s ted intention to a tta in a 5 percent growth in t h e gro s s dome s t ic produc t du r ing 1 9 8 3 . The f i r s t f ru i t of the negot iat ion with the Fund wa s an agreemen t by wh ich a s tandby l oan of U S $ 2 . 1 5 b i l l ion , to be spread over a g i ven per iod , wa s g ranted a s compen The l oan wa s to be s a t ion for d imi n i shed export s . del ivered in fu l l by March 1 9 8 4 , the latest date se t for the n ewly e l ected government to a s sume powe r . F rom pa r t i a l information tha t ex i s t s concern ing the s e l oan s , i t can b e deduced that by September 1 9 8 3 U S $ 5 6 0 mi l l ion i n IMF l oa n s for dimin i shed exports and two s tandby tranche s of approx imately U S $ 3 1 8 mil l ion ea ch entered th e country . Apar t f rom th i s , the progre s s made i n the negot ia t i on s wi th the Fund opened the door s to aux i l iary c r e d i t f rom the interna tional bank s , wh ich wa s to b e u s �d for the payment of intere s t and to service th e ou ts tanding debt that had been pending s ince Apr i l 198 2. For th i s pu rpo se a b r idge l oan of U S $ l . l b i l l ion , s ig ned on Decemb er 3 0 , 1 9 8 2 , wa s obta ined , and the f ir s t two instal lment s were # made wi th no prob l em . Accord ing to the n ewspaper C l a rin of S eptember 1 3 , 1 9 8 3 ,
26 0 " or ig ina l l y the l oan wa s no t to be ref inanced o r po s t poned , and i t s gra dual amo r t i z a t ion wa s directly tied to the payment of funds f rom the above-ment ioned IMF s tand by c r ed i t . " At the same t ime , it wa s agreed that , in princip l e , a medium- term loan o f US $ 1 . 5 b i l l i on wou l d be granted in three i n s ta l lment s , the ob j ec t ive be ing a l s o t o a i d the payment o f intere s t and out s tand ing amo r t i z a tion s . However , troub l e a r o s e wi th the payment of the l a s t insta l lmen t of the b r idge c redit and the who l e of th e med ium- term c red i t . To b eg in wi th , a f ter March 1 9 8 2 A rgentina had f a l l en behind in the payment of some intere s t . The l end ing bank s demanded tha t th e s e payment s be brough t u p t o date before th ey wou l d di sbu r s e the l a s t instal lment of the br idge credit , thu s crea t ing a vic iou s c i rc l e : Argentina had in su f f ic ient funds t o pay the intere s t , and th e new funds were withh e l d until th e s e intere s t s were paid . F ina l l y , according to the Ju l y 1 , 1 9 8 3 , edition o f the N ew Y o rk T ime s , i t wa s to have been agreed tha t Arg ent ina wou l d not rec e ive U S $ 3 0 0 m i l l ion of th e l a s t b r idge credit i n s ta l lmen t , divert ing i t d i rectly t o th e payment o f th e inter e s t owed in May . It wa s added tha t the operat ion wa s pa rt of a new agreement concern ing the medium- term c redit o f U S $ 1 . 5 b i l l ion tha t had been agreed upon b e f orehand but had not been d i s bursed . In f ac t , b y S eptember th i s l oan h a d s t i l l not Th i s time the prob l em a r o s e b ecau s e been handed over . th e l end ing bank s in s i s ted on a mod i f ic a t ion t o Arg entine l aw that placed fo r e ign l ender s on an equa l s tand ing with th e local l ender s . Th i s mod i f icat ion in the l eg i s l a t ion f in a l l y came th rough . But even th i s wa s not enough to overcome a l l the ob s tac l e s , f o r the bank s in s i s ted tha t renegotiat ion b e c omp l e ted prev iou sl y with Aero l inea s Argentina s and other s ta t e enterpr i s e s . A s wa s s a i d before , one of th e largest portions of Argentina ' s f o r e ign deb t is tha t o f s ta te enterpr i s e s , who s e matu r i t i e s in 1 9 8 2 and 1 9 8 3 to ta l ed approx imately U S $ 7 b i l l i on . It wou l d th erefore seem rea s onab l e tha t the l ending bank s shou l d demand th e renegot iat ion of th e capita l deb t before d i sbur s ing further c redit . H owever , it i s suf f ic ient to take into account the cond i t ions set by th e l ending bank s for renego t i a t ion for th i s impre s s ion o f the i r rea sonab l ene s s t o b e era s ed . Th e s e cond i tion s inc luded such abu s ive demand s a s intere s t ra tes set 2 . 1 2 5 po in t s above L IBOR � a commi s s ion a t over 1 . 1 2 5 percen t � ve ry h igh add i t iona l mo ratory intere s t in th e ca se of defau l t � th e g l obal guarantee tha t th e term defau l t appl y to a l l s tate enterpr i s e s , or the state it se l f , wh en any one of them f a l l s beh ind in i t s payments � an expl i c i t renunc iat ion of a l l e f forts on th e pa rt o f the s tate or i t s en terpr i s e s t o de f end i t s e l f f rom any emba rgo wha t soever � th e ob l igation to provide deta i l ed inf o rmat i on to th e l enders r ega rding the economic pe r f ormanc e o f the s ta te and its enterpr i s e s � and other
261 s imi l a r con di ti on s app l ied t o a c ountry man i f e s ting a genuine intent ion to pay i t s debts . The cut of the rema inder of th e c redit a l ready agreed upon to a l e s ser amount , c redit wh ich wa s vital to a c ountry on th e verge of a suspens ion of paymen t s , and th e tak ing a dvan tage of th e needs o f tha t country in o rder t o ob ta in a s igned contra c t reinforce the imp re s s i on o f abu s e . La stly , th i s impre s s ion i s c on f irmed when th e r e s t r i c t ions imposed on th e country through the agreement a re examined : To f a i l to provide the inf o rma t ion agreed upon imp l i ed th e suspens ion o f payment s ; to que s t ion or a rgue abou t any o f the c l au s e s o f the agreement in th e futu r e impl i ed the su spen s ion of paymen t s ; the withdrawa l of IMF suppor t a l so imp l ied su spen s ion of paymen t s . In o th e r words , t o adopt an economic pol icy approved b y the IMF impl ied tha t the repayment of the debt might b e dema nded immediately , a l ong with th e paymen t of mo ratory intere s t . D e s p i t e th e s trong oppo s i t ion f rom th e s ta t e enter p r i s e s , reluc tant to s ign such an agreemen t , th e govern ment backed down and approved a genera l agreemen t for s tate enterp r i s e s in accordanc e with the l ender s ' demands . Th e f i r s t concrete agreemen t wa s s igned with Aerol inea s Argentina s . However , th e troub l e s were s t i l l not over . The publ ica t ion o f th i s agreemen t cau sed a s t rong genera l i z ed pub l ic reac t ion tha t cal l ed f or the interven tion of f ederal j udge P into K rame r . K ramer ' s ba s ic ob j ec t ion wa s to the . submi s s ion to the j u r i sd i c t ion of the New York c ou r t s , a s convened in th e s igned agreement ( wh ich pa radox ica l l y wa s probab ly the l e a s t s e r i ou s of th e F i r s t he ordered th e government not to cond ition s ) . proc eed with th e renewa l of other pending contrac t s ; l a ter he nul l if i ed the agreemen t a l ready s igned with Aerol inea s Argentina s ; f ina l ly h e detained the p re s ident of th e Banco C entra l , Jorge G on za l e z del S o l a r , on charges of having appa rently f a i l ed to ful f i l l his of f ic ia l obl igation s in th i s respec t . On hea r i ng th i s news th e l ending bank s not only dec ided to su spend th e f ir s t in stal lment o f th e medium term c redit onc e mo re but a l so to suspend th e who l e c redit opera tion with Argen tina . T h e I n terna tiona l Mon e ta ry Fund , wh ich h a d su spended the payment o f the th ird in s ta l lment becau s e of i t s inconformi ty with th e ful f i l lment o f the c l a u s e s of th e s tandby c redit , ma in ta ined th e su spen s ion . Wh i l e th e government appea l ed th e orde r s of the j udge , th e Ban c o C entral suspended the del ivery of new import permi t s and the del iver y of F inanc i a l panic ensued . fore ign currency to trave l e r s . Th i s wa s th e s i tu a t ion at th e beg inn ing of October 1 9 8 3 a t th e t ime o f th i s wr iting . Furth e rmore , even though th i s c on f l i c t we re to be sol ved , th ere i s anoth e r prob l em tha t mu s t no t be ignored , about wh ich there i s very l i ttl e in forma t ion . Th i s i s
26 2 th e exchang e insurance and " swap " operat ion s , wh ich tota l ed U 5 $ 7 b i l l ion . The s e deb t s were a s sumed by th e s ta t e and postponed u n i la t e ra l ly until 1 9 8 5 or 1 9 8 6 , th e corre sponding promi s sory note s b eing handed over to the fore ign l ender s . However , rumor h a s it tha t there i s d i s agreement a s t o t h e condition s of the rol l ove r e s tabl i shed by the Argen tine government . An attempt to e s t ima te A rgen t ina ' s overa l l commi t men t s shows about U5 $ 2 . 8 b i l l ion tha t must b e paid in intere s t and amorti za tions on l oan s tha t ma tured in 1 9 8 2 � U 5 $ 7 b i l l ion in ou t s tand ing p r ivat e debt s or deb t s due to b e paid in 1 9 8 2 f o r exchange in surance and " swap s " � nea rly U 5 $ 7 b i l l ion in capital deb t s by pub l ic enter p r i s e s du e in 1 9 8 3 � and intere s t that mu s t b e pa id on debts ma tur ing a f ter 1 9 8 3 , on deb t s tha t we re ref inanced in 1 9 8 3 , and on ou t s tanding deb t s . All in a l l , accord ing to d i f f erent national and foreign pub l ication s , th i s amou n t s t o a tota l of abou t U 5 $ 2 1 b i l l i on . Th i s c ommitmen t made i t n ec e s sary to ob ta in re f inanc ing with fore ign r e s ou r c e s to the sum o f U 5 $ 1 7 . 6 5 b il l ion , to b e divided into the U 8 $ 3 . 6 5 b i l l ion tha t Wehb e hope d t o ob ta in f rom th e IMF and the pr ivate inter nat ional bank ing in s t i tu t i on s , on one hand , and U 8 $ 1 4 b i l l i on to ref inanc e " swap s , " exchang e insu ranc e , and the deb t s of pub l i c en terpr i s e s . La stly , it wa s hoped tha t approx imately U 8 $ 3 . 3 5 b i l l ion more wou l d be ob ta ined to pay th e rema inder , mo s t of wh ich wa s intere s t on deb t s that w e r e e ith er due , out s tanding , o r ref inanc ed . W ith th i s , the above-mentioned U 8 $ 2 1 b i l l ion wou l d be covered . The U8 $ 3 . 3 5 b i l l ion wou l d be ob ta ined f r om th e expected trade balance su rpl u s and po s s ib ly th rough an addit ional l oan f o r a much l e s se r amoun t , as th e agreement with th e Fund inc l uded r e s t r ic t ions rega rding the tak ing out o f furth e r f ore ign l oan s . A s fund s we re a l s o needed a l mo s t immediately t o cover needs u n t i l the a r r iva l o f the U 8 $ 3 . 6 5 b il l ion , it became n ec e s sary to resort to the a f orementioned b r idge l oa n of U 8 $ 1 . 1 b i l l ion and to fund s f rom the B I 5 e s t imated at U 8 $ 6 5 0 mi l l ion . However , a s ha s been shown , th e ref inanc ing plan f o r th e deb t s wa s only partia l l y ful f i l l e d du e to th e increa s ing d i f f icu l t ie s tha t a r o s e . In Tab l e 9 . 5 , th e very sma l l contr ibution reg i s tered so f a r dur ing Wehb e ' s term can be seen a s r egards th e obta in ing o f U 8 $ 5 . 4 b i l l ion of the a f oremen t ioned f ore ign funds . To sum up , a f te r two and a h a l f yea r s of c r i s i s , the s i tua t ion in the f a l l of 1 9 8 3 continued uns tabl e . Ma tu r i t i e s were not b e ing pa id on time , and the prob l em wa s be ing handled on th e ba s i s of l a s t-minu te dec i s ions made under pr e s sure , amid an a tmo sphere of conf l ic t and cons idera b l e uncerta inty and anx i e ty .
26 3 Es timate of Loans Applied for and Received Tabl e 9 . 5 Argentina : During 1 9 8 3 ( mi l l ions of U . S . dol lar s ) I tem Bridge l oan from private bank s for 1 year IMF : Compensation for diminished exports
Amount Reques ted
1 , 100
560
IMF : Standby credit ,
5 tranches
B I S : Short-term
Medi� term l oan from private banks
1 , 590
650
1 , 100 i n July 19 8 3 560
beginning of 1 9 8 3
636 end o f
September 1 9 8 3
1 , 500
Tota l c redit granted for
outstanding payments and settlement o f debts
a
of 1 9 8 3
5 , 400
2 , 94 6
Th e l oans were agreed upon al though in s om e c a s e s the sums were
not del ivered to the c ountry but were s ent directly to settle accumula ted outstanding debts .
Source : Estimates ba s ed on information released by Coyuntura y Desarro l l o , no . 5 7 ; Informe Indu s tri a l , no. 6 7 , Clarin newspaper , s everal d i f f erent date s ; La Nac i6n newspape r , s evera l d i f ferent
dates ( a l l of the se publi shed in Buenos Aires ) ; Wa l l Street Journal , Financ ial T ime s , and other fore ign publications i s sued between September 1 9 8 2 and June 1 9 8 3 .
The T e rm of F inanc e Min i s te r Wehbe A s f a r a s Wehbe ' s influence on internal order i s concerned , h i s econ omic team began i t s term with a re n ewed and progre s s ive un i f icat ion of the exchange ra te , wh ich wa s c omp l e ted by N ovember 1 9 8 2 �i th the u sua l rece s s ive an d inf l a t ionary c on s equenc e s . A s rega rd s th e rate of inf l a t ion , the propo s ed 1 6 0 percent wa s overtaken by a c on s iderabl e amount . The desperate s t ruggl e on the part o f th e wag e ea rn ers to recuperate the i r sha re of income , genera l i z ed s t r ik e s , the preva i l ing pree 1 e c tora1 a tmo s phere , and th e prog r e s s ive l o s s o f au tho r i ty o n the part o f the government gave way to ma s s ive wag e inc rea s e s tha t in turn caused an a c c e l e ra tion in the prog r e s s ive deva luat ion of th e off icial ma rke t ra te . At the same t ime , the sharp r i se of th e " pa ra l l e l " dol l a r ma rke t o r ig inated by the unc erta inty of the s i tu a t i on a l so had a cons iderab l e in f l a tiona ry e f f ec t . As a r e su l t , in S eptember 1 9 8 3 th e ra te of in f l a t ion reached 5 5 0 percent per annum .
264 Th e gu idel ine s r e l a ted t o the f i s ca l de f ic i t were breached f o r s everal rea son s . F i r s t , there wa s unfore seen state expen d i tu r e du e to f l oods in the northea s tern part o f th e c oun try to an ex tent never before experienced in th e h i s tory o f Argentina . S ec ond , phenomena commonly found in all s tab i l i z a t ion plans a ppeared : On one hand , th e rec e s s ive c ondit ion s adve r s e l y a f f ec ted th e tax paye r s ' c apac i ty ; on the o ther , th e r i s e in th e rate of inf l a t ion l ed to c on s iderab l e delay in tax c ol l ection . Thu s , to a great extent the budget def ic i t a rose a s a resu l t of th e in f la t ion , wh ich wa s in turn f ed by th e strugg l e f o r h igher income tha t a t l e a s t s e emed to generate a certain recovery in rea l wage s . La s tly , a s reg� monetary l iqu idity , th e expa n s i on ary l imits agreed to with the Fund--based on an a s sumed 1 6 0 percent in f l a t ion- -were in fa ct too l ow in re l a t ion to th e a c c e l erated growth o f the p r i c e s and l ed to dra stic The total credit ava i l ab l e at the rate i l l iqu i d i ty . regula ted by the Banco C entral wa s completely inadequate in th e l igh t of the demands of the economic sy s t em . Mean wh i l e , in S eptember , inte r e s t rates ro s e to 3 5 percent In short , month l y in th e pa ra l l el o p en c redit mark e t . even f o r th e Argen t in e s accu s tomed to tremendou s d i s tortion a n d uncerta i n ty i n th e economic sys tem , the s i tuation in Oc tob e r 1 9 8 3 bordered on sc ience f ic tion . COND I T IONS FOR A WAY OUT By the proc e s s j u s t de s c r ib ed , Argent ina f ound it s e l f in an ex treme l y d i f f icu l t po s i t ion . A s we have seen , th e intere s t a l one on th e fore ign deb t accounted The inf l ow of f o r e ign fo r ha l f the c ountry ' s export s . exchange wa s never suf f ic ient to su s ta in even moderate economic growth , s o by the f a l l of 1 9 8 3 Argen t ina had a t its di spo s a l no more than ha l f th e foreign currency amount needed to support its produ c t ive stru c tu r e with import s . Under th e s e c ond i t i on s , not even th e s evere rec e s s ion is su f f ic i ent to f ree the nec e s s a ry fore ign funds to pay th e intere s t on the deb t . I n other words , to a c h i eve th e relatively modest a im of f re e z ing the capital debt and paying th e intere s t a l one , an even deepe r rec e s s ion wi l l be n ec e s sary . Wha t a r e th e pro spec t s f o r a way out ? Trad i t iona l f inanc i al sector s with o r tho dox tendenc i e s are awa i t ing a solu tion in th e form of in terna tiona l recovery and a greater demand f o r Argen t ine expor tabl e produc t s . How eve r , the ba s ic d i s equ i l ibr ium in the interna t ional payments sys tem tha t l ed to the pre s en t s i tu a t ion s t i l l preva i l s . S o , pe rmanent wor l dwide recovery s e ems very un l ikel y . Moreove r , even i f th i s reac tiva t ion were ach i eved , th i s s i tuation might improve bu t cou l d never solve the prob l em , because o f the magni tude of th e f o r e ign deb t .
265 A s opposed to the orth odox point o f v i ew , pol i t ic a l pa r t i e s pla c e empha s i s on the n e e d t o renegotiate a n d to po s tpone int e r e s t payment s and payment s on the debt pr inc ipa l . The exper i enc� of Argentina and other coun t r i e s h a s shown tha t a l though r enegoti a t ion is not d i f f icul t , prob l ems a r i s e f rom the condi t ions the l ende r s a ttempt to impos e . Tho se c au s ing mo s t conc e rn a r e the typical rece s s ive conditions s e t by th e Internat ional Monetary Fund , who s e intervent ion is a lway s in s i s ted upon I f th e s e a r e by the f o r e ig n bank ing in s t i tu t ion s . acc epted , th ey render expa n s ion a n d growth v irtua l l y impo s s ib l e . The que s t ion h e r e i s whe th e r the s e rec e s s ive cond i t io n s are ina l terab l e or whe ther it is pos s ib l e to postpone debt service without a c c ep t ing th em . L e t u s f i r s t cons ider the rea s on why the Fund e s tabl i s h e s the s e r ec e s s ive demand s . The ma in concern of the IMF in approving renegotiat ion i s to ensure tha t th e indeb ted country takes a dvantage of the respite g ranted to i t to generate th e capa c i ty to s e rvic e th e deb t . Howeve r , a s rega rds p ra c t i c a l f ree- exchange mea su r e s of r e s traint on wh ich the Fund has impo sed its own ph i l o s ophy , th e only e f f ec tive method r ema in ing tha t wou ld enab l e a country l ike Argen t ina to a tta in the surplu s in i t s current balance-of-payme nt s account n eeded to pay its deb t s is an overa l l drop in th e l evel of a c t iv i ty . Thu s , the in s i s tence on rec e s s ive mea sure s . A l th ough rec e s s ion i s by no mean s d e s i rab l e , the externa l b a l anc ing e f f ec t tha t is sough t is e s s entia l , even f rom th e point of v i ew of the indeb ted country . If th e n e c e s s a ry fund s f o r the payment o f the debt a r e not genera ted , th e on ly th ing th e country woul d a ch ieve by po s tpon ing the ma tu r i t i e s wou l d b e a b r i e f respite , bu t it woul d f in d i t s e l f faced with the same prob l em two or three years l a ter , aggravated in th e interim by the bu r den o f additional accumu l a ted intere s t and an even g reater ba s ic external d i s equ i l ib r i um due to th e d i s parity b e tween impor t s a n d exports , wh ich tends to r e s t r ic t b oth recovery and growth . Th e correct approach to the prob l em i s to re j ec t the rec e s s ive o r thodoxy o f th e Fund and to a dvocate re spon s ib l e he terodoxy . Tha t i s to say , it i s not enough to me rely r e j ec t o r th odox procedu re s ; they mu s t b e rep l a c ed by other mea sure s tha t wi l l make th e repay ment o f th e debt f ea s ib l e . Spec if ica l l y , wh i l e demanding a non r ec e s s ive renegotiat ion , th e country mu s t des ign and e s tab l ish an a l ternat ive f o r e ign economic pol icy capab l e of providing the surplus o f fore ign exchang e nec e s sary to pay its deb t s , without the need for rec e s s ion . A l a s t ing s olu tion to th e present s i tu a t ion in Argentina therefore requ i r e s a eo l i cy compa tib l e with dome s t ic exeans ion and equ i l ibr1um in the ex terna l sector . We a r e c onv 1nc ed tha t a po l icy of th i s k ind i s f ea s ib l e i n Arg en t ina , wh ich h a s a particularly h igh expo r t ing and sub s t itu t ive capac i ty untapped owing to the lack of
266 the appropriate econ omic tool s . Th e Ba s i c Concep t s B eh ind a Compa tib l e pol icy I n view of l imi ta tions of spa c e , we wi l l s impl y mention the ma in conceptual chang e s tha t are impl i ed when c ompa red with cu s tomary pol i c i e s . F i r s t , there i s the probl em of diagno s i s . For many yea r s Argent ina ha s a l terna ted between two theoretical model s der ived f rom con f l ic t ing econ omic pol i c i e s . The f ir s t i s neoc l a s s ic a l , based on orthodox pol icy . As the pa s t expe r i en c e s largely demon stra ted , it l eads to rec e s s ion , s tagna tion , and accumu l a t ive f ore ign indeb ted ne s s . The s e c on s equenc e s are a r e su l t of the model ' s compl ete ina dequacy to cope wi th r ea l ity . But in a c tual f a c t , th i s model is ba s ed on the pre sumed opt imum u t i l i z a tion of produc tive capa c i ty , and the conc l u s ions and prior i t i e s derived f rom it a re b e ing a ppl ied to a country wh o s e ma in probl em i s prec i s e l y the subu t i l i za t i o n o f th i s capa c i ty . Th e a l t e rna t ive model tha t provides th e i n s p i ration for th e more a c c eptab l e pol i c i e s and a l terna t e s with th e orthodox mode l in th e pre-Al f on s l n government pol ic ie s i s o f K eyne s ian o r ig in . I t wou l d appea r tha t th i s model is a ppropriate for Argent ina as it is b a s ed spec i f ic a l l y o n a s sumed reduc t ion in t h e produc t ive capac i ty . H ow ever , th i s i s an erron eous conc l u s ion : The Keyn e s ian mode l i s a ppl icab l e to c a s e s in wh ich unempl oyment is du e to spontaneou s i n su f f i c i ency in dome s t ic demand , tha t i s , a f a l l in demand tha t occu r s where a c u t e contra c t i on of th e ex ternal se cto r does not ex i s t ; yet the rec e s s ion in Argen tina and countr ie s in a s imilar po s i t ion i s der ived prec i s ely f rom such a deter iora t ion . The in su f f ic i ency in demand tha t can b e ob s e rved i s not spontaneou s , but i s del iberately provoked by the Banco Centra l in orde r to b r ing balance to th e externa l s ector . I t can b e overc ome with expan s ion i s t Keyn e s ian pol i c i e s o n c e th e foreign re s tra int mot i va t ing th e i n su f f ic iency is overcome . Th erefore , the f ir s t s t ep towa rd a change in economic pol icy is to a dopt a dif f erent theory a s d i s t inct f rom the c la s s ic a l and K eyn e s ian theor i e s a s th e s e two a r e f rom each o ther , tak ing a s i t s point o f depa rture the ex i s tence of external cons tra int and th e priority of overcoming i t . 1 S Th e sec ond c on cep tual change conc erns th e need to accep t unbalanced produ c t ive s truc ture a s pa rt of rea l i ty . Argen tina h a s sy st ema t i ca l ly confu sed th e need f o r protec t i on i s t b a r r i e r s for i t s indu s try wi th indu s tr i a l inef f ic i enc y , attribut ing t h e la tter to t h e incompe tence Th i s ideo l og ical or indo l ence of its entrepreneu r s . pre j udice i s b eh ind the numerou s destruc t ive e p i s odes of " ef f ic ienc y " and h a s impeded the des ign not only of a
267 stab l e c oherent import- sub s t i tut ion pol icy bu t a l so o f a pol icy for indu s tr i a l export s . Th erefore , it i s o f pr ime impor tan c e to under s ta nd tha t the g a p between interna t i ona l and Argentine indu s t r i a l p r ic e s is not the r e su l t of indu s trial inef f ic iency , mea sured in ab solute terms , bu t rather r e su l t s f rom the relative di sadvantage of indu s try as oppo s e d to the pr ima ry s ecto r , wh ich i s chara c te r i s tic o f the initial and inte rmediate s tag e s of devel opment . F o r th i s rea son , in the c a s e of unba l anced produ c t ive s truc ture s based on the co ex i s tence of a h igh l y produ c t ive pr imary sector and a l e s s produ c t ive indu strial s ec to r , protection i s t ta r if f s on imported goods a re not a s ign o f ine f f ic i ency . Ra the r th ey c on s t i tute an indirec t way of g enera t ing mu l tiple ra t e s o f exchange on impor t s su i ted to the indu s tr i a l pa r ity . A c l ea r unde r s ta nd ing of th i s c onc ept wi l l pave the way f or inten s e i mport sub s t i tu tion , wh ich i s a t present impeded by th e not ion tha t r e la t e s any inc rea s e in indu s tr i al prices over and above the inte rna tiona l l evel to in e f f i c i ency . O f cour s e , th i s doe s not imply sub s t i tu t i on a t any c o s t . A rationa l a t t i tude towa rd indu s tria l i za tion i n Argent ina requ i r e s tha t the re be a h igh e r r a t e for t h e indu s t r ia l do l la r than f or the fa rming do l l a r , bu t with in rea son . An appropria te ana lytic f rame of ref erence of the k ind j u s t ment ioned would a l l ow the wea l th-gene ra ting power o f each additional dol l a r in an economy tha t h a s been s trang l e d by an inef f ic ient f o re ign exchange s ystem to b e c ompa red with th e even tua l sacri f ic e in e f f ic iency tha t g o e s hand in hand with th e a s s ignation of funds f o r import sub s t i tu tion a t a h igher than interna t i ona l c os t . O n th e ba s i s o f th i s compa r i s on , the max imum c o s t o f su b s t itu tion a l l owabl e in each d i f f erent stage o f devel opmen t may b e c a l c u l a ted , and incen t iv e s f or import sub s t i tu t ion e s tabl i shed with in th e s e l imit s . Th e mob il i zat ion of indu s t r ia l exports , wh ich i s the th ird concept t o b e examined here , i s a l so fac i l i ta ted by th e c l a r i f icat ion o f the prob l em o f e f f ic iency . We have seen tha t th e ma in rea s on for Argen tine balance-of paymen t s probl ems h a s been th e d i spa r i ty b e tween expo r t s a n d impo rt s , du e to th e impo s s ib i l i ty ( or a t b e s t th e d i f f i cu l ty ) of expo r t ing indu strial produc t s . Th i s d i f f icul ty in turn i s a t t r ibutab l e t o the gap between Arg en tine indu s t r ia l pr i c e s and tho se of the inter national ma rket . We s ta ted that the cau s e of th i s gap wa s a re l a tively l ower indu st r i a l a c t ivity in rel a t ion to tha t o f f a rming a ct i v i t ie s , as wel l as th e fact tha t the rate of exchange wa s ba sed o n th e produc t iv ity o f the l a tter . A s f a r a s import sub s t i tu t ion i s c oncerned , th i s inadequa cy i n the rate of exchang e , when app l i ed to indu strial produ ct ivity , wa s g radua l ly overcome th rough import ta ri f f s a ppl ied f rom th e t ime the indu s trial i z a tion proc e s s c ommenced . B u t when dea l ing with expor t s ,
268 for decades the s ame rate o f exchange wa s ma inta ined for indu s try as for tradi tional f a rming . I t i s here tha t the ba s ic incoh e rence in Argentina ' s indu strial proc e s s l ie s . On one hand , it wa s acc epted that th ere wa s a need for d i f f erential rates o f exchange when indu s t ry worked for the dome s t i c ma rke t , but when i t wa s a que s t i on o f export ing indu s tr i a l goods , th i s c r i ter ion wa s not appl ied . I n order to e l iminate cons tra ints in th e fore ign s ec to r and remove the ob s ta c l e s to Argent ina ' s growth , th i s incoherence mu s t b e rec t i f ied onc e and f o r a l l . To do th i s i t i s nec e s sary to mod i f y th e underly ing ph i l o sophy . I n s tead of in s i s ting on greater indu s tr i a l e f f ic iency a s a cond it ion f o r exporting , it mu s t be rea l i zed tha t ach i evemen t o f greater e f f ic iency is one o f the goa l s o f t h e proc e s s o f indu strial devel opment and cannot be cons idered a prerequ i s ite f o r the same . There f or e , th e deg ree o f indu s tr i a l produc tivity a t ta ined at any given moment mu s t b e a c c epted as a f ac t , a t l ea s t in th e medium run . F rom th i s can b e derived the need to el imina te con straints in the fore ign secto r . One of the ma in ways of a ch ieving th i s i s to develop a sys tem of d i f f eren t i a l incentives for indu s tr i al export s . There are a numb er o f tech n iqu e s ava i l ab l e tha t c ou l d ach i eve th i s ob j e ct ive . One i s the u t i l i z a t ion o f a sys tem o f tax refunds s imil a r t o tha t u s e d for ta r i f f s . Anoth e r i s to s e t th e nominal rate of exchang e c l o s e r to the indu s trial pa r i ty and to read j u s t th e tra d i t ional f a rming indu stry ' s ra te o f exchang e th rough a dequate export taxe s . Th e tru th i s tha t both procedures have been f o l l owed in the l a s t twenty yea r s and are s ti l l be ing u t i l i z ed i n Argentina today . But the i r appl i c a t ion ha s been so indec i s ive and incon s i s tent tha t they have been qu ite inef f ec t ive . The a im wou ld b e to convert th e s e mea sure s , wh ich up un t i l now have me rely been u sed a s conj unctural pa l l iatives o r as a reluc tant conc e s s ion to indu s tr ial inef f ic iency , into key el ements of sec tor pol icy and the country ' s devel opment . Th e f ou r th option invo l ve s the encou rag ement of expor tab l e f a rming produ c t s . The prob l em here i s tha t a r i s e in produ c t ion imp l i e s e ithe r the CU l t iva tion of new land that at pre sent is ly ing f a l l ow or mo re inten s e f a rming of CU l t ivated land u s ing mo re technol ogy and inve s t ing more capita l . Both procedu r e s imply a rela tively h igh e r c o s t f o r th e a dd i t ional produc tion requ i red ( f or examp l e , th e se cond tonne o f wheat per hectare wou l d cost more than th e f ir s t ) . orthodox po l ic i e s a ttemp t to encourage inc rea sed f a rming pro duc t ion by mea n s of h eavy deva lua t ion s and con s equent p r i c e inc re as e tha t wou l d c ompen sate for th i s inc rea sed c o s t . However , the s e h igher pric e s , apa r t f r om b e ing appl ied to the new produ c t ion , are a l s o appl ied to the prev iou s one , the c o s t s o f wh ich rema in the same . Thu s , ma s s ive tran s f e r s o f income are ma de in favor of th e
269 fa rming s e c tor . The se tran s f er s are unsu sta inab l e f o r the re s t o f th e soc i e ty a nd c on s t i tute the ma in provoca tion o f th e s trugg l e f o r inc rea sed income and the s evere inf l a t ionary phenomena in Argentina . The an swer to the probl em i s to d e s ign and e s tabl i sh inc entive s tha t wou l d have a marg inal e f f e c t and b e appl icab l e spec if ica l ly t o increa s e s in produ c tion w ith ou t provok ing unne c e s sary tran s f e r s o f income in favor of produ c t ion a l ready undertaken . Thi s can b e ach i eved th rough an appropriate c omb inat ion o f moderate inc rea s e s i n f a rming pric e s a l ong with appropriate f ixed l and tax . Anoth e r mea n s i s to u s e state sub s id i e s or to l ower tax e s o n techno l og ical input o r strategic capital good s nec e s sary to inc r e s e th e p roduc tiv ity o f the l and . The f i f th and l a s t techn ique involves th e exchang e reg ime and do�e st i c f inanc ial sy stem. In th i s r e s pec t , pol ic ie s in Argen t ina move b e tween two ex treme s . The orth odox pol i c i e s are a lways charac ter i z ed by free exchange and a dome s tic f inanc ial sys tem des igned to a ttra c t short- term fore ign ca p i ta l . Th i s mean s e i ther h igh dome s t i c po s i t ive real intere st ra tes or not so po s i t ive rea l rate s , c omb ined with pos tponemen t of ad j u s tmen ts to th e exchang e rate . The f i r s t va riab l e i s The second , even though it may b e heavily rec e s s ive . expan s ive , l eads t o a much mo re a c c e l e rated accumu l a t ive fore ign indebtedn e s s tha t in a very short t ime wou l d l ea d to a renewed balance- o f -payments c r i s i s . At the other extreme the r e a r e the more popu l i s t pol i c i e s tha t a r e cha racter i z ed b y inter e s t rates heavily negat ive in rea l terms , c omb ined with exchang e c ontrol s a imed a t i sola t ing the dome stic f inanc ial c i rcu i t f rom the fo r e ign . Howeve r , the moment th e d i f f erenc e between f ore ign intere st ra tes and real dome stic rates become s pronounc ed , the control of the exchange rate is over r idden , and there is a h eavy f l ight of capital via th e " pa ra l l el " fore ign-currency market . There i s no perf ect solution here . The mo st tha t can b e ach i eved i s a reasonab l e c ompromi s e b e tween the c onf l ic ting ex ternal and dome s t ic ob j ec tives . such a compromi s e can only be ach i eved by : 1 . ma in ta in ing th e exchange control with a ba s ic rate of exchange tha t reta ins its real l evel , tha t i s , tha t evolves in rea l terms according to dome s tic inf l a tion less internat ional inf l a tion 2. e s tabl i sh ing the" short- term pa s s ive bank intere s t ra tes a t l eve l s tha t a r e only s l ightly neg a t ive and th e a c t ive ra tes a t n eu tra l l eve l s 3 . ma inta in ing suf f ic ient monetary e f f i c i ency to a l l ow short- term ac tive nonbank rates to e stabl i sh th em selves a t a s l igh tly h igher po s i t ive l evel tha n tha t of th e interna tional marke t 4 . providing mea sures to encourage long- term dome s t i c sav ing a t rates s imi l a r to tho s e of the
270 interna t i onal market . I f the economic pol icy i s r e s tru ctured according to the s e ou tl ine s , Argentina may e f f e c tive l y reconc i l e i t s economic expan s i on wi th the c reation of the surp l u s I t i s tru e tha t f r om a nec e s sary t o s e rvice i t s deb t . more tradi t ional point of view, s ome of the proposed mea su r e s may s e em c o s t l y i n terms of the e f f ic ient a l l o ca tion o f resourc e s o r f i s c a l expend i ture . Bu t , i f s e en f rom the point of v i ew o f a theore tica l model worked out on th e ba s i s o f the dominant character i s tic , that i s , cons tra ints in the externa l s e c to r , the s e c o s t s become l e s s important in the l ight of the economic bene f i t s obta ined th rough the recover r a n d growth tha t the pro posed mea su r e s wou l d a l l ow . 1 Renego t i a t ion o f th e D eb t Any mea sure des igned to modify the produ c t ive s t ru c tur e wi l l take t ime to bear f ru i t , even a s suming tha t the extern a l ec onomic pol icy adopted were very e f f ec t ive , s ince it wou ld be impos s ib l e to el iminate c on s tra ints in the ex ternal s e c to r immed i a tely . There fore , the renegot i a t i on o f c a p i ta l deb t s and pa rt of th e intere s t wou l d have to continue . Neverth e l e s s , the need for rec e s s ive c ond itions wou ld b e avo ided , becau s e in adop t ing a nonrec e s s ive prog ram for achieving equ i l ibr ium in the externa l se ctor--a program b a s ed on d i f f eren t i a l ra t es o f exchang e f o r importe r s a n d exporte r s , greater ma rg inal incentives f o r fa rming , and a f l ex ib l e exchang e and f inance pol icy-- i t wou ld again be po s s ib l e to show the creditor s tha t Arg entina wa s capab l e o f g enera t ing the capac i ty nec e s sa ry to settl e its debt s and to achi eve economic expa n s ion . Th e prob l em tha t a r i s e s in th i s c a s e i s tha t th i s nonrece s s ive program wou l d c l a sh with th e second condi tion u sua l ly demanded by the I n terna tiona l Mon eta ry Fund as rega rds the withdrawa l of protec tion i s t mea sure s , the un i f icat ion of the ra te of exchange , the el imina t ion of d i f f eren t i a l incentives for nontraditiona l export s , and o ther " ef f ic i ency " mea sure s . The Fund u su a l l y in s i s ts on th e remova l o f th e mea su res tha t Argentina and o ther c ountr i e s in a s imi l a r pos i t ion need in order to recon c i l e economic expa n s ion with equ i l ibr ium in the ex ternal sec tor . Th i s pa radox is due to the Fund ' s doubl e ob j ec t ive . Apa rt f rom a s suming the ta sk o f mak ing sure tha t the economic po l ic i e s of the indebted countr i e s are compa t ib l e with the i r capa c i ty to settl e the i r deb t s , becau se of i t s trad itiona l ideol ogy the Fund f e e l tha t i t s second ta sk i s t o s a f egua rd f ree interna t iona l trade . No one with any common sense cou ld f a i l to s e e th e obv iou s c on trad ic tion b e tween th e s e ob j ec t ive s . The more tha t d i f f eren ti a l p rotec tion i s t mea sures and th o s e
271 d e s igned t o s.t imu l a t e exports a r e e l iminated i n c ountr i e s l ik e Argen t ina , the g reater wil l b e the tendency for imports to grow and f o r indu s tr ia l exports to dimin i sh . The tendency toward d i s equ i l ibrium in the externa l s ec tor wil l inc rea s e , the rec e s s ion needed to countera c t it wil l have to be grea ter , and i t wi l l b e more d i f f i cu l t to imp l emen t th e IMF prog ram . F rom th e point of view of doc trine , th i s contradic t i on is alway s den ied by the Fund on th e ba s i s o f neo c l a s s ic a l ra t iona l e advoca t ing automa tic equ i l ibrium in th e f o re ign s ec tor through f ree-market a c t ivity . Ma rke t f reedom i s i n s i s ted upon a s an automa t ic cure f o r a l l i l l s . Neverth e l e s s , i n the l ight o f the i r pra c t ic a l expe r i enc e , th e Fund ' s o f f i c ia l s r ea l i z e tha t the pro cedu r e s propo sed by th i s in s ti tu t ion for coun t r i e s l ike Argen tina f o r externa l a d j u s tmen t do not work according to th eory . For th i s rea son a l though the Fund never propo s e s heterodox p la n s for a d j u s tment in the ex terna l sec tor on i t s own i n i t ia tive , i t may a c c ept th em when propo sed by th e indebted c ountry . The ma in condit ion i s tha t the program be theore t i ca l l y sound . I n other word s , the I n terna tiona l Moneta ry Fund wi l l u l t imately tol erate heterodoxy i f and whe n i t is techn i c a l l y r e l i ab l e . I n Argentina the prob l em h a s a lway s b een tha t with the u sua l o s c i l l at i on in economic pol i c i e s , rel iab l e h e te rodoxy h a s neve r occurred . The local o r thodox trend h a s u su a l l y tended to be even more rigidly f ree- exchang e or iented than th e Fund i t self . I n fac t , in order to over c ome dome s t ic ob j ections to th e pol ic ie s b e ing impo sed , th e Fund ' s point of view h a s o f ten b een u sed a s an a rgumen t , thu s mak ing it appear even mor e v il l ainou s and its nego tiab l e sugg e s tions are pre sented as ca tegoric impo s itions impo s s ib l e to b e re s i sted . Moreove r , up until n ow th e popu l a r opinion h a s u sua l ly repudiated orthodox pol i c i e s with ou t tac k l ing the ba s ic prob l em , tha t i s , without propos ing coheren t conc rete a l terna t ives for a d j u s tments in the externa l sector tha t wou l d b e c ompa t ib l e wi th expan s ion . The c oun try ' s grea t e s t cha l l enge is to get ou t o f th i s o s c i l la tory movement . Th ere i s s t i l l one mor e a spe c t of the negot iation to be c on s idere d , and tha t is c o s t . When payment i s pos tponed th e I MF u sua l ly appl i e s heavy r i s k surcharg e s to th e rol l over c redi t , p l u s rol l over c ommi s s ions and add i tiona l surcharg e s for delayed payment or defau l t . The s e lack any rea sonab l e j u s t i f ic a t ion . I n priva te commerc ial a c t ivity , wh en a m i stake is made and credit i s g ranted to a company that l a ter appears before a c reditor s ' meet ing , i t i s cons idered sa t i s f a c tory i f the amount l en t i s recuperated a l ong with the norma l a c c rued intere s t a nd w i thou t pun itive mea sure s . I t is h igh ly unl ikely tha t addit iona l g a i n s f rom the po s tpone men t wou l d even be con s idered .
272 I n the renego t i a t ions b e tween the interna tional bank ing in s t i tutions and indeb ted c ount r i e s , the oppo s i te o c cu r s . Here , the po s tpon ement of payment s h a s become a cons iderabl e additional s ou r c e of pro f i t s f o r the bank s . Furthermore , a s can b e seen i n the agreement with Aerol in ea s A rg en tina s , th e government tend s to agree to l eg a l c l au s e s tha t a r e extremely d i f f icu l t to ful f i l l . The s e c l au s e s may tota l l y inh ib i t fr eedom o f a ct ion , impo s e exc e s s ive pena l t i e s f o r even th e s l igh t e s t defau l t , and imply the appl i c a t ion o f pena l t i e s . In short , ra th e r than ensuring payment o f th e deb t , th e s e renego t i a t ion contra c t s ref l ec t th e c reditor ' s intent ion of taking max imum advantage of the s i tuat ion and gradua l ly secur ing the dependenc e of th e debtor s . Why do e s A rg en tina a l l ow i t s e l f to b e sub j ec t to the s e cond i tion s ? In th i s c a s e i t is not a que s t ion of any real d i sadvantag e in the bargaining s i tua t ion , but rather the inab i l i ty of the country to determine its own po s i t ion adequately . B e tween Argentina and i t s c reditor s there c l early ex i s ts a s i tuation of mu tua l dependen c e . Argent ina cannot run the r i s k of a su spens ion of payments f o r it wou l d mean del inkage f rom th e res t of the wor l d . O n the oth e r hand , due t o the s i z e o f Argent ina ' s debt and the l eg a l imp l i ca t ion s for the bank s of an expl i c i t suspen s ion o f payment s , t h e c reditors cannot take the r i sk o f th i s occurr ing e i ther . I n view o f th i s , cond itions do ex i s t tha t would a l l ow very equ i l ibra tory negot iation s . The a t t i tude o f the Argen tine government i s not der ived f rom a ny true balance o f power but rather f rom the lack o f any l oc a l pol i t ic a l cohe s ion , the hab i t of a l ways reso rting to l a s t-minu t e negotiat ion s when a su spen s ion of payments is imminent , a nd the s trong ideol og i ca l , soc ia l , and cul tura l p r e s sure exerted on the country ' s rul ing e l i te s by the in ternat ional bank ing ins t itution s . Moreove r , the repre s enta t ive s of the l ead ing par t i e s tend to ignore th e real seve r i ty o f the f inanc ial c on d i t i on s and to overe s t ima te the country ' s negot iating capa c i ty . Hard- l ine ta c t i c s in s i s ted on in th e tal k s in pra c t i c e a r e very di f f i c u l t t o su s ta in . O n c e mor e t h e f ami l iar a t t i tude that o sc il l a t e s between imag ined omn ipotence and exc e s s ive submi s s ion become s apparent . Wha t i s needed i s a mo re s e r i ou s , mo re rea l i s t ic , and l e s s inprovisational a t t i tude towa rd the nego tiat ing proc e s s . THE FUTURE I s Argent ina capab l e o f emerg ing f rom the present c r i s i s by adopting a rationa l attitude and e s tab l i sh ing c oh e rent economic pol i c ie s ? Or w i l l the hab i tua l cyc l e of expans ion and rec e s s i on cont inue ? C e r ta in ob j ec t ive c ircums tanc e s wou l d appear to indicate tha t , for better
273 o r for wor se , we are on the verge o f a g reat qua l i ta t ive chang e . Af ter many yea r s o f mi l i tary government , el ect ions wi l l be held in Argent ina sh ortly to choo se a con s t i tu tional government . D rawing a rath e r l oos e pa ra l l el w ith the United S ta te s , the mi l i ta ry government in Argen t ina cou l d be compared to the Repub l ican admini s tra tion with i ts rec e s s ive orthodox and economic " recovery " pol i c i e s . The con stitu t iona l government cou l d b e compa red to the D emo c ra t s ' expans ive Keyn e s ian pol i c ie s . However , up until now , e i ther a s an e f f e c t o f a recent rece s s i on or a s a resul t of a favorab l e s i tuation in the wo rld ma rket , the rep r e sentat ive governments have a lways been in power in s i tuat ion s where abundant interna tional res e rve s have mad e dome s t ic economi c expa ns ion po s s ib l e . On each occa s ion , th i s expa n s ion has l a s ted only a s l ong a s the international re serve s . Th i s wi l l be the f i r s t time tha t a con s t i tutional government a s sume s power i n the ab s enc e of r e se rve s , wi th the country o n the verge of a su spen s ion of paymen t s a n d with a fore ign deb t on wh ich the intere s t a l one accounts for hal f the revenue f rom exports . Th ere f o re , th e government wi l l lack its u sual mar g i n of maneuverab i l i ty in t h e ex ternal sector needed to achieve the r ea c tiva t ion o f th e dome stic ma rke t . O n the othe r hand , the prospects f o r a n even tual swing toward orthodoxy woul d not be advantageous e i ther . With th e s e turnabou t s , a f ter the accus tomed " a tonement for s in s " o f the f i r s t rec e s s ive pha se , there wa s a lway s the pro spect o f a " rewa rd , " typ ic a l o f pha se two and provided by economic expa n s ion on the ba s i s of fore ign credit . Such a rewa rd a lways l a s ted on ly a s long a s the country ' s debt- servic ing capac ity . But today the inter nationa l f inanc ial c r i s i s makes further indebtedn e s s on the p a r t o f Argentina impo s s ib l e a n d wi l l cont inue to do s o for a l ong time , so tha t th i s door to a solution i s c l o sed . Therefore the u sual o s c i l l a tion between expans ion and r ec e s s ion woul d appea r to have ended . I n the l ight of the pre sent s ituat ion , th ere are two po s s ib l e cou r s e s to take . I f th e economic pol i c i e s f o l l owed up u n t i l now are not mod i f ied , the only al ternat ive w i l l be a pro l ong ed rec e s s ion , intense enough to a l l ow the payment of intere s t on the fore ign debt . With the present debt magn itude an even deeper rece s s ion than the pre s ent one is nec e s s ary . But wi th the soc ial , pol i t i ca l , and economic ten s i on and national f ru s trat ion that ha s accumu l a ted , th i s al ternat ive i s unsu s ta inab l e and wou l d have unfores een pol itical c on s equenc e s . The s econd a l ternat ive i s the adoption of a rationa l economic po l icy adapted to th e needs o f the country . The There are two po ints in favo r o f th i s propo s a l . f i r s t is the g rowing awarene s s on th e po l i t ical s c ene tha t the day s of improv i sa tion are over and that dra s t i c s o l u t i o n s a r e nec e s s a ry . T h e second is th e maturing
274 techn ical knowl edge o f the two ma j or democratic partie s , one o f wh ich wil l shortly a s sume power . Today the s e part i e s are much more qual i f ied than b e f o r e t o free them selves f rom the yoke of deep- rooted idea s and to adopt a c r ea t ive approach in keeping with rea l i ty . The Overal l Natu r e o f the P robl em The ana l y s i s o f Argent ina ' s indebtedn e s s tha t ha s been done up until now i s incompl ete . The p r e s en t d i s equ i l ibr ium in t h e b a l a n c e o f payments o f the d i f f erent L a t in Ame r ican c ountr i e s is not due solely to indiv idua l structural p rob l ems or to errors in the individua l eco nomic pol i c i e s o f each country . I ndependently of the s e , th e d i s equ i l ibrium s tems a l so f r om a n overa l l d i s equ i l ibrium in th e wor l dwide payment s sy s tem tha t a ro s e in par t a s a r e s u l t o f the o i l c r i s i s . In f ac t , the ma j o r con sequence o f th i s c r i s i s wa s tha t for a l mo s t ten yea r s the o i l - importing countrie s ac cumu l a ted an overa l l ba l ance-of -payment s de f ic i t on current accoun t in rel a t ion to the o i l - exporting coun trie s . A number o f o i l - impo r t ing countr ies were forced to ma intain th i s de f ic i t becau s e , wh i l e the wor l dwide di s equ i l ibr ium continu ed , i t wa s not math ema t ical l y po s s ib l e f o r al l countri e s to ma i nta in an equ i l ibrium in th e i r bal an c e o f payment s . F inal ly , ma in ly a s a resul t of worl d rec e s s ion , the overa l l o i l def ic i t tended to recede . But th e surpl u s e s tha t the o i l - exporting coun tries had accumu l a ted in the interim , wh i ch had been recyc l ed via the worl d bank ing i n s t itut ions to the importing countr i e s , con t inued to generate intere s t . Thu s , the overal l de f ic i t i n the current account per s i s ted- -not , s t r ic tly speak ing , as a r e su l t of th e o i l c r i s i s bu t rath e r of t h e d i s equ i l ibr ium generated th rough th e s e rvic ing of deb t s tha t had accumul ated as a resu l t . Th e s e s e rv i c e s have become particularly heavy w i th the r i s e in real world inter e s t ra tes over the l a s t f ew yea r s . I n th i s s i tua tion , it continues to be impos s ib l e f o r a l l coun t r i e s t o achieve an equ i l ib r ium in th e i r bal anc e o f payment s on current account , and it i s even l e s s l ikely that they can ac cumu l a te the surplu s e s neces s a ry to s e ttl e the i r deb t s . I s I t is po s s ib l e tha t th i s ob j ec t ive migh t be reached b y Argent ina a l one , b u t if th i s were the c a s e , it wou ld mean t h e aggrava tion o f the de f ic i t of some o th e r country o r group o f countrie s . Pre sumably , tha t country woul d try to d e f end it s e l f by r e s t r i c t ing impo rts o r encoura gi ng export s , wh ich wou l d th en make Argent ina ' s a im t o ach ieve equ i l ibr ium even mo re d i f f icu l t to atta in . The hoped-for recovery o f the indu s trial coun t r i e s wi l l not solve the prob l em e i ther , becau s e its immed iate e f f e c t might be to inc rea s e o i l p r ic e s , wh ich woul d then agg ravate the overa l l imba l an c e even mor e .
275 A def in i t ive solution app l icab l e to a l l countr i e s s imu l taneou s l y can o n l y be found by t h e comb inat ion o f po l ic ie s adapted to t h e n e e d s of ea ch individu a l c ountry and by an ove ra l l sol u t ion for th e payments p rob l em . Th i s wou l d imply a heavy redu c tion i n wor l d intere s t ra tes and , until the overa l l d i s equ i l ibr ium ha s receded , an adequate recyc l ing system e s tab l i shed with the inter vention o f s ome k i nd o f intergovernmental security net wo rk . Above a l l , it wou l d imply the need f o r government s a n d bank ing i n s t i tu t ions t o rea l i z e that they a re not merely fac ing a s impl e aggregate of probl ems a r i s ing f rom countri e s u nab l e to balance the i r fore ign account s , but rather th e consequ ence s o f an overa l l di s equ i l ibr ium in the sys tem that mu st b e trea ted as such . Th i s sub j ec t , h owever , goes beyond the s cope o f th i s chapter . NOTE8 1. Th i s is the titl e of an Argent ine f i lm ref l e c t ing tha t particu l a r s i tuat ion . 2 . A l do F errer , " L a Deuda Externa Argentina : Prob l ema s y pe r spectiva s , " paper pre sented at conf erenc e held at th e Unive r s ity of N ew York ( pub l i shed in Informe Ganadero , Buenos A i re s , 1 9 8 2 ) . 3 . An anal y s i s of th i s exchange e f fect can be found in Marc e l o D iamond , Doc trina s Economi ca s , D e s arrol l o e Independenc ia , Bueno s A i re s , 1 9 7 3 . Al so in Marcelo D i amond , " La E s tru c tura P rodu c tiva D e s equ i l ibrada y el T ipo de Camb io , " Desarro l l o Economi co ( Buenos Aire s ) , Apri l - June 1 9 7 2 . 4 . A deta il ed d e s c r ip t ion o f the economic model of imba lanced produ c t ive s truc tu r e s and th e i r chara c t e r i s tic s can be f ound in D iamond , Doc tr ina s Economic a s . 5 . Th i s type of i n f l ation i s ana l y z ed in ibid . : Marc e l o D iamond , " Towards a Change in the Economi c P a rad igm Through the Experienc e of Devel op ing C oun t r i e s , " Jou rnal o f Devel opmen t Economic s 5 : 1 9 - 5 3 : a n d Marc e l o D iamond , " Lo s Cuatro T ipo s de I n f l a c ion Arg en t ina , " C ompe tenc ia ( Bueno s Aire s ) , Apr i l 1 9 7 1 . 6 . Calcula ted on the ba s i s of da ta f rom the Banco Centra l . 7 . Guido D i T e l l a , P e ron-P eron 1 9 7 3 - 7 6 , Buenos Aire s , 1 9 8 3 . 8 . Anton io Lope z , " La Deuda Ex terna en C if ra s , " unpubl i shed ( synth e s i s in th e newspaper C l a r l n , Buenos Aire s , July 1 9 8 3 ) . 9 . A s shown l a ter , the f igu r e s f o r the fore ign debt obta ined f rom th e Banco C entral survey d i f f e r f rom tho s e obtained f rom the analys i s of the ba lanc e o f payment s f o r 1 9 7 6 t o 1 9 8 1 . Thu s , acco rding to the su rvey , th e foreign debt increa s ed du ring th i s period by U 8 $ 2 7 .79 b i l l ion , whe r e a s the bal ance of payment s indicates a n inc rea s e o f U8 $ 2 0 . 0 3 4 4 b i l l ion . Th i s means
276 a d i f f erenc e o f U S $ 7 . 7 6 4 b i l l i on . 10. D iamond , Doc trina s Economi ca s . 1 1 . C a l c u l ated acco rding to da ta from IFED , C oyuntura y De sarrol l o , severa l i s su e s and s ta t i s t ic a l append i ce s , Bueno s A i re s , 1 9 8 2 . 12. IFED , C oyuntura y De sarro l l o , no . 5 0 , Buenos A i re s , Apr i l 1 9 8 2 . 13 . D iamond , Doctrina s Economica s . 1 4 . Marc e l o D iamond , " Ha c i a una pol i t i c a del S e c tor Externo , " pape r pre sen ted a t t h e s emina r La Con s trucc ion de la Democrac ia en Arg entina , Bu eno s A i r e s , Augus t 1 9 8 3 . 15. D iamond , " Towards a Chang e in the Economic Paradigm . "
10
Resched u ling Brazi l's Foreign Debt: Recent Developments and Prospects Paulo Nogueira Batista, Jr.
INTRODUCTION S ince the f inal months o f 1 9 8 2 , B ra z i l has been in vo lved in the l aboriou s proce s s o f reschedu l ing i t s external debt . l Renegotiat ing a debt a s l a rge a s B ra z i l ' s i s o f c ou r s e a mo st d i f f i cu l t task . According to o f f i c i a l data , in March 1 9 8 3 Bra z i l ' s fore ign debt ( in c l uding short- term obl igation s ) was in the range of U S $ 8 6 b i l l ion 2 o f wh ich U S $ 5 7 b i l l ion had been provided by fore ign private bank s operating within the Bank for I nternational S e t t l ement s ' reporting area . ' G iven the s tructure o f the debt , two-thirds of wh ich is owed to fore i gn commerc i a l bank s , and the fact that s everal hundred individu a l credit i n s t i tutions f rom the Uni ted State s , Europe , Japan , and o ther countries are invo lved , the prob l em o f coordinating and keeping in balance a l l the s e intere s t s tran s forms the who l e renegotiation pro ce s s into a veritable admin i s trat ive nightmare . I n thi s context , it i s d i f f icu l t to evaluate adequately the recent r e s t ructur ing and ref inanc ing o f B ra z i l ' s debt service a s imp l emented by the B ra z i l ian economic autho r i t i e s wi th the support o f the I nternational Monetary Fund and a group o f large U . S . comme r c i a l bank s . Neverthe l e s s , becau s e o f t h e importance o f th i s i s sue f o r the short- and long- term pro spe c t s o f both Bra z i l and internationa l f inanc i a l marke t s , i t i s e s s ential t o examine how negotiations between B ra z i l and i t s foreign creditors a r e being conducted . T hi s e s s ay attemp t s to de scr ibe how B ra z i l ' s external f inanc ial relat ions have evo lved recent l y , highl ight ing the ma j or drawback s in pre s ent reschedu l ing procedure s . The f i r s t section comments brie f ly on the origins of the current ba l ance-of -payments c r i s i s and the impac t i t has had on Br a z i l ' s internat iona l reserve s . The s econd sect ion d i s c u s s e s the rea sons for the early f a i lure o f the first pha s e o f debt renegotiat ions f rom December 1 9 8 2 to mid- 1 9 8 3 . The third sect ion dea l s with the gene ral out l ine o f the f inanc ing and reschedu l ing 277
278 agreement for 1 9 8 4 , now under negotiat ion . I n the f inal sect ion , the ma in probl ems involved in the p r e s ent approach to B ra z i l ' s debt- s e rvic ing d i f f icu l t i e s are under l ined and an attempt is made to sketch some aspects o f a new debt- r e structur ing strategy . My v iew i s that , unl e s s B ra z i l ' s po l i cyrnake r s rad i c a l l y change the i r attitude toward the foreign debt probl em , they wi l l f ind it d i f f icult to avo id a further deterioration of the country ' s a l ready s e r iou s economic s i tuation . THE BRA Z I L IAN FORE I GN-EXCHANGE CRI S I S The immediate cause o f the recent fore ign- exchange c r i s i s wa s the sudden , unexpected interruption in the f l ow o f foreign bank c redi t . This interruption c ame about in the th i rd quarter of 1 9 8 2 in the wake of the conf idence c r i s i s generated by the Mex ican morator ium . However , B ra z i l ' s bal ance- o f - payments probl ems evidently started much ear l ie r , and the drastic reduct ion in the i n f l ow of exte rna l credit ha s only b rought into the open the l atent l iqu idity c r i s i s that had ex i s ted s ince 1 9 8 0 , a s can be s een from f igures fo r foreign- exchange r e s e rves pres ented later in thi s section . I n fact , B ra z i l ' s balance-of-payments s i tuation , a l ready precarious s ince the f i r s t o i l c r i s i s o f 1 9 7 3 - 7 4 , 4 became cons iderably mo re s e r ious after 1 9 7 9 a s a resul t o f th e s econd o i l shock , t h e dramatic increa s e in inter national intere st rate s , the wo r l d rece s s ion of 1 9 8 0 - 1 9 8 2 , th e contrac t i on in international t rade , and the f a l l in �he prices of several o f B ra z i l ' s ma j or export s . The impact o f the s e exte rna l shocks wa s magn i f ied by th e B ra z i l ian economic autho r i t i e s ' f a i l ure to eva luate correctly the evo lution o f the international s i tuation . I n fact , economic pol icy during this per iod wa s extreme ly erratic and tota l ly l ack ing in a c l e a r d e f i n i t ion o f ma in obj ective s . 5 Cons equent ly , B ra z i l ' s fore ign- exchange po s i t ion at the start o f 1 9 8 2 wa s a l re ady quite unfavorab l e . After the Mex ican payments suspens ion and i t s e f fect on inter national bank cred i t , it became incre a s ingly d i f f icult to admit that B ra z i l ' s foreign l i abi l i t i e s cou ld cont inue to be r e f i nanced o r " recyc l e d " through norma l market mechani sms . I n 1 9 8 2 , a s e r i e s of unfavorab l e c ircum s tance s ( a f a l l in export s , an unexpected increa s e in intere st payment s , a reduced i n f l ow o f med ium- and long term foreign funds , and the prob l ems invo lved in re f i nanc ing the short-term commerc i a l debt and the l iab i l i t i e s of foreign branche s and sub s id i a r i e s of B ra z i l i an bank s ) wore down B ra z i l ' s re s i stance ( s ee Table 1 0 . 1 ) . I n November 1 9 8 2 , the B ra z i l ian gove rnment made pub l i c i t s intention to s eek max imum acce s s to IMF fund s . I n Dec ember , after being a s sured d i rect suppo rt f rom the
Errors
&
omi s s io n s 0.2 -0 . 3
-3 . 3 0. 9
8.6
2.3 -0 . 9 0.2
7.1 0.9
a
Banco Central do Bras i l .
Exc l udes re inve s tment
Exc ludes r e i nvested pro fits and inc ludes uni lateral transfers
Sourc e :
d
c
-7 . 2 -4 . 2 -3 . 0
-2 . 8 15. 2 18. 1
1979
0.6
-0. 4
-0 . 3 -3. 5
-0. 1 -3 . 2
-6 . 2 1.1
-5 . 0 2.6
15 . 6
12 . 0 1.6
-11 . 0
-3. 0
-12 . 2 -9. 2
-6 . 4 0.6
10 . 6
1.1
1.5 11 . 2
9. 3
6.9
-12 . 4
-9 . 6 -6 . 3 -3. 3
1.2 23. 3 22. 1
20. 1 23. 0
1981
do l l ar s )
-2 . 8
1980
( in bi l l ions of U . S .
- 10 . 0
1 968- 1 9 8 2
( F ) Surplus o r def i c i t ( C+D+E ) 1.0 0. 9 Note : In s ome c a s e s numbers may not add because of roundi ng . a Annua l average b Pre 1 1m1nary d ata " "
(E)
Other
long-term)
( D ) Capi t a l d D i r e c t Inve s tment s ( ne t ) Currency Loans & F i nancing ( medium- and l ong- term ) Amo r t i z at i on s ( medium- &
-6 . 0
-1 . 9
-3. 7 -1 . 8
-2 . 3 10 . 3 12 . 6
1974-78
1.9 0.3
-1.0
( A+B )
(C)
Current tran s actions
-1 . 0 -0 . 3 -0. 7
( B ) S e rvic e s Intere s t ( ne t ) c Other s e rv i c e s
a
( main items ) ,
1 968- 7 3
Balance of Payments
0. 0 3. 3 3.3
Braz i l :
( A ) T rade balance Exports ( FOB ) Imports ( FOB )
I tem
Tab l e 1 0 . 1
-8 . 9
-0 . 4
-7 . 0 -0 . 3
12 . 5
6.3 1.0
- 14 . 8
-15 . 5 -11 . 4 -4 . 1
0.8 20. 2 19 . 4
1982
b
IV -..J �
280 Fund , B ra z i l presented i t s ma j or p rivate creditor s with a global f inanc i a l scheme for 1 9 8 3 and decided to part i a l ly su spend amo rt i z at ion payment s . In spite of the br idge loans provided by a group of large pr ivate inter national bank s , the U . S . Treasury , the Bank for I nter nationa l S e t t l ement s , and the f ir s t tranche o f the c ompensatory f i nanc i ng f ac i l i ty f rom the IMF , B ra z i l ' s i nterna t iona l re s e rves were cons iderably l ower at the end o f 1 9 8 2 , f a l l ing f rom US $ 7 . 5 b i l l ion in Decembe r 1 9 8 1 to only US $ 4 b i l l ion by December 1 9 8 2 . Furthermore , it mu st be noted tha t the s e o f f i c ia l f i gure s , which r e f e r to the " i nternational l iqu idity o f the monetary author i t i e s , " provide only � partial ind i c a t i o n o f t h e real s i tuat ion . I n fact , the s e f igures shou l d not be cons idered a s correct indicators o f the e f f ec t ive international l iqui d i ty o f the monetary authori t i e s . F i rst , becau se th ere i s some unc ertainty a s t o t h e r e a l conver t i b i l ity o f the a s sets regi stered a s internat iona l r e s erve s b y the central bank . Al though the exact compo s i t ion o f the r e se rve s i s unknown , there are indications that fore ign- exchange c r i s e s in severa l of Bra z i l ' s trading partne r s , such a s P o l and and Mex ico , to wh i ch substant i a l amounts o f export f i nance cred i t had been extended , h ave l ed to a reduction in the value and e f f ec t ive l iqu idity o f some a s se t s inc luded in B ra z i l ' s o f f ic ia l re serves stat i s t i c s . Second , s ince the s e f igur e s corre spond t o g ro s s a s se t s ( see Tab l e 1 0 . 2 ) , the monetary authorit i e s ( and o ther government agenc i e s ) can arti f i c ial ly ma intain o f f i c i a l l iqu idity l eve l s by tak ing out short-term cred i t s o r through accounting operations with branch e s o f Bra z i l ian bank s abroad . Th i s i s exac tly what seems to have been happening in B ra z i l over the p a s t three years . As can be seen f rom t h e d a t a in Table 1 0 . 3 , the monetary autho r i t i e s ' short-term l i abi l i t i e s in creased s igni f icantly dur ing 1 9 8 0 and were con s i s tently I n the early months o f 1 9 8 2 , above US $ 3 b i l l ion in 1 9 8 1 . they increa s ed c on s iderably again . The reduc tion i n net re serve s wa s much greater than the reduct ion in gro s s reserves in th i s period , and the f o rmer have almo s t a lways stood at l e s s than the va lue o f two month s ' imports s i nce mid- 1 9 8 0 . More recent data for S eptember 1 9 8 2 were inc luded in the Techn i c a l Memorandum annexed to the Letter of I ntent sent to the IMF on January 6 , 1 9 8 3 ( see T ab l e 1 0 . 4 ) . O n September 3 0 , 1 9 8 2 , the gro s s res erve s o f the monetary authorit i e s came to a total o f US $ 4 . 3 5 2 1 b i l l ion and short- term l i ab i l i t i e s to US $ 3 . 3 0 3 7 b i l l ion . Thus , net international r e s erve s amounted to only US $ 1 . 0 4 8 4 b i l l io n , equ iva l ent to l e s s than twenty days ' imports . By th e end o f 1 9 8 2 , net international r e s erve s o f the B ra z i l ian monetary author i t ie s , a s def ined i n the T echn i c al Memorandum of Understand ing , were a l ready In Dec ember 1 9 8 2 negat ive by s everal b i l l ion do l l ars . the total o f short-term fore ign l iab i l i t i e s o f both the
281 Gross International Re serves of the Monetary Tab l e 1 0 . 2 Braz i l : Authorities (B anco Central and Banco do Bra s i l ) , 1 9 7 6 - 1 9 8 2 ( in mi l l ions o f U . S . dol lars ) Special Drawing Rights (A)
Period
1 97 6 : December 1 9 7 7 : December 1 9 7 8 : December 19 7 9 : December 1980 March June September
December 1981 March June September December 1982 March June September December
Re serve Po si tion in IMF a (B)
Forei gn Exchange b
Gro s s Res erves of Monetary Gold c Authorities (D) ( E=A+B+C+D )
(C)
199 2 10 239 383
188 195 181 241
6 , 101 6 , 787 11 , 406 8 , 342
56 64 68 722
468
262
6 , 185
1 , 036
7 , 95 1
508 504
288 271
384
344
4 , 825 4 , 534 5 , 04 2
953 1 , 179 1 , 143
6 , 574 6 , 488 6 , 913
456 447 444 452
301 258 255 264
4 , 749 4 , 496 4 , 759 5 , 888
971 948 887 905
6 , 477 6 , 149 6 , 345 7 , 509
439 425 189 0
260 2 74 282 287
5 , 594 5 , 428 4 , 7 14 3 , 64 1
789 814 871 65
7 , 08 2 6 , 941 5 , 056 3 , 99 3
6 , 544 7 , 256 1 1 , 8 94 9 , 688
a Uncondi tional IMF rel ated reserve assets b Cl aims against fore i gners in the form o f bank deposits , treasury bi l l s , and other documents that may be used to c over balance-of payments deficits , inc luding nonnegotiable credit b i l l s obtained through agreements between central bank s or governments c Since October 1 9 7 9 gold has been asses sed on the bas i s of the dai ly average c l o s ing quotations in London during the preceding two months . Source :
International Monetary Fund .
B anco Central and the Banco do B ra s i l , p l u s th e l iab i l i t i e s incurred by mak ing u s e o f IMF fund s , exceeded the value of the ir fore ign a s s e t s by approx imately U S $ 3 . 0 b i l l ion . 6 DEBT RENEGOT IAT I ON :
THE F I RST ROUND
On December 2 0 , 1 9 8 2 , the Bra z i l ian economic author i t i e s presented the country ' s ma j or bank c reditors with a comprehens ive f inanc ial program for 1 9 8 3 , sub divided into the f o l l owing four pro j e c t s :
Brazi l :
14 , 465 2 1 , 950
5 , 657 6 , 216 1 0 , 281 7 , 925
887 1 , 04 0 1, 613 1 , 763
6 , 544 7 , 256
1 1 , 894 9 , 688
December Decemb e r
December Decemb e r
1976 : 19 7 7 :
1978 :
2 , 311 2 , 505
Banco Central do B r a s i l and Internation a l Monetary Fund .
Imports of preceding three months at annual rate
Sourc e :
a
March
February
1982 Janua ry 3 , 476
3 , 087 4 , 272
3 , 258 3 , 237
6 , 345 7 , 509
September December 3 , 808
2 , 899 2 , 746
3 , 578 3 , 4 03
6 , 477 6 , 149
March June
4 , 769 4 , 577
3 , 500
3 , 4 13
6 , 913
De c ember 1981
7 , 08 0 7 , 08 2
3 , 427 3 , 159
7 , 284
5 , 068
2 , 883 3 , 14 7 3 , 329
7 , 951
June September
6 , 57 4 6 , 488
1980 March
19, 738 19 , 216
2 1 , 036
22 , 441 2 1 , 238
22 , 42 3 2 2 , 261
22 , 717
2 2 , 999 24 , 1 7 4
2 1 , 931
13 , 196 1 1 , 934
( 3=1- 2 )
(2)
(1)
Period
1979 :
(4)
of Mone tary Autho r i t i e s
o f Mone tary Authorities
Monetary Autho r i t i e s Imports ( FOB )
a
1976-1982
Net Reserves
Net I n ternational Res e rves of the Monetary Authoritie s ,
Short-Term Liab i l i t i e s
do l l ars )
Gro s s Re s e rves o f
of u . s .
Tab l e 1 0 . 3
11. 7 13 . 0
16 . 5
13 . 8 20 . 1
12 . 9 12 . 3
15 . 4
14 . 9 13 . 1
23 . 1
36 . 1
71 . 1
42 . 9 52 . 1
( 5= 3 / 4 )
( 'Ii )
Ratio
Imports
Re s erves /
( in mi l l ions
I\J CD I\J
283 Table 1 0 . 4 Brazil : Net International Re serves o f the Monetary Authorities ( B anco Centra l and Banco do Bra z i l ) , September 3 0 , 1 9 8 2 ( in mi l l ions of U . S . do l lars ) ( A ) Assets Spot Assets
4 , 35 2 . 1 1 , 386 . 1 2 , 617 . 4 348 . 6 3 , 303 . 7
Short-Term Assets Medium- and Long-Term Assets
( B ) Liabil ities Spot Liab i l i t i e s Short-Term Liab i l ities
Medium-Term Liabi lities ( IMF ) ( C ) Net International Res erve s
a
3 , 303 . 7
a ( A-B )
1 , 04 8 . 4
Inc ludes a l l repurchase obl igations ar�s �ng from the use of Fund
resources in the f irst credit tranche , under the extended agree
ment ,
the c ompensatory financ ing fac i l i ty , and the buffer stock
financ ing fac i l i ty
Source : Technical Memorandum of Understanding o f Intent o f January 6, 1 9 8 3 ) .
1. 2. 3. 4.
( annexed to Letter
a jtmbo loan" o f US $ 4 . 4 b i l l ion to be provided by foreign comme r c i a l bank s in proport ion to th eir outs tanding c redits to B ra z i l the reschedu l ing of amo r t i z at ions due to f ore ign bank s in 1 9 8 3 ( to ta l value e s t ima ted to exc eed US $ 4 . 0 b i l l ion ) th e renewa l o f short-term commerc i a l c red i t l ines the re storation of tota l interbank l ine s for fore ign branches and sub s idiarie s o f B ra z i l ian bank s to the l evel observed in mid- 1 9 8 2 . 7 "
The vo lume o f funds requ e s ted depended o f cour s e on th e forec a s t s f o r the current and cap ita l a ccounts o f the bal ance of payment s , including the e s t imat e s concerning short- term f oreign debt and interbank debts of the sub s id iarie s and fore ign branch e s of B ra z i l ian bank s . The c entral a spect o f the pro j ections wa s B ra z i l ' s commitment to generate an unprecedented surp l u s o f U S $ 6 . 0 b i l l ion in its trade balance and to en sure an a l so unprecedented redu c tion o f over 50 percent in its current account de f i c i t in 1 9 8 3 . It wa s hoped that the re sources pro vided by the s e four pro j ects a l ong with loans f rom o f f i c i al c redit source s , suppl iers ' credits , and direct inve s tment wou l d c reate a capital account surp l u s su f f ic ient to cover t h e d e f i c i t on current account a n d t o f i nanc e a n incre a s e o f approximately U S $ l . O b i l l ion i n g ro s s international reserve s . I t mu s t be stres sed f ir s t o f a l l that even if th e f inanc i al program for 1 9 8 3 had been succ e s s ful in a l l i t s b a s i c po in ts , i t woul d n o t have b e e n ab l e to a s sure a
284 smooth admin i stration o f B ra z i l ' s foreign account s . When one cons iders tha t B ra z i l started 1 9 8 3 with negative net r e serve s , and g ro s s r e se rves tota l ing l e s s than three month s ' imports , it is obviou s tha t an increa s e o f barely US $ l . O b i l l ion in re s e rves wou l d not have brought about any s ig n i f icant change in the country ' s fore ign- exchange s i tuation . Despite the adj u s tment e f fort impl ic it in a reduction of over 5 0 percent in the current account def i c i t , B ra z i l ' s ex terna l vulnerab i l i ty woul d s ti l l have been extremely h igh by the end of 1 9 8 3 . I n f ac t , mo st o f the n ew r e sour c e s provided by the fore ign c ommerc i a l bank s and the IMF in 1 9 8 3 wer e a l ready committed to the sett l ement of b r idge loans d i sbu r s ed dur ing the f inal qua rter o f the previous year . More than 6 0 percent of the resourc e s to be provided by the IMF in 1 9 8 3 were to be p r ima r i l y d e s t ined to s e tt l e short-term debts owed to the u . s . Treasury and to the B I S ; more than 5 0 percent o f the US $ 4 . 4 b i l l ion j umbo loan wa s to be used in the s e t t l ement of bridge loans advanced by commerc i a l b ank s . More impo rtant , however , is the fact that the p rogram propos ed to the fore ign bank s wa s based on a series o f rather controve r s ia l hypoth e s e s regard ing the behavior of B ra z il ' s fore ign accounts in the short term . I n f ac t , the four- pro j ec t package propo sed in December 1 9 8 2 did not contain enough medium- and l ong term f inanc i al re sourc e s and therefore became exc e s s ively dependent on short- term credit l ines . After a f ew month s , it bec ame apparent th at the plan for a d j u s tment and fore ign f inanc ing des igned by the Bra z i l ian government for 1 9 8 3 could not be ful f i l led a s i n i t i a l l y formul ated . B ra z i l wa s then obl i ged , even before the end of the f i r s t seme s ter of 1 9 8 3 , to seek a way o f broaden ing the scope of the f inanc ing prog ram pr e s ented to the p r ivate international bank s in December I t had become absolutely c l ea r that one of the 1982 . ba s i c a s sumption s of the program wa s unrea l i st i c , namely , the a s sumption that fore ign bank s wou l d voluntar i l y ma in tain o r even increa s e the i r short-term expo sure with B ra z i l or foreign branches of B ra z il ian bank s . The pa r t i a l f a i lure of th e th i rd pro j e ct ( short-term commerc ia l l iab i l i t i e s ) and , in particu l a r , of the fourth pro j ec t ( re e st ab l i shment of interbank l in e s for foreign b ra nch e s of B ra z i l ian banks ) seems to have l argely contr ibuted to the deter iorat ion of the s i tuat ion . The ob s tinate re s i s tance of a SUb stantial part of the internationa l bank ing communi ty prevented B ra z i l f rom reach ing the expected l eve l s of short-term f i nanc ing . Th i s r e s i s tanc e can be attr ibuted to a number of factor s , th e mo s t obvious b e ing a genera l di s sa t i s fact ion with the way in wh ich nego tiations were carried out , the incompa t i b i l ity of the fourth pro j ect with the no rma l func t ion ing o f the inte rbank market , a genera l lack o f conf idenc e in Latin Ame r i can borrowers , growing doubt s conc ern ing B ra z i l ' s tru stworth ine s s , and , f inal l y ,
285 d i scontentment among various bank ing sector s in face of the preeminence o f N ew York bank s dur ing the negot iat ions on the f our B ra z i l ian p ro j ec t s . 8 Furthermore , a s ha s a lready been s tated , the four pro j ec t prog ram wa s based on a s e r i e s o f controver s ia l hypoth e s e s rega rding the behav ior o f B ra z il ' s foreign accounts in 1 9 8 3 . F rom month ly data i s sued by the govern ment , one coul d see tha t the b a l ance-o f - trade surp l u s woul d probab ly equa l , or even exceed , t h e target o f U 5 $ 6 . 0 b i l l ion . N everthe l e s s , o n t h e who l e the foreign accounts d i d not ad j u st to the government ' s forec a s t s for 1 9 8 3 , and there wa s a cons iderab l e deter ioration in the g l obal balance- o f - payments po s i t ion . The d i sc repanc i e s between targ e ts a n d actual re sul t s se em t o have been partly due to a l a rger than expected d e f i c i t in the inte r e s t and other s e rv i c e s a ccount s . More important , however , were the devia t ions observed in capital account o f th e bal ance o f payments . As a r e su l t o f the f a i lure o f the fourth p ro j ec t , of a sub s tantia l f a l l in foreign direct inve s tment , and o f delays in the di sbur sement of loan s , net re serves became inc r e a s ing negat ive whi l e the vol ume o f payment arrears expanded . Under the s e c ir cumstance s , B ra z il wa s unabl e to respect the qua rterly c e i l ings for the global balance-of-payments de f ic i t agreed upon with the IMF . I n f ac t , the inevitab l e rede f in i t ion o f the debt renego t iat ion proc e s s s u f fered con s iderabl y f rom the pre mature f a i l ur e of the f ir s t and second vers ions of the internal a d j u s tment program negot iated b etween B ra z i l and the Fund . The four-pro j ec t program was merely a f inanc ial compensation for a s evere ad j u s tment p rogram approved by The di sbur se the IMF . Execu t ive Board in F ebruary 1 9 8 3 . ment o f resourc e s for the f i r s t pro j ect wa s l ink ed contrac tua l l y with the r e l e a s e o f IMF fund s , wh i ch in turn depended on the quarterly mon i tor ing of the a d j u s t men t program and the previou s l y e stabl i shed performance c r iter ia . I n mid-Ap r i l 1 9 8 3 , th e pres ident o f the Banco Central announc ed the IMF ' s dec i s ion to suspend the d i sbur s ement of the second t ranche o f i t s loan to B ra z i l until the rea son s for the nonfu l f i l lment of some of the performa nc e c r i teria were c l a r i f ied . B ra z i l had greatly exc e eded the targets f ixed for the pub l i c sector s ' borrowing requ i rements as we l l as for the net dome s t ic a s s e t s o f the monetary autho r i t i e s and f o r the g l obal balance- o f payments def ic i t . 9 Thu s , in l e s s than two month s i t had become pub l i c that the agreement s i gned in January and rev i s ed in F ebruary had become ob sol ete . The targ e t s were s o unrea l i s tic that t h e quan t itative c r iteria s t ipul a ted in the Letter o f I ntent prepared at the end o f F ebruary proved imp o s s ib l e t o ach i eve o n l y o n e month l ater . I n fact , the shortcomings of th e ad j u s tment program , a s we l l a s the speed with wh ich th i s f i r s t pha se o f
286 negotiations be tween the B ra z i l ian auth o r i t i e s and the IMF had been conc luded , did show , on one hand , a neg l i gent attitude o n the part of B ra z il and , o n the other , a lack o f unde r s tanding o f the pecul i a r i t i e s of the B ra z i l ian economy by the IMF techni cal sta f f . As a resu l t , the d i sbur s ement o f cr e d i t s that had a l r eady been agreed upon wa s ca l l ed to a hal t , and th ere wa s a growing ero sion of the dome s t i c and f o reign c redib i l ity o f B ra z i l ian pol i cymak e r s . l o The comb inat ion of the s e p rob lems exerted unprece dented pres sure on B ra z i l ' s f o re ign account s . S ince it s interna tional res erve s w e r e exhaus ted a nd i t wa s im p o s s ib l e to cont inue r a i s ing short- term compensatory loan s , B ra z i l had no a l terna t ive but to a l l ow a rrears to accumu l ate . B ra z i l ' s net internat iona l r e s e rve s , a l ready neg at ive by severa l b i l l ion do l l a r s a t the end o f 1 9 8 2 , were even further reduced i n the f i r s t s eme ster o f 1 9 8 3 . At th e end of June , the short- term and med ium- term ( IMF ) l iab i l i t i e s of the monetary autho r i t i e s exc eeded the va lue o f the i r for e ign a s sets by some US $ 4 . 5 bi l l ion ( see Tabl e 1 0 . 5 ) . The tota l sum o f payment a rrea r s amounted t o almo s t US $ l . O b i l l ion at the end of March I 1 and exceeded US $ 2 . 5 b i l l ion at the end of Augu st . 1 2 DEBT RENEGOT IAT ION :
THE SECOND ROUND
G iven the f a i lure of the f i r s t f inanc ing and a d j u st men t program negot i a ted with the fore ign commerc i a l banks and the IMF , the B ra z i l ian government wa s forced to initiate a s econd round of negot ia t ions hal fway th rough 1 9 8 3 . However , the delay in a r r iv ing at a new agreement with the IMF resul ted in the s l owing down of nego t ia t ions with fore ign comme r c i a l bank s and other sourc e s o f c redi t . Al though negotiations had not been conc luded a t the t ime o f th i s wr i t ing , th e new version for the prog ram had a l r eady been outl ined , permitt ing a prel iminary evalua t i on . The new fore ign f inanc ing program ha s been des igned to me et the c redit r equ i rement s for 1 9 8 4 and to cover th� short f a l l s o f the 1 9 8 3 program . The mo st important chang e i s p e rhap s the dec i s ion to app ly to the P a r i s C l ub , that i s , to reschedu l e the amo r t i �ation s and intere st du e on loans f rom fore ign government s or guaranteed b y for e i g n governments . Dur ing t h e previou s round of negotiations , only medium- and l ong- term amort i zations due to fore ign bank s ( and B ra z i l ian bank s ab road ) wer e re schedu l ed . Th ere h a s a l so b e e n a sl ight redu c t ion in the spread ( and othe r cos t s ) and an ex ten s ion o f the grac e period and the f in a l ma tur ity app l i ed in the f ir s t pro j ect ( US $ 6 . 5 b i l l ion in " new money" ) and the second pro j ec t ( re schedu l ing o f amo r t i z ations due to bank s in 1984) . F in a l l y , there a r e s igns tha t the governments o f indu s t r ia l i z ed count r i e s wi l l be wi l l ing to step up ,
287 Tab le 1 0 . 5
Bra z i l :
Net International Re serve s of the Mone tary
Authorities ( Banco Central and Banco do Bras i l ) , June 3 0 , 1 9 8 3 ( in mi l l ions of U . S . do l l ars ) ( A ) Assets _ Spot Assets
2 , 940 . 8 677 . 8 1 , 739 . 7 5 23 . 3 7 , 434 . 8
Short-Term Assets Medium- and Long-Term Assets
( B ) Liab i l ities spot Liabi l i t i e s Short- Term Liab i l i ti e s
Medi�Term Liab i l ities
( IMF )
a
5 , 9 78 . 3 1 , 456 . 5 -4 , 49 4 . 0
( C ) Net International Res e rves ( A-B ) a Inc l udes a l l repurcha s e obl igations ar1s1ng from the use o f Fund
resources in the first credit tranche , under the extended arrange ment , the compensatory financing , and the bu ffer s tock financing fac i l i ty
Technical Memorandum of Unders tanding ( annexed t o Letter o f I ntent of September 1 5 , 1 9 8 3 ) .
�:
a l though only ma rg ina l ly , th e i r l evel of invo lvement in f inanc ing the country ' s imports . Despite the s e improvements it cannot be sa id tha t there has been a ba s i c chang e in the manner of approach G iven tha t the debt ing the i s sue of debt renegotiation . owed to fore ign gove rnments ( or guaranteed by government agenc i e s ) amount s to a relatively sma l l f ra c t ion of total debt , apply ing to th e Paris C l ub do e s not imply any sig n i f icant inc rea se in the l iab i l i t i e s sub j ect to r e s chedu l ing . A s f a r a s the c o s t of bank credit i s concerned , the new program w i l l not improve conditions s ig nif icantly : The . 1 2 5 perc ent reduct ion in spread shou l d l ead to a reduct ion o f only about U S $ 1 5 . 0 mil l ion in intere s t payments i n 1 9 8 4 a n d th e ex tens ion of the f inal matur ity ( f rom 8 to 9 year s ) wi l l have no s ig n i f icant e f f e c t on the debt ' s t ime s tructure . However , th e inc r e a s e of the gra c e period f rom 2� to 5 years wi l l help avo id a ma j o r conc entra t ion o f payments in the mid- 1 9 8 0 s . I t ought to be emph a s i z e d , howeve r , that a l l the se chang e s and amendments a re part of a program that a t pre s ent i s s t i l l under negot iat ion . I t mu s t al so be stre s s ed tha t the s e chang e s are c l ea r l y only o f s econdary importanc e . I n f ac t , th e program resu l t ing from th i s second round o f nego t i a t ions reta ins a l l the ma j or characteri s t i c s of the f i r s t one . The ad j u s tment program outl ined in th e th i rd ver s ion of the Letter of Intent i s a s harsh a s or even harsher i n i t s approach than the prev iou s documents . 1 3 The new agreement with the IMF continu e s to demand a sUb stantial redu c t i on in the current ac count d e f i c i t and in the pub l i c - s ec tor ' s borrowing requ i remen ts withou t prov iding adequate fore ign f inanc ing in compen sation . I n f a c t , th i s new prog ram wi l l probably
288 not a l l ow a n appreciab l e increa se o f in terna t ional re serve s in 1 9 8 4 . The ma in prob l em appears to be that B ra z il is suppo sed to cont inue paying nearly a l l intere s t To h igh l ight the inadequacy o f the present payment s . program, one only has to compare the vo lume of new loans put at B ra z i l ' s d i spo s a l for 1 9 8 4 with e s t imates referring to the intere s t account . Approx imately U S $ 4 . 0 b i l l i on o f the n ew US $ 6 . 5 b i l l ion j umbo l oan wa s in f a c t t o be used to c over add it iona l c redit r equ i r ement s in 1 9 8 3 , mean ing that l iquid fund s ava i l ab l e f rom th i s loan in 1 9 8 4 wi l l c over l e s s than one - third o f the e s t ima ted US $ 9 . 0 b i l l ion o f intere s t payments due to foreign commerc ia l banks in the same year . Exc e s s ive ly amb itiou s targ et s for the trade balance and the c on sequent adopt ion of pol ic i e s that increa s e i n f l a t ionary pre s sure s and / o r reduce the l eve l of economic a c t iv ity are thu s made inevitab l e . I n the s e c i rcumstan c e s one cannot exc lude the po s s ib i l i ty of a th ird round of negotiations in the not too d i stant future . In a l l probab i l i ty , new talk s woul d involve a rede f in i t i on n o t only o f the fore ign f inanc ing program but a l so o f the terms of a d j u s tment impo sed by the IMF . Noneth el e s s , one shou l d not forget that th i s never ending proc e s s of negot iation and renego tiation aggrava te s dome s tic i n s tab i l i ty and make s the task of f ind ing a suitab l e solut ion to the p rob l ems po s ed by B ra z i l ' s fore ign debt even more d i f f i cu l t . Al ternat ive debt res tructuring strateg i e s , wh ich by now appea r to be e s s ential , wi l l be dea l t with in the fol l owing sect ion . MAIN PROBLEMS INVOLVED IN THE PRE SENT AP PROACH AND AN OUTL INE FOR AN ALTERNAT IVE DEBT- RESTRUCTURING STRATEGY The attitude adopted by the B ra z i l ian government s ince the open i ng o f f ormal debt renegotiations in late 1 9 8 2 has been far too cautious and h e s i tant . The i n i t ia l a ttempt ( by now tota l l y d i s c re d i ted ) wa s to d i f f erentiate Bra z i l f rom th e r e s t o f Latin Amer ica . B ra z i l even wen t so far a s to try to pro j ect an image o f it sel f a s the v i c t im o f the e f f ec t s o f a conf idence c r i s i s generated by even t s in Mex ico and Argentina . I n s tead o f present ing an expl i c i t pol icy program and a coherent debt- renegotia tion scheme , B ra z i l engaged in a series of dub iou s del ay ing maneuve rs tha t have pr imar i l y re sul ted in a continuous dec l ine in th e po s s ib i l i ty of ser iou s nego t i a t ions with the IMF and bank c reditor s . But the ba s ic prob l em with the economic po l i c i e s suppor ted b y th e IMF a n d the interna t ional bank s i s tha t the degree o f ad j u s tment dema nded f rom B ra z i l i s c l early exc e s s ive , threa ten ing to surpa s s the l imi t s deemed tol erab l e f rom both po l itical and social po ints o f view . From 1 9 8 3 on , B ra z i l wi l l be obl iged to e f f e c t a pre For the f ir s t ma tu re tran s fer of rea l resources abroad . t ime in many year s , aggrega te expenditure on inve s tment
289 and consumption w i l l b e cons iderably l ower than the g ro s s dome s t ic produc t . The d i f f erence wi l l be trans f erred abroad in th e fo rm o f a p o s i t ive ba l a nc e in the trade and nonf ac tor services a ccounts . I n 1 9 8 3 th i s ou twa rd trans f e r wa s t o amount t o about US $ 3 . 0 b i l l ion . F rom th e n ew Letter of Intent sent to the IMF on S eptembe r 1 5 , 1 9 8 3 , it can be deduced that th i s trend wou l d cont inue du ring 1 9 8 4 . I f o f f i c ia l targets are ful f i l l ed , there wi l l be a negat ive " re source gap" o f about U S $ 6 b i l l ion in 1 9 8 4 , tha t i s , an outwa rd tran s f e r twice a s l a rg e a s t h e o n e ob served in 1 9 8 3 . I n fac t , i f the balance between a d j u s tment and f inanc ing i s not changed , th i s prema ture tran s f e r o f r e s ourc e s wi l l b e a great burden to B ra z il throughout the 1 9 8 0 s and cou l d sub s tan t i a l l y reduc e i t s capa c i ty for economic growth . 1 � The incre a s e in the nex t externa l debt r e f l e c t s e s sentia l l y t h e d i f f erenc e between t h e current account Ignor d e f i c i t and the net inf l ow o f direct inve s tment . ing other factor s e rv ic e s , unilatera l trans fer s , and net l ending to o ther countr i e s , th e rate o f growth of the net stock of debt i s determined by the re source gap , the average international intere st rate , and the net fore ign exchange contribution of equity cap ita l : toED ED t_ l
=
RG ED t_l
+
_I_ ED t_1
DI-PD ED t_ l
+
where ED n e t ex terna l deb t , RG resource gap , I intere s t payments ( ne t ) , D I direct inve stment ( ne t ) , and PD pro f i t s and dividends ( ne t ) . A s suming tha t the remittanc e of pro f i t s and dividends is more o r l e s s compensated for by the inflow o f direct inve s tment , the resource gap can be seen a s re f l ect ing the d i f f erence between the rate o f growth o f the debt and the average international inter e s t rate : =
=
=
=
=
RG ED t_l
=
! to E D ED ED t_ l t_ l
Under present c ircums tanc e s , internat iona l bank s , the ma j or sourc e o f c redit for B ra z il , are apparently refus ing to agree to an inc rea s e of the i r expo sure above 7 or 8 percent annua l l y . 1 5 Unl e s s th ere is an increa s e i n o f f ic ia l a n d mul t i l a teral credit s , a n d i f the average annual interest rate rema ins at the present l evel of about 13 percent , B ra z il wi l l have to generate dur ing the next f ew years net export s of goods and nonfactor serv i c e s equ ival ent to 6 or 7 perc ent o f out s tanding debt . We therefore face a h i therto unknown s i tuation in wh ich a l ow- income c ountry such a s B ra z i l i s having to tran s f o rm i t s e l f overn ight into an exporter o f real re sourc e s , a s a resu l t of a l a rge and unexpected reduct ion
290 i n f o r e ign loans . 1 6 I n s tead o f accept ing commi tment s o f th i s nature and programs tha t requ ire a sub s tant i a l tran s f er of rea l re sourc e s abroad , B ra z il shou l d mak e i t c l ea r tha t it i s not prepared t o b e a r the f u l l burden of a bal anc e-of payments c r i s i s that wa s par t i a l l y c aused by externa l fac tor s , such a s th e r i s e in the p r i ce of o i l , unreso lved c ontrad ictions i n u . s . economic po l i cy , a dramatic in c r e a s e in inte rnational intere st rate s , and wor l d re c e s s ion , cou p l ed with an abrupt and unexpected contract ion in the i n f l ow o f fore ign b ank loans s ince mi d - 1 9 8 2 . A shar ing of th e a d j u s tment burden i s unavo idab l e g iven the c r it i c a l s i tuation in wh ich B ra z i l f inds it s e l f a s a re su l t of pol icy mi stake s and a l so o f a protracted inter nat ional c r i s i s . I n te rnat ional bank s , wh ich in the pa st have ben e f ited sub s tantia l ly f rom mak ing loans to B ra z i l , wi l l have to prepare themselves to accept emergency solutions and to absorb l o s s e s . They mu s t now recogn i z e tha t Bra z i l i s n o t i n a po s i t ion t o cover intere s t payment s with an increa s ing trade surp l u s and a cont inuou s l y g rowing tra n s f e r of real re sourc e s abroad . On th e o ther hand , it mu st a l s o be recogni zed tha t the bank s thems elves a re fac ing s e r iou s r e s tr i c t i o n s and going through a c r i s i s on a s c a l e unknown since the 1 9 3 0 s . The s imu l taneou s non fu l f i l lment of ob l iga tions on the part o f ma j or debto r s such a s B ra z i l , Mex ico , Argen t ina , Pol and , a n d Ven ez uel a wil l probab ly have a l a s ting negat ive e f f e c t on t he growth Recent e s t imat e s show rate of interna t ional bank credit . that B ra z i l ' s tota l intere st p ayment s wi l l reach approx i mate ly U S $ 3 5 . 0 b i l l ion in 1 9 8 4 - 1 9 8 6 . 1 7 S inc e the se payments w i l l not be f inanced with addit ional credit f l ows , i t s eems inev itab l e that the inter e s t on the debt be re schedu l ed . I f not , B ra z i l and other debtor coun trie s wi l l be forced to generate ma s s ive outwa rd tran s f e r s of rea l re sourc e s . There are c l ea r advantage s in capita l i z a t ion o f intere s t payments a s c ompa red with the p r e s en t system f o r pa rtial f inan c i ng o f inter e s t b y j umbo loans organ i zed in a s emicompul s ory manner and based on a comb ination o f pol i t i c a l pre s su r e o n the bank s a n d very h igh spread s . F i r s t , reschedul ing interes t payment s could l ead to a change in the balance between ad j u s tment and f inanc ing , avoid ing ( or at the very l e a s t min imi z ing ) th e ou twa rd tran s f e r of r e sourc e s . S econd , automa t i c protection wou l d be provided aga in s t an unexpe cted rise in inter national intere s t rates . Th ird , it wou l d a l l ow B ra z i l t o negot iate a s ign i f i cant reduction i n sprea d s and a l so extend matu r i t ie s , s ince it wou l d no long er be nec e s sa ry to attract th e bank s ' partic ipa t ion in j umbo l oans by ent ic ing them with extor tionate f inanc ial condition s . I n fact , g iven support f rom bank superv i sory auth o r i t i e s and chang e s in bank regu l a t ion s in c e rtain countr ie s , r e s chedul ing intere st repayment s cou l d b e a mo re f avorab l e
291 solut ion even fo r the b ank s themse lve s . C ontrary t o the f ina nc ing of interest payments via new l oan s , the capita l i z a t ion o f intere s t wou l d automat ica l l y guarantee th e bal anced and equ i tab l e invo l vement o f the severa l hundred individua l c redito r s i n f inanc ing the add i t iona l requ irement s o f B ra z i l . I n the s e c ircumstanc e s , the expo sure o f each bank in B ra z i l wou ld inc rea se propor t ionately to l oans out s tand ing . A rea l i s tic debt r e structuring ad j u s ted to B ra z il ' s e f f ec t ive repayments po s s ib i l i t i e s shou l d include the f o l l owing b a s i c point s : ( 1 ) re schedul ing o f a l l , or almo s t a l l , medium- and l ong- term amor t i z a t i on s ; ( 2 ) reschedul ing or c apital i zat ion of intere s t payment s ; ( 3 ) conver s ion o f shor t - term f inanc i a l debt into medium or l ong- term debt ; ( 4 ) l engthening o f matur i t i e s and con s iderabl e reduc tion in spreads and other charg e s and c ommi s s i on s impo sed by the bank s in recent dea l s ; and ( 5 ) extens ion o f the consol ida t ion period ( th e period in wh ich payment s to be re schedu l e d f a l l due ) f rom one to three o r f ive yea r s . A rea l i s tic r e s t ructu r ing of the debt service due over the nex t f ew yea r s woul d avo id ( or at l ea s t reduc e ) outward resource tran s f e r s and enab l e B ra z i l t o defend the l eve l o f dome s t i c employment , re bu i l d internat ional r e s erve s , and br ing under control i n f l a t ionary pre s su r e s cau sed by external constra int s . I f B ra z i l f a i l s to win the �nders tanding and support o f i t s credito r s , it wi l l probably b e obl iged to adopt a very inf l ex i b l e approach in the future and impo se con ditions on a un i lateral b a s i s . I n B ra z il , it i s becoming incre a s ing l y c l e a r tha t a rad i c a l chang e o f attitude i s e s sent i a l i f the country i s t o res tore a min imum l evel o f economic g rowth a n d bring inf l a tion under control over the next f ew years . NOTE S 1 . Th i s chapter wa s written on the ba s i s o f in Part of th i s s tudy forma tion ava i l ab l e in October 1 9 8 3 . wa s carried out with f inanc i a l support f rom th e I n s t i tu to de Planej amento Ec onomico e Soc ia l Apl icado ( IPEA ) . 2 . Banco C entra l do B ra s i l , I n f o rma tivo Men sa l , S eptembe r 1 9 8 3 , p . 1 1 . 3 . Da ta reported by bank s in the G roup o f Ten count r ie s ; by Luxembou rg , Swi t z e r l and , Au s t r ia , D enmark , I re l a nd , and by branches of U . S . bank s in the Bahama s , th e Cayman I s l ands , Panama , Hong Kong , and S ingapore . Bank for I nternational S ettl ement s , Interna t iona l Banking Developmen t s - - S econd Quarter 1 9 8 3 , Mone tary and Economic Departmen t , Ba s l e , O c tober 1 9 8 3 , p . 1 and tab l e 5 . 4 . For an ana l y s i s of the e f f e c t s o f externa l shocks and B ra z i l ' s economic pol icy respon s e in the year s 1 9 7 4 - 1 9 7 8 , s e e Anton io C a r l o s L emgruber , Pau l o Nogue ira
292 B a t i s ta , Jr . , and Roberto F endt , J r . , Choque s Externos e Re spo s ta s d e pol l tica E conOmica n o B ra s il : 0 P r ime iro Chogue do P e trol eo , E s tudo s E spec ia i s IBRE , no . 3 , Rio de Janeiro , 1 9 8 1 . 5 . For a recent eva luat ion of the B ra z il ian economy and i t s p l ac e in the wor l d e conomy , see Edmar L . Bacha F rom the Mira c l e to and P edro S . Ma l a n , " B ra z i l ' s Deb t : the Fund , " paper presented a t the conference on Democra t i z ing B ra z i l ? Y a l e Unive r s ity , Ma rch 1 9 8 3 ; and Pedro S . Ma lan and Reg i s B on el l i , " C re s c imento Economico , Indu s t r ia l i zacao e B a l anco de Pagamento s : 0 B ra s i l do s Ano s 7 0 a o s Ano s 8 0 " ( I PEA / INPES , Texto para D i scu s sao I n terna no . 6 0 , Octob er 1 9 8 3 , mimeo ) . 6 . Acc ording to pre l imina ry informa t ion included in a report prepared by the techni c a l sta f f o f the IMF , th e net r e s e rves of the mone tary author i t i e s we re nega tive by US $ 1 . 5 b i l l ion on De cembe r 3 1 , 1 9 8 2 ( se e th e appendix to the speech g iven by the f inance mini ster , E rnane Ga lvea s , "A C r i s e Mundial e a E s tra teg ia B ra s i l e ira de A j u s tamento do B a l anco de pagamento s , " in the f edera l S inc e the e s t ima ted balance Senate on Ma rch 2 3 , 1 9 8 3 ) . o f - payment s def ic i t for 1 9 8 3 wa s later inc rea s ed by US $ 1 . 4 b i l l ion , net internationa l r e s erve s mu s t have been negative by a lmo s t US $ 3 . 0 b i l l ion at the end of 1 9 8 2 . 7 . C a r l o s Gera ldo Langon i , " A E s tra teg ia do B ra s i l na C r i s e F inanceira Atua l , " speech g iven in N ew York o n Decembe r 2 0 , 1 9 8 2 , a t a me e t ing of B ra z il ' s ma j or bank c redi to r s ( pub l i shed by the B ra z i l ian pre s s on December 24 , 1982) . 8 . For a good j ourna l i s t ic descr iption of some of the prob l ems o f th i s f i r s t round o f debt nego t i a t ions , see " Th e War Among B ra z i l ' s Bank e r s , " Fortune , July 1 1 , 1 9 8 3 , pp . 5 0- 5 5 . 9 . Accord ing to a document prepa red by the We stern H emisphere Department of the IMF , released uno f f i c ia l ly by th e B ra z i l ian pre s s on July 8 and 9 , and a l so in accordanc e with the Letter of Intent sent to the Fund on S eptemb e r 1 5 . 1 0 . For an account o f rec ent negot iations between B ra z i l and the IMF , see Ma r i a S ilvia B a s to s Ma rque s and Paulo Nogue ira Ba t i sta , Jr . , A Terce ira versao do Acordo B ra s i l -FMI " ( Fundacao Getu l io Varga s , IBRE / CEME I , Octob e r 1 9 8 3 , mimeo . ), pp . 3 - 7 . For an ana l y s i s and c r i t i c a l ob s e rvations on the th eore tical model used by the IMF , see , for examp l e , E dmar L . Bacha , " The IMF Threa t : The P rospec t s for Ma l a d j u s tment in B ra z i l " ( Pont i f l c ia Unive r s idade C a tol ica de Rio de Jane iro , May 1 9 8 3 , mimeo . ) : Ma r i a S i l via B a s to s Ma rque s , " 0 Conc e i to de A tivo s Dome s t i c o s L l qu idos e Sua Apl icacao ao B ra s i l " ( Fundacao Getu l io Varga s , June 1 9 8 3 , mimeo . ) ; Paulo Nogu e i ra B a t i sta , Jr . , " Em D e f e s a de C r i t€!rios de D e s empenho I ndexado s " ( Fundacao Getu l io Varga s , IBRE / CEME I , June 1 9 8 3 , mimeo . ) : Edmar L . Bacha , " Do B ra � i l para 0 FMI : P ro l ogo para a Terce ira Ca rta " ( Pont i f ic ia "
293 Univers idade Catol ica d e Rio d e Jane iro , June 1 9 8 3 , mimeo . ) ; Rogerio L . F . Werneck , " A Armadilha F inanc e i ra do S etor Pub l ico e a s Empresas E s ta ta i s " ( Pont i f i c ia Univers idade Catol ica de Rio de Jane iro , June 1 9 8 3 , mimeo . ) . 11 . p r e l iminary da ta relea sed by the Bano C entral in Apr i l 1 9 8 3 to the fore ign bank s partic ipating in the l ia i son committee . Later the se f igures were a l so made ava i labl e to the Bra z il ian p re s s , indicating tha t at the end o f Ma rch the c entra l bank ' s c a sh po s i t ion wa s negat ive by U S $ 9 9 9 mi l l ion . 1 2 . See pa ra . 8 o f th e Techn ical Memorandum annexed to the L e tter o f I n tent of S eptemb e r 1 5 , 1 9 8 3 . 13 . For a recent ana l y s i s o f the th i rd vers ion o f t h e agreement between B ra z i l and t h e IMF , see Ba s to s Marque s and B a t i s ta , " A Terce ira Ver s a o , " pp . 8 - 3 4 . S ince B ra z il ' s net expo rts of good s and " non 14 . factor" s e rvic e s only cover a par t o f facto r payments to non re s iden t s , tota l dome s tic expend iture i s greater than th e GNP . Despite the f a c t tha t dome stic expenditure i s now l ower than GOP , the r e i s s t i l l a fa irly l arge def i c it on current account that ba sica l ly corre spond s to the d i f ference between net factor payments and the surp l u s in t h e trade a n d " nonfac to r " servic e s account s . The exc e s s o f GDP over aggregate dome stic expendi ture " f inanc e s " part o f the income tran s f e rred in the form of intere s t payment s , pro f i t s and dividends , and so on . 1 5 . The U S $ 4 . 4 b i l l ion " j umbo loan" of 1 9 8 3 represents a 7 . 5 perc ent inc rea s e i n bank exposure to B ra z i l , as e s t imated by Banco Centra l , I nforma t ivo Men sa l , January 1 9 8 3 , p . 8 . �6 . Paulo H . Pere ira L i ra , " A C r i s e Internac ional da D ivida Externa--Um T ra tamento O r i entado para 0 C r e s c imento , " pape r pre sented a t con f e rence on the I n te rna t ional Debt C r i s i s h e l d in London , spon sored by the Internat iona l Banking and F inanc e Centre , �he C ity Univer s i ty , Oc tob er 5 , 1 9 8 3 . 1 7 . P edro Sampa io Mal a n and Pau lo Nogueira Bati s ta , J r . , " E s t ima tiva da s N e c e s s idades de F inanc iamento Externo do B ra s i l ate 1 9 8 6 " ( Jul y 1 9 8 3 , mimeo . ) , tab l e 1 .
11
The Mexican External Debt: The Last Decade Ernesto Zedillo Ponce de Le6n
unt i l a decade ago the h i s tory o f Mex ico ' s foreign debt had cQmpr i s ed four c l early d i s t ingu i sha b l e per iod s . F i r s t , the period f rom 1 8 2 4 to 1 8 8 8 . The s e two dates mark the year that th e country obtained its f ir s t s i g ni f ic ant foreign loan and the year the orig ina l Engl i sh debt of 1 8 2 4 and 1 8 2 5 wa s f i na l ly settled a f t e r many b i tter inc ident s invo lving defau l t s , morator iums , and the l ike . The second per iod was f rom 1 8 8 8 to 1 9 1 1 , wh ich e s sent i a l l y corre sponds to the P o r f i r iato era . During the period , thank s to th e image of po l i t ica l st ab i l i ty and improved management o f pub l i c f inance s , Mex ico en j oyed ready acce s s to foreign f inanc ing . As a con sequenc e , th e country ' s foreign debt grew more than eightfo l d . Third wa s the period ranging from the s tart o f the Mex i c an Revo lut ion to the s ign ing o f th e Sua r e z Lamont Agreement in 1 9 4 2 . Dur i ng the se d i f f ic u l t years , the Mex ican government wa s repeatedly unab l e to ful f i l l i t s fore ign-debt obl igations o r t o reach a reschedul ing agreement with its c reditor s . The epi sode wa s f i na l ly c l o sed with the s i gning o f a rather advantageous agree ment for Mex ico , a s had happened in 1 8 8 8 . The fourth per iod wa s f rom World War I I until the early 1 9 7 0 s . Dur ing tho se year s , in wh ich the country regained i t s a c c e s s to international capital ma rket s , fore ign f inanc ing wa s mo stly obta ined f rom o f f ic i al sourc e s and wa s kept in a mode st proportion with respect to mo s t mac roeconamics aggregate s . I f n o t qu i t e un impo rtant , the role of fore ign f inanc ing wa s strictly l imited to suppl ementing other po l i cy instruments . 1 1 9 7 3 wa s a real turning point . Between 1 9 5 4 and 1 9 7 2 , th e net f low of the fore ign pub l i c debt averaged U8 $ 2 1 8 . 7 m i l l ion a year . It inc rea sed to someth ing more than U8 $ 1 . 6 b i l l ion in 1 9 7 3 a l one and kept growing in subs equent yea r s . As a cons equenc e , the stock o f the foreign publ ic debt , wh ich amounted to US $ 6 . 8 bi l l ion at the end of 1 9 7 2 , inc rea sed to a lmo s t U8 $ 2 1 b i l l ion by the t ime th e EcheverrIa admi n i s t ra t ion wa s over ( 1 9 7 6 ) and to US $ 5 8 . 1 b i l l ion when P r e s ident Lope z Port i l l o l e f t 294
295 o f f ic e ( 1 9 8 2 ) . Cons ider ing the foreign debt o f c omme r c i a l bank s and o f pr ivate- sector f irms , th e country ' s total ex ternal debt had reached US $ 2 7 . 5 b i l l ion in l a t e 1 9 7 6 and U S $ 8 4 . 1 b i l l ion s ix years l at e r . Not surpr i s ing l y , the l a s t two f inanc i a l c r i s e s exper ienced b y Mex ico ( 1 9 7 6 and 1 9 8 2 ) have been c l o s e ly l ink ed to the extern a l deb t prob l em . I t i s the purpo se o f th i s chapter t o review- - albeit briefly and rather informa l ly - - th e evo lution o f Mex ico ' s foreign debt s inc e 1 9 7 3 . For rea son s of rel evance and opportun i ty , empha s i s wi l l b e g iven to the l a t e s t event s . THE ECHEVERR I A EPOCH ( 1 9 7 1 - 1 9 7 6 ) A s far a s the growth o f the external debt i s , con cerned , the f ir s t two years o f P r e s ident Echev�rria ' s term we re no t d i f f e rent f rom the S tabi l i z ing Development pe riod , 2 yet the a c t ive pursuit of f inanc ia l stab i l i ty th at s ti l l c ommanded a great deal of importance in 1 9 7 1 sta rted t o taper o f f i n 1 9 7 2 . For one th i ng , GDP growth in 1 9 7 1 had been the sma l l e s t in e ighteen years . On the other hand , there wa s a mount ing current of op in ion at th e h igh e s t government l ev e l that f e l t the economic po l icy model i n e f f e c t since the mid- 1 9 5 0 s had been " exhau sted , " and there fore a change in priori t i e s and in cour s e s o f a c t ion wa s long overdue . Con s equently , pub l ic expen d i ture began to expand . Notwithstanding tha t the new stra tegy had an immediate negative impac t on the pub l i c sector ' s de f i c i t a n d on monetary expan s i o n , it se emed to work prope rly in many other important respec t s : GDP g rowth surged to 8 . 5 perc ent , i n f l a t ion wa s a b i t more tha n 5 perc ent , and the current account def i c i t wa s not very d i f f erent f rom the l eve l s reg i s tered in the two previou s year s - around U S $ l b i l l io n ( s ee Tab l e 1 1 . 1 ) . The se resul t s rea f f irmed th e st a n c e o f tho se advocating a more a c t ive government invo lvement in the solution of social and economic prob lems through the expan sion o f pub l ic expenditure . The " new med i ci ne " wa s appl ied vigorou s l y in 1 9 7 3 : Pub l ic expenditure a s a proportion of GDP , wh ich had averaged 21 percent during 1 9 6 6 - 1 9 7 0 , reached 27 percent , wherea s th e overa l l pub l i c s ector ' s de f i c i t r e l a t ive to GDP ( h i storica l l y l e s s than 2 . 5 percent ) soared to 6 . 9 percent . Th i s t ime , however , the " mag i c o f 1 9 7 2 " worked rather impe r f ectly . I n f l a tion c l imbed to a doub l e-dig it f igure for the fi r st t ime in a lmo st two decade s , and the current acc ount def i c i t j umpe d to US $ 1 . 5 b i l l ion . Yet GDP growth wa s susta ined at th e h i gh l y re spectab l e rate o f 8 . 4 percen t , and fur the rmore , f inanc i ng o f the en l arged external d i s equ i l ibrium did not pose a n important probl em . As stated before , the net f l ow o f the foreign publ i c debt wa s e a s i l y increa sed many t ime s over i t s
c
Average for the period
As a per centage of GOP
The overall f i n an c i a l d e f i c i t as
3 , 68 3 . 3
3 , 226 . 0 4 , 44 2 . 6
1 , 00 5 . 7 1 , 5 28 . 8
a percentage of GOP
For 1 9 7 1
1983 .
Nac ional F i n an c iera , La Economi a Mex icana en C i fras ( Mexico , D . F . , 1 9 8 1 ) 1 Banco de M e x i c o , Sourc e : Indicadores Econ omicos , Subd i r e c c i o n de Inve stigaci on Econ6mi ca , several i s sues l Bahco de Mex i c o , I nd i c e s de pre c io s , Subdirec c i o n de I nve stiga c i o n Econ omi c a , s everal i s sues l Secretar i a de H a c i enda y C r edito P Ubl ico , E s tad i s t i c a s H a c endarias del Sec tor PUb l i c o , Direcci on General de Eva luaci o n Hac endaria ,
e
d
do l lars )
7 50 . 5 9 28 . 9
of U. S.
Current Acc ount De f i c i t ( mi l l ions
For 1 9 6 6 - 1 9 7 0 the average annual perc entage increase in the workers ' cost of l iving wa s used . onward the ave rage annua l percentage increase i n the con sumer price index was taken .
Mex i c o ' s National Accounts were revised in 1 9 8 0 ; have been ad j u s te d upward .
b
a
d
as a con sequence , GDP growth f i gur e s from 1 9 7 0 onward
23 . 5
33 . 6
9. 9
· 15 . 8
4.2
1976
20 . 9 23 . 0
28 . 3 33 . 2
7.2 10 . 0
23 . 7 15 . 1
6.1 5.6
1974 1975
18 . 5 19. 8
4.9 6.9
5.0 12 . 0
23 . 6 27 . 0
( lis )
Income
Pub l i c
19 . 0 18 . 2
8.5 8.4
1971
1966- l 9 7 0
( lis )
Publ i c d Expenditure
21 . 1 20 . 9
( lis )
Pub l i c - Sector De f i c i t C
1972 1973
b
2.5 2.5
( lis )
I n f l ation
Some B a s i c Indic ators of the Echeverr i a Term
3.5 5.3
e
( lis )
Rea l GOP a Growth
Mex i c o :
6.9 4.2
Year
Tab l e 1 1 . 1
N \D 0'1
29 7 trend va lue . I n spite of the s ig n i f icant a c c e l erat ion o f infla t ion and the f inanc i a l and current account d i s equ i l ib r i a of 1 9 7 3 a n d o f t h e f o l l owing yea r , economic po l icy wa s kept on the s ame track unti l the end of the admi n i s tra t ion . The early warn ing s i gna l s did l i t t l e to induce a change o f course . Undoubted l y , there wa s a marked chang e in the p r io r i t i e s o f po l icymakers dur ing tho s e yea r s , pa rtly provoked by the p a s t a c cumu l a t ion of soc ial and pol itical demands and partly the r e su l t 9f the very pecu l ia r way in wh ich P re s ident Echeverria exerc i s e d h i s governmenta l author i ty . Y e t the ma in j u s t i f ication for the e conomic po l icy tha t preva i l e d a t the t ime came f rom condi t ions abroad . Thu s , inf l a tion wa s exp l a ined not a s a phenomenon cau s ed by internal factor s , but rather a s a cons equence o f the wor l dwide r i s e in inf l a tion . Th i s wa s a mo s t powerful a rgumen t for neg l e c t ing the urg ency o f pursu ing an an t i i n f l a t iona ry pol icy . I n turn , th e r ec e s s ion in the indu s t r ia l countr i e s served a s an a rgument fo r incre a s ing dome st i c expend iture to compen sate for the fa l l in external demand . The l a tter , be cause o f its impac t on Mex ican expo r t s , wa s a l so b l amed for wor sen ing the current ac count d i s equ i l ibrium . I f the above external factors were u sed to j u s t ify the economic pol ic y , i t wa s quite anoth e r ex terna l phenomenon tha t made such a pol icy su sta inab l e over s evera l yea r s ; the amp l e ava i l ab i l i ty of foreign f inanc ing . Tab l e 1 1 . 2 shows the evo lut ion o f the stock and f l ows o f th e fore ign pub l ic debt during the per iod 1 9 7 0- 1 9 7 6 . 3 The f a s t g rowth in the nomina l va lue of th e s tock o f the foreign pub l i c debt s ta r t ing in 1 9 7 3 h a s a l ready b e e n mentioned . The sheer s i z e o f th e deb t says l ittl e , i f not mea sured in real terms or--pref erably- aga inst oth e r economi c va r iabl e s , espec ial ly aga inst a mea sure o f the national wea l th . Unfortunate ly , such a mea sure doe s not ex i s t f o r Mex ic o , and one ha s to sett l e f o r the u s e o f some p rox i e s . Th i s i s done i n Tab l e 1 1 . 2 , where th e net f l ow of the debt is a s s e s sed aga inst several mac roeconomi c aggregate s . Of cou r s e , compar ing debt f igu re s - -wh ich are mea sured in do l l a r s - -with vari ab l e s that are c a l cu l ated in dome s t i c currency ha s to be done with some care . The u sual procedure i s to convert peso- denominated f igures into dol l a r s by means of th e observed excha nge rate . Th i s method y i e l d s a very d i s torted p i cture wh en the per iod o f anal y s i s h a s been charac ter i z ed by h igh i n f l a t ion rates and a n insu f f ic iently adj u sted exchange rate . A ma j or d i s to r t ion in such compa r i s o n s may al so a r i s e for periods fol l owing a signif icant deva luat ion in the exchang e rate . In order to smooth out- - i f not avoid a l togeth e r- - th e s e di f f ic u l t ie s , a l l ratios o f Tab l e 1 1 . 2 invo lving a peso denominated va r i ab l e have been c a l cu l a ted with an " equ i l ibr ium" exchange rate , der ived f rom a purcha s ing power pa r ity method , as exp l a ined in the Appendix to
6 , 255 . 5 6 , 6 66 . 7 6 , 820 . 9 8 , 44 8 . 8 11 , 373 . 8 15 , 705 . 1 2 0 , 84 6 . 4
1970 1971 1972 1973 1974 1975 1976
a
443 . 4 411 . 2 1 54 . 2 1 , 627 . 9 2 , 925 . 0 4 , 3 31 . 3 5 , 14 1 . 3
F l ow
Net
Interest
290 . 3 3 06 . 2 3 21 . 4 442 . 1 7 07 . 1 1 , 03 1 . 5 1 , 318 . 7
Payments
a
1.4 1.2 0.4 3.2 4.6 5. 5 6.1
GDP
F ixed
7.2 6.7 2.0 16 . 8 23 . 1 25 . 8 29 . 2
Inve s tment
13 . 6 11. 6 3.6 30. 1 42 . 8 60. 7 62 . 1
Account Income
Current
6. 3 5. 8 1.6 12.0 16 . 2 16. 7 18. 2
Expend i ture
Pub l i c
Total
Intere s t Payments /
37 . 8 48 . 8 7.7 47 . 3 63 . 5 55 . 2 62 . 0
8.9 8. 7 7.5 8. 2 10. 3 14 . 5 15 . 9
s ec tor ' s Current Def i c i t Account Income
Pub l i c
Net F l ow as Percentage of
Evo lution of the Foreign Pub l i c Debt During the Echeverr i a Term
Mex i c o :
�l
dol l a r s
Recent H i s tory and Future Oil Bounded Optima l Growth , " Ph . D .
d i s s ertation ,
Ya l e Univers i ty ,
1981 .
secretar i a de H a c ienda y Cr ed i to PUb l i c o , E s tad i s t i c a s Hac enda r i a s del Sector PUb l i c o , Dire c c i o n de Informa t i c a y Evo l u c i o n Hacendar i a s , 1 9 8 3 : Ernesto Zed i l l o , " External Pub l i c Indebtedne s s in
Mi l l i ons o f u . s .
Sourc e :
a
All comparisons b e tween a do l lar and a peso variab l e were made by means of an " equ i l ibr ium" exchange Note : rate cal culated a s d e s c r ibed i n the Appendix to Chapter 1 1 .
S tock
a
Mex i c o :
Year
Tab l e 1 1 . 2
t...l \0 00
299 th i s chapter . Wha t i s sugg e sted by th e nominal f igur e s i s ampl y con f i rmed by al l t h e r e l a t ive mea sure s . Dur ing 1 9 7 0- 1 9 7 2 , the net f low o f the fore ign pub l ic debt averaged only 1 percent of GOP . Tha t proportion more than tripled in 1 9 7 3 and averaged 5 . 4 percent in 1 9 7 4 - 1 9 7 6 . Equa l l y drama t i c wa s the increa s e i n the ratio o f n e t f l ow to current account income - - a proxy c l o s e r to dep icting the growth o f the debt with re spect to the economy ' s capa c i ty to s e rve i t . Tha t ra tio-- l l . 6 percent in the f i r s t yea r of the admin i stration--rose to mor e than 6 0 percent in the f inal year o f the per iod . It can a l so b e seen tha t th e increase in th e fore ign pub l ic debt went f a r b eyond the increa s e in pub l i c expenditure and f i scal def i c i t s Thu s , the rat i o of the net f l ow to dur ing thos e yea r s . pub l i c expendi ture , wh i ch wa s norma l ly a round 6 percen t- look at the f igures for 1 9 7 0 - 1 9 7 1 in Tab l e 1 1 . 2 - - doub l ed in 1 9 7 3 and tripled in 1 9 7 6 . As a proport ion o f the pub l ic s ec tor ' s def ic it , the aggregate averag ed 6 0 per c en t in the second h a l f o f the a dmini s t ra t ion ; it had averaged l e s s than 4 0 percent dur ing the f ir s t ha l f . In short , the r e l a t ive mea sur e s in Tab l e 1 1 . 2 con f irm that , start ing i n 1 9 7 3 , pub l i c ex terna l borrowing took on in c rea s ing importance for the Mex ican economy . Th i s importang e wa s not reversed dur ing the re s t o f the Echeverria admin i strat ion . The imp re s s ive growth of the fore ign debt f rom 1 9 7 3 onward wa s accompan i ed by s ig n i f icant changes in s evera l debt-management a spec t s tha t seem wor th ment ioning . � L e t u s l ook a t the sou r c e s of c red i t . Dur ing the 1 9 5 0 s and early 1 9 6 0 s , c redits granted by o f f i c ia l en t i t i e s - b i l ateral o r mu l t i l a tera l o rgan i zations--were the ma in s ource of fore ign pub l i c bo rrowing . Th i s predominanc e of o f f i c ia l l ending s ta rted to decl ine rather rapidly in the mid- 1 9 6 0 s , so much so tha t by 1 9 6 7 pr ivat e f inanc ia l f l ows w e re the ma in so u r ce o f pub l i c ex terna l f inanc ing . Th i s trend a c c e l erated with th e expan sion of Mex ican bo rrowing . Thu s , by 1 9 7 3 , 55 percent of th e tota l s tock o f fore ign publ ic debt wa s owed to p r ivate f inanc ial institution s ; th ree yea r s l a t e r the proport ion had in creased to 75 percent . Also du r ing the same period , loans ra i sed through syndicates in the Eurocurrency ma rke t became the mo s t popu l a r instrument to tap f inanc i a l market s . Previou s l y , direct bank loans had con s t i tu ted the u sual in strument . In turn , the greater rel iance on syndica ted Euroc red i t s a l l owed Mex ico ' s foreign pub l ic debt to become much more dive r s i f ied w i th re spect to th e number and na t iona l i ti e s o f l ending i n s t i tution s . It a l so permi tted a mod e s t degree of d iver s i f icat ion in the cu rrenc i e s in wh ich the debt wa s denominated . Re ly ing on ex terna l f inanc ing wa s doubtl e s s further encouraged by th e re l a t ively l ow cost o f fore ign saving s . Th e nominal imp l ic i t intere s t ra te pa id on the foreign
300 pub l ic deb t averaged somewhat l e s s than 9 percent dur ing 1 9 7 3 - 1 9 7 6 . However , when internat iona l inf l a t ion i s accounted for , the real rate prove s t o be nega tive ( a round - 2 . 0 percen t ) for the same period . Thi s h e l p s to exp l a in why , in spite o f the many fold increa s e s i n borrowing , the ratio o f intere st payments to tota l current account income did not r i s e very much until 1 9 7 5- 1 9 7 6 , a s shown in the l a s t column o f Tab l e 1 1 . 2 . Of c ou r s e , a s th e deb t mu shroome d , l ending c onditions began to ha rden . Thu s , whe rea s the typ i ca l Mex ican Eurocurrency c redit carried a tota l ma tur i ty o f over ten year s and a spread above L IBOR of only . 6 2 5 in 1 9 7 3 , such terms became f ive yea r s and 1 . 5 , re spec t ively , by 1 9 7 6 . The seemingl y smoo th work ing s of the " new" model did not l a s t very long . I n 1 9 7 4 , th e ra te o f inf l a t ion- 1 2 percent in 1 9 7 3 - - al mo s t doub l e d , whe rea s GDP growth - though s ti l l h igh- - f e l l by more than two percentage points with respect to the rate reg i s tered th e prev iou s Economic growth further decreased i n 1 9 7 5 and yea r . 1 9 7 6 . At th e same t ime , pub l ic f i nanc e s c ont inued to deter iorate and other economic pol icy ins trument s , such as the exchange rate and dome s t i c intere st ra te s , c on t inued to be handl ed inf l ex ibly . A proc e s s of f inanc i a l d i s intermed iation re su l ted tha t , togeth e r with the e f f ec t ive crowding out induced by publ i c expend iture and other factors , produced s tagnation in pr ivate inve s tment . The exp l o s ive c omb ina tion of phenomena--moun ting f i scal d e f ic i t s , h igh rates o f in f l a tion , a f ixed exchange rate , negat ive real rate s of intere s t , and b i tter exchang e s between the pub l i c a n d the pr iva te sectors abou t each other ' s role in the economic and pol i t i c a l l i f e of the country- -wa s bound to provoke capital f l ight . The s i tuat ion became openly worri some by late 1 9 7 5 , yet only minor ad j u stments were made . After a l l , 1 9 7 6 wa s a n e l e c t ion year , and foreign f inanc ing , i f more expen s ive , wa s s ti l l ava i l ab l e . However , during July and Augu st capital out f l ows became unbearab l e and on the eve of the l a s t pre s idential addre s s - - on Augu s t 3 l - - the cra sh occurred . The twen ty- two -year- l ong era o f f ixed parity wa s termina ted , and the peso wa s a l l owed to f l oat aga inst the dol l a r . By then , f o r e i g n sourc e s o f c redit had shrunk , and i t bec ame only a matter of days before a standby agreement had to b e s i gned with the IMF a s a precond i t ion to avo id a comp l ete exhaust ion of external I n short , another chapter of Mex ico ' s f inanc ing . h i s tory a s fore ign debtor had been c l o s ed- - a l b e i t temporari ly--by t h e f in a l month s o f 1 9 7 6 . P erhaps the epitaph for the period wa s provided by The Economi s t in 1 9 7 7 when it s tated rather cyni c a l l y , " Mex ico used to be the darl ing o f international banke r s . Not any more . " Why the debt cyc l e had become so pronounc ed , short , and expl o s ive--not only for Mex ico but al so f or many other deve loping countr i e s- -became a focal po int of
301 con f erenc e s and artic l e s . The early attempt s a t probing into the genera l causes o f the h igher indebtedn e s s unan imou s l y pointed to the 1 9 7 3 - 1 9 7 4 o i l shock and the sub sequent wor l d depre s s ion as the main causes of the spectacul a r increa s e in the LDC s ' foreign pub l i c debt . I n o ther word s , external shock s were to be b l amed for wha t happened . Th i s point o f view a l so preva i l ed among Mex ican o f f i c ia l s and wa s taken a s an excuse to avoid , or at l ea s t delay , s ig n i f icant change s in the conduct o f economic po l icy . Thi s vi ew a s app l ied t o Mex ico , however , wa s wrong . I f the externa l - shock s hypothe s i s wa s correct for countries such as B ra z i l , it had only a minor content of truth with respect to Mex ico . I n previous works guided by B a l a s sa ' s 1 9 7 9 pioneer study , " Po l icy Responses to External Shocks in Develop ing Countrie s , " I a na l y z ed the inf luence of external d i s tu rbanc e s on the growth o f the foreign pub l i c debt dur ing the per iod of concern . 5 The methodo l ogy used con s i s ted o f decompos ing incre a s e s in the debt over and above i t s trend value during s everal year s . S ome were st r i ct l y ident i f iab l e a s caused by external shock s ; the re s t were a t t r ibutab l e to po l icy re spon s e s to ex tern a l shocks and / or to internal shock s thems e lve s . Within th i s f ramework , two typ e s o f external shock s wer e carefu l ly def ined and accounted f o r : the bal ance o f - payments e f f e c t s o f reduced world demand for Mex ican exports and the balance-of- payments e f fect s o f adve r s e terms - o f - trade chang e s . T h e re su l t s of th i s r esearch cou l d not be more striking : Dur ing the period 1 9 7 3 - 1 9 7 6 , the foreign pub l ic debt grew US $ l O . l b i l l ion beyond wha t Yet , of th i s addit ional wa s wa rranted for p a s t trend s . growth , only 22 percent can be accounted for by external shock s . Actua l l y , externa l condi t ions proved to have a f avo rab l e impact on the country ' s ba l ance o f payments in 1 9 7 3 , regarding the expan s ion in foreign demand a s wel l a s the improvement i n th� terms o f trade . During the 1 9 7 4 - 1 9 7 6 period , the s e external phenomena were trul y debt induc ing- - e spec i a l l y t h e wor sening o f terms o f trade , but th e i r overal l impact f a l l s very short o f exp l a in i ng t h e tremendou s growth in Mex ico ' s debt . Con sequentl y , one h a s to l ook at internal factors in order to exp l a in the growth o f the debt . Resul t s of the s tudy showed that increa sed import demand wa s the mos t important f ac to r underlying the surge i n the debt level dur ing the 1 9 7 3 - 1 9 7 5 per iod , whe rea s p r ivate capita l f l ight- -by a wide marg in--became the ma in debt- induc ing phenomenon in 1 9 7 6 . Put in a nutshe l l , the greater externa l di sequil ibr ium of the Mex ican economy during the Echeverr i a admi n i s tra tion wa s provoked not by external shoc k s but rather by interna l one s . The adopt ion o f a broader range of economic and s o c i a l ob j ectives on the part of the govern ment wa s not accompan ied by more and better pol icy
302 instrumen t s . 6 A sharply increased aggregate demand imp l ied not only more demand for imports but a l so a reduced avai l ab i l i ty o f surp l u s e s to be expo rted . Such e f fec ts were further reinforced by the accel eration of dome s ti c i n f lat ion v i s - a- v i s external rate s . The latter phenomenon , interac ting wi th a rather i n f l exib l e interes t rates pol i cy , imp l i ed a s igni f ic ant reduct i on in real y i e l d s o f l iabi l it i e s o f fered by dome s t i c f inanc i a l intermed i ar i e s . As a cons equenc e , t h e r a t e o f real growth of f i nanc i a l saving s s tarted to dec l ine very rapidly , becoming only one - s ixth o f what it had been during the period 1 9 6 5 - 1 9 7 0 . A s i n f l ation continued- - thus over valuing the real exchange rate-- and the externa l d i s equi l ibrium pers i s ted , expectation s about a p e s o deva luation sharp ly increased . T h i s l ed t o an ava l anche of capital f l ight that wa s r e s i s ted only by means of contracting more foreign loans and draining o f f fore ign exchange r e s e rve s . I n short , the E cheverri a government , s i ncerely or not , tried to achieve more po l i t i c a l and economic obj ectives than the admi n i s trations that preceded i t in the previou s forty year s . Such e f fort s , however , de manded much more than an unbridled expans ion of pub l i c expendi ture a n d external borrowing . The f inal r e s u l t cou ld be nothing l e s s than a f i nanc i a l c r i s i s , in the mid s t of wh ich the Lope z Port i l l o admini s tration took over in Decembe r 1 9 7 6 . FROM BOOM TO BUST : THE L O P E Z PORT I LLO ADMI N I STRAT I ON ( 1 9 7 7 - 1 9 8 2 ) Mex ico ' s economic outlook wa s extreme l y g l oomy in early 1 9 7 7 . The country ' s po s twar record o f f a s t economic growth h a d begun t o l o o k l ike a phenomenon o f t h e pas t with l it t l e chance it could be repeated in the near future . Very f ew ob s e rvers doubted that the stab i l i z ation prog ram s igned with the IMF in November 1 9 7 6 marked the s tart o f a l ong period in which s l ow economic growth wou l d be the p r i c e to pay i f the coun try ' s precar iou s f inanc i a l s i tuation wa s to be improved . I n spite o f the IMF s tandby agreement and the f i rmne s s wi th wh ich i t began t o b e app l ied i n early 1 9 7 7 , there we re widespread fe a r s about the country ' s ab i l ity to cont inue borrowing in international capital market s . I n many--bu t not a l l - - respects , the country ' s economic performance l ived up to tho s e expectations dur ing 1 9 7 7 ( see Tab l e 1 1 . 3 ) . Ad j u s tment , i f not dramat ic , wa s truly dra s t i c . Total real inve s tment decreased almo s t 7 percent in 1 9 7 7 . T h e pub l i c sector ' s de f i c i t a s a per centage o f GDP f e l l by more than three percentage po ints . The average exchang e rate f o r 1 9 7 7 wa s 8 0 percent h ighe r than the rate that was kept f ixed during more than two decade s . The current ac count de f i c i t f e l l by almo s t 6 0
27 . 2
1981
7.9
58 . 9
28 . 0
12 . 4
17 . 8
-6 . 0 20. 9 17.1
22.4
7.3
10 . 5
(1)
13 . 2
11 . 1 12.4
10. 7
(2)
Investment
22 . 7
25 . 7
23 . 4 24 . 2
21 . 1
19.6
(2)
122 . 5
26 . 2
23. 3
22.8
22 . 7
11
146 . 9
77 . 4
83 . 9
99 . 1 93 . 9
102 . 5
Rea l
( Index )
b
7 2 , 008 . 4
7 2 , 00 8 . 4
60 , 1 2 6 . 3
4 5 , 80 3 . 6
1 6 , 001 . 6
4 0 , 1 94 . 0
Reserves
e
c
( value at the clos ing of December of
each yea r )
Gerenc ia de Ana l i s i s y Eva1uacion del Mercado Internaciona 1 ,
Coordinac ion de Comercio Internationa l ,
Source : Banco de Mex i c o , Indicadores Economicos , Subdireccion de Investigacion Economdca , several i s sue s ; Banco de Mex ic o , IndiCes de Prec i o s , Sllbdirec c i on de Inve stigac ion Economica , several i s sue s ; Secretarla de Programacion y Presupue s to , Si stema de Cuentas Nac iona l e s d e Mexico , severa l i s sues ; Petro l eos Mexicanos , El Sector Petrol ero Mex icano , 1 9 7 9- 1 9 8 2 .
Estad i s t i c e s S e 1 e c c i onadas ,
1983 .
2 , 7 48 . 2
2 , 31 3 . 0
1 , 93 6 . 0
1 , 471 . 0
981 . 1
1 , 21 2 . 6
Production
Oil
free and control led rates )
d o l l ar)
22 . 7
U.S.
(pesos per
Exchanlje Rate a
Nominal
it is the average of the
2 , 684 . 5
1 2 , 544 . 3
7 , 2 23 . 3
4 , 870 . 5
2 , 693 . 0
1 , 5 96 . 4
dol lars )
( m i l l ions of
Deficit
t h e 1 9 8 2 figures a r e the same a s 1 9 8 1 because t h e ma jor o i l f i e l d s a r e currently being studied for
a bet�er evaluation of tota l reserves.
e According to t h e sourc e ,
Current
Account
U.S.
Real exchange rate i ndex c a l c u l ated as described in the Appendix to Chapter
( for 1 9 8 2
-15 . 9
14 . 7
14 . 9
20 . 2
6.7
15 . 2
(1)
Total
Investment
at the c los ing of December of each year
Investment a s percentage o f GOP
11 . 0
11.0
8.9
10. 0
(2)
Private
e r n mi l l ions o f barre l s ( in c l Udes oil a n d natural gas ) d Da i ly produc tion in thousands of barre l s
b
98 . 9
28 . 7
29.8
20. 0
16 . 2
27 . 4
(1)
Investment
Pub l i c
Percentage change i n r e a l investment
-.5
18 . 2
26 . 3
a Nominal exchange rate
(2)
(1)
19 82
9.2
8.3
1980
1979
17 . 5
3.4
8.2
to
December
Average
Rea l
Growth
I n f l at i on
B a s i c Economic Indicators During the Lopez Por t i l l o Term
December
Mexico :
GDP
11. 3
1978
1977
Table
d
w o w
304 percent , and GOP growth reg i s tered i t s l owe s t rate in more than two decade s . Contrary to what had been expected ear l i er about the ava i l ab i l ity of external f inancing , the pub l ic sector wa s able to ra i s e the targeted amounts in international capital markets . Ex po st , thi s achievement wa s not surpri s ing . A deu s ex machina had begun to appear . Shortly after tak ing o f f i c e , the new gove rnment changed the pol i cy o f hand l ing a lmo s t secretly the f igures on the country ' s o i l res erve s and revea l ed tha t f igure s we re much higher than previou s l y thought . Thu s , proven hydrocarbon reserves o f 6 . 4 b i l l ion barre l s by the end of 1 9 7 5 in creased to 1 1 . 2 b i l l ion by the end o f 1 9 7 6 and to 1 6 bi l l ion b y late 1 9 7 7 . The s e f igure s , a s we l l a s the dec i s ivene s s shown by the new government in taking advantage o f the country ' s o i l potenti a l , made inter national bankers once again enthu s i a s t i c about Mex ico . The " n ightmare o f 1 9 7 6 " wa s over soon . By late 1 9 7 7 , expectations about Mex ic o ' s economic pro spects were very d i f ferent f rom what they had been only a year be fore . Al though other factor s - - such a s the conc i l i atory tone o f t h e new admini stration a n d t h e e a r l y suc c e s s e s o f i t s economic ad j u s tment program- - p layed an important ro l e , there should be no doubt that the announcements abou t o i l re serves and the p l a n s t o exp l o i t them were the ma in factor beh ind the renewed vigor in aggregate expend iture that led to the " ea r l i e r- than- expected " recovery o f the economy in 1 9 7 8 . Actua l ly , the pub l i c - expend iture - l ed growth mod el wa s revived w ! th a s much vigor a s it h a d b een dur ing the peak Echeverria years . In 1 9 7 8 , pub l i c inve s tment grew more than 2 0 percent , and ove ra l l pub l i c expend iture started to increa s e again a s a p roportion o f GOP ( s ee Tab l e 1 1 . 3 ) . I n spite o f the fact that the traumatic events o f the mid- 1 9 7 0 s were too recent to be forgotten , nobody s eemed to pan i c , for it was c l a imed that the reviva l of the f a i l ed model wa s be ing impl emented on b a s e s qui te d i f f erent f rom the ones observed before . F i r s t , it wa s said , the re sourc e s to f inance the deve lop ment o f Mex ico in a non i n f l a t ionary fa shion were going to be provided by the new o i l wea l th . Fur thermore , tak i ng advantage o f such wea l th required the expan s ion o f pub l i c inve stment at any event . S econd , it was a l s o a f f i rmed that the government was going to mo re actively use other po l i cy ins truments left pract ical ly untouched before . I n thi s respec t , th ere were some encouraging symptoms a t the beginning . A f i nanc i a l reform was undertaken by wh ich the bank ing system wa s res tructured and th e instruments of monetary control were modern i z ed . I ntere s t - rate po l i cy became mu ch more f l exibl e and attentive to real yields and to deve lopments in foreign f inanc ial marke t s , and Trea sury Certif icates ( CETE S ) were introduced as a mo re rational way to f inance the pub l i c se c tor ' s d e f i c i t . On the
305 f i sc a l s ide , an in-depth reform was announced with the introduction of the va lue- added tax . With respect to indu s t r i a l and c ommerc i a l po l icy , there were some early attempts to rationa l i z e the who l e struc ture o f re l a tive pr ice s through the e l imination of quantitative restric t ions on imports and the s imp l i f ication o f f i s c a l incen tives for indu st r i a l activitie s . Th i rd , th i s t ime the pub l ic sector wa s not going to be a l one in enhancing the c ountry ' s s tock of capital . P r ivate inves tment wa s to be encouraged s o that a more b a l anced pattern o f g rowth evo lved . The mode l , a s supported by th i s rationa l i ty , seemed to perform s a t i s fac tori l y-- some wou l d say , terr i f ical ly- for a f ew year s . I t l ed to the high e s t GOP growth - - a r a t e o f 8 . 4 percent on average during t h e 1 9 7 8 - 1 9 8 1 period-- ever exper ienced b y the Mex ican economy . As predicted , not only pub l i c inve stment soared but a l s o private inve s tment . Con sequently , total f ixed inv e s tment , wh ich had been l e s s than 2 0 percent o f GOP in 1 9 7 7 , reached a proportion o f 2 5 percent i n 1 9 8 1 . Al though Mexican l abor stat i st i c s are rather unre l iab l e , it i s indi sputab l e that emp loyment grew s ign i f icant ly , so much so that l egal min imum wages s topped having much of a s ig n i f icanc e . The l abor market became , indeed , a suppl iers ' market . Th e bet on o i l wa s a winning one , at l e a s t for a wh i l e . P roven re serve s continued growing every year , and th e i r exploitation evo l ved rapidly . O i l export s , wh ich had been only . 2 mil l ion barre l s a day in 1 9 7 7 , surpa s s ed the one-mi l l ion-barre l - a-day mark by late 1 9 8 0 . The t iming to tap the new o i l wea l th seemed even mor e strik ing : C rude prices increa sed two a n d a h a l f t ime s between the date the f i r s t opt imi stic news on o i l reserves wa s known ( late 1 9 7 6 ) a nd 1 9 8 0 . On the externa l - debt f ront , some developments were a l so very po s i t ive up to 1 9 8 0 . The s tock o f fore ign pub l i c debt grew rather con s e rva tively dur ing the period 1 9 7 7 - 1 9 8 0 . The net f l ow o f the aggregate averaged only US $ 3 . 2 b i l l ion dur ing that per iod- - fa r less than the average f l ow o f more than US $ 4 b � 1 1 ion reg i stered in the l a st three years o f the Echeverria term . O ther component s o f the country ' s externa l debt grew mo re dynami c a l l y . Thu s , the pr ivate sector ' s fore ign debt- -of f i rms and bank s - - that had amounted to US $ 6 . 8 b i l l ion at the end o f 1 9 7 7 reached a lmo st US $ 1 7 b i l l ion b y l ate 1 9 8 0 . Yet , th e total externa l debt , when mea sured aga inst the s i z e o f economy , con s i stently decreased th rough 1 9 8 0 . As shown by the f igur e s o f Table 1 1 . 4 , the ratio o f total debt to GOP f e l l f rom 3 5 . 8 percent in 1 9 7 7 to 3 1 . 3 per cent in 1 9 8 0 . 7 However , when the net f low o f the tota l externa l debt i s a s s e s sed against total f ixed inve s tment and current account income , its importance started to c l imb right after 1 9 7 8 , as shown in Tab l e 1 1 . 5 .
29 . 8
84 , 146
8 , 000
1 8 , 000
58 , 1 4 6
1982
5 , 1 00 7 , 000
7 4 3 1
a
I n d i c adores Economi cos , Me xico :
Secretar i a de Haci enda y C r e d i to P Ub l i c o ,
Banco d e Me x i c o ,
AS percentage of GDP
Sourc e :
a
Note :
Subdirec c i o n de Inve sti gac i o n E con omi c a , severa l i s sues ; Economi c and Finan c i a l Statist i c s , December 1 9 8 3 .
A l l compa ri sons b e tween a dol lar and a peso var iab le were made by means o f an " equi l ibrium" exchange rate c a l c ul ated a s d e s c ribed in the Appendix to Chapter 1 1 .
43 . 1
32. 31. 31 . 39 .
35 . 8
7 2 9 6
27 . 8 25 . 23 . 20. 27 .
3 3 , 622 40, 257 50, 773 7 4 , 056
5, 7, 11 , 14,
3 0 , 634
1 , 800 2 , 000 2 , 600
5 , 00 0
23 , 834 26 , 4 2 2 29, 757 33 , 873 52 , 156
1977 1978 1979 1980 1981
Fore ign Debt
Stock o f Tota l
S tock o f Fore ign Pub l i c Debt a
200 900 800 900
Total
Banks
do l l ars )
Private
( mi l l ions of U . S . Commerc i a l
The Evo lution of the Total Externa l Debt During the Lope z Porti l lo Term
Stock o f Fore ign Debt
Mex i c o :
Pub l i c
Tab l e 1 1 . 4
w 0 0'\
F l ows
6 , 6 34 . 7
All
3 , 3 34 . 7
5 , 98 9 . 6
1 8 , 28 3 . 3
4 , 115 . 5
10 , 8 79 . 4
8 , 38 3 . 2
5 , 47 6 . 7
3 , 709 . 3
1 . 97 3 . 9
2 , 57 1 . 6
Foreign
7 , 7 91 . 3
5 , 476 . 0
3 , 95 7 . 6
2 , 888 . 4
1 , 542 . 3
2 , 02 3 . 1
Pub l i c Debt
Indicadores Economicos ,
23. 2
26 . 9 48 . 0
22 . 1
19. 5
13.8
Investment
of
an
several
i s sues .
3.1
9.7
2.5
2.6
3.5
2.5
GOP
several
i s sues ;
exchange
rate
35 . 4
22 . 0 27 . 2
22 . 8
21. 5 22 . 1
i
c a l cu lated as described
17 . 4
32 . 3 66 . 0
35 . 3
51. 8
37 . 8
Secretar a de Programacion y
6.4
22 . 8
7.1
7.8
11. 3 7.8
Current Account
Sector De f i c i t
Pub l i c Expenditure
Income
Percenta2e of
a Total
Interest Payments of External Debt as
Pub l i c
as a Percenta�e o f
Net F low o f Foreign Debt
"equi librium"
75.6 32 . 8
42. 2
40 . 8
35 . 8
25.6
Income
Account
Current
percenta2e of
To tal Filled
Debt as
Porti l lo Term
Net Flow of Total External
the Lopez
Subdireccion d e Inves tiqacion Economica ,
S i s tema de Cuentas Naciona les de Mexico ,
Banco de Mex ico ,
Presupue s to ,
Source :
11.
Externa l
Debt
Total
During
( mi l l ions
do l l a r s )
Payments
of U . S .
Interest
of the Exte rnal Debt
comparisons between a dollar and a peso variab le were made by means
1 0 , 089 . 6
2 3 , 283 . 3
10, 515 . 5
2 , 5 88 . 8
2 , 98 7 . 3
2 , 988 . 8
3 , 287 . 3
Pub l i c
Foreign
Debt
of
dollars )
External Debt
o f Tota l
of U . S .
The
( mi l l ions
Mexico :
Net Flow
1l. 5
in the Appendix to Chapter
Note :
1982
1980 1981
1979
1977 1978
Table
3 08 I n any c a s e , the pub l i c foreign debt , wh ich had been the banker s ' headache in 1 9 7 6 , evolved very rea sonably through 1 9 8 0 . Its net f low , with respect to severa l rel evant mac roeconomic aggregates a f ter the i n i t i a l ad j u s tment o f 1 9 7 7 , wa s k e p t in rather modest proportion s du r i ng two - th i rds o f the Lop e z Port i l l o admin i s tration . Thu s - -wi th respect to GDP , pub l ic expend iture , and the pub l ic- sector de f i c i t - - the net f l ow averaged 2 . 5 percent , 7 . 5 percen t , and 3 5 . 1 percent , respectively , dur ing 1 9 7 8- 19 8 0 . The r e l a t ive ad j u s tment in the s i z e o f th e foreign pub l i c debt during tha t period , together with the expec tations c reated by the new oil wea l th , shou l d h e l p to exp l a i n the tremendou s upgrading Mex ico ' s credit ex per ienced i n internat iona l c ap it a l marke t s . F ierce compet i t io n among fore ign l enders to grant new loans to the Mex ican government and to pub l ic enterp r i s e s wa s an everyday event during the booming years . I n a matter of hours an d day s , important credit l i ne s could be arranged . Putting together Eurocredit syndicates wa s not a d i f f icult task by any mean s ; there wa s a lway s an exc e s s demand to sub scribe them . I t i s intere s t ing to not ice that 3 5 per cent o f th e g ro s s borrowings undertaken by pub l i c agenc i e s in 1 9 7 9 wa s made through c l o s e syndicate s ; th e partic ipation i n such dea l s had been n i l in 1 9 7 7 . Un doubtedl y , the f ru s trat ion o f many fore ign l ende r s in p l ac ing new loans i n the pub l ic sector wa s not unre lated to the e a s e with wh ich the Mex ican private sec tor wa s ab l e to f inance i t s e l f abroad during the s ame period . Need l e s s to say , Mex ican negotiators took fu l l advantage o f the bu l l i shne s s o f th e market t o improve on the matu ri ty pro f i l e and c o s t o f the country ' s debt . e Wh erea s the maturity o f credits obtained by Mex ican pub l i c agenc i e s in th e Eurocurrency ma rket wa s , on average , a b i t l e s s than f ive yea r s dur i ng 1 9 7 5 and 1 9 7 6 , such average matu r i ty became longer than e i gh t years by 1 9 7 8 and 1 9 7 9 . Equa l ly important wa s the improvement in the spreads over L IBOR charged in Eurocurrency credits . The typ ical Mex ican l ong- te rm c redit carried an average spread of around 1 . 6 2 5 perc entage points dur ing the 1 9 7 5 - 1 9 7 7 period . For th e same customer s th e spread f luctuated between . 6 2 5 and . 8 7 5 perc entage po int s in 1 9 7 8 and 1 9 7 9 . I n fac t , wha t had been a very expen s ive debt , with ma tu r i t i e s h eav i l y concentra ted in the medium term in 1 9 7 6 , two years later had become a n i c e l y schedu l ed one ca rrying very low spread s on ly comparabl e t o tho s e paid b y pr ime custome r s i n Western indu s t r ia l i z ed c ountr i e s . Needl e s s to say , the nat iona l o i l company Petro l e o s Mex i cano s wa s of pa ramount importance in Its improving on the cost and pro f i l e o f the debt . " f inanc i a l g l amor " wa s ful l y ut i l i z ed f o r such purpo s e s . The state o i l monopoly ' s partic ipa t ion in g ro s s borrowing by the Mex ican pub l i c s e c tor increased f rom 1 4 . 5 percent in 1 9 7 7 to a lmo s t 4 0 percent by 1 9 7 9 .
11.6
Mexico :
a
1.6
4.3
0.2
3.6
9.2 1.0
2.5
6.0 2.2
10 . 8
1977
- 56 . 7
32 . 0 -3.4
12 . 7
19. 3
10 . 9
- 20 . 6
-9 . 9
-9 . 8 4.5
( 1976-197 7 )
Change
Percentage
2.7
5.2
0.4
4.2
1.9
68 . 7
20 . 7
75 . 1
16 . 0
26 . 5
27 . 0 80 . 7
3.2
11. 7
8.2
38 . 4 28 . 8
1 1 .7
8. 3 2.8
( 1 97 7 - 1 9 7 8 )
1978
Change
Percentage
4.9
6.8
0. 7
4.9
3.9
16 . 3
4.5
12 . 6 4.1
21 . 1
80 . 1
30. 2
72 . 4
17.7
1 07 . 6
Subdireccion de Investigacion Economi ca ,
and petrochemi c a l s
Indi cadores Economi cos ,
derivative s ,
Banco de Mexico ,
gas ,
7.2
8.8
1.0
5.3
9.9
24 . 9
6.5
32 . 2
19 . 8 5.9
several
i s sues .
48 . 3
30. 2
47 . 2
6.4
1 54 . 5
53-4
44 . 4
52 . 2
57 . 1 45 . 6
( 1 97 9- 1 980 )
Change
Percentage
dol l a r s )
1980
do l l ars .
39. 6
38 . 9
81 . 4
51 . 0 45 . 9
( 19 7 8- 1 9 7 9 )
Change
Percentage
( i n bi l l ion s of u . s .
1979
CUrrent Account During the Lopez Port i l l o Term
The percentage changes were calcul ated with figures in mi l l ions o f u . s .
lncludes o i l ,
Source :
a
Note :
De f i c i t
Current Account
Services & others
Intere sts abroad
Nonai l exports
Oil exports
Income
Servi ces & Other s
Imports ( C l F ) Interest & Pro f i t s
Expenses
Table
12 . 5
10. 0
1.4
4.8
14 . 6
30 . 8
9. 3
25 . 2 8.9
43 . 4
1981
73 . 7
13.8
35 . 6
-7.8
47 . 5
23 . 5
43. 3
34 . 8
27 . 2 50 . 9
( 1 980- 1 9 8 1 )
Change
Percentage
-0 . 3
2.7
8.5
1.2
4.5
16 . 5
-78 . 6
-15 . 4
- 10 . 0
-6 . 5
13 . 1
- 24 . 9
30. 7
7.0
-40 . 2 27 . 7
-23 . 0
Change ( 1 98 1 - 1 9 8 2 )
15 . 0 11 . 4
33 . 4
1982
Percentage
310 Unfortunate l y , booms are not forever . Wh i l e the idy l l between international bankers and Mex ico wa s reach ing its mo s t i ntens e s tages ( 1 9 8 0 - 1 9 8 1 ) , some fundamental d i sequ i l ibria in the domes t i c economy had taken on re newed force and r eached tremendous proportion s . At the same t ime , the outs ide wor l d had also changed . Tab l e 1 1 . 6 shows in g ro s s terms what happened in the externa l s e c tor . The early ad j u s tment in the current account de f i c i t o f 1 9 7 7 - 1 9 7 8 had f rankl y sub s ided by 1 9 7 9 , when the de f ic i t reached US $ 4 . 9 b i l l ion in spite of the fact that th e value of o i l exports had inc rea s ed almo s t four t imes in j u s t a coupl e o f years and nonoi l export s had a l so been growing very dynami c a l l y . B y 1 9 7 9 , the Mex ican economy wa s impo rting US $ 1 2 . ·6 bi l l ion ( e lF ) worth of merchand i s e - - a pretty high f igure if a s s e s sed aga inst any mac roeconomic variab l e . Y e t , imports further in c re a s ed to a lmo s t US $ 2 0 . 0 b i l l ion the next year . A s a con s equenc e , and notwith standing the fact that o i l exports had almo s t reached the U S $ l O . O b i l l ion l eve l , the current account def ic i t exceeded U S $ 7 . 2 b i l l ion . Th i s seemed inconce ivab l e for an o i l- endowed deve lop ing country . Even if due account is taken of internationa l i n f l a tion and its impact on import p r i c e s and intere s t rate s , the fact that the current account deficit cou l d reach such a l evel in a year in wh ich o i l revenu e s increased two and one-ha l f t ime s shou ld have c au s ed ob s e rvers of the Mex ican economy to ra i s e the i r eyebrows . To the international bank e r s ' comfort , Mex ico became the " ch ampion o f ab sorption " - - not o n l y o f i t s own o i l revenue s , b u t o f other s a s wel l . The external d i s equ i l ibrium wa s j u s t the tip o f the I t wa s pu rely a con s equence of many other iceberg . di sarrays in the Mex ican economy- -mo st notably , the un checked expans ion i n agg regate demand led by the growth in pub l ic expendi ture . Tab l e 1 1 . 7 t e l l s the story o f t h e pub l ic f inances dur ing th e Lope z Port i l l o year s . As wa s shown in Tabl e 1 1 . 7 , pub l ic expenditure a s a pro portion o f GOP had peaked at 3 3 . 6 percent during the previous admi n i s tration . I n spite of the ear l y rheto r ic , th i s proport ion wa s reached again in 1 9 7 9 and wa s sur pa s s ed by two percentage point s in 1 9 8 0 . It wa s not caused only by the need for inc rea s ing PEMEX inve s tment ; non-PEMEX pub l ic expenditure as a share o f GOP wa s con s i stently augmented f rom 1 9 7 7 on . Of cour s e , within the context o f short-run mac roeconomic pol icy , a mu sh rooming pub l i c expendi ture is not so much of a prob l em in i t s e l f . I t become s so , however , when pol i t i c ians of any ideological stance forget about the f inanc ing s ide of it . Al though the pub l i c income der ived f rom the o i l sector almo s t doub l ed as a proport ion of GOP between 1 9 7 7 and 1 9 8 0 , the overa l l def i c i t cou l d never be reduc ed to the l eve l s contemplated a t the beg inning o f the admi n i s tra ti on . Wha t happened wa s j u st the oppo s it e , worsen ing after 1 9 7 8 . The ma�c impact of the
Pub l i c
y Eva l uaci6n Hacendaria .
1983 .
Secretar i a de Haci enda y Credito PUb l ico .
�t i c a
Sourc e :
31 . 0
12 . 4
8.0
Income
2.9
4.5
7.4
20 . 1
3.8
6. 2 14 . 1
14 . 7 17 . 9
19 . 7 18 . 6
Direcc i6n General de
2.9 8.5
4.9
7.9
19 . 7
3.7 2.7
3. 1 4.0
19 . 8 6.7
External
Financ ial De ficit Internal
6.7
De f i c i t
F inanc i a l
20 . 4
Sector
Nono i l
Es tad sticas Hacendarias del Sector PUbl i c o .
i
paid by the pub l i c sector on its internal and foreign debts
40 . 8
7.6
41. 3
48 . 9
1 98 2
a
40 . 0
7.5
35 . 0
42 . 4
1981
27 . 7
6.1
27 . 8
33. 5
5.2
30 . 4
35 . 6
1980
8.0
26 . 2
31 . 4
5.3
28. 3
33 . 6
1979
4. 3 5.0
24 . 2 25. 5
29 . 0 30 . 2
3.7
4.7
27 . 2
27 . 5
Sector
Oil
Income
30 . 9
Income
Pub l i c
Total
32. 2
Payments
Expenditure
PEMEX
Expendi ture
a
( a s percentage of GDP )
1978
Interest
Without
Expenditure
PEMEX
Expenditure
Pub l i c
P ub l i c Finance During the L6pez Port i l lo Term
Without
Total
Mexico :
Pub l i c
11 . 7
1977
Table
W I-' I-'
312 pub l i c sector ' s f inanc ial d i s equi l ibr ium i s better a s se s sed by l ook ing at a concept tha t in Mex ican pub l i c f inanc e s i s c a l l ed t h e internal d e f i c it . 9 A s shown in Tab l e 1 1 . 7 , the deterioration of th i s factor wa s more acute than tha t reg i s tered by the overa l l f inanc i a l d e f i c i t . T h e government ' s retreat f rom early intentions o f increa s i ng the r e l at ive s i z e o f f i s c a l and pub l ic enterp r i s e revenu e s exp l a in s th i s d i s equ i l ibrium a s much a s the overf low o f al l catego r i e s o f pub l i c expend iture . The impact of the f i sca l de f ic i t on the dome st ic market ' s di s equ i l ibr ium wa s reinforced b y t he rapid expan s ion o f private demand , both in consumpt ion and inve s tment . I n spite of the rather prec ipitate and un p lanned opening o f the economy to fore ign import s , the strong demand pul l wa s bound to have a s igni f icant e f f ect on dome s t i c inf l ation . As shown by the f igures o f Tabl e 1 1 . 3 , inf l ation c o u l d n o t b e l owered even t o the l eve l s o f 1 9 7 5- 1 9 7 6 , and i t started to accel erate again in 1 9 7 9 . Yet , dur ing more than four years and we l l into 1 9 8 1 , the exchange rate wa s kept practica l ly f ixed . Obviou s l y , th i s s i tuation had to lead to a con s i s tent overva luation o f the Mex ican peso , as proven by the index of the real exchang e rate o f Tab l e 1 1 . 3 . Cons idering the overheat ing o f the ec onomy and the exchange- rate pol icy f o l l owed at the time , it i s not surpri s ing a t a l l th at th e externa l - s e c tor d i s equ i l ibrium wor s ened t o the deg ree it did despite increased o i l revenue s . The economic balance o f 1 9 8 0 shou l d have su f f iced to a l ert po l icymak e r s o f the r i s k s ahead . At that po int , f a r l e s s than an overa l l ad j u s tment wa s needed . A c l ean up of pub l ic f i nanc e s to stop the wor s en ing trend of the f i scal de f ic i t , p l u s s ome ad j u s tment s - - e s pec i a l l y in exchange- rate pol icy with po s s ib l y a more active c rawl - woul d have done th e tr ick . Admi ttedly , the budget approved for f i sca l year 1 9 8 1 exp l i c i tly incorporated the ob j ect ive o f not a l lowing the overa l l d e f i c i t to be come further increa sed in nomi nal terms . Unfortunate ly , In practic e , even a t imid th i s wa s j u st a forma l i ty . g radua l i s t i c approach on f i s c a l ma tters and ex change- rate po l i cy sounded l ike here sy-- even an insul t- - to the rat iona l e o f the t ime . The mo st popu l a r members o f the cab inet were tho s e who produced the grand e s t pro j ec t s and programs , overrid ing the budge t approved by the congre s s . ( I n contra s t , the head o f the central bank wa s no l ong er summoned to the economic cabinet meet ings by early 1 9 8 0 . ) Just a s had happened in th e Echeverr ia yea r s , the pre s ident h ims e l f autho r i z ed the ampl iac iones pre supue s ta l e s ( ou t- o f -budg et items ) tha t were needed . Th e inertia of the pub l ic- expenditure- l ed growth model proved to b e overwhelming . The wa rn ing vo i c e s of the more prudent members o f the cabinet were comp l e t e l y I t i s not an ine f f ec t ive to provoke a change o f cou r s e . exagg eration t o s a y t h a t th e ma j or ity o f t h e pe s s imi st ic ec onomic forec a s t s made then found their way , not t o the
313 cabinet meeting s , but to the wa stebasket . Thi s exp l a i n s why th e 1 9 8 1 budge t overl ooked not o n l y internal bottle neck s but also conditions abroad . P e rhaps the mo s t dramatic examp l e o f th i s mi s c a l culation i s prov ided by the pro j ections on the value of c rude exports for 1 9 8 1 . Th e budget maker s a s sumed that Mex ico cou l d export a vo lume 7 5 percent h igher at a price 1 0 percent above wha t wa s reg i s tered in 1 9 8 0 , when o i l pr ices were a l ready above th irty U . S . dol la r s a barrel and the world economy had started to enter into a deep rece s s ion . The o f f i c ia l scenario s t i l l had some c redib i l i ty during the f i r s t h a l f of 1 9 8 1 . The beginning o f the debac l e took place in June when it became c l ea r tha t PEMEX had to l ower sa l e p r i ce s in order to cont inue plac ing orde r s o f crude abroad . Th i s wa s too ha rd to swa l l ow . I n s tead o f fac ing the s igna l s o f the ma rket-as natura l ly a s had been done two yea r s before , when o i l pr ice s started the ir upwa rd swing-- th e Minis try o f N a t iona l p rope r t i e s a n d Indu st r i a l Development ( SEPAF IN ) des igned a " new" ma rke t ing strategy by wh ich tho s e buy er s unw i l l ing to pay the Mex ican pric e s wou l d be era s ed from PEMEX ' s customer l i st . 1 D Forgett ing about the " sma l l c ountry " a s sumption--perhaps fo r b e ing too neoc l a s s ic a l ? - a good percentage o f Mex ican o i l expor t s wa s l e f t o u t o f t h e interna tional c rude ma rket over the space o f s evera l week s . Al though ho l de r s o f wea l th had started to read the ba s ic economic s ta t i s t ic s in a l e s s compl a cent way , th e pos s ib i l i ty o f an exchange- rate deva luation st i l l l ooked s omewhat academic j u s t before the " o i l price a f f a i r . " Such a po s s ib i l i ty became an open threat by mid- June , however , l eading to a tremendou s capital f l ight and to " do l l a r i z at ion " o f depo s i t s in the Mex ican bank ing sy stem . The ser iou sne s s o f the s itua tion demanded bold act ions tha t again were not taken or were po stponed . Even though there wa s o f f i c i a l admi s s ion that the peso wa s under heavy attack , l i ttl e wa s done beyond rhetoric to The face wha t had started to be a f inanc i al c r i s i s . exchang e rate c ontinued to b e depre ci a ted da i l y at an annua l rate o f only 9 percent . An acro s s - the-board cut o f 4 percent in pub l ic expend iture wa s decreed , but with respect to the a l ready h igher than budgeted level . And , a s it turned out , not even th i s t imid a dj u s tment wa s made . By l a te July , the targeted overal l de f i c i t had been rev i s ed upwa rd to 5 4 0 b i l l ion pesos ( f rom l e s s than 4 1 5 b i l l ion pesos in the orig ina l budg e t ) . Yet , when the year wa s over , the de f ic i t reached 8 6 5 bi l l ion peso s . Th i s outcome wa s not caused by a relative f a l l in publ ic income , s ince the same proportion o f GDP wa s kept . Actua l l y , th e unde r lying fac tor wa s the tremendou s in crea s e in pub l ic expenditure . The l atter agg regate evo lved f rom 3 5 . 6 percent of GDP in 1 9 8 0 to 4 2 . 4 percent in 1 9 8 1 ( Tabl e 1 1 . 7 ) . As a consequence , the overa l l d e f i c i t reached a lmos t 1 5 percent o f GDP ( it had been 1 0
314 percent i n the " wo r s t " Echeverria year ) . One doe s not have to be a moneta r i s t to rea l i z e that such a n imba lance ha s to produce a pro found d i s equ i l ibrium in the money ma rke t tha t sooner or later h a s to be settled e i ther via pr ic e s , the balance o f payme nt s , or a comb ination o f both . The ba lance- o f - payments e f fe c t wa s the dominant one in the Mex ican economy dur ing 1 9 8 1 . The current account I t can be sa id tha t def ic i t soared to US $ 1 2 . 5 b i l l ion . an impre s s ive imports b i l l ( U S $ 2 5 . 1 b i l l ion ) a n d a sha rp wo r s en ing in the tradit iona l l y favorabl e s ervi c e s a ccount wa s wha t l ed to such a resul t . Al though oil exports did not reach the l evel o f f i c i a l l y foreca st , they did reach a value o f U S $ 1 4 . 6 b i l l ion-- 4 7 . 5 percen t more than dur ing the previou s year . Equ a l l y impre s s ive wa s the drain via capital account . There is no foo l proof way o f e s t imat ing capital f l ight . An idea c an be ga ined , howeve r , f rom the fact tha t the o f f ic ia l balance- o f - payments s ta t i s t i c s of 1 9 8 1 repo rted an incre a s e o f Mex ican f inanc ia l a s set s abroad o f US $ 2 . 5 b i l l ion , a s we l l a s a negat ive errors and omi s s ions item fo r US $ 8 . 4 b i l l ion . Mo s t probably , the l a tter f igure conta ins other phenomena such a s smugg l ing , but a t any rate a total e s t ima te f o r capital f l ight between U S $ 8 and 9 b i l l ion doe s not seem un reasonabl e . 1 1 The que stion i s why r ight a f ter the o i l probl em th e Mex ican economy , f a r f rom s inking into a f inanc ia l c r i s i s tha t woul d have f o rced a n immediate ad j u s tmen t , wa s abl e t o continue g rowing a t the expen s e of enlarg ing i t s fundamenta l di sequ i l ibria . The a n swer t o th i s ridd l e c a n b e f ound in the ava i l ab i l i ty of fore ign f inanc ing . As shown in Tab l e 1 1 . 4 , Mex ico ' s total externa l debt g rew more than US $ 2 3 b i l l ion in 1 9 8 1 a l one . Of c our se , mo s t of the new debt wa s contracted b y the pub l ic sector . The net f l ow o f the fore ign pub l ic debt wa s US $ 1 8 . 3 b il l ion . Y e t , a l l of the increa s e in th e comme r c i a l bank s ' external debt o f tha t yea r ( a round US $ 2 . 0 b i l l io n ) wa s a l so relent to the pub l i c s e c tor . Undoub tedly , in 1 9 8 1 foreign f inanc ing became the s lack va r i ab l e tha t served to avo id the adj u stment tha t othe rwi s e wou l d have been wa rranted . Need l e s s to say , r e s o r t ing to ex ternal borrowing in such a way had to b ring about profound and adve r s e con s equenc e s . Immediate l y , th ere wa s a sharp deteriora tion i n l ending cond i t ions to Mex i c o . At the c l o s e of 1 9 8 0 , the short-term foreig n pub l i c debt wa s only US $ 1 . 5 b il l ion . A yea r l a ter , the same aggregate j umped to US $ 1 0 . 8 b i l l io n , not count ing th e amounts obta ined through Mex ican commerc i a l bank s . The enviab l e spread s o f a f ew months earl ier had a l s o started to van i sh and were repl aced by new one s that were cons iderably h igher . 1 2 I t wil l take the talent o f a top spec ial i s t on h ighly competitive but imperfect mark e t s to understand why international bank e r s d id not s top l ending to Mex ico before they did . One po s s ib l e yet unexplored explana t ion i s that they did not individu a l l y real i z e wha t they
315 were doing a s a who l e . S ome of them might have bel i eved the o f f i c ia l story that Mex ico wa s j u s t experienc ing a temporary c a sh- f l ow probl em and had f a l l en into the tempta tion o f recycl ing ( short- term and p ro f itab l y ) the then abundant pe trodo l l ar s . O the r s , tradit ional l y involved in Mex ic o , j u s t f o l lowed the inertia of pa s t y ea r s . Wha t s e ems to be c l ea r , however , i s tha t very f ew knew tha t Mex ico ' s debt wa s g rowing so f a s t dur ing the second ha l f I t i s h igh l y sugge s tive tha t the bal anc e-o f of 1 9 8 1 . payment s stati s t ic s re l ea s ed in F eb ruary 1 9 8 2 s ti l l reported a net inc r ea s e i n the foreign pub l i c debt o f US $ 1 4 . 5 b i l l ion for 1 9 8 1 - - a l mo s t U S $ 4 b i l l ion l e s s than the actual f igure . 1 3 D e spite some f inal re s i s tanc e , it wa s announced that the peso wa s being deval ued on the n ight of F eb rua ry 1 7- in i t ia l l y b y 4 0 percent ; some d a y s later an overa l l s tab i l i z a t i on package o f rather orthodox mak ing wa s announc ed . For a f ew day s , i t s e emed po s s ib l e tha t the Mex ican economy c ou l d pa s s f rom a booming s i tuation to an orderly a d j u s tment . Th i s was far f rom tru e ; the initial ad j u s tment program wa s soon overr idden by mea sures that were c l ea r l y inco n s i s tent w i th it . A l though the program wa s never o f f i c ia l ly repudiated-- and wa s even forma l i zed a s a pres idential decree- - it wa s not put into real pract i c e e i ther . Thu s , fo r examp l e , the program c a l l ed f o r a max imum emergency wage increase o f 1 0 percent . I n s tead , and j us t a f ew week s a f ter the deval ua t io n , wage ra i s e s o f up to 3 0 percent were decreed by the government . The program a l so c a l l ed for immed iate in c rea s e s in the prices cha rged for s e rv i c e s and goods produ c ed by pub l ic enterpr i s e s ; s evera l month s had to pas s , however , b e fore the f i r s t s ig n i f icant ra i s e wa s announced . Rath e r , an " eme rgenc y " p l an to support produc t ive f irms wa s imp l emented . By providing f i sc a l rel ie f a n d g ranting outright sub s id ie s , th i s plan con s t i tu ted another c lear s ignal tha t it wou l d take a wh i l e before pub l i c f inanc e s c ou l d indeed be improved . P r e s sure s to f in i sh pro j e c t s a l ready s ta rted made it very d i f f i cu l t to control the nominal expan s ion in pub l i c expenditure . Meanwh i l e , the c l a sh e s between the government and the pr ivate- sector spok e sm en- -qu i t e remini scent of the one s that had occurred s ix years previou s ly- -became more f requent and f iery . Not surpr i s ing l y , as soon as mid Ma rch 1 9 8 2 there were s igns tha t capital f l ight had s tarted again . Another ma j o r devaluation wa s avo ided for s evera l month s , but only a t the expen s e of exhau st ing foreign-exchange re s erves and u s ing the l a s t " vo l untary " f o re ign c redit ava i lable t o Mex ic o . Renewing short- term c redits tha t had been obta ined dur ing 1 9 8 1 became in creas ing ly dif f ic u l t . Renewa l per iods became shorter and shorter wh i l e spreads c l imbed h igher and h igher . In o rder to a l l eviate an impre s s ive p i l ing up o f short-term credits inherited f rom 1 9 8 1 , three important
316 med ium- term syndicates were a rranged dur ing the f i r s t s eme s t er o f 1 9 8 2 . T h e f ir s t , p l a c ed b y PEMEX in February , r a i sed U 8 $ 2 . 0 b i l l ion . A s ta t e devel opment bank ( Na c iona l F inanc i era--NAF INSA ) wa s the borrowing agency in the second , which took p l a c e in March . It provided U S $ 1 . 2 b i l l ion . The l a s t synd icat ion con s i s ted o f a " j umbo " o f U S $ 2 . 5 b i l l ion wi th the Mex ican federal governmen t a s debtor and wa s a rranged du r ing May and June . In many ways , th i s c redit wa s a tu rn ing point . A s the fac i l i ty wa s being put toge ther , it became c l ea r tha t ma rke t perception concerning Mex ico ' s creditwo rth ine s s wa s completely deteriorat i ng . Even though the pric ing o f th e l oan t o l enders wa s very a ttrac t ive compared to previou s dea l s , it took an enormou s e f fort on the part o f Mex ican negotiators to gather the neces sary commi t ment s . l � To the i r d i smay , only 75 bank s out o f 6 5 0 accepted th e inv itation to sub s c r ib e the fac i l i ty . Cons ider ing the eno rmou s d i f f i cu l t i e s that had to b e f ace d b e f ore s ign ing th e loan on J u ne 3 0 , i t became c l ear tha t the on l y debt-management expedient left wa s to cont inue ro l l ing over sho rt- term c redi t s - - a t a ny price and a t any ma tur i ty . Thi s , o f cour se , cou l d not l a s t . The peso cont inued to be under heavy specu l a tion during July 1 9 8 2 . Too l a te , it wa s dec ided to imp l ement s ome of the mea su r e s included in th e Economic Ad j u s tmen t P rogram th a t h a d n o t b e e n put i n t o e f f ec t . According l y , a t the beg inn ing o f Augu st , i t wa s announced tha t the p r i c e s of some ba s ic produc t s were be ing ra i s ed . A f ter th i s announc ement wa s made , pre s sure on the c entral bank ' s res erves bec�me unbearab l e . On Augu st 6 , 1 9 8 2 , a new two- ti e r fore ign- exchange sy s tem wa s set up . S ti l l specu l a tion continued , and j u s t one week later , do l l ar denominated depo s i t s in the Mex ican bank ing sys tem were made payab l e only in dome s t i c currency . Banks were a l so ordered to tempo ra r i l y su spend fore ign-exchang e tran sac tions . I n the face o f tho s e even t s , i t became evident tha t foreign c reditors had been tota l l y scared away and that the re sump t ion o f any k ind o f normal c redit con d i t ions could not be expec ted for a long t ime . At that moment , th e f inan c i a l author i t i e s cou l d e i ther wa it f o r foreign creditors t o mak e pub l i c the country ' s insolvency or con front the facts and dec l a r e unilater a l l y tha t t h e country wa s not ab l e t o k e e p u p with payment s o f principa l . W i s e l y , t h e second approach wa s f o l l owed . On Augu s t 2 0 , the sec retary of f inanc e , Jesus S il va-H e r z og , met with repr e s entatives of a l arge number o f c redito r bank s and reque sted a th ree-month moratorium on payments of pr inc ipa l as we l l as the format ion of an advisory group of c reditors to nego tiate the r e s truc tur ing o f the fore ign publ ic debt . A f ew day s earl ier , th e Mex ican government had ob tained important f inanc ial back ing f rom its u . S . counterpart in th e form o f cred i t s f rom the C ommo d i ty C redit Corpora tion and the Treasury Departmen t . N egotiations with the Bank for
317 Internat iona l S e t t l emen t s to obta in a US $ 1 . 5 b i l l ion credit f rom s evera l o f i t s members were in it iated in the l a s t day s of Augu s t . Early that month , f orma l ta l k s about a s tandby agreement had b e e n s ta r ted with an IMF mi s s i on . The rea l i sm of Augu st comforted Mex ico ' s c redito r s f or only a f ew days . O n September 1 , P r e s ident Lopez Port i l l o announc ed tha t pr ivate bank s were be ing nat iona l i zed and tha t overa l l fore ign- exchange contro l s were be ing i n s t i tuted . The international bank ing c ommu n i ty mu s t have pan icked at the idea that such a radical s tance cou l d a l so spread to the management o f th e fore ign- debt probl em- - a po s s ib i l i ty that , indeed , wa s very f ea s ib l e f o r a f ew week s . To everybody ' s luck , it did not happen . E P I LOGUE , OR HOW TO ATTEMPT MEND ING A COUNTRY ' S INTERNAT IONAL C RED I T Wh en P re s ident Lope z P or t i l l o l e f t o f f i c e on Dec emb e r 1 , 1 9 8 2 , the Mex ican economy wa s expe r i enc ing a c r i s i s even mor e profound tha n the one reg i s tered s ix years earl i er-- someth ing inconc e ivab l e fo r a country that had ea rned U S $ 4 7 b i l l ion in oil revenu e s and had gone th rough a rapid proc e s s o f capital formation dur ing the previou s f ive years . Thu s , by the end of 1 9 8 2 , real GDP had f a l l en by . 5 percen t ; in f l a tion had. reached a lmo s t 1 0 0 percent ( con sumer price index g rowth , Dec ember to December ) ; the mone tary author i t i e s had completely l o s t control o f t h e f o r e ign- exchange ma rke t , so much so tha t t h e bl ack-ma rket rate wa s more tha n doub l e the average o f f ic ia l rate s ; 1 5 capital f l ight cont inued prac t i c a l l y uncheck e d, in s p i t e of the suppos edly overa l l fore ign exchange contro l s ; the pub l ic sector ' s f inanc ial de f ic i t h a d reached 1 7 . 9 percent o f G D P dur ing the yea r ; th e dome s ti c f inanc ial sys tem wa s shr ink ing ; and , for prac tical purpo s e s , the coun try wa s in a morator ium with respect o f i t s fore ign- debt obl igations . I n f ac t , dur ing th e l a s t four month s of 1 9 8 2 , th e coun try compl i ed only with payment s of intere s t and a minor percentage o f payment s on p r inc ipa l o f the foreign pub l ic debt . All payments corre sponding to the pr iva te foreign debt had been su spended . The c ountry ' s overa l l The publ ic secto r had externa l debt p i c ture wa s d i sma l . a rrears o f U S $ 8 . 1 b i l l ion in payment s of pr inc ipal a l ready ; furthermore , U S $ 1 4 . 3 b i l l ion wou l d have come due in 1 9 8 4 and 1 9 8 5 . Re l a t ively speaking , the pr ivate s e c tor ' s s ituation wa s wor s e . I t owed U S $ 1 8 . 0 b i l l ion to fore ign f inanc ial i n s t i tu t ion s , two- th i rd s of whi ch had repayment periods tha t went no fa rth e r than 1 9 8 4 . I t a l so dec l a red US $ 4 . 0 b i l l ion in l iab i l i t i e s out s tanding with foreign suppl i e r s when a reg i s try at the Secreta r i a t of C ommerce wa s opened .
318 On general ec onomi c pol icy , the new admini s tration opted for a dra s t i c ad j u s tment- - i t a c tua l ly had no o ther a l ternat ive . Not surpri s ingl y , the core o f the Economi c Ad j u s tment P rog ram wa s to correct the pub l i c f inance d i s equi l ibrium . The target wa s to reduce the de f i c i t t o 8 . 5 percent o f G D P in 1 9 8 3 . A s a con s equence , i n addi tion t o important a c ro s s - the-board rea l c u t s in publ i c expenditure , s t i f f a c t ions on the income s ide were taken a t once . They inc luded s ign i f icant inc rea s e s both in th e va lue-added tax and in income - tax rates for upper brackets , a s we l l a s ma j or rev i s ions in the p r i c e s charged by publ ic enterp r i s e s ( ga s o l ine , e l ectric ity , and so on ) . At th e same t ime , important rectif icat ion s we re made on the exchange-rate and f inanc i a l po l i c ie s . The overa l l system of exchange contro l s wa s rep l a c ed by a rather s tandard dual sys tem c on s i s t ing of a contro l l ed ma rket ( including a l l merchand i s e expo r t s , the ma j or ity o f merchandi s e import s , a n d a l l fore ign-debt- rel ated f l ows ) and a free market ( fo r th e re s t of tran saction s ) . The initial l evel i n the exchange rate for the f ree ma rket wa s p l a c ed c l o s e to the r a t e preva i l ing o n the b l a c k ma rket , thu s leading to a s igni f icant redu c t ion in the latter ' s vo lume of In the contro l l ed ma rke t , an open ing rate tran s ac ti on s . tha t overshot th e val ue cons idered to be equ il ib rium f rom a PPP criterion wa s dic tated . A da i ly " c rawl " in th i s rate a l so f ol l owed . I n th e f inanc i a l sph ere , dome stic intere s t rates were inc rea sed , and a s t r ict monetary target ing c on s i stent wi th the pur sued adj u s tment in pub l ic f inanc e s wa s impl emented . A numbe r of the above mea sures were c onta ined in the l etter of intention submit ted to the IMF Board of D i rectors in November 1 9 8 2 and were ra t i f ied as soon a s The agreement reached the new admin i s tra t i on took over . with th e techn i ca l mi s s ion of the IMF ca l l ed for a net f l ow o f fore ign l end ing to the pub l i c sector provided by pr iva te bank s of U5 $ 5 . 0 b i l l ion in 1 9 8 3 . To the credi to r s ' surpr i s e , the IMF manag ing d i rector l e t every body know that he wou l d " not recommend the approva l of the IMF Agreemen t to the Executive Board o f the LMF with ou t a s suranc e s f rom bo th o f f ic ia l sourc e s and comme r c i a l banks tha t adequate ex ternal f inanc ing wa s i n pl a ce for th e suc c e s s o f the Mex ican Ad j u s tment P rogram and the IMF Ag reement , and the princ ipl e s of a rea l i s tic res truc tur ing scheme o f th e Mex ican debt wou l d be favorably c on s idered by the c ommu n i ty . ,, 1 6 The t e l ex f rom wh ich the f orego ing quo te wa s taken conta ined the pr inc i p l e s of the strategy f o l l owed by the Mex ican government to dea l wi th both the borrowing of net resources and the res tructur ing of the f o r e ign pub l i c debt in 1 9 8 3 . The e s sence of the approach to obtain the additional f inanc ing requ i red for 1 9 8 3 wa s to organ i z e an unprece dented number of banks to sub s c r ibe a " mammoth " l oan ( U5 $ 5 . 0 b i l l io n ) . Each c reditor ' s rel ative partic ipation in th e dea l wa s def ined on the ba s i s of th e expo sure of
319 each i n the c ountry a s o f Augu s t 1 9 8 2 . I t impl ied tha t every bank with a s se t s in Mex ico wa s requ e s ted- -and some h ow subtly f o rced- - to underwri te the f ac i l i ty . Th i s e l ement o f " fa irne s s " expl a in s , to a great ext en t , th e enthu s ia stic support rece ived f rom the l a rge s t bank s to ra i s e th e needed r e sourc e s . The attra c t ive pric ing a l so he lped to c l o s e the deal . C reditors were o f f ered , a t the ir own option , a spread o f 2 . 5 over L I BOR o r 2 . 1 2 5 over pr ime . The matu r i ty requ e sted did not puni sh l enders e ith e r � it c on s i s ted o f only six yea r s , including a th ree year grace period . Attra c tive c ommitment and fac i l i ty f e e s were o f f e red a s wel l . W i th the a s s i s tance of the adv i sory group and o f top o f f ic ia l s f rom the IMF and s evera l c en tra l bank s , inc luding the Federal Reserve , th e credit wa s granted p ra c tica l ly on t ime , an impre s s ive tota l o f 5 2 6 bank s having partic ipated in thi s syndic a t ion . Regarding the r e s tructuring o f the foreign pub l ic deb t , the target wa s to re schedu l e all payments to fa l l due between Augu s t 2 3 , 1 9 8 2 , and December 3 1 , 1 9 8 4 , with the exception of payment s to be due on " ex c luded " debt . The l atter c ompr i s ed , b e s i d e s oth e r minor categor i e s , c redits granted or gua ranteed by o f f ic i a l ent ities- e i th e r government or mul t i l a te ra l . Consequen tly , the reschedu l ing wa s ba s i ca l l y appl i ed to the debt owed to private f inanc i a l i n s t i tutions . Mex ican negot iators a sked f o r a princ ipal repayment per iod of eight year s , inc luding a four-year g rac e period . In exchange , c reditors we re to b e pa id a t th e i r own e l e c t ion a ra te o f L I BOR p l u s 1 . 8 7 5 o r pr ime plu s 1 . 7 5 . They were a l so o f f ered a 1 percent r e s tru cture f e e . The re schedu l e undertak ing wa s a l s o quite succe s s f u l . Only a year a f ter the orig inal requ e s t wa s made , the f ir s t s e t of r e s truc tu r ing c ontra c t s wa s s igned . By t he en d o f 1 9 8 3 , twenty- s even, r e s tructure agreement s between Mex ican pub l ic- sector enti t i e s and th e i r foreign creditors had been concl uded , representing l iab i l i t i e s o f U5 $ 23 b i l l ion . The probl em o f the pr iva te sector ' s fore ign debt p roved to b e as cha l l eng ing as the pub l i c sector ' s . Arrea r s in inter e st tha t had a c c rued during the l a s t f ou r month s o f 1 9 8 2 and early 1 9 8 3 ( a lmo s t U 5 $ . 9 b i l l ion ) were th e f ir s t prob l em to solve . Deb tor f i rms were a sked to con s t itute , through a pe so payment and a t the con tro l l ed ra te o f exchange , dol la r - denominated depo s i t s in f avo r o f the i r fore ign c re d i tor s . The s e depo s it s earned a commer c i a l rate ( typica l ly L I BOR plu s 1 . 0 ) and were tra n s f erred by the central bank through s evera l in s ta l l ments f o r comp l ete l iqu idat ion by the end o f 1 9 8 3 . I t wa s c l ea r , however , tha t the s imu l taneou s occurrenc e o f the ha l t i n the automa t ic rol l ing over o f the debt , the balance-of- payments c r i s i s , and the abrupt deter iorat ion o f dome s t i c bu s in e s s cond i tion s inevitably had to l ea d to an overa l l renegotiation of the priva te sec tor ' s debt . F rom the s ta r t , two important dec i s io n s were taken by t h e Mex ican f inanc ial auth o r i t ie s : F ir s t ,
3 20 the government wa s not going to a s sume th e private sec tor 1 s debt- - that i s , fore ign l ende r s wou l d have to reta in the c ommerc i a l r i sk involved in the i r c redit s , with debt renegot ia t ion having to tak e pl a ce individua l l y between l enders a n d borrowe r s � second , debtors wou l d rec e ive no sub s idy to settle the i r fore ign ob l igation s . 1 7 I n order to encourage the res tru c tu r ing proce s s , i t wa s dec ided to o f f er exchange r i s k coverage of principal and intere s t for deb ts that cou ld b e re schedu l ed accord ing to th e gu ide l ines i s sued by the f inanc ial autho r i t ie s . P l a in l y speak ing , f i rms were abl e to sub s t itute th e i r peso- denominated l iab i l i t i e s for th eir do l l a r obl igation s , a s long a s the l a tter c ou l d be res truc tured at l ong term . According l y , f i rms were ab l e to tran s f er th e fore ign exchange r i sk of the i r l iab i l i t i e s to the pub l ic sector . Th i s mecha n i sm wa s a l s o suc c e s s f u l , and by the t ime th e deadl ine rol l ed around ( l a t e Oc tober 1 9 8 3 ) , pr iva te l i ab i l i t i e s for almo s t U5 $ 1 2 b i l l ion had been covered by the f a c i l i ty . Almo s t 1 0 0 percent of tha t amoun t corresponded to ob l igat ion s renegotia ted t o ma ture at e ight o r more yea r s , inc luding a four-year g rac e period . Nearly three hundred d i f f erent f inanc i a l in st itu t ion s agreed to th e mechan i sm in add ition to two hundred fore ign suppl iers . As th i s chapter wa s b e ing wr i tten , the pr ivate foreign debt tha t did not enter under the prog ram wa s b e ing settled or restru c tured through other mechani sms . D ebt owed to fore ign suppl i e r s wa s repaid th rough two other programs , wh ich were made pub l i c by the c entral bank on F ebruary 2 8 and Augu s t 3 , 1 9 8 3 . B a s ica l l y , the s e programs a l l owed f irms - - th r ough a p e so payment-- to con s t i tute dol l a r-denominated depo s i t s who s e ownersh i p cou l d be tran s f e rred in payment to fore ign suppl i e r s . I n addit ion , up to 1 0 0 percent o f inc ome f rom exports o f debtor f i rms wa s permitted to b e u s e d to pay o f f the same type of debt . Another s egme n t of private f ore ign debt-- invo lv ing some U5 $ 2 b i l l ion - -wa s a l ready l ong-term and covered for exchange risks by virtue o f another sys tem of fore ign currency swaps o f f ered by Banco de Mex ico s ince 1 9 7 7 . Loans gua ranteed by agen c i e s of foreign government s are to be settl ed th rough b i l a teral agreemen t s tha t are in th e proc e s s o f nego t i a tion . The rema inder wa s l a rgely that o f f i rms in exc e l l e nt f inanc i a l cond ition who s e l iab i l i t i e s h a d b e e n re s tructured a n d who s e pro spec t s were g o o d f o r expor ting , thu s automatica l l y g ranting them coverage aga i n s t f lu c tua tion s in the exchange rate . The proc e s s of res tru c tur ing the country ' s fore ign debt wa s greatly f avored by th e way in wh ich the economy ad j u s ted i t s e l f du ring 1 9 8 3 . To the a s toni shment of many peop l e , the targe t wa s achi eved o f reduc ing the pub l i c sec tor ' s overa l l f inanc ial d e f i c i t t o 8 . 5 percent of GOP . But even mo re striking wa s th e a d j u s tment in th e ba l a n ce The trade surp l u s amounted to U 5 $ 1 3 . 7 of paymen t s : b i l l ion , and that o f the current ac�t wa s US $ 5 . 6 b i l l ion .
3 21 I n spite of the pronounced deva luat ion and the short- run impact o f inc reased pric e s on many produ c t s produced by the pub l ic sec tor , inf l a t ion ( De c ember to D ec embe r ) wa s reduced by one- f if th with respec t to the rate reg i s tered during 1 9 8 2 . The economic ad j u s tmen t pa id o f f in terms o f improved In December 1 9 8 3 , a genera l agreemen t c reditwor th ine s s . wa s reached w i th the advis ory group , d e f i n ing the con d i tions f o r the new money to be l ent to the Mex ican government during 1 9 8 4 . According to th e agreement , the package wou l d c omp r i s e U 8 $ 3 . 8 b i l l i on . L ending bank s were again a sked to partic ipate on the ba s i s of the i r pro rata exposure to Mex ico in Augu s t 1 9 8 2 . Th i s t ime , however , cond i t ions were sof tened s ig n i f icantly , w i th c reditors b e ing o f fered 1 . 5 perc ent over L IBOR or 1 . 1 2 5 over pr ime , a t the i r own e l e c t ion . I n s tead o f the s ix yea r ma tur i ty obta ined in t h e previou s dea l , t h e new credit woul d carry a ten-year term , inc l uding a f ive-yea r grace per iod . C ommi tme n t and f a c i l i ty f ee s were a l so reduced , and even though t h e amoun t requ e sted wa s not f u l l y committed as o f e a r ly F eb rua ry 1 9 8 4 , it wa s expec ted tha t eventu a l l y the dea l wou l d c ome th rough as expec ted . I n sh ort , one cou l d say tha t the debt c r i s i s o f 1 9 8 2 wa s overcome . F e a r s tha t Mex ico wou l d provoke an inter n a t ional f inanc ial heca tomb began to fade as probl ems of o th er deb tor c ountr i e s came into focu s . It is too soon to say whe ther a t any moment in the nea r or not-so-near f u tu r e th i s resp ite wil l g ive way to anoth e r d i sa strou s epi sode i n the c ountry ' s h i s tory a s f o r e ign debtor . Much w i l l depend on wh ether the E conomic Ad j u s tmen t Pr ogram prove s t o be suc c e s s fu l - - not onl y f o r correcting th e ba s i c macroeconomic d i sequ i l ibria bu t for l ea d ing to a n ew s tage of f a s t economic growth . Growth of th e same qua l i ty a s in recent deca de s c ou l d only be su s ta inab l e for a f ew yea r s at mos t . In order t o avoid a n ew c r i s i s , much more than contro l l ing in f l a t ion or re suming growth wi l l be needed . It is not an exaggeration to say tha t it wi l l requ i r e deep s truc tural chang e s in Mex ico ' s economic a n d pol i t i c a l l if e- chang e s tha t have yet to be conc e ived a n d undertaken and who se anal y s i s goes b eyond th e scope o f th i s chapter . A c r i t i c a l f a c tor a l so wou l d be tha t th e interna tional environment--both economi c and i n s t i tu tiona l - - no t b e any wor s e than the one now preva i l ing . APPEND I X A s s tudied b y Artu s 1 8 and ma n y oth e r auth or s , a l l procedu res t o c a l c u l a te a n " equ i l ibr ium" exchange rate have s everal shortc oming s . More f o r s impl ic i ty in i t s ca l cu l a t ion a n d interpreta t ion than f o r i t s th eoretical appea l , a purch a s ing power par i ty ( PP P ) method wa s cho sen here to e s t ima te such an equ i l ibr ium ra te . U s ing the
3 22 f o rmu l a ti on sugg e s ted by L ip s ch i t z , 1 9 an index of th e rea l exchange rate wa s c ompu ted with the f o l l owing f o rmu l a : n w I RR 'II' ( e . P . /P) i i=l l. l. =
wh ere e . i s an index o f the dome s t ic currency price o f f o r e ig n l.currency ; P . , an index of th e p r i c e l evel i n country i ; P , an in a ex of th e dome s tic p r i c e l evel ; and w ' the we igh t of c ountry i in th e index i n ( 1: w . = 1 . 0 ) . i=l l. The who l e s a l e price index of each country wa s u sed ; n= 2 l ; w . wa s determined a ccord ing to each country ' s pa r t ic ipa t i on in Mex i co ' s tota l merchan d i s e trade ; th e ba s e yea r i s 1 9 7 8 and wa s chosen for s evera l - - a l b e i t a rb i tra ry-- rea son s . F i r s t , i t wa s a y e a r o f h igh economic g rowth . S e c ond , merchand i s e impo r t s - - ex c l uding tho s e by the o i l sector- -grew 1 5 percent in real terms , not a very h igh inc ome e l a s t ic i ty . Thi rd , non o i l merchan d i se exports g rew 8 percent in rea l terms ; oth e r exports such a s tou r i sm a l so g rew ve ry dynamica l ly . And f ou r th , the error s and omi s s io n s i tem of the ba l ance of payments wa s negl i g ib l e , a f a c t tha t sug g e s t s tha t capita l f l ight a n d smugg l ing w e r e in s ig n i f icant . In shor t , even though 1 9 7 8 wa s a year of rapid growth , the externa l sector wa s very much in equ i l ibrium. The f a c t th a t i t i s a ra th e r recent yea r i s conven i en t , too . 2 0 A l l rel evant data were ob ta ined f rom the I nterna t iona l F inanc i a l S ta t i s t i c s of th e IMF . Acc o rding to the above me thodol ogy , dur ing the per i od 1 9 7 2 - 1 9 8 2 the equ i l ibrium exchang e rate ( pe s o s per u . s . dol l a r ; avera g e va l u e f or th e yea r ) wa s a s f o l l ows : 1972 1 9 73 1 9 74 19 75 1976 1977 1 9 78 19 79 19 8 0 1981 1982
13 . 84 5 13 . 788 14 . 152 14 . 049 1 6 . 3 56 21 . 59 2 2 2 . 753 23 . 963 26 . 3 8 3 3 2 . 7 58 50 . 566
NOTES The opin ion s i n th i s chapter a re mine and shou l d n o t b e a ttributed t o my emp l oyer . I thank Norman G l a s s f o r h i s helpful sugg e s tions i n r ega rd t o my u s e of Eng l i sh .
323 1 . Good sourc e s o n the h i s tory o f Mex ico ' s fore ign debt are Tur l ing ton ( 1 9 3 0 ) ; Ba zant ( 1 9 6 8 ) ; and Green ( 19 7 6 ) . 2 . T e rm u sed by a former min i s ter of f inance to d e s c r ib e the economic pol i c i e s f o l l owed dur ing the s econd h a l f o f the 1 9 5 0 s and the 1 9 6 0 s ; th i s wa s a per iod of rapid g rowth and price stab i l i ty . 3. Data on the externa l private debt a re rather unre l ia b l e for th i s per iod ; therefore , the analy s i s o f th i s s e c t ion foc u s e s on the foreign pub l i c debt . 4 . These f a c t s on debt management are mor e ex tens ively s tudied in Z ed i l l o ( 1 9 8 l a ) , pp . 5 8 - 8 9 . 5. Z ed i l l o ( 1 9 8 0 ) and Z edi l l o ( 1 9 8 l a , chap . 4 ) . 6 . For an intere s t ing ana l y s i s o f the per iod s e e SoI l s ( 1 9 8 1 ) . 7 . Th e s e compa r i sons are a l so made by means o f an " equil ibrium" exchange rat e . 8. S e e Z ed i l l o ( 1 9 8 la ) pp . 5 8 - 8 9 . 9 . Equa l s total f inanc i a l def ic i t minus the " external def i c i t . " The latter is def ined as the d i f f e rence between pub l ic s e c tor ' s income in fo re ign exchang e ( e . g . , oil r evenues ) minus expenditures abroad ( e . g . , imports and payments o f inter e s t s ) . 1 0 . New York T ime s ( 1 9 8 1 ) . 1 1 . Fore ign-exchange reserves s t i l l had a mode s t g a i n during t h e year . 1 2 . S e e Ca stro (1 9 8 3' ) . 13 . S e e Banco de Mex ico ( 1 9 8 2 ) . 1 4 . S e e C a s tro ( 1 9 8 3 ) . 1 5 . A t the t ime there were two o f f ic i a l rates ( 5 0 and 7 0 p e s o s per dol l ar ) ; the b l a ck-market rate f l uc tuated a round 1 4 0 pe sos . 1 6 . Quoted f rom p . 4 of a telex sent by the mini ster o f f inance o f Mex ico to t h e internationa l bank ing c ommun i ty on Decembe r 8 , 1 9 8 2 . 1 7 . A desc r iption of th i s mechan i sm i s g iven in Z edi ll o ( 1 9 8 3 ) . 1 8 . Artu s ( 1 9 7 8 ) . 1 9 . Li ps ch i t z ( 1 9 79 ) . 2 0 . Further j u s t i f ication of thi s index can be found in zedillo ( 1 9 8 lb ) . I thank Migu e l Duran o f Banco de Mex ico for gather ing the data and comput i ng the index . B IBLIOGRAPHY Artu s , J . R . 1978. " Me thods of A s s e s s ing the Long- run Equ i l ibri um Val u e of an Exchange Ra te . " Journal o f Interna tiona l Economic s 8 : 2 7 7 - 2 9 9 . Bala s s a , B e l i . 1979 . " Po l i cy Re spon s e s to External Shoc k s in Devel oping Countr i e s : Impl ications for International Trade and Long -T ime Growth . " Wa shington , D . C . Mimeo .
3 24 Banco de Mex ico . 1982 . I n fo rme Anual 1 9 8 1 . Mex ico , D.F. 1968 . H i s toria de l a Deuda Ex terior de Ba zant , Jan . Mex ico ( 1 8 2 3 - 1 9 4 6 ) . Mex ic o , D . F . C a s tro , E . 1983 . " Alguna s Cons idera c iones S obre e l F inanc iamiento Exte rno de Mex ico en l o s A�os d e 1 9 8 0 - 1 9 8 2 . " Mex ico , D . F . Mimeo . Green , Ro s e r io . 1 9 7 6 . E l Endeudamiento Pub l ico Externo de Mex ico 1 9 4 0 - 1 9 7 3 . Mex ico , D . F . L ipschit z , L . 1979 . " Exchange Rate p o l icy for a Sma l l D eve lop ing C ountry , and the S e l ec t ion o f an Appropr iate S tandard . " IMF S t a f f Papers 2 6 : 4 23-4 4 9 . " Mex ico , in Switch , Wi l l L i f t O i l P r i c e . " 1 9 8 1 . New York T ime s ( June 1 7 ) . s o l i s , Leopoldo . 1 9 8 1 . Economic Pol icy Reform in Mex ico : A C a s e S tudy for Developing C ountr i e s . N ew Y ork . " Mex ican Headache for I nterna t ional Bank s . " 1977 . The Ec onomi s t ( January 2 2 ) : 9 9 . Turl ington , Edga r . 1 9 3 0 . Mex ico and Her For eign Debto r s . N ew York . Z e d i l l o , E rn e s to . 1 98 0 . " The B a l ance of Payment s E f fects o f External Shocks i n Non-OPEC Devel oping C ountr i e s . The C a s e of Mex ico . " P a ri s . " Exte rna l Pub l ic Indebtedn e s s in Mex ico . 1 9 8 1a . Recent H i s tory and Future O i l Bounded Optimal Growth . " Ph . D . di s serta t ion , Y a l e Univer s i ty . " Algunas C on s iderac ion e s Sobre e l T ipo 1 9 8 1b . de Camb i o del P e so . " Subd irecc ion de I nvestigac ion Economica , Banco de Mex i c o . Mimeo . 1983 . " The P rog ram for Coverage o f Exchange R i sk s . A General De sc ript ion and F inanc ial Aspec t s . " Mex ico , D . F . Mimeo .
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12
The Renegotiation of Venezuela' s Foreign Debt D u ri ng 1 982 and 1 983 Eduardo Mayobre
PROBLEMS IN RENEGOT IAT ING By the end of 1 9 8 2 , Vene zuela ' s fore ign debt had reached approx imately US $ 3 3 b i l l ion . Al though th i s is a h igh f igure , it i s low when compared to tha t o f other Latin American countr i e s . I n terms o f fore ign earning s , the Venezuelan debt i s equa l to 1 5 1 percent of the coun try ' s exports of good� and servic e s . By way o f contra s t , the corresponding f igure f o r Argentina ' s debt i s 3 8 8 percent , for B ra z il 3 5 4 percent , Ch i l e 2 8 7 percen t , and for Mex ico , Peru , and Equador 2 6 4 percen t , 2 6 0 percent , and 2 3 0 percen t , re spec t ively . However , in the renegotiat ion proc e s se s tha t became genera l prac t i c e th roughout the continent dur ing 1 9 8 2 and 1 9 8 3 , i t ha s been Vene zuela tha t h a s found i t mo s t d i f f ic ul t t o reach an agreement with i t s c reditor s . S ince March 1 9 8 3 , wh en the need for renegotiation wa s o f f i c ia l l y recogn i z ed , the Ven e zuelan government ha s had to recur on two occa s ions ( in Apr i l and Ju l y ) to a n inety day def erments of payments on its debt , and a t th e end of the second of the s e periods it barely manag ed to obtain a third def erment o f th irty days . In a dd i t ion , there wa s very l i ttle probab il i ty tha t an agreement wou l d be reached before t h e e nd o f t h e y e a r a s regards a re schedu l ing o f the debt , and it wa s thought that it woul d o n l y be po s s ib l e for mea n ingful negotiations t o b e i ni t iated when t h e new government came to powe r in F ebruary 1 9 8 4 . . Th i s deve lopment i s surpr i s ing , for until recently Vene zuela e n j oyed a pr ivi l eged place in the international f inance mark e ts ; du e to the charac ter i s t i c s of its debt and the s i z e of its r e se rve s , the res chedu l ing o f matu r i t i e s s eemed , a t f i r st g l a nc e , an easy ob j ective to atta in . However , what se emed an e a s i l y manageable s i tuat ion h a s become mo re and more comp l ex , with ser ious repercus s ions on the c ountry ' s dome stic economy a s wel l a s it s international po s it ion . On f i r s t examina t ion , severa l f a c t s appear that exp l a i n the chang e s ment ioned . 325
326 1 . The s truc ture o f the debt i s very vu lnerab l e , a s 4 5 percent o f Ven e zuel a ' s foreign indebtedn e s s i s short term . Th i s mea n s tha t al though the tota l debt is not exc e s s i ve , the matur i t i e s due in 1 9 8 3 and 1 9 8 4 exc eeded the country ' s repayment c apac i ty during thi s period . The portion sub j ect to renegotiation , which inc l ud e s l ong term debt amor t i z a t ion due dur ing the same two year s , is U S $ 1 8 b i l l ion without tak ing account of the pr ivate sector debt who se share o f short-term matu r i t i e s i s h igher than tha t o f the pub l ic secto r . I f one mak e s compa ri son s with other countri e s in L a t i n Amer ica , one f inds tha t the i r short-term debt account s for 1 9 percent o f the total debt in B r a z i l , Argent ina , and C h i l e and 20 percen t , 29 percent , and 3 0 percent in Ecuado r , P e ru , and Mex ico , respectivel y . 2. The drop i n earning s f rom o i l s a l e s tha t b egan in 1 9 8 2 shou l d b e pointed out . The s e earn ing s , wh ich account for more than 9 0 percent of Ven e z u e l a ' s exports , f e l l by 2 0 percent in 1 9 8 2 , and a s imilar dec l ine wa s expected in 1 9 8 3 . Th i s fal l in fore ign revenue i s due to a reduc tion in c rude export p r i c e s and to a cons iderab l e contrac tion i n export vo lume a s a result o f the pro duc t ion quotas agreed upon by OPEC in respon s e to the depr e s s ing conditions in the internat ional oil market . I n i t ia l ly , s ince the Vene zuelan author i t i e s thought that th i s wou l d be a minor t empora ry reduc tion , no appropriate preventive a c t ion wa s cons idered . 3 . The emergence of d i f f ic u l t i e s in s e rving the debt in oth e r countr i e s in L a t i n Ame rica , and the Mex ican c r i s i s o f 1 9 8 2 in particul a r , l ed the international bank s to act with more caution with regard to the i r Latin American debto r s and to reexamine the r i s k s they had a s sumed in the region . This general attitude proved detrimental to Vene z u e la whe n it became obviou s tha t the country wa s experienc ing d i f f ic u l t i e s in meet ing its fore ign commi tments a s we l l . Al though the need to re f inanc e the short-term debt had a l ready been recogn i z ed , to the extent tha t in Augu s t 1 9 8 1 the Vene zuelan Congre s s had p a s sed a l aw autho r i z ing the undertak ing o f appro priate c ommi tment s , the executive b ranch refra ined f rom tak ing a c t ion for admini s trat ive reasons and beca u s e it mi sund e rs tood wha t wa s occurring in the market . Thu s , when th e Latin American s i tuat ion began to be v iewed a s a wor l d c r i s i s , only sma l l amoun t s o f c redit had been renegotiated by Ven e zue l a . 4. The f a c t tha t Vene zuela had amp l e interna t ional r e s e rves at the beginn ing of 1 9 8 2 made the author i t i e s bel i eve tha t they woul d rece ive spec ial treatment from the interna t ional bank s . At the b eg inning o f 1 9 8 2 , i t s o f f ic ia l internat ional re serves tota led US $ 8 . 6 b i l l ion . Added to the s e were the f inanc i a l r e s erve s o f the o i l indu s t ry a n d Vene zuela ' s I nve s tment Fund , g iv ing a total o f approx imately U S $ 1 9 b il l ion . There wa s a l so the po s s ib i l ity of reva lu ing the gold reserves sti l l valued
327 a t the o f f i c i al price o f U S $ 4 2 per ounc e . When probl ems in the fore ign- trade s e c tor and d if f ic u l t i e s in the renegotiat ing proc e s s s tarted to become apparent , the auth o r i t i e s dec ided tha t central i z ing the internat iona l r e s e rve s in the C entra l Bank and reva lu ing the g o l d r e s erve s wou l d demon strate t h e c ountry ' s f inanc i a l strength and thus f ac i l i tate the negotiations . Th i s , however , turned out to be s e l f - d e f eat ing , s ince it gave the impre s s ion that th i s wa s the government ' s l a s t recou r s e a n d o n e that c o u l d adver s e ly a f f ec t t h e o i l indu s t ry . 5 . The dome s t ic economic s itua t ion and the monetary po l i c ie s tha t were adopted brought about a f l ight o f capital that began in 1 9 8 1 a n d became more acute through out 1 9 8 2 . From 1 9 7 9 onwa rd , pol ic i e s were adopted tha t were d e s igned to restrict e conomic a c t ivity . The s e l ed to a 5 0 percent reduc tion in real terms in pr ivate inv e s t ment b e tween 1 9 7 8 and 1 9 8 1 . A great deal o f the surp l u s c a p i t a l that h a d prev iou s l y been inve sted internal ly wa s withdrawn f rom the country . In addition , in mid- 1 9 8 l , dome s t ic intere s t rates f e l l wh i l e fore ign rates rema ined a t a much h ighe r l ev e l and had a tendency to r i s e . Th i s meant a d i f f erential o f more than four points i n favor of fore ign intere s t rates within the f ramework o f a f ree exchange s ys tem , which encouraged the f l ight o f capital . Th is f l ight o f capital wa s condoned by the moneta ry autho r i t i e s a s part of a very s trange pol icy termed " de l iberate l eak s , " which wa s d e s igned to reduce the c a sh f l ow in the dome s tic economy . Towa rd the end o f the yea r , wh en dome s t ic intere s t rates were a l l owed to f l oa t a n d tended t o r i s e to internationa l l eve l s , the ou t f l ow o f capital c ontinued due to a g rowing lack o f conf idenc e in the future o f the dome s t i c economy . Later , the drop in earn in g s f rom oil sa l e s , the centra l i zation of the o i l indu s try ' s f inanc i a l r e se rve s , the executive ' s inter vent ion in th e l a rg e s t bank in the country- -Banco de l o s Traba j ado res d e Vene zuela , a nd the g rowing conv i c t ion that a deva luat ion wa s imminent undermined con f idence even further and accel erated the f l ight of capita l . In th e month s prec eding the introduction by decree o f exchange contro l s a n d d i f f erential exchange rates i n F ebruary 1 9 8 3 , there wa s a n e t weekl y capital out f l ow o f U S $ 4 0 0 m i l l ion . Th i s meant that wh i l e in a normal year , such as 1 9 7 8 , the short-term capital out f l ow wa s US $ 1 . 3 b i l l ion , th i s f igure reached U S $ 5 . 5 b i l l ion in 1 9 8 1 , U S $ 7 b i l l ion in 1 9 8 2 , and over U S $ 2 b i l l ion in the f i r s t two months o f 1 9 8 3 . 6 . The f act that the currency had r ema ined stab l e f o r twen ty yea r s , with the exception o f two minor read j u s tmen t s a t the beginn ing o f the 1 9 7 0 s and only one deva luat ion s ince 1 9 4 1 , mean t tha t a change in the exchang e rate woul d prove economica l ly and pol it ica l ly trauma t i c . Th i s l ed the auth o r i t i e s to delay and attempt to avoid th e deva luation o f the b o l iva r . When the deva luation became inevi tab l e in February 1 9 8 3 , i t
328 wa s d i s gu i s ed under an ex tremely comp l ex sys tem of exchange rate s . The Vene zuelan currency ha s u sua l l y been overva lued s ince i t s par va l ue i s determined relat ive to the o i l sector and n o t t o the r e s t o f the economy . But , even withou t tak ing th i s fa ct into account , it is ea sy to see that f rom 1 9 7 8 onwa rd the b o l ivar underwent cons iderab l e rea l apprec iat ion in val ue , a s a con s equence of inf l at ion ra te s in Ven e z u e l a h igher than tho �e o f i t s trad ing pa rtners and of the strengthen ing of the dol l a r aga in st th e European curren c i e s ( the bol ivar ma inta ined a f ixed par va lue i n r e l a t ion to the dol l a r ) . C a l c u l a tions show that in the four years preceding the exchange mea sures of F eb ruary 1 9 8 3 , th e cur rency became overval ued by approx imately 3 5 percent in relation to tha t o f the indu s tria l countri e s . The exaggerated value o f the bol ivar l e d to an increa s e in imports and foreign travel and made i t prac tical l y impo s s ib l e to inc rement nontrad i t ional exports . Sub s equent l y , when it became obvi ou s tha t the exchange rate could not be sus ta i ned , capi tal f l ight inc rea sed . The government ' s reluctance to imp l emen t exchange mea sures a l l owed the se e f f e c ts to reach an extreme . The di f f icu l t i e s in arrang ing the ref inanc ing 7. of the debt can b e exp l a ined by the f a ct that a f ter hav ing ma intained an average annual growth rate of 5 . 5 percent over the twenty yea r s f rom 1 9 5 8 to 1 9 7 8 , the country ' s economy underwent fou r consecutive years of stagnation . During th i s l a s t per iod the autho r i t i e s were unwi l l ing to take the mea sures nec e s sary to deal with the s i tua tion tha t they faced for fear o f the soc ia l and po l i t ic a l On the contra ry , a l though repercu s s ions the s e cou l d have . th ere were some reduc tions in c entra l government spend ing , s ta te en terpr i s e s and pub l i c f inanc ial inst itution s became more heav i l y indebted . Both grou ps resor ted to fore ign c redit in order to c ompensate for the i r operating d e f ic i t s , the reduct ion i n funds a s s igned by the central government , and the lack o f l iqu idity in the internal market . 8 . Th e pol i ti ca l s i tuation tended to make the gove rnment po s tpone any mea sure tha t might have proved unpopu l a r , and con sequently it bec ame eva s ive in i t s negot iations with i t s credi to r s . Almo s t f rom the out set , the governmen t ' s popu l a r i ty wa s damaged by the stagnation in the economy , unempl oyment , and r i s ing inf l a t ion that far out s tr ipped l evel s cus tomary in Ven ezue l a . When the f i nanc i al and f i sc a l c ri s i s became evident in mid1 9 8 2 , the s e l ec t ion o f th e p r e s iden tial candida t e s to s tand i n th e Dec ember 1 9 8 3 e l e c t ions had j u s t b egun . Du r i ng the per iod of negotiations with the fore ign cred itor s , the e l ec tora l c ampaign wa s in ful l swing , and pol l s were showing a c l ear d i sadvantage for the governmen t pa rty candida te . In the s e c i rcumstanc e s th e author i t i e s avoided tak ing any action or mak ing any
329 commitment that wou l d undermine th e i r popu l a r ity . For examp l e , a s will be seen later , attempts were made to avo id reaching an agreement with the I nterna t ional Monetary Fund and strong obj ections were even made to the measure s re commended by that i n s t i tution . As a resul t , no ser iou s negot iations with the Fund c ame about . In addition , there wa s an ab sence o f uni f ied criteria o n the part o f th e f i sc a l and monetary author i t i e s , which reached the extreme o f a pub l i c d i spute between the min i s te r o f the Trea sury and the d irector o f the Central Bank . 9 . The central government ' s lack of contro l over the i ndebtedne s s o f b o t h t h e s tate enterp r i s e s a n d other decentra l i z ed government bod i e s made i t virtua l ly impo s s ib l e to arrive at a c l ear idea o f the total o f the pub l ic- s e c tor debt . The absence o f hard data in turn h i ndered the negot iations, a s it created a d i s c repancy between the part i e s involved as to the amount th at wa s to be negot i ated . There were a l s o d e l ay s in the intere s t payments o f the state i n s t itution s , and d i f f i cu l t i e s aro s e over t h e recogn i t ion o f l o a n s contracted without attention to the pertinent l eg a l procedur e s . Mo reover , there wa s the prob l em o f private foreign debt , for wh ich there were ne ither records nor contro l , mak ing it impo s s ib l e to determine the nature or the total o f the s ame with any prec i s ion . S inc e the exchange contro l l aw stipu l a t e s that foreign currency wi l l only be provided for certain type s of private debt s , for wh ich ref inanc ing h a s a l ready been arranged , the foreign nebt o f the private secto r is cons idered together with tha t o f the pub l ic sector in the negotiations with the creditor s . 1 0 . As a result o f several o f the a forementioned po int s , not only was there no reduct ion in pub l ic spend ing dur i ng the period in wh ich the c r i s i s wa s deve loping , but it actu a l ly expanded c on s iderabl y between 1 9 8 0 and 1 9 8 1 as a r e su l t of increa s e s in o i l earning s , and rema ined virtu a l ly stab l e over the f o l l owing two ye ars . The se f a c t s can be more c learly unders tood once the reader is acquainted wi th the nego t ia ting proc e s s th at took p l a c e during 1 9 8 2 and 1 9 8 3 . THE RENEGOT IAT I ON PROCESS I n Augu st 1 9 8 1 , the National Congre s s pa s sed a Re f i nanc ing Law for a sum o f 6 1 b i l l ion bol ivar s . Th i s l aw , wh ich author i z ed the execut ive to a s sume , con s o l i date , a n d re structure t h e short-term debt o f th e pub l i c sector , wa s d i scus sed in the S ixth National P lan . The p l an ' s inve s tment program enta i l ed pub l ic borrowing for severa l pro j ects a nd contained a number o f legal init iatives de s i gned to f ac i l i tate the i r f inanc ing . A plan for the ref inan c i ng o f short - term debt s contracted prior to June 1 9 8 2 wa s a l so inc luded in the national plan ,
330 s o that total pub l i c borrowing cou l d b e tak en into account . A s ignif icant propo rtion o f th i s borrowing had been undertaken by state enterpr i s e s without the authori z a t ion o f the executive and in some c a s e s without c omplying wi th a l l the r e l evant l egal requirement s . In order t o prevent the s e prac t i c e s f rom cont inuing , the Re f i nanc ing Law wa s pa s s ed , and mod i f ications were made to the Pub l i c Credit Law tha t introduced contro l s and sanctions to be app l i ed to whoever a s sumed obl igations for the state without autho r i z ation . One o f the requi re ments e s t ab l i shed for r e f inancing was the approval by the F inanc e Commi s s ion o f the l e g i s l at ive chamber o f a deta i l ed l i s t of the deb t s involved . D e s p i te the author i z ation that had been g iven by Congre s s , the execut ive del ayed in starting r ef inanc ing negotiations and in approach ing the international f inance market s . F i r s t it a ttended to admini st ra t ive probl ems in gather ing the informa tion required by Cong re s s , and then it dec ided tha t the market cond i t ions were no t suitabl e . Negot iations initi ated with the international bank s on several o cca s ions in 1 9 8 2 in mo st c a s e s did not l ead to a n y agreement , a s t h e Vene zuelan authorit i e s cons idered that the terms they were o f fered were not in k e eping with the country ' s f inanc ia l po s i t ion . The dec l ine o f the o i l ma rk e t s and the appl ication o f produ c tion quotas agreed upon by OPEC during the summer o f that year made the government bel i eve tha t Venezuela wou l d create a false impr e s s ion before the international bank s o f be ing weak , for they thought that th e oil demand wou l d increa s e during the s econd ha l f of the year and th e e s t imates o f fore ign earnings wou l d therefore b e much more f avorab l e . On the b a s i s o f the s e a s sumption s , the Ven e zue l an government cons idered that it wou l d not be wi se to accept the intere s t rate s it wa s be ing o f fered , wh ich were approx imately an eigh th o f a percent higher than tho se i t had obtained previou s ly , s ince th i s cou ld create a precedent and undermine the country ' s po s it ion in the internationa l f inanc e mark e t s . For the se reason s , the Ven e zuelan government dec ided to po s tpone the r e f inancing negotiations unti l midyear and t o renew short- term loans a s they ma tured . As part o f th i s s tra tegy , credit for the vast sum of U S $ 2 b i l l ion wa s b e ing arranged and wa s to be ready by June or July . Meanwh i l e , the F a l k l ands c r i s i s occurred in wh ich Ven e z u e l a supported the Argentine po s i t ion a c t ive ly and with determination . The resu l t ing rumo r s and o p i n i o n s adver s e l y a f f ected r e l a t ions w it h the B r i t i sh f inanc i a l c ommunity . S ome o f the fund s f rom the Vene zuelan o i l indu stry were withdrawn f rom B r i t i sh banks when it wa s rumored tha t they might be f ro z en , and a number of the united K ingdom ' s bank s abandoned the talks regarding th e g i ant credit . At the s ame t ime , Mex ico wa s a l ready invo lved in negot iations for credit for an amount s imi lar to that
331 requ e s ted by Vene zuela and had decided to accept h igher i ntere s t rates in order to obtain resourc e s . Th i s in f luenced the t e rms o f f ered to Vene z u e la , wh ich were re j ected . The government ob j ected to the comb ined u s e o f the u.s . preferent i a l rate and the London interbanking rate , wh ich had been u sed on previous occas ions , and cons idered that , in its vi ew of the market , the money wa s ove rpr iced . Events tha t f o l l owed were to show tha t to r e j e c t t h e te rms tha t had b e e n o f f ered wa s a great mi s take . Later , the Mex i c an c r i s i s and the d i f f icul t i e s faced by o th e r c ountr i e s in the regi on l ed the international bank s to adopt a more inf l ex i b l e po s i t ion toward Latin America . Th i s , c oupl e d with the deter iora t ion in the internal s i tuation in Vene z u e l a and the fact that s ever a l state enterpr i s e s w e r e behi nd i n the ir payment s , resul ted In the face i n s ome short-term c redit not be ing renewed . o f th i s s i tuation , wh ich wa s a l so compounded by the reduction in re s e rve s due to the f l ight o f capita l , the autho r i t i e s dec ided to centra l i z e the r e s e rves of the state enterpr i s e s and to set a new par value for go l d in o rder to show that " do l l a r for do l l a r " the country ' s foreign l iabi l it i e s were matched by i t s international res e rve s . Th i s mea sure particularly a f f ected the nat iona l i zed o i l indu s t ry , wh ich unt i l then had mainta ined a po s i t ion o f absolute f inanc i a l independence , thu s a l l ow ing it to f inance i t s own current account operations and ma intain enough fore ign currency to f inance i t s expans ion By the end of 1 9 8 1 , the net short-term inter prog ram . national a s se t s o f Petr6 l e o s de Ven e zu e l a ( the Vene zuelan oil c ompany ) tota l e d U S $ 7 . 6 6 b i l l ion . The new gold par valu e , wh ich rose f rom US $ 4 2 . 2 2 to US $ 3 0 0 per ounc e , meant a US $ 3 b i l l ion do l la r increa s e in interna t ional r e serve s . The se measures did not overly impre s s the interna tional bank s , wh i ch had l ong been aware o f the di f f e rent type s of reserves h e l d by Ven e zue l a . I n the l ight of th e s e new market c ircums tanc e s , towa rd the end of S eptembe r a new r e f i nanc ing p l an wa s presented by the government that wa s des igned to re schedu l e U S $ 8 . 7 b i l l ion of the current account debt . Under th i s new plan the government wa s wi l l ing to pay much h igher inte r e s t rate s ( o f between 1 perc ent and 1 . 6 2 5 percent above LIBOR) than tho se i t had r e j ected a f ew month s previou s l y and abandoned the idea of obta ining g iant loan s . Under the s e cond i t ions , it managed to ref inance approx imately U S $ l b i l l ion by the end o f 1 9 8 2 . The aggrava t ion o f the c r i s i s in Mex i c o , B ra z i l , and Argentina , fear of a reduct ion in o i l pric e s , and the c o l lapse of the dome s t ic economy ( invo l v ing intervent ion in th e Banco de los T raba j adores de Vene zue l a ) impa ired the succe s s o f the above-mentioned plan . A report by the F inanc i al T ime s at the beg inn ing of Janu a ry 1 9 8 3 commented i n thi s regard tha t the " Eu romarke t responded
332 enthu s i a s t i c a l l y to th e announcement i n October o f the ref inanc ing p l an , particu l a r l y a s conditions were o f f ered that were c o n s i dered exceptiona l l y generous by the bank s wh ich had been u s ed to bargain ing with Vene zuela over th e pr ice of its foreign c redit . " I t added that the "enthusiasm due to the s e ref inanc ing p l a n s is beg inning to wane . " By th i s t ime , the imminent reduction in o i l p r i c e s and the f l ight o f capital h a d seriou s l y eroded conf idenc e in the Vene zuelan economy . It wa s not di f f ic u l t to fore see that a currency c ri s i s wa s probab l e . Durfug 1 9 8 2 , e f forts had been made to dea l with th e prob l em o f the short- term debt . The s e were unsucc e s s fu l , a s th e Vene zuelan autho r i t i e s had f a i l ed to perce ive the deterioration of conditions in the internat iona l f inance mark e ts . They cons idered tha t the extent o f the i r international reserves g a v e them a f inanc ial s tabi l i ty that deserved pref erent ial treatment , and they rema ined under the i l l u s ion that an upturn in the oil markets wou l d increa se the i r foreign earning s . None o f the se hopes came to f ru i t io n , and the dome stic economic s i tua tion meanwh i l e cont i nued to worsen . THE S I TUAT ION IN 1 9 8 3 B y 1 9 8 3 the s i tuation had become even mo re d i f f icul t . Th ere was the need not only t o renew short-term credit but a l so to pay the amo r t i z a t ion s on the medium- and long term loans contracted in previou s years that were heav i ly concentrated in 1 9 8 3 and 1 9 8 4 . The unsucc e s s fu l negot ia tions undertaken i n 1 9 8 2 had undermined the country ' s international c redib i l ity , and th e foreign drain on res erve s had become more acute , as a resul t of a l o s s o f conf idence with in the nation and o f rumors of a deva luation . Furthermore , du ring the f i r s t four months o f 1 9 8 3 the o i l market had deterio rated even further , and there wa s fear that a price wa r could begin b etween the export ing countri e s . The production quotas agreed upon by OPEC in the summer o f 1 9 8 2 were no l onger appl icable in the second h a l f o f the year , and the production increa s e s by countr i e s l ike N ig e r i a , Vene zuel a , I ran , and I ndon e s i a we re caus ing f r i c t ion w i t h i n t h e organ i z ation . Furthe r more , th e OPEC count r i e s were accus ing one another o f g rant ing d i s counts th at viol ated the p r i c e schemes agreed upon . The OPEC countr i e s ' l o s s o f a cons iderab l e share o f the ma rket to new exporters wa s mak ing the s i tuation even more d i f f ic u l t . Under the s e c ircums tanc e s , th e free convert ib i l i ty o f the bol ivar wa s su spended on F eb ruary 1 8 , 1 9 8 3 , and a f te r severa l day s o f d i scu s s ion and d i s agreement between members o f t h e government a new exchange scheme wa s e stabl i shed . Th i s con s i sted o f th e introduction of th ree exchange rate s . The exchange rate o f 4 . 3 0 bol iva r s to th e dol l a r
333 wa s ma intained for pub l ic- sector transaction s , inc luding debt s e rvic ing and the importation of e s s ent ial good s . A rate o f 6 bol ivar s per do l l a r wa s set for the rema inder of trade trans ac t ions , which wou l d b e sub j ec t to a system of exchange control . La stl y , a f re e f loat ing rate wa s e stab l i shed for f inanc i a l operat ion s , trave l ing expen s e s , and o th e r internat iona l t ran saction s . I t wa s e s tab l i shed that for the payment o f the priva te- sector fore ign deb t , do l la r s wou l d b e made ava i lab l e at the pref erent i a l rate of 4 . 3 0 b ol iva r s for the tota l debt amount , provided that the l a tter had been re f inanced by the c redito r s a l l owing a t l e a s t a one-year grace period and a three-year period of maturity . Thi s wa s one o f the points that c au sed mo s t c ontrove r sy among member s of the government and that s t i l l h a s not been completely wo rked out , owing to the d i f f icul ty o f de f ini ng the total debt amount and the fact tha t one of the condi t ion s , that o f r e f i nanc ing , i s beyond the control o f the debto r s . In o rder to admin i s ter th i s exchange plan the O f f i c e f o r the Sys tem o f D i f f erenti a l Exchang e Ra t e s ( RECAD I ) wa s set up under the control o f the Trea sury , a s a result o f the d i f f erence s in opinion betwe en i t and the Centra l Bank o f Vene z ue l a . The e stab l i shment o f RECAD I l ed to admi n i s trat ive d i f f icul t i e s that cau s ed a permanent d e l ay in furni s h i ng foreign currency at the preferent i a l rates o f 4. 30 and 6 bol iva r s per dol l a r . Th i s o f f ic e wa s pra c t i c a l l y c reated f rom noth ing , and it spent the greater part o f its t ime e stabl i shing the l e g i t imacy o f reque s t s for preferent i a l r a t e s o f currency . Later , t h e C entral Bank o f Vene z u e l a refused to recogn i z e some of the autho r i z a t ions g iven by RECAD I , particu l a r l y tho s e re lat ing to th e private f oreign debt , thu s prolonging an atmosphere o f uncertainty that s t i l l continu e s to be f el t . As a comp l ement to the exchange mea sure s , a decree wa s pa s s ed f ree z ing prices for two month s . Thi s wa s later repla ced by an " admini s t rated prices sys tem" tha t s t ipulated tha t any p r ice increa s e s mu s t b e author i z ed by the M in i stry for Devel opmen t . Under th i s system the autho r i t i e s had th ree months in wh ich to con s ider pro pos ed price r i s e . In actual fact pr i c e s wer e fro z en for nearly s ix month s . Under the exchange sys tem that had been adopted , the government dec ided not to intervene in the free I n i t ia l l y , the bol ivar s o l d at around 8 to the market . do l l ar , but then rapidly s tarted to r i s e due to a shortage o f foreign currency . A pecu l iar ity o f the Vene zuelan ec onomy is that 9 0 percent of its fore ign currency earnings are g enerated by the pub l ic secto r ; thu s the act ion the monetary autho r i t i e s e i ther do or do not take determines the marke t . Faced w ith th i s r i s e in the p ri c e o f the dol l a r , the Central B ank dec ided to intervene in the S tock Exchange , but i t s intervention
334 gave r i s e t o exc eeding l y easy specu l ative prac t i c e s and d e s tab i l i ze d the marke t . I n the l ight of the s e c i r cums tanc e s , the Centra l Bank withdrew f rom the ma rket and s tarted to provide t h e comme r c i a l banks with fore ign currency at a f ixed rate o f 9 . 9 5 bol ivars per do l lar , wh i l e the S tock Exchange wi thdrew f rom the fore ign cur rency market . The amount so l d by the C entra l Bank ( US $ 1 2 0 mil l ion per month ) wa s greatly inferior to the demand and l ed to the emergence of a l ternat ive marke t s . One o f th e s e operates through the money- exchange o f f ice s , providing l imited quant i t i e s t o purchasers i th e othe r , with h igher rate s , ha s no re str ictions a s regards quantity , it s tran sactions b e i ng carried out directly between vendor and purcha ser . Having rema ined stab l e at between 8 and 9 bol iva r s f o r a f ew week s , t h e f ree do l la r ro s e cont inuou s l y t o reach 1 2 bo l iva r s , when t h e C entral Bank withdrew . By mid-July i t reached 1 7 b o l ivar s , only to fall to a rate of between 13 and 14 bol iva r s per do l la r during Aug u s t and September . A s a resu l t of a l l the s e factors , in Oc tober 1 9 8 3 there were f ive d i f f erent exchange rate s : two preferential rate s of 4 . 3 0 and 6 bo l ivar s , the bank rate o f 9 . 9 5 , the money- exchange- o f f i c e rate o f 13 bol iva r s , and the free rate of 1 4 . To the s e can be added s everal spec ial intermediate rates . A s can b e ob s e rved , th ere i s more than a 3 0 0 percent var i a t ion among the d i f ferent exchange rate s , wh ich not only mak e s for c omp l e te un c ertainty ( s ince a c c e s s to the d i f ferent rates is not c l early def ined ) but a l so encourages irregu l a r transac tions to be made . I t i s e a sy to imag ine that a s a re sult of th i s exchange d i s o rder , the cons equent uncerta inty , and th e admin i s trat ive d i f f icu l t i e s in obtaining fore ign currency at preferent i a l rate s , there has been a t endency for production to fal l dramatica l l y on one hand and for un empl oyment to rise steeply on the othe r . Th i s can b e c l early ob s e rved in t h e moneta ry indic ator s : Despite a notab l e increa s e in dome stic l iqu i dity a s a result o f exchange control , the demand for c redit ha s rema ined stagnant . I n add i t ion , the lack o f fore ign currency at preferen t ia l rates h a s l ed to a fall in input supp l i e s t o the production cente r s . Faced with dif f ic u l t i e s in obta in ing fore ign currency a t such rate s , manu f acturers have only u s ed the f ree market in extreme c a s e s , l eading to a reduction in imports and a shortage of raw ma ter ia l s and mak ing i t nec e s sary for manu f acturers to reduc e pro duction l eve l s . There have been no seriou s shortag e s , s ince i t wa s customary for the country to ma inta in h igh l eve l s of invento r ie s , and with an impending deva lua t ion , ex tra supp l i e s were in ma ny c a s e s purcha sed in advanc e . Thu s the shortage o f fore ign cur rency h a s resul ted in lower l eve l s o f invento r i e s rath e r than chronic shortag es . I n any ca s e , rel iab l e e s t ima t e s show tha t imports have
335 f a l l en by more than 4 0 percent s o far i n 1 9 8 3 , a decrease that can only b e expl a ined by a marked reduction in invento r i e s . RELAT IONS WITH THE IMF The renegotiation proc e s s has been accompanied by the para l y s i s o f the economy and the retention o f an unsu s t a inable exchange-rate sy s tem . When the exchange contro l wa s introduced i n February 1 9 8 3 , the author it i e s made a f inal a ttempt to r e f inance t h e short- term debt f o l l owing th e out l i n e s it had been propo s ing s ince October 1 9 8 2 . The s e negot ia t ions f a i l ed and , by the s econd h a l f o f March , gave way to negotiations to ob tain a three-month moratorium on capital payments , the idea being that dur ing th i s period cond it ion s coul d a r i s e that wou l d ensure the coun t ry ' s medium- t erm payment capa c i ty . The morato r ium wa s obtained without ma j or d i f f icul t i e s , and the same intere s t rates were ma inta ined for the debts out s tanding . H owever , the total sum to be ref inanced rose f rom US $ 8 . 7 b i l l ion , wh ich wa s the o r ig ina l ly sugg e s ted f igure , to U S $ 1 8 b i l l ion , ac counted for by th e loans due to mature in 1 9 8 3 and 1 9 8 4 . For the purpo s e of the s e new n egotiation s , the Ven e z u e l an autho r i t i e s adopted the a t t itude tha t Ven e z u e l a ' s c a s e wa s d i f f erent f rom tha t o f o ther Latin Amer ican count r i e s in that i t s total debt wa s r el at ively sma l l e r ; the country s t i l l had about U S $ 9 b i l l ion in re serve s and did not require new credit to s a t i s f y i t s fore ign requ irement s . For the se rea son s the government hoped to rea ch an ag reemen t tha t wou l d not involve the I nterna tional Monetary Fund or , at l e a s t , tha t wou l d not imply the k ind o f cond i t ions a credit agreement with tha t i n s t itut ion norma l ly impl i e s . I n the meant ime , in mid-March 1 9 8 3 OPEC decided to cons iderab l y reduce i t s o f f i c i a l o i l pr ices and to reintroduce produc tion quo t a s for i t s membe r s . Al though th i s dec i s ion meant an add i t i ona l reduct ion in Vene zuela ' s fore ign earning s , it introduced an e l ement of stab i l i ty into the o i l market tha t a l l owed better pl ann ing o f the action to be taken in the home sphere and d i s s ipated a s e r i e s o f f ea r s concern ing the o i l market that h a d become wide spread dur ing the prev iou s month s . Under these c i rcums tanc e s , an advi sory committee o f c reditor bank s wa s set up , headed b y t h e Cha se Manhattan Bank , to s e rve as th e counterpart to the Vene zuelan autho r i t i e s in the negot iation s . The commi ttee demanded f i rs t that the total of Ven e z u e l a ' s debt b e made c l ea r . Thi s requ irement turned out to be more of a prob l em than wa s at f i r s t thought , becau s e the deb t s o f the s tate enterpr i s e s and in s t i tu t e s were often ne ither contro l led nor reg i s tered . The committee a l s o demanded that some
336 o f the s e i n s t itutions tha t had not been included in previou s r e f inanc ing scheme s ( in particular the Banco Indu s trial de Vene zuel a ) bring the i r del ayed payments up to date . Th i s requir ement wa s not carried out to the ful l because o f a l ack of o rgan i z a t ion and for dome stic l egal rea son s . The d e l ay in out s ta nding intere s t pay ments wa s to become a permanent source o f irritat ion th roughout the who l e nego t i a ting proc e s s between the Venezuelan government and its c reditor s , partic u l a r l y becau s e promi s e s to s o l v e t h e prob l em w e r e made severa l t ime s wi thout the s e commitments be ing honored . The thi rd cond i t ion stipu l a ted by the creditors wa s that ta l ks shou l d be initi ated wi t h t h e I nterna tional Mon etary Fund . At f i r s t the nature o f the s e talks wa s not c l ea r , s ince it wa s not propounded tha t Ven e z u e l a needed to reach a credit agreement with the Fund . The initial talks with the Internat ional Monetary Fund were consu l ta t ive . Howeve r , the government h inted tha t i t might reque s t a credit agreement and even went so far a s to a sk to be informed o f the ba s i c condi tions demanded by the Fund . As part o f the Fund ' s routine procedures in the superv i s ion of exchange systems , a consultation had been propo sed for 1 9 8 3 to examine the The government reque sted tha t th i s c a s e of Vene zuela . meet ing be b rough t forwa rd , th i s be ing the o f f i c i a l r e a s o n for th e exchange o f mi s s ions . At the t ime of th e i r s econd v i s it to the country , th e Fund repres enta tive s , who we re expec t i ng to commence negotiations for a credit agreement , found tha t the Vene zuelan author itie s were not prepared to d i s cu s s the i r exchang e sys tem . The ta l k s were l imited to e s tabl i shing the verac ity of the o f f i c i a l f igure for the f i scal de f ic i t . Meanwh i l e the Vene zuelan autho r i t i e s had been di scus s ing how they cou l d so lve the prob l em of obta in ing the Fund ' s approval for the ir po l ic ie s without hav ing to constrain themselves to the condit ions of the s tandby credit agreement s of tha t i n s t i tution . The government expected the Fund to be sympa the tic towa rd its concerns , s ince Venezuela had made signif icant contributions to the Fund du ring th e yea r s of its o i l bonan z a . As a re sul t of the se contr ibution s , the country had a net credit with the Fund o f U 5 $ 1 . 2 b i l l ion . Th i s amount , cons idered pa rt o f it s international r e s e rve s , cou l d be used automatical l y but wa s not an endo r s ement for the wo r l d monetary authority o f the way the Vene zuelan government would manage the economy . The appa rently obvious solut ion to th e prob l em of obta ining th e support o f the Interna t iona l Monetary Fund without having to mee t its cond it ions lay in the compensa tory credit fac i l i ty . Thi s service is provided for count r i e s tha t have su f f ered a temporary setback in export earning s , prov ided that the cau s e of th e i r short fa l l in income be beyond the control of the author i t i e s . Usua l l y , th i s reduc tion in earnings i s due to f lu c tua t ions
337 in the raw-material mark e t s in count r i e s who s e exports depend o n the s e produc t s . This wa s the case in Vene zuel a , where oil exports had fal l en by almo s t 2 0 percent i n two consecutive yea r s . However , the compensato ry c redit fac i l i ty had never been appl i ed to an o i l - exporting country for the s impl e reason that none of the s e h a d ever needed it . G iven the important ro l e that the OPEC coun t r ie s had pl ayed in the f inan c i a l upheava l s tha t occurred fo l l owing the increa s e s in o i l p r i c e s between 1 9 7 4 a n d 1 9 7 9 , it wa s a pol i t ical l y del i cate matter to co n sid e r a l l owing the o i l exporters t o u s e the IMF compensa tory fac i l i ty . I n order to oppose the o i l countrie s ' acc e s s to the compen s a tory c redit f ac i l i ty , it wa s argued tha t the pr i ce of c rude oil wa s not out s ide the control of the autho r i t i e s in the OPEC countrie s , s ince it is f ixed by a cartel of produc ers . A more techni c a l a rgument h el d tha t there wa s no certa inty t h a t th i s shortage o f re source s wa s rever s ib l e a n d therefore temporary , s ince oil prices are not sub j ect to the cyc l e s a f fe c t ing other raw ma te r i a l s . On the bas i s o f the s e f a ct s , the managing dir ector o f th e IMF addre s sed h imse l f to the gene ral prob l em of wh ether the o i l - export ing countrie s cou l d have acc e s s to the compen sa tory c redit fac i l ity . Dur ing cons iderat ion o f the matter , it wa s conc luded tha t no impediment ex i s ted i n th i s respec t , but that req u e s t s by the o i l export ing countrie s should be studied on a c a s e-by- c a s e b a s i s . T h e ma in a rgument in suppo rt of th i s conc l u s ion wa s that OPEC doe s not a c t as a c a rtel , s ince the f ixed pr i c e s e s tabl i sh ed by i t do not determin e market con d i t ions but rather re spond to them . Th i s l ine of thought i s important i n the l ight o f propaganda that c i rcu l a ted in previous yea r s , wh ich held tha t price f ixing by OPEC had been the cause o f mo s t internat ional economic i l l s . However , the Fund , who se argument s tend to s u i t i t s own conven ienc e , coul d not admi t d i s c r imina tion aga in s t a group of countr i e s without contradict ing its princ i p l e of equ a l treatment for a l l memb er s . The Vene zuelan author i t i e s con s idered the IMF Ex ecutive Board ' s dec i s ion a vic tory . They thought tha t it woul d make an agreement po s s ib l e , wh ich in turn wou l d f ac i l i tate a re f inanc ing arrangement . They forgot , however , that a further requ i rement for a c c e s s to be had to the compensa tory f a c i l ity i s that " the autho r i t i e s cooperate with the Fund in solv ing th e i r bal ance o f payments prob l ems . " S ince they h a d n o t taken a n y measures that could be interpreted as doing so , acc e s s to the f ac i l ity proved practica l ly impo s s ib l e . Meanwh i l e , the Ven e zuelan government made the grave mi stake o f announc ing to its creditor s that in princ iple i t had reached an agreement wi th the IMF , a l though such an agreement did not ex i s t . Denial of th i s by the Fund author i t i e s damaged the credib i l i ty o f the Vene zuelan
338 autho r i t ie s, a s wa s to b e expec ted . I n the consul tat ion on Ven e zuela tha t took p lace in the Execut ive Board o f the Fun d , the g enera l impre s s ion regard ing the mea sures taken by the government and i t s intentions for future action wa s negat ive . T h e report by the IMF autho r i t i e s dec lared , for examp l e , tha t " the recent act ion by the Ven e zuelan autho r i t i e s is insu f f ic ient to deal with the country ' s economic d i f f icul t i e s and the mea sure s they have taken are not the appropr iate ones . " I t exp l a ined tha t the measures " ran the ri sk o f rapidly dep l e t i ng internat ional r e s e rve s , s e r io u s l y inc rea s ing i n f l a tion and d i s tort i ng the a l l ocation of resource s . " By way of conc l u s ion , i t sa id that " the country ' s serious prob l ems can only b e solved through a d j u s tment mea sur e s " in the mos t d iver s e areas of the economy . In the tal k s with the Vene zuelan author i t i e s , the Fund mi s s ions had recommended the f o l l owing measure s : 1. 2. 3. · 4. 5. 6. 7. 8.
mod i f ic a t ion of the exchang e system , prefer ably by mean s of a deva l uation a imed at un i f ying the exchange rates ra i s ing the dome s t i c p r ice o f c rude o i l to interna t ional leve l s reduct ion i n pub l ic spending increa s e in th e p r i c e s of pub l ic s e rv ic e s and of goods produc ed b y state enterpr i s e s i nc rea sed income tax and th e introduc tion of a sales tax reduction o f net internal credit and a l l ow ing intere st rate s to cont inue to f l oat l i ft ing the recently decreed r e s t r i c t ions on imports f ree ing p r i c e s and f ree z ing wag es
The s e recommenda tion s � never s e r iou s l y d i s c u s s ed , s ince a t no t ime d i d t h e tal k s on a pos s ib l e c redit agreement between Ven e z u e l a and the Fund g o beyond the prel iminary stage s . I n the i r report , the autho ri ti es o f the Fund recorded that al though the Vene zuelan autho r i t i e s exp r e s sed agreement with some of the recommenda t ion s , they con s idered " that it wa s not po s s ib l e to c ontemplate immediate a c tion in th e s e area s , due ma i n ly to the impending Decembe r 1 9 8 3 e l ect ion s . " I n the s e c ircumstances the Vene z ue l an government pub l i c l y re j ected the Fund ' s recommenda tions , a l l eg ing tha t they were impo s s ib l e to accept becau se of the i r h igh soc i a l c o s t . Th i s prac t i c a l l y c l o s e d the door s to I t should be noted tha t th e a f orement ioned an agreement . mea sures were recommendation s made during the consu l ta ti on proc e s s and not cond i t ions for a cred i t agreemen t , s ince there ex i s t s , in pr inc ip l e , a l imit t o the cond i t ions that can be set in such agreement s . A s th e po s s ib i l ity o f a cont ingency credit wa s never seriously cons idered , the Fund did not modi fy i t s initial
339 recommendat i on s . The c onsul tat ion in the Execut ive Board of the IMF took p l a c e at the beg inn ing of July 1 9 8 3 , and it wa s suppo sed tha t it wou ld form the ba s i s for the negotia tions . By tha t da te the Vene zuelan government had requ e s ted and obtained a second morator ium for i t s amo r t i z ation payment s . A s a cond i t ion for g rant ing i t , the creditors had ins i s ted tha t t a l ks with the Fund continu e with the ob j ec t of reach ing an agreement with i n t h e three-month p e r i o d o f payments d e f erred . They h a d a l so in s i sted that t h e outs tand ing intere s t payment s be met and tha t a so l u t ion be found to the prob l em o f t h e private deb t . At the end of July a new mi s s ion f rom the Fund v i s ited Venez u e l a . Th i s proved to b e f ru i tl e s s , f o r in a tele vised me s sage to the nat ion the min i ster o f trea su ry s ta ted tha t th ere wou l d be no change s in the po l ic ie s adopted up unt i l then-- in the exchange sy stem i n part icular- -and tha t any se t t l ement with the Fund woul d have to b e made f o l l owing the December 1 9 8 3 e l ec t ion s . Shortly a f t e r , at the beg inn i ng of S eptember , the foreign bank s ' adv i s o ry commi ttee agreed that it wou l d mak e no forma l propo sal to the government o f Ven e z u e l a for th e re schedu l ing o f i t s deb t , s inc e it cons idered i t e s s en tial tha t Vene zuela reach a para l l e l agreement with the I n terna t i ona l Monetary Fund and mee t its out standing paymen t s . Th i s ref erence to a " pa ra l l e l " agree ment can ea s i ly b e interpreted a s a demand for a contin gent credit agreement , s ince th i s a rrangement i s the only one tha t c ou l d be carried out s imul taneou s ly , as i t i s sub j ec t to a quarterly review . An add i t i onal p robl em wa s the pub l ic d i s pute between the minis ter of treasury and the p r e s ident o f the Central B ank concerning the hand l i ng of the private fore ign debt . The Centra l Bank invoked legal reasons for refu s ing to provide currency a l ready approved by RECAD I for the debt payment s of a number of pr ivate compan i e s . The matter wa s important s ince one o f the c reditor banks had threatened l eg a l a c tion if the ou t st anding payments were not made . The Vene zuelan company concerned wa s wi l l ing to meet it s ob l igation s but c ou l d not obta in the foreign cur rency it had been author i z ed . After severa l days of pub l i c d i s c u s s ion , a b i l l wa s p a s sed on S eptemb e r 2 7 b y wh ich dol l a r s c o u l d be granted at the preferential rate up unt i l Decembe r 31 for the payment o f the p r ivate sector ' s deb t , provided tha t the d i f f erence between the pre f erential and the bank rate for the dol lar wa s put up a s surety and tha t the debt wa s recogni z ed by a commi s s i on created espec ia l l y for th i s purpo s e . Al though th i s b i l l d i s pe l l ed the uncerta inty of the moment , i t did not solve the que st ion o f th e private trade debt and the treatment that the pr ivate sec tor woul d rece ive f rom January 1 9 8 4 onwa rd .
340 Sub sequently , on the day on wh ich the second morator ium ended , the c reditor bank s granted a th i rd deferment o f payments o f only one month and at a h igher rate o f intere s t . Thi s l imit wa s des igned to observe Vene zuela ' s behavior in rela tion to meet ing its ou t stand ing intere s t paymen t s . I f th i s s i tuation wa s re c t i f ied , the moratorium woul d be extended for another three month s unt i l January 3 1 , 1 9 8 4 , four days before the takeover I t c an therefore b e concluded tha t o f the new government . t h e ref inanc ing proc e s s i n i t ia ted in 1 9 8 1 a n d t h e re nego t iation o f the debt attempted during 1 9 8 3 were unsucc e s s fu l and tha t the re schedul ing o f Ven e zuela ' s fore ign commi tmen t s cou l d not b e achi eved before mid- 1 9 8 4 a t the ea rl i e s t . ACH I EVING ECONOMIC S TAB I L I ZATION Al l th e f a c t s r e l a ted so far expl a in why the 1 9 8 3 negot iat ions to r e s chedu l e the debt have f a i l ed and why Ven e zuel a , in spite o f b e i ng in a more favorabl e po s it ion tha n other countr i e s in the region , ha s become one of th e mo s t d i f f icul t c a s e s . I t wou l d , however , seem pertinent to make a f ew additional comment s . Vene zuela i s not only in the po s i t ion of having to solve a del icate f o re ign-debt prob l em , but i s a l so faced with the d i l emma o f having to adopt a prog ram o f economi c stab i l i z at ion a f ter f our yea r s of economic stagnation . Norma l l y , a d i s equ i l ibr ium in the balance of payment s i s cau s ed by the exc e s s ive u ti l i z a t ion o f re sourc e s in the dome s t ic economy , producing rates of g rowth tha t are un sustainab l e in the med ium term . Thu s , the Internat iona l Monetary Fund ' s cus toma ry pre s c r iption con s i s t s of reduc ing the l evel o f internal economic a c t iv i ty , wh i ch th en l eads to a f a l l in the demand for imports and gene ra t e s exportab l e surp lu s e s . In the c a s e of Vene zuel a , however , f our yea r s of rece s s ion came between the per iod o f accel erated growth and the time when bal anc e - o f - payment s prob l ems arose . Th i s pecu l ia r s ituation i s d u e to the rec e s s ion coincid ing with a ma rked increa s e in fore ign- currency re sourc e s . The 1 9 7 9 incre a s e s in o i l p r i ce s me ant tha t between 1 9 7 8 and 1 9 8 1 expo rt earning s went up f rom US $ 9 . 2 b i l l ion to US $ 2 0 . 2 b i l l ion . De spite th i s , the gro s s national product dropped du ring the s e yea r s a t a n average annua l rate o f . 2 perc ent . In 1 9 8 2 it rose by . 6 percent , and e s t ima t e s su gge s ted that it wou ld drop aga in in 1 9 8 3 by a t l e a s t 3 percen t . Thu s , a t the time o f the bal ance of-payments probl ems , unempl oyment had reached an a l l - t ime h igh , and th e uti l i z a t ion of insta l l ed capa c i ty wa s particularly l ow . Under the s e c i rcumstan c e s , it woul d b e counter produc t ive to f o l l ow tradit ional remed i e s . Greater de f l at ion c ou l d l ead to the d e stru c t ion of the produc tion
341 capac i ty , inc rease the a l ready ex i s ting d i s t ru s t , inh i b i t inve s tment , ra i s e unemployment t o soc i a l l y unacceptable l evel s , a n d d i scourage t h e return o f capita l previou s l y taken out o f the country . The social ten s ion that would be caused by h ighe r unemp loyment d e s e rves spec ial a ttention as g ood labor r e la t ions have been one o f the mo s t pos i t ive f ea tu r e s of the Vene zuelan economy in the l a s t twenty- f ive year s , despite the ex i s tenc e o f s trong trade union s . I t shou ld a l s o be unde rl ined that the f inanc ial s i tuation o f the manufactu r ing compani e s cou l d prove impo s s ib l e to sustain i f there were a further drop in demand . In short , in Vene zuel a a t the present moment there i s not the soc ial tol e rance to a de f l a tionary po l icy tha t might pos s ib l y ex i s t in countr i e s who se balanc e-of- payment s probl ems emerged immediately fol l ow ing periods of a cce l erated growth . Furthermore , the ex i s tenc e of cons iderabl e idle capac i ty l eads one to b e l i eve that i t would be po s s ibl e t o adopt pol i c i e s t o reactiva te the economy without un nece s sa r i l y aggravat ing the balance-o f - payments and inf l a t ion prob l ems . The overvaluation o f the currency ha s meant tha t th e Vene zuelan economy is ex traord ina r i l y open and tha t there are , therefor e , amp l e opportun i t i e s for import sub s t i tu t i on , even of f in i shed con sumer good s . The reac t ivation o f the economy , moreover , wou l d s erve to encourage the return o f capital f rom abroad tha t ha s not yet been inve sted in other economi e s , since it woul d create new inve s tment opportunit i e s i n th e dome s t i c secto r . The deva luation cou l d have become an incentive to rea c t ivate the economy s ince , in i t s e l f , it imp l i ed in c reased protection . But the adopt ion of an e s sent i a l l y unstab l e exchange system inhibited inve s tment , c reat ing unc erta inty as regards the f inanc i a l s ituat io n of enter p r i s e s . Moreove r , the repeated announc ement of a re f inanc ing agreement that never a c tua l l y materia l i z ed ma inta ined th e suspen s e a s to the future o f the economy , wh ich brought product ion to a s tand s t i l l . I n order f o r production to return to normal , therefore , it i s e s sent i a l that an exchange pol icy be def ined . But thi s i s j u s t one aspec t of a wider stab i l i z a t ion program whos e a im shoul d be to achieve a return to reasonab l e rate s o f growth . The d e s ign ing o f such a program woul d f ac i l i tate nego tiations with the c reditor s . But , by the same token , no program of any k ind wi l l be accomp l i shed i f the negotiations are un succ e s sful . Now , th e cour s e the 1 9 8 3 negotiations have taken leads one to c onc lude tha t , i f the debt is to b e re schedul ed , it i s pra c t ic a l ly inevitab l e tha t an agree ment be made with the I nternational Monetary Fund . However , an agreement with the Fund can only be made i f t h e n e e d t o reac t ivate the economy i s recogn i z ed . The Venezuelan government shou l d , there fore , b e c l ever
342 enough to formu l a t e a r ea c t iva t ion program that wou l d reestab l i s h a b a s ic equ i l ib r ium in t h e b a l ance o f pay men ts and in th e f i sc a l s i tuation . A s far a s the Fund i s concerned , i t needs t o be f l ex ib l e a n d rea l i s t i c enough to recogn i z e tha t th i s equ i l ibrium w i l l only be ach ieved i f a c l imate o f conf idenc e can b e c reated and a dome s tic demand capab l e of sett ing th e produc tion apparatu s in mo tion can be ma inta ined . I f th i s does not occur , the only rema in ing a l ternat ive wi l l be a settlement wi th th e creditors tha t wou l d not invo lve the Fund or a moratorium tha t woul d have negative e f f ec t s for both Ven e zu e l a and the interna tional f inanc ial community . A stab i l i z ation and reactiva t ion p rogram wi l l re quire as much d i s c i p l ine as tha t demanded by tradit iona l Fund strategy , except tha t the d i sc ip l ine woul d be of a d i f ferent k ind . Wha tever the approach adopted it i s e s sentia l that pub l ic f inanc e s b e put i n order , wh i ch cou l d s erve a s c ommon ground between the orthodox recommenda t io ns and a stra tegy mo re in keep ing with the needs of th e country . Theoretica l ly , such order ing i s ea sy t o achieve , s ince the re i s a wide ma rgin o f wa s tage and d i sorderly u t i l i z a tion o f re sourc e s for pub l i c spending . Furthermore , s inc e tax e s a r e exc e s s ivel y l ow in Vene z uel a , the ir inc rea s e i s f ea s ib l e . Thu s one s e e s tha t th e Fund ' s recommenda tion s concerning f i sc a l austerity , increa s e s in th e dome st i c price of o i l , and th e introduc t ion of new tax e s form an a c c eptab l e and even nec e s sary part o f any stab i l i z a t ion program . The d i f f e ren ces men t ioned might a r i s e in other area s , such as the role to b e pl ayed by the pub l i c s e c tor . In Ven e zuela the s ta t e ha s f o r many yea r s been the d riving force beh ind the economy . The fact tha t it genera tes more than 4 0 percent of the gro s s national produc t mak e s th i s pra ctica l ly inevitab l e . There fore , a l though one might a ccept tha t the weight o f react iva t ion shou l d l ie with the p r ivate sector and tha t it i s e s sent i a l that resourc e s be f reed t o a l l ow p r ivate indu s try to recover , i t is a l so true that the pr iva te sector wi l l only incre a s e its l evel of a c t ivity if the pub l i c sector ma inta in s an adequate l evel o f demand . In th i s sense , the adopt ion o f doc trina ire po int s of v i ew concerning the rela t ive importance of one or other In the Vene zuelan economy sector i s tota l ly misplaced . the pub l ic sector plays a role that cannot be mod if ied in the short term , and i f th i s sector i s para l y z e d , the res t o f th e economy wi l l a l so come t o a stand s t i l l . The second a rea in wh ich d i f f erenc e s shou ld b e reduc ed i s trade po l icy . Wh i l e in the medium a n d long term Vene zuela needs to inc rea se i t s nontrad i t ion a l export s , th e sh ort- term po s s ib i l i t i e s f o r dive r s i f y ing exports are qu i t e s l im , even tak ing into account the inc entives c reated by the deva l uat ion . I n the f ie l d o f import s , on the oth e r hand , th ere i s a wide margin f o r reduc ing fore ign- currency need s , s ince income l eve l s in
343 previou s years and the overvaluat ion o f the bol iva r c reated consumer pattern s tha t encouraged impo r t s . Thi s r e s u l ted , for exampl e , in impor t s repre sent ing more than 2 7 perc ent o f the gro s s nationa l produc t in 1 9 8 2 . Ther e i s therefore a wide ma rg in for import sub s t itution . As previou s l y ment ioned , the produ ction capac i ty s tanding idl e cou l d ach ieve th i s goal in the short term . Th i s wou l d c on s t itute one of the k ey e l emen t s f o r reac t iva tion and canno t , there fore , be subordinated to theoretical pos ition s regarding trade l ibera l i z a t ion . A th i rd area in wh ich an unde r s tanding of the Vene zuelan s i tuat ion is required in o rder to des ign an economi c s prog ram i s prices and wag e s pol icy . For many yea r s , Ven e zuela has been a c oun try in wh ich pr i c e s have been s tabl e . B e tween 1 9 5 8 and 1 9 7 8 the average annual increa s e in the c o s t of l iving wa s 4 pe rcent . I n the pa s t four yea rs th i s average ha s r i sen to 1 5 percent . However , wag e increa s e s have not k ept pac e with inf l ation . Wage negotiat ions are s t i l l carr ied ou t on the ba s i s o f nominal con sumer p r ic e s and , w i th only two exceptions i n the l a s t t e n year s , no general wage inc rea s e s have been g ranted . Th i s s itua tion has preva i l ed despite the fact tha t th e country ha s st rong trade u n i on organ i z a t ion s and en j oy s f reedom of contra ct and c ivil r ight s . I n the p as t , real increa s e s in income gen�rated by economi c activity and the l ow rate of inf l a t ion a l l owed an income-price spiral to b e avo ided . But after three yea rs of real decrea s e s in income , any increase in pri c e s tha t is not a t l ea s t partia l l y compensated by wag e in crea s e s is qui te l ik e l y to produc e chang e s in the att itud e s o f the workers . The r i sk of a wage increa s e caus ing a conf l ic t c annot b e tak en , a s i t wou l d destroy th e peaceful l abor relations that have f o rmed one o f the mo st po s i t ive features of Vene zuela ' s economy and democracy and cou l d cause an i n f l a t ionary spiral that wou l d undermine the equ i l ib r ium o f the ec onomic and soc ial fabric . For th i s rea son , any economic stab i l i z a t ion program in Vene z u e l a shou l d rema in f l ex ib l e in the treatment o f wage s a n d pri ce s . T h e po s s ib i l i ty shoul d n o t be pre cluded o f adopt ing wage pol i c i e s that woul d incorporate control mechani sms app l icab l e to both wag e s and pric e s . Th i s i s particularly pertinent in th e present s i tuation , s ince the e f fect o f the deva luation and the c heck ing o f inf l a ti onary pre s sures b rought about a s a re sult o f the price free z e ( wh ich l a s ted mo re than s ix month s ) c ou l d create a n unmanag eab l e s i tuat ion i n the ab sence o f suitab l e control mecha n i sms . The prob l ems concern ing price increa s e s and the i r e f f ec t s on income s mu st be taken into account in determin I t i s c l ear that th e present ing the exchange rate . exchange sys tem cannot be ma inta ined . It i s nec e s sary for i t to be s imp l i f ied and for th e number o f d i f f erent ial exchange rate s and th e d i f f erenc e between the o f f ic ia l
344 and the f ree rates to b e reduc ed . H ere the react iva t ion pol icy can be reconc i l ed with orthodox pol icy without any ma j o r probl em . But the ex treme mus t not b e reached where determining an equ i l ib rium exchange rate cou l d provoke uncontrol la b l e ins tab i l i ty in wage s a n d pric e s . For th i s rea s on i t i s nece s sary to either l imi t the extent of th e devaluation or make ava i l ab l e suitab l e too l s f o r ad j u s tment and contro l . I t wou l d s e em po s s ib l e to des ign a reactivat ion and stab i l i z a t ion prog ram tha t wou l d ensure Ven e zuela ' s med ium- term payment c apac ity and that c ou l d con s equentl y lead to an agreement w i th i t s creditors concern ing the reschedu l ing o f the debt . The Internat iona l Monetary Fund ' s support for a prog ram o f thi s k ind i s important in that it would f a c i l itate the nego t i a t ions and ma intain the r itual of international f inanc i a l relations . But i t wou l d be l amen tab l e i f ma inta ining th i s r i tu a l prevented reach ing a s o lu t ion to the probl em of Ven zuel a ' s debt- one o f the ea s i e s t to solve , s ince it i s the mo st a rt i f ic i a l in what h a s come to b e termed t h e internat iona l fore ign- debt c r i s i s .
345 APPEND IX For many yea r s Vene zuela has been a c ountry with a sma l l f o r e ign debt . Fol l owi ng the b lockade impo sed in 1 9 0 2 by Great B r itain , Germany , a nd I ta l y in reta l i a t ion for the delay in pay ing out s tanding debt s , the govern ment s o f Vene zuela have avo ided becoming indebted to fore ign countr i e s , and pub l i c opin ion ha s rema ined par t icularly s en s i t ive and ave r s e to international f inance commitments . The dic tatorsh ip o f General V icente Gome z , who rul ed the c ountry between 1 9 0 8 and 1 9 3 6 , set i t s e l f the t a s k o f e l iminat ing the fore ign debt . I n 1 9 3 0 , on the o c c a s ion of the centenary of the death o f 5 imon B o l f va r , the g eneral gave the f o l l owing addre s s to the " I bel i eve tha t the b e s t , mos t p l e a s ing a nd country : endur ing g if t we can o f f e r to h i s memo ry i s to tota l l y e l iminate t h e foreign deb t , for by th i s uncommon action the nat ion wi l l achieve new g l ory and respect . " Funds were mob i l i z ed for th i s purpo s e , and f rom then unt i l 1 9 5 7 o f f ic ia l l y Vene zuel a had n o fore ign debt . Th i s wa s made po s s ib l e by the d i s c overy and exp l o i tation 9 f the country ' s o i l wea l th and the resul tant increa s e in its fore ign reserve s . H owever , dur ing the 1 9 5 0 s the decentra l i zed pub l ic secto r enterp r i s e s had begun to acqu i r e d eb t s without reg i s t e r ing them . As a resul t , by January 1 9 5 8 th i s debt had reached the f igu re of 3 b i l l ion bol iva r s , twice that o f 'the nat ion ' s of f i ci a l deb t . During the year in which the present period o f Vene zuelan democ racy began , the deb t s were consol ida ted . But at the s ame t ime the f l igh t o f capital brought about by po l i t ic a l instab i l ity and a f a l l in o i l p r i c e s l ed to a decrea s e in interna t iona l r e serve s . In the l ight of the s e c i rcumstanc e s a l oan for U 5 $ 2 b i l l ion wa s agreed upon in 1 9 6 0 with a consortium o f foreign bank s . Th i s operat i on s ign i f ied Ven e zuela ' s return t o the inter national f inanc e market s . F o l l owing that date , " the country began a pol icy of comp l emen t ing it s pub l i c saving s with foreign r e sou rc e s to cover both i t s day - to- day and devel opment needs , a proc e s s wh ich wa s encouraged by Vene zuel a ' s permanent so lvency resu l t ing f rom its balance of payments s itua tion . " l Th i s pro c e s s meant a moderate In 1 9 5 7 increa se in indebtedne s s up unti l 1 9 7 3 . Venez ue l a ' s tota l foreign pub l i c debt wa s U 5 $ 2 3 6 In 1 9 6 0 it wa s U 5 $ 2 9 4 mi l l ion ; in 1 9 6 3 , 1 6 1 mi l l ion . mi l l ion ; i n 1 9 6 8 , 4 3 7 m i l l ion ; and i n 1 9 7 3 , U5 $ 1 . 2 l 2 b i l l ion ( th e s e data are f rom the Banco Central de Vene zuela ) . After 1 9 7 4 and the inc r e a s e in o i l price s , the s i tuat ion chang ed radical l y . The new foreign earnings were too l a rg e to b e absorbed by the economy , and mecha n i sms such a s th e Ven e zuelan Inve stment Fund were c reated to take money out of c i rcul ation in order to a s s ign i t a t a later dat e to pro f i tabl e inve s tment . The
346 increase i n aggregate dema nd made i t nec e s sary , howeve r , to incre a s e impo r t s . The economy had acqu i red new d imen s io n s and very r igorous inve s tment pro j e c t s were drawn up to absorb add itional r e source s . Wha t held mo s t sway a t thi s t ime wa s the conv i c t ion , conf irmed b y the forec a s t s of the internat iona l o rgani zation s , tha t th e real pr i c e o f o i l wa s to inc rea se stead i l y . F rom 1 9 7 5 onward inve s tment grew i n real terms a t an interannual By 1 9 7 8 , total inve s tment rate of more than 20 percent . repre sented 4 0 perc ent of the gro s s national produc t . F rom 1 9 7 4 onwa rd , however , o i l earnings f e l l , and the government thought it w i s e to ma intain h igh leve l s of re serve s , particu l a r l y fol l owing the nationa l i z ation o f th e o i l indu s try in 1 9 7 6 . Thu s , it turned t o fore ign credit in o rder to f inanc e its l a rge inve s tment pro j ec t s , many of wh ich impl ied undividabl e expenditure s . By th i s t ime , the mu l t i l ateral f inanc e agenc ie s , such a s the Wo r l d Bank , had su spended c redit to the o i l - export ing countr i e s � the refore the latter turned a lmo st exc l u s ively to the pr iva t e interna tional bank s . The tendency to use the pr ivate banks rather than the international o rgani zations had ex i s ted f o r s everal yea r s . Thu s , wh i l e three-qua rters o f th e debt contra c ted i n 1 9 6 5 wa s granted by pub l i c f inance i n s t i tutions , in 1 9 7 3 th i s percentage had dropped to 3 0 percent . The attra c tion of the o i l c ountr i e s for th e inter national bank s a l so meant tha t Venezuela wa s o f f ered the mo st advantag eou s credit condit ions for almo s t any purpo s e . The c entral government ' s di f f icul t i e s in con tro l l ing th e debts of the state enterpr i s e s and agenc ie s , wh ich had been growing in previous yea r s , inc reased to the ex tent that by 1 9 7 8 approx imately 3 0 percent of the debt c on s i sted of shor t-term loans taken ou t by th e s e inst itution s . The s e were n o t reg i s tered a s p a r t of the publ ic deb t , so total pub l ic debt f igures for the period 1 9 7 4 - 1 9 8 2 ( a s we l l as tho s e a l ready c ited for 1 9 5 7 - 1 9 7 3 ) a re undere s t imated . The 1 9 7 4 - 1 9 8 2 f igures on Ven e z u e l a ' s total for e ign pub l i c debt ( a l s o f rom the Banco Central de Vene zuel a ) a re : 1 9 7 4 , US $ 1 . 0 9 5 b i l l ion � 1 9 7 6 , 3 . 2 9 0 b i l l ion � 1 9 7 8 , 7 . 2 5 3 b i l l ion � 1 9 8 0 , 9 . 6 5 5 b i l l ion � and 1 9 8 2 , 1 2 . 1 0 1 b i l l ion . The increa se in the debt b etween 1 9 7 4 and 1 9 7 8 can be traced to the Law for the Na t ional i z a t ion o f the O i l I ndu stry b y which bonds for the pub l i c debt were i s sued to the val u e o f U S $ 9 1 8 mil l ion � the Law for I nve stment in th e B a s i c Sectors of P roduc tion , wh ich repr e s ented a debt of approx imately US $ 5 . 4 b i l l ion � and the Ref inanc ing Law des igned to improve the short- term po s i tion o f the s tate i n s t i tu t ion s . F i f ty- two percent of the reg i s tered debt for 1 9 7 4 1 9 8 2 ma tu red i n the f ive yea r s between 1 9 7 9 and 1 9 8 3 . To th i s shou l d be added the short- term debt for wh ich rel iabl e f igu r e s a r e not ava i l a b l e and who s e tota l has been th e sub j ect o f controversy . E s t ima tes revea l its
347 to tal to b e at l ea s t 2 3 b il l ion bol ivar s but do not g ive a b reakdown for the fore ign and the internal debt . If the same percentage i s u s ed for the fore ign debt a s for the reg i s tered deb t , th i s g ive s a short-term fore ign debt of U5 $ 3 . 7 b il l io n , to wh i ch can b e added a s im i l a r sum for l iabi l i t i e s out s ide the pub l i c - f inance s e c tor . By th e c l o s e o f 1 9 8 2 , according to Vene zuelan cal cula tion s made for the renego t iat ion tal k s , the total foreign debt wa s running a t U 5 $ 2 6 . 6 9 0 b i l l ion . Th i s tota l , wh ich inc l uded debt o f s ta t e enterpr i s e s and f inance bodi e s , wa s made up o f U 5 $ 1 3 . 9 9 2 b i l l ion in reg i s tered med ium- and l ong- term debt and U S $ 1 2 . 6 9 8 b i l l ion in sh ort - term debt and fore ign l iabi l i t ie s of the pub l ic f inanc e secto r . Th i s i s in ma rked c ontra st to the previous f igu re o f US $ 1 2 . 1 0 1 b i l l ion in reg i s tered deb t for 1 9 8 2 . The unu sua l inc rease in the indeb tedn e s s o f the pub l i c s ector ' s f inanc e i n s t i tut ion s wa s due to the u s e o f short- term fore ign credit t o b r idge operat ing de f ic i t s and t o f inance l ong- term inve s tment . To the short-term debt of state agenc i e s shou l d be added the p r ivate sector ' s f o re ign deb t . Accord ing to RECAD I , tha t total l ie s s omewhere b e tween U S $ 8 and 9 b i l l ion and ma inly cons i s t s of short- term debt . NOTE S 1 . Ven e zuelan I nve s tment Fund , Evolut ion of the Pub l i c Debt in Venezue l a , C a ra ca s , 1 9 7 9 .
13
The External Debt, Financial Liberal ization, and Crisis in C h i le Ricardo Ffrench-Davis
Mo s t Latin Amer ican coun t r i e s are fac ing a dramatic prob l em o f externa l indebtedn e s s . The sharp deteriora t ion in international ma rkets reg i s tered s ince 1 9 8 1 ha s a f f ec ted the developing nations with unu sual sever ity ; the drop in export pric e s and d i f f icul t i e s of acc e s s to the ma rkets o f indu stria l i z ed countr ie s , the r i s e in intere s t rate s , and the sharp reduc t ion in th e new in f l ow of capital have a l l j oined together to g ive r i s e to the b iggest external shock in the l a s t ha l f century . Al though general i z ed , the e f f ec t s of the external shock on the economies of the deb tor na t ions di splay cons iderable va r i e ty , wh ich i s du e to the diverse bargain ing powers o f the count r ie s , the d i f f erent speeds and magn itude s o f each country ' s indebtedne s s proc e s s , and the development and indebtedn e s s s tra teg i e s adopted by The l atter wa s a l so a determin ing facto r in th e them . l evel o f devel opment tha t each country had reached when i t wa s hit by the external c r i s i s . I n o ther words , th ere are nat ion s who s e economi e s s tagnated or even contracted dur ing the la s t decade , yet there a re others tha t grew vigorou sly by u s ing for th i s purpo se the abundant ex terna l credit ava i lab l e to them on inter nat ional ma rkets . Dur ing the l a s t decade th e Ch i lean economy ha s under gone chang e s o f overwhelming impor tanc e . After the 1 9 7 3 coup d ' eta t , an orthodox moneta r i s t economic model wa s impo sed tha t progr e s s ively l iberated var iou s marke t s , tra n s f erred pub l ic enterp r i s e s to pr iva te hand s , and systema t i c a l l y did away with th e capa c i ty of the s ta t e to regu late economic a c t ivity . In the a rea o f interna t ional economic rel a t ions , an import l ib e ra l i zat ion proc e s s wa s carried out tha t suppre s s ed s e l e c t ivity in trade pol icy , e l imina ted parata r i f f r e s t r ic t ion s , and e stab l i shed a uniform ta r i f f of 1 0 percent for a lmo s t a l l imports . Th i s open ing-up proc e s s in trade wa s accompanied by a s im i l a r l y unre st r i cted opening-up proc e s s v i s - a - v i s fore ign inve s tment a n d by th e redu c t ion o f r e s t r ic t ions on th e pu rch a s e and sal e of fore ign cur rency and capital 348
349 movements . With in th e context of the innumerab l e change s tha t have taken p l a c e i n recent year s , it is dif f ic u l t to s ing l e ou t the e f f e c t s of a par t icu l a r area of economic pol icy . Th i s s tudy concentra tes , however , on the externa l debt o f C hi l e . B ec au s e of the intimate relation th i s had with the opera t ion o f the dome stic capital ma rket and the balance- o f -payments pol i c y , the ma in f eatures and resul ts reg i s tered in the s e two area s wil l be set forth here , too . A s ha s been shown in other s tud i e s , the Ch i l ean economy reg i s tered a very unsa t i s fa c tory performance during the perio d 1 9 7 3 - 1 9 8 2 . 1 At the same t ime , a spectacular proc e s s of conc entra t ion o f income and wea l th took p l a c e . 2 The total f a i l u re of the exper iment carried out in the s e years i s a s so c i a ted to a s i g n i f icant extent , a l b e i t not exc l u s ively , with the trade and f inanc ing pol ic i e s impo sed in the per iod in que s tion . The way the s e pol i c i e s wer e a ppl ied made it po s s ib l e for the external debt to g row very rapidly in the mo s t recent year s . At the same t ime , in s tead of supporting dome s t i c capital f o rmation , th i s incr e a se in debt d i s c ouraged it . the rapid and Th i s r e su l ted f rom f ive important cau se s : ind i s c r iminate l ibera l i z a tion of impor t s ( espec i a l l y of consumer goods ) , the lag in ad j u s tment o f the nominal exchange rate , the per s i s tence of h igh real inter e s t rate s on th e dome stic ma rket , the ab solute f re edom g iven to th e marke t forc e s to dec ide on the use made of fund s o f both domestic and extern a l origin , and th e d i f f icu l ty in ident ify ing the , market comparat ive a dvantages or f inding a ttract ive opportuni t i e s f or product ive inve s tment in the context of th e ma rket cond it ion s determined by th e appl ica ti on of an orthodox mon eta r i s t mode l . F inal ly , a h igh l evel of vuln e rab i l i ty of the nat iona l economy wa s generated . Thu s , in view o f the pa s s ive and neutra l dome s t ic pol i c i e s pursued , the ec onomy had no weapon s to deal with chang e s orig inating in the exterio r . Furthermore , the rapid indeb tedn e s s and th e magnitude o f the de f ic it o n cu rrent account cou l d obviou s l y n o t be mainta ined in the med ium term , even if the international f inanc ial c r i s i s had not occurred . Con s equentl y , the ex ternal s ec tor wa s placed on a cou r s.e tha t would inevitably c a l l for a trauma t ic ad j u s tment proc e s s . The seriou sne s s o f th i s s i tu a tion wa s a ccentuated , o f cour s e , by the fact tha t du r ing thi s ten-year period the national produc ti on base and capac ity for a d j u s tment we re actua l l y weakened rather than devel oped . Thu s , for examp l e , the va lue added by Ch i l ean manu f a c tu r ing in 1 9 8 2 wa s 1 6 percen t l e s s tha n in 1 9 7 3 : a f lagrant contra s t with the develop ing countries a s a who l e , wh ich ra ised the i r production over the same per iod by 5 0 percent . The f i r s t sect ion of th i s chapter set s forth the ma in f ea tu r e s of th e f inanc ial opening-up proc e s s and g ives brief deta i l s of the o f f ic ia l conc eptua l f ramework ,
350 the pol i c i e s adop ted , and the evolution o f capital move ment s and th e external deb t ; spe c i a l a ttention i s g iven to bank loans and the behavior of the capital f l ows rece ived by pr ivate debto r s . In th e second sect ion , the macroeconomic impac t of the ex ternal indebtedn e s s i s examined ( e spec i a l l y the way in wh ich it a f f e c ted monetary and exchange- rate pol i c i e s ) , the g lobal a d j u s tment proce s s e s to wh ich i t gave r i s e are ana l y z e d , and the evo l u t ion of intere s t ra tes - -e spec i a l l y the per s i s tent gap between dome st ic and ex terna l interest rate s-- i s s tudied . A n examination i s made i n the th ird section of the va riou s sourc e s o f externa l vu lnerab il ity t o which Ch i l e has been expo sed a s a re su l t of the f inanc ial openne s s . I a rgu e i n contra d i ct ion to the orthodox moneta r i s t approach tha t th e probl ems tha t arose were concentrated in the priva te- sector s egment of the deb t , a n d I a ttempt t o expla in why the ma s s ive in f l ow of f inanc ial capita l , a s wel l a s be ing accompan i ed by a reduc t ion in nationa l saving , wa s a s sociated with a dec l ine in the rate of capital fo rma t ion . The sec t ion ends with a b r i e f desc r iption of the ma in f ea tur es of the extern a l f inanc ial s i tuation and the renegotia tion proc e s s f a c ed by Ch i l e in 1 9 8 3 . F inal ly , the l a s t section conta ins a b r i e f recap i tu l a t ion of th e l e s sons provided by th e orthodox moneta r i s t expe riment in the f i el d o f f inanc i a l r e l a t ion s and fore ign deb t . F I NANC IAL OPENN E S S AND EXTE RNAL INDEBTEDNE S S The o f f ic ia l pol icy postulated an unre s t r ic ted open ing up to capital movements and the ind i sc r iminate l ibera l i zation of the dome s t i c f inanc ial ma rket . In th i s s e c t ion I set forth th e conc eptual f ramework on wh ich the f inanc ial opening up wa s based , then examine the way in wh ich th e princ ipl e s in que s t ion were appl ied and f ina l l y analy z e th e qua nt i tat ive deta i l s o f the vo lume and c ompo s i t io n of capital movements and external indebtedn e s s . The C onceptua l F ramewo rk of the Experiment There are o f cou r s e some very soph i s ticated orthodox moneta r i s t ver s io n s o f how th e l ibera l i z a tion of capital ma rkets shou l d work and o f i t s effects a s compared with tho s e o f th e so-ca l l ed f inan c i a l repre s s s ion . The e s sentia l a spec t s o f the o f f ic ia l vers ion can be conveyed by a very s imp l e sch eme , however . The l ibera l i z a t ion o f th e dome stic f in anc ial marke t and th e opening up to capita l movement s sought to in c rea se saving f rom both dome s t ic and external sources and to improve th e a l l ocat ion of c redit r e s ourc e s . In re spon se , it wa s expe c ted that th ere wou l d be an inc rea s e
3 51 in th e vol ume of inve s tment and in i t s e f f i c iency tha t wou l d provide the ba s i s f o r vigorou s economic growth . I n s impl e terms , th e concep tua l f ramework may b e desc ribed with the a id o f F igure 1 3 . 1 . Curve s 0 a n d D show the supply o f and d emand for l endabl e funds pre- va i l ing in the ma rket , ident if ied w ith saving and inve s tment , respective l y . To begin with , there had p reva i l ed wha t i s c a l l ed in the j a rgon o f moneta r i sm a s i tua tion of f inanc ia l repre s s ion , in th e sense tha t there were restrictions regard ing the o rgan i z a tion o f new banks and the operations they c ou l d c arry out . Aga in s t th i s background , the author i t i e s f ixed a n intere s t rate ( rc ) l ower tha n the equ i l ibrium rate for a c l o s e d economy ( re ) and a l so l e s s than tha t of an open economy ( r f < r e ) . �h i s gives a vol ume of saving s Vc , and demand is-rationed to the same l evel ( fo r the sake o f s imp l i c i ty i t i s a s sumed tha t init i a l l y there wa s no net in f l ow of The vo lume of saving and inve stment f oreign c ap i t a l ) . ( Vc ) is l e s s than tha t in a c l o s ed ma rket s i tua tion with a-rree rate , wh ich woul d b e Ve ; a t th e same t ime , some unpro f i tab l e inves tmen t s a re-made , s in c e the ra t ion ing mea n s tha t no t a l l of the mo s t e f f ic ient inv e s tments are made . Thu s , some inve s tment s wou ld be made tha t even had returns equ a l to rc , whe rea s o th e r s with a h igher y i e l d woul d rema in withou t f inanc ing ( inevitab l y , in some the return woul d be greater than re , s i nc e th e tota l inve s t ment woul d not exc eed Vc ) . F igure 1 3 . 1
Conventiona l Conceptu a l F r amework of
L ibera l i za t ion of C ap i ta l Ma rkets
r
re �------�� rf �------�����-- Oa rc 01
�----�--��- Volume
Vc
Ve
Va
th e
352 The dome s t i c f inanc ia l reform wou l d permit r to r i s e t o i t s equ i l ibr ium l evel a nd wou ld g ive save r s mor e a l terna t ive s for inve s t ing the i r fund s . Thank s to the greater va riety of a l te rnat ive option s , there wou l d b e a greater supply ( 01 , l oca ted to the r ight of 0 ) , wh ich wou l d d i sp l a c e in par ticular " inves tmen t " in-" non product ive " a s s e t s . A t th e same t ime , the open ing up of f inance to the exterior wou l d permi t the entry of fore ign capita l to suppl ement the funds ava i l ab l e for inv e s tmen t . With the f ree movement of capita l , a vo lume of invest men t Va >Ve woul d b e reached , and the dome s t ic intere st ra te WOul d become equ a l to rf . The exchange-ra te po l icy adopted i s a determin ing factor in the resu l t s obta ined . In order for interest rates to be equa l , there mu s t b e no expecta t ions of variat ion in the rea l rate o f exchange ( de f l a ted by net inf l a t io n ) . F ir s t o f a l l , th i s wa s sought through a po l icy o f min idevalua t i on s . Sub sequently , an attempt wa s made with a f ixed exchange rate . O f f ic ia l pol icy a s sumed tha t , in a free trade reg ime such a s wa s a l ready in operation in 1 9 7 9 , with a f i sc a l budg e t tha t reg i s tered a surp l u s a n d an exchange r a t e c l o s e t o the " equ i l ibr ium l evel , " f re e z ing o f the nominal exchang e rate woul d rapidly prevent dome s t ic inf l a tion f rom exceeding externa l in f la t ion . Thu s , the exchange rate wou l d become the ma in instrument for s tab i l i z ing the l evel o f dome stic price s . 3 The auth o r i t i e s thu s f o rma l l y adopted the mo s t ex treme type o f moneta r i sm : that i s to say , the monetary approach to the balance of payments , with i t s coro l l a ry o f a f ixed exchange rate and neutral monetary po l icy . The d i screpanc i e s betwe en o f f i c ia l th ink ing and rea l i ty were very mark ed . The vo lume s o f national saving and c a p i ta l forma t ion were l e s s than Vc : Tha t i s to say , ins tead of growing , they went down markedly . The dome s t i c inte res t r a t e stood a t unexpectedly h i g h l eve l s a n d wa s spectacu larly h igher than the ex ternal rate . F ix ing of the nomina l exchang e ra te l ed to a s ign i f icant loss of purch a s i ng power . P r ivate indebtedne s s grew out o f a l l proport ion , encouraged b y borrowe r s ' a s sumption tha t i t s rea l c o s t wou l d r ema in l ow and that there wou l d cont inue to be ea sy a c c e s s to credit in the future . F ina l l y , the exc e s s ive indebtedne s s , with the corre sponding l y h igher service co s t s , weakened the sys tem of produc tion and the payment s capac i ty instead of propo r t ionately st rengthen ing them . The inten s i ty of th e s e d i s c repanc i e s contr ib uted to the genera l f a i lure o f the model imposed du r ing the 1 9 7 0 s in Ch i l e . The N ew I n s ti tutional Framewo rk In the period under con s iderat ion , � three sub periods may be d i s t ingu i shed as rega rds the app l ication
3 53 o f th e s e f inanc ial pol ic ie s . The f i r s t ran f rom 1 9 7 3 to Dur ing tha t per iod there were no sub s tant ia l 1975 . chang e s in the dome st i c f inanc i a l system . Var ious mea sure s taken to encourage f oreign inve stmen t and external c red i t s had l ittl e e f f ec t , in the sen s e tha t The s econd per iod the net f l ows were not s ig n i f icant . began in 1 9 7 5 , with the dra s t ic reform o f the dome s t i c f inanc ial sys tem a n d t h e trans f e r o f mo st o f t h e c ommer c ia l bank s to private owne rship . The appl ication o f the princ ip l e s in que s t ion a s regards extern a l f inanc ing wa s g radua l , howeve r . The evo l u t ion that took p l a c e in th i s a spect wa s in contra st to the speedy open ing up to the ex terior as rega rds trade , an opening tha t wa s s t i l l expand ing . I n the f o l l owing yea r s , h owever , the re wa s a heavy inf l ow of capita l , which grew rapidly b etween 1 9 7 6 and 1 9 8 1 . The determining factors o f thi s f l ow were the abundanc e of fund s ava i l ab l e on the interna t ional marke t , the l ow initial bank debt , the " image o f c redit wo rth i ne s s " tha t Ch i l e managed to pro j ec t , and the ab sence o f dome stic and ex terna l restric t ions regard ing the use of the funds . I n the l a s t part o f the per iod , f rom the end o f 1 9 8 1 onwa rd , even though the l ibera l i za t ion of capita l in f l ows wa s inten s i f ied s t i l l further , the net f l ows shrank dra s t ica l l y , both a s a re sul t of th e emergence o f the internation a l f inanc i a l c r i s i s and o f t h e tardy recogn i tion b y t h e internationa l bank ing sys tem of the overindebtedn e s s incurred by Chi l e . The ma i n reason for the l imitation s on the s i z e and periods o f the capital movements i s to be found in the a im o f ensur ing control over the money supply , wh ich for severa l years p layed the pr inc ipa l rol e in the anti inf l a t io n po l icy . I t wa s cons idered tha t , in view o f t h e big d i f ferences tha t had ex i sted between the dome s ti c a n d externa l inter e s t rate s , " a dra st i c l ibera l i za t ion o f the capital account woul d a ttract credit in such vo l ume tha t th i s woul d hold up the stab i l i zat ion prog ram . For th i s reason , a g radua l l ibera l i z ation pro c e s s wa s preferred . li S The o f f ic ial dec l a rations a lway s in s i s ted on the temporary nature o f the restrictions impo s ed , however . I ndeed , with the pa s sage o f t ime , the mov ement o f capital wa s l iberal i z ed through inc rea s e s in the max imum amounts of indebtedne s s and the e l iminat ion o f restric t ions or the ir repl a c ement with more f l ex ib l e control s . I n 1 9 8 1 , th e year in which the net u s e of fore ign capital came to 21 percent of the GOP , the en try of f inanc i a l c redits ( unde r Artic l e 1 4 of the l aw on inter na t ional exchange opera tion s ) wa s sub j ec t to a min imum stay in the country of twenty - f ou r months and the compu l so ry depo s i t of a percentage of the credit ( 1 0 o r 1 5 percent , depending on the term) in the c a s e of operations for l e s s than s ix ty - s ix month s . There were no spec i a l re striction s on the volume of credit that th e bank s cou l d procure abroad and grant in the f o rm o f
354 foreign- currency loans i n C h i l e , but there wa s s t i l l a l imit on the secur i ty that cou ld be provided . During 1 9 8 2 , in the mids t of the internal c r i s i s o f the C h i l ean economy , the min imum term o f twenty- four months for cred i t s wa s e l iminated and the compu l sory depo s i t wa s set at 5 percent o f the externa l loan , wh ich was a rate s imi lar to the r e se rve s demanded in respect o f dome st ic bank depo s i t s . The capital movements have been inf luenced by the conditions in wh ich the f inanc i a l i n s t itutions have operated . At the end of 1 9 7 3 , the commerc i a l bank s were mo st ly in the hands of the s tate , a s a resu l t of the proc e s s of nationa l i z at ion o f the bank ing sys tem pro moted by the previou s government . During 1 9 7 5 , mo st o f the bank s were o f f e red for s a l e and returned t o the private sector . Together with the freeing o f interest rates in Apr i l o f that year , wide fac i l i t i e s were a l so g iven for the setting o f read j u s tment conditions (monetary correc tion s ) in respect o f operations for more than ninety days and for the payment o f inter e s t on short-term depo s i t s . Furthermore , the regu l ation s regarding contro l o f the amount o f credit in national currency , wh ich had ma inly been a imed at channe l i ng credit to produc tion rather than con sump t ion , were e l iminated , and both the autho r i z ed operations and the i r conditions were made the same for the d i f f erent typ e s of f i nanc i a l i n s t i tutions . Changes in the regu la t ion o f foreign banks were a l so inc luded within th i s trend toward uniform treatment . The activ i t i e s of foreign banks had been restricted during the government s of P r e s idents Frei and A l l ende , and they did not begin to return to the market unt i l December 1 9 7 4 , when the r e s t r i c t ions proh ibit ing the i r operation in the country were l i fted . F inanc i a l C a p i t a l Movement s a n d I ndebtedne s s , Vo lume , Origin , and D e s t ination Capital movements grew rapidly f rom 1 9 7 7 onward . Even though after that date the C h i l e an externa l sector reg i s tered a l a rge and growing current account def i c i t , the net inf l ow o f cap i t a l wa s suf f i c i ent to permit s ig n i f icant accumu l ation of international res erves unt i l 1 9 8 1 . The l arger f low took p l a ce aga inst the background o f big expan s ion of the extern a l se ctor , espec i a l ly of imports of none s s ent i a l consumer goods . The capital movements were overwhe lming ly concentrated in cred i t s to the pr ivate s ector without any state guarantee , l e s s than 2 0 percent o f the i n f l ow b e i ng ac counted for by direct foreign i nve s tment and loans to the pub l i c s ector . Table 1 3 . 1 shows the evo lut ion o f various indic ator s o f annua l capital movements . The f l ows , expr essed in money of con stant purch a s ing powe r , increased very markedly in the second ha l f of the 1 9 7 0 s ( co lumn s 1 and 2 ) . They
941 772 1 , 302 1 , 106 1 , 064 1 , 109 1 , 086 1 , 390 2 , 559 2 , 6 91 3 , 270 4 , 64 0
6.8 15 . 5
Inve s tments (3)
( 'Is ) 1.4 2.8
(4)
Expendi ture
( 'Is )
Externa l F inancing of Dome s t i c
1952-80 , "
88 . 5 F french- Davi s ,
47 . 7 70 . 8
Balanza de Pago s ,
do l la r o f the same year . Deuda Externa de Chi le ,
expre s s ed in 1 9 7 7 pesos pe r u . S .
C a l c u l ated on the bas i s of Banco Central de Ch i l e , Sourc e : and Cuent a s Nac iona l e s Nuevas .
rate for the three-year period 1 9 7 6 - 1 9 7 8 was u s ed ,
Notas Tecni c a s no . 3 2 [ Santi ago : CIEPLAN , 1 9 8 1 ] ) in order t o convert them into f i gure s at 1 9 7 7 pric e s . Co lumn ( 3 ) mea su r e s the percentage re lationship between the d e f i c i t on current ac count and gro s s fixed capi tal formation ; co lumn ( 4 ) indi cates the relationship between the de f i c i t on current a ccount and the gros s dome st i c product ; co lumn ( 5 ) is the re lation between the d e f i c i t on current account and exports of non financ i a l good s and servi c e s ; co lumn ( 6 ) is the quotient o f the gro s s out flow plus net intere s t For the convers ion into u . S . dollars of payments and total exports o f nonfinancial goods and s ervi c e s . the f i gure s f o r GDP and inve s tment , which were origina l ly given i n 1977 pesos , th e average rea l exchange
36 . 4 24 . 7 12. 0 32 . 5
52 . 7 52 . 8 58. 3 50 . 8
27 . 0 38.4 27 . 9 25 . 4 35. 1 55 . 6
6.5 16 . 9
(6)
( 'Is )
(5)
do l l ars )
Debt- S e rvicing Coe f f i c i ent
( 'Is )
Export De f i c i t
( mi l l ions of 1 9 7 7 u . s .
5.4 40 . 0 20 . 7 3.6 8. 9 2.1 29 . 3 5.0 -534 -6. 5 -1.4 -11 . 4 1976 160 22 . 5 4.6 34 . 1 1977 -551 38 . 5 7.4 50 . 9 1978 -965 27 . 3 6.6 42 . 2 -933 1979 36 . 8 9.0 51 . 2 1980 - 1 , 382 103 . 2 20 . 7 1 08 . 1 1981 -3 , 348 12 . 2 53 . 4 87. 2 2 , 238 1982 -1 , 693 A l l the nomin a l figures in u . S . dollars were d e f l ated by the External Price Index ( R . Note : �i c e de P r e c i o s Externos para Calcular e l Va lor Rea l d e l Comercio Internac ional d e Chi le ,
- 166 -367 - 6 90 -441 -256
1970 197 1 197 2 1973 1974 1975
Credits (2)
(1)
A c c ount
Year
Externa l Financing o f
Annual Deficit on Current Account and Capital Movements
C ro s s Inflow of
Chi l e :
Balance on Current
Tab l e 1 3 . 1
W tn tn
356 a l s o grew a s a proportion o f various dome s t i c variab l e s . Thus column s 3 and 4 show tha t the cap i t a l movement s markedly increa sed a s a proportion o f gro s s dome s t i c inve s tment a n d o f t h e GOP . Th i s wa s partly a result o f t h e re l ative stagnat ion o f t h e l a t t e r two variab l e s dur i ng the 1 9 7 0 s . External savings ( de f ic i t on current account ) and the servi c ing o f capital a l so grew , with s ome ups and down s , in r e l ation to exports ( co l umn s 5 and 6 ) , in spite o f the dynamic growth of the latter in the early years of the o rthodox monetari st exper iment . The total debt serv i c i ng amounted in 1 9 8 1 to 71 percent o f exports o f good s and servic e s , a nd in 1 9 8 2 i t ro s e to 8 8 percent : that i s to say , three t ime s the servic ing I n short , various coe f f i c i ent o f the years 1 9 7 0- 1 9 7 4 . quant itat ive data show that f rom 1 9 7 7 onward , capital movements a s s umed a rapidly growing re l ative we ight in the C hi l ean economy . The coe f f ic ient s re f l e ct ing the i r incidence show a debt- servic ing burden s ubs tanti a l ly greater than for Latin America a s a who l e in the 1 9 7 0 s . 6 Debt-rel ated tran sactions ( a s ref lected by the volume of gro s s transactions and amort i z ation payment s ) increased f a s te r than the net capital f l ows , s ince the terms of the external cred i t s grew shorter . Thi s wa s a direct consequence of the increa sed share accounted for by debt s with private creditor bank s ( see Tab l e 1 3 . 2 ) , wh ich operate with shorter matur i t i e s . The magnitude reached by capital movements is re f l ected by the fact that i n the two-year period 1 9 8 0 - 1 9 8 1 , the gro s s inf l ow o f c red i t s wa s equiva lent to 2 5 percent o f the GOP . During the period under ana l ys i s , s ign i f ic ant chang e s took p l a ce a s regards th e agents ( creditors and debtor s ) part ic ipating in movements of capital . In regard t o creditor s , i n 1 9 8 1 over 8 0 percent o f the external debt wa s with bank s and f inanc i a l i n s t i tution s , wh ich had accounted for only 1 9 percent of it at the end of 1 9 7 4 ( Tabl e 1 3 . 2 ) . Th i s increa s ed part ic ipation by pr ivate l ender s in the o r i g i n of funds wa s r e f l ected in a dec l ine i n the nominal amount o f the debt with o f f i c i a l bodie s . Th i s rea s s ignment o f bo rrowing wa s partly the result of greater u s e of an externa l supp ly of bank funds , wh ich had previously been relatively l i ttle u s ed by Ch i l e a s compa red with other s emi indus tr ia l i z ed countri e s . B e fore 1 9 7 7 , Ch i l e had had l e s s recourse th an the r e s t o f the Latin Amer ican count r i e s to t h e international bank ing sys tem . F rom then on , however , i t rap idly caught up and ( according to the Bank for I nternational S e t t l ement s data ) became one of the principal debtors with the private internat iona l capital market among the non- o i l - exporting deve loping countrie s , mov ing up f rom e l eventh place in 1 9 7 6 to f i fth p l ace in 1 9 8 1 . Within the Latin American context , Ch i l e ' s per capita bank debt in 1 9 8 2 came to over US $ l , O O O , compared with a regional average of U S $ 6 0 0 and only abou t US $ 5 0 0 i n the c a s e o f B ra z i l . 7
357 Tab le 1 3 . 2 Chi le : Total External Debt and Debt with Private Financial Institutions
Year
1974 1975 1976 1977 1978 1979 1980 1981 1982 Source :
Total D ebt ( mi l l ions o f US$ )
4 , 776 5 , 453 5 , 392 5 , 763 7 , 15 3 8 , 790 11 , 331 1 5 , 706 17 , 263
F i nanc i a l Institutions Share in total
( mi l l ions of US $ )
923 1 , 352 1 , 506 2 , 144 3 , 723 5 , 885 8 , 579 1 3 , 169 1 4 , 986
Banco Centra l , Deuda Externa de Chi l e ,
(%)
19. 3 24. 8 27 . 9 37 . 2 52. 0 67 . 0 75. 7 83 . 8 86 . 8 1 98 2 , tables 1 ,
3,
and 1 1 ; R . F french-Davis and J . P . Are l lano , " Apertura Financiera Externa : La Experiencia Chi lena en 1 9 7 3-80 , " Coleccion Estudios The total debt refers to the current CIEPLAN 5 , 1 98 1 , table 7 . di sbursed balance .
In addition to the traditional debt , it
inc ludes national currency l i abi lities , l i abi lities with the IMF ,
and short-term internat ional l i abi lities of the monetary sys tem . From 1 9 7 5 onward , it inc ludes short-term debts contracted by sectors other than the monetary system , with the exception o f direct fore i gn-trade operat i ons .
Furthermore , Chi l e ' S bank debt grew at the rate of 5 7 percent per year between 1 9 7 7 and 1 9 8 1 , compared with an average o f 28 percent for the deve loping countries a s a who l e . As regards debtor s , the inf low o f cred i t s for the pr ivate s ector showed ma rked growth 1 in the pub l i c sector debt- amort i zation payments predominated . Thu s , after 1 9 7 5 the growing net inf low o f cap ital was rece ived mo stly by the p r ivate sector . Th i s s i tua tion wa s in l ine with a del iberate po l icy o f the government , as part o f i t s program o f redu c i ng state partic ipation . Thi s wa s f ac i l itated by the change that took p l ace in inter national marke t s : the loss o f we i ght on the part of o f f ic ia l f inance inst itution s , wh ich operated mo stly with government bod i e s , and the vigo rou s emergence o f the pr ivate internation a l capital mark et s , wh ich o f f er acce s s to both pub l ic and private debtor s . T h i s evolution , de s c r ibed so far in terms o f annual f l ows o f resource s , i s a l so ref l ected in the extern a l debt balance s . Tab l e 1 3 . 3 shows t h e compos i tion o f the gro s s and net debt ( gro s s debt l e s s reserves ) , by pr imary I t wi l l be seen tha t the pr ivate sec tor borrowe r s . ( includ ing the commerc i a l bank ing system) increased i t s share a s gro s s debtor from 1 9 percent in 1 9 7 3 t o 7 3 per cent in 1 9 8 2 . I n add ition , the l evel of the international reserves rose stead i l y up to 1 9 8 1 . This has impl ications for the
358 Table 1 3 . 3 Chi l e : u . s . do l l ars )
Year
External Debt , by Borrowers
Gro s s Debt Private Pub l i c Sector Sector (1) (2)
(mi l l ions of
Net Debt Pub l i c Private Sector Sector (4) (3)
Private- Sector Share in Net Debt ( 'is ) (5)
1973 1974 1975 1976
3 , 276 3 , 897 4 , 426 4 , 252
786 879 1 , 027 1 , 140
3 , 063 3 , 709 4 , 252 3 , 7 18
7 16 773 931 1 , 016
18 . 9 17 . 2 18 . 0 21 . 5
1977 1978 1979 1980 1981 1982
4 , 319 4 , 858 5 , 018 4 , 90 5 5 , 14 5 5 , 892
1 , 444 2 , 295 3 , 772 6 , 426 10 , 561 11, 371
3 , 763 3 , 648 2 , 88 2 1 , 569 1 , 878 3 , 866
1 , 339 2 , 147 3 , 053 5 , 986 9 , 761 1 0 , 586
26 . 2 37 . 0 54 . 9 79 . 2 83 . 9 73 . 2
Note : Column ( 1 ) exc ludes state-guaranteed private debt and external debt contracted by the Banco de l Es tado de Chi l e ; co lumn ( 2 ) includes state-guaranteed pr ivate debt and debt contracted by the Banco del Es tado de Chi le ; co lumns ( 3 ) and ( 4 ) repres ent the gro s s debt less the internationa l reserves o f the Banco Centra l and o f the financial sys tem , respective ly . For the purpose of measuring res erves , holdings of gold were valued at the constant real price o f US$ 4 2 . 2 2 2 p e r ounc e o f fine go ld , b a s e 1 9 7 7 . Source :
International Monetary Fund , International Financ ial Yearbook , 1 98 2 , and May 1 98 3 ; Banco Centra l , Bo1et i n Mensual ( May 1 98 3 ) , Deuda Ex terna de Chi l e ( 1 9 7 9 and 1 9 8 2 ) , and Indicadores Econ omi cos y Soc ia1es ( 1 960- 1 9 8 2 ) ; DIPRES , Expo s i c i o n Sobre e1 Estado de 1a Haci enda P Ub l i c a , Oc tober 198 2 .
�t i c s
ef fects cau s ed by the ex ternal indebtedne s s of dome s t i c purch a s i ng power . Wh en fore ign c redit h a s a s it s counter part a bigger current account d e f i c i t ( corres p onding , for examp l e , to a s im i l a r increa s e in import s ) , the recipient of the credit increa s e s purcha s ing power with out a direct impact on the rest of the economy . When the external credit u l t imately i nvo lves an inc rease in the reserve s , however , the debtor ' s purchas ing powe r is in creased at the expense o f the Central B ank emi s s ion co rre spond ing to the exc e s s foreign currency on the ex change ma rk et that the C entral Bank i s ob l iged to acqu i re . The f inal inc idence on the purcha s ing power of the pub l ic and private sector wi l l therefore depend on th e react ion o f the government to the ac cumu l a t ion of reserve s , wh ich may be expre s s ed th rough such measures as ra i s ing the exchange ra t e , furthe r l ibera l i z ing imports , redu c i ng dome s t ic cred i t , or reduc ing pub l i c expenditure . An e s t imate of the impact or initial e f f ec t o f the movement o f capital is shown in co lumn s 3 and 4 o f Tab l e 1 3 . 3 , wh ich show the total debt l e s s the re s e rves o f the respect ive s ector s . As the accumu l a tion o f a s s e t s
3 59 wa s c oncentrated in the pub l ic sector ( C entra l Bank ) , up to 1 9 8 1 th i s wa s r e f lected in a sub stant i a l reduction in i t s ne t l iab i l i t i e s ( ac cumu l a ted balanc e o f current loans l e s s reserves o f the secto r ) . I n the case o f the private s e c to r , in contra st , the net indebtedne s s grew very rap idly , increas ing by a fa cto r o f f i fteen bebleen 1 9 7 3 and 1 9 8 3 . The s e data show c l early that the i n f l ow o f external capital he lped t o acc entuate the proc e s s of greater pr ivate par t i c ipation in expend i ture in the Ch i lean economy . I t shou ld be noted that the ma j ority of the pr ivate debt wa s contracted without state guarantee . Thu s , in 1 9 8 1 almo s t two - th i rds of Chi l e ' s to t a l debt l acked o f f ic i a l guarantee , and the f igure wa s st i l l over 60 per cent towa rd the end o f 1 9 8 2 . The presence of a non gua ranteed debt of over U5 $ 1 0 . 5 b i l l ion undoubtedly con s t itutes a dec i s ive factor in the proce s s of re negotiat ion o f the exte rna l deb t . I n regard to the intermediari e s deal ing with the extern a l capital , up to 1 9 7 7 the pr iva te sector obtained a s i gn i f ic an t part o f the credits d i rectly , becau s e of the quantitat ive restric t ions faced by the bank s in the s e ope ration s . Th i s statement c a l l s f o r two qua l i f ication s , h oweve r . On the one hand , the sect ion o f the nonf inan c i a l private s e c tor w i th mo st acc e s s t o ex tern a l c redit wa s that wi th the c l o s e s t connec t ions with national and fore ign bank ing in st.itution s . On th e other hand , a sub s tant i a l proportion o f thes e loans had bank guarantee s . F rom 1 9 7 8 onward , the dome s t i c f i nanc i a l secto r a s sumed greater importanc e in th e direct intermediation o f external pr ivate f inanc ing . T ab l e 1 3 . 4 g ives deta i l s o f the c redits tha t entered the country under the terms o f Art i c l e 1 4 . Th i s tabl e shows that between 1 9 7 8 and 1 9 8 1 , the pub l i c sector vi rtua l ly d i s appeared a s a u s e r o f th i s source o f external funds wh i l e t h e bank ing in s t itutions achieved mark ed predominanc e a s intermedia rie s , operat i ng with th em directly or indi rectly ( i . e . , a s guaranto r s ) During the f ir s t yea r s of the proc e s s , in spite o f t h e expan s ion o f external indebtedn e s s a n d t h e inc rea se in th e de f ic it on current account , the government did not On the contrary , it show much concern in th i s respect . ma inta ined that what wa s important wa s th e way in wh ich the rea l net debt evolved , the rate o f intere s t pa id , and the sectors contrac t ing indebtedn e s s . The o f f ic ia l f igur e s for th e rea l net debt showed a redu c t ion over the f ive-year period 1 9 7 6 - 1 9 8 0 : According to them , it went down from U 5 $ 5 . 3 b i l l ion in 1 9 7 5 to U 5 $ 4 . 3 b i l l ion in 1 9 8 0 ( in 1 9 7 7 do l l a r s ) . Two externa l facto r s exp l a ined th i s redu c ti on in contra st with the h igh annual rate of indebtedne s s . The f ir s t factor in terms o f i ts importance wa s the rate of international inf la t ion , wh ich eroded the real va lue of the debt ba l anc e : the second factor wa s that th e debt a l so went •
360 Tab le 1 3 . 4
Chi le :
Credi t , b y Debtors
Artic le l4--Gross Annual F l ows o f
Total Flow
Year
of Credit ( mi l l ions o f US$ ) (1)
1976 1977
262 . 6 336 . 4
1978 1 97 9 1980 1981 1982
Pub l i c
Sector (2)
13 . 3 13. 2
78 0 . 2 1 , 24 5 . 2 2 , 5 03 . 7 4 , 516 . 7 1 , 7 70 . 8
Percenta�e Br e akdown Private Nonfinancial
Sector ( 3 ) and ( 4 )
Fj nanc ial Institutions (5)
86 . 3 80. 1 Nonguaranteed (3) 31. 0 34 . 7
0.4 6.7
Guaranteed (4) 26 . 0
4.2 38 . 8 1.8 21 . 6 41 . 9 3.1 17. 6 14 . 5 64 . 8 1.9 20 . 6 4.6 72 . 9 24 . 4 24. 7 6.1 44 . 8 Column ( 1 ) shows the gro s s annual f l ow of di sbursed credits , Note : less compulsory depos i t s . The breakdown over columns ( 2 ) to ( 5 ) was estimated on the basis o f that for Santi ago . Source :
Prepared on the basis of Banco Central ,
Liquidados Art i culo 1 4 " no . 6 6 2
(Apri l 1 9 8 3 ) .
" Creditos
( December 1 9 8 0 ) , and Bolet i n Men sual ,
down in response to the r i s e in the va lue of tha t por tion o f the res erves ma intained in go l d . Between them , the s e two f a c t o r s exp l a ined a redu ct ion of US $ 2 . 7 b i l l ion i n real net indebtedne s s in t h e f ive-year period i n qu e s t ion . s Thu s , instead o f hav ing gone down in r e a l terms b y 1 8 percen t , t h e d e b t wou l d have grown b y one th ird i f i t had not b een for the s e two factors and wou l d have shown a sharp a c c e l e rat ion towa rd the end o f the per iod in que stion . I t wa s therefore c l ea r tha t the rapid growth of ex ternal indebtedn e s s permi tted wa s dangerou s , and a l so pre j ud i c i a l to national devel opment , a s i s shown l a te r . N everthe l e s s , the government in s i s ted right up to the end that enter ing into debt wa s good bu s i n e s s because the real inte r est rate wa s very low or actua l ly negat ive ; furthermore , the debtors were in the priva te secto r , wh ich was sub j ect to " f ree " ma rke t l aws so that , in o f f ic i a l opinion , there could be n o doubt that i t wa s e f f i c ient . INDEBTEDNE S S AND MACROECONOMI C ADJUSTMENT A ma s s ive proc e s s . of ex ternal indebtedn e s s such a s the o n e that took place between 1 9 7 7 a n d 1 9 8 1 ha s s ig n i f icant e f f ec t s in many areas of the national economy . Th i s wa s demon st rated with great inten s i ty in Ch i l e . TI:l� proc e s s profoundly a f f ected total demand and i t s compo s i t i o n , contr ibuted t o t h e spectacul ar conc entra t ion •
361 o f wea l th , con s i derably a l tered th e func tioning o f the proc e s s o f saving and i nvestment , and cond i tioned to a dec i s ive extent the hand l i ng o f monetary and foreign exchange pol ic i e s . The in i t i a l impact o f the external indebtedne s s i nvolved a n inc rea se in the ava i labi l i ty o f foreign exchang e . Th i s incre a s e gives r i s e to two po s s ib i l i t i e s tha t a r e i t s counterpart . O n e i s an inc re a s e in the internat ional re serve s , u sua l ly accompanied by an in crease in monetary i s sue ; the other con s i s t s o f the expans ion of the current account d e f ic i t . I n prac t i c e , up to 1 9 8 1 , the growing indebtedne s s man i f e s ted i t s e l f in both ways s imu l taneou s ly , s ince the net inf low o f capita l wa s greater than the capa c i ty o f the nation a l economy to absorb the resource s provided by external credit s . The current account d e f i c i t steadily increased by cons ider able amount s ( see Tab l e 1 3 . 1 , column s 1 and 4 ) : In 1 9 8 0 , net u s e o f foreign capital Wa s c l o s e to the equival ent of 9 percent o f the g ro s s dome s t i c product , in contra st with 5 percent for Latin Ame r i c a a s a whol e . I n spit e of th i s , the i n f l ow o f c ap i ta l through pr ivate debtor s grew s t i l l more qu ickly . T h e corre sponding surp l u s ( th e d i f f erence between the volume of fund s rece ived a n d tho s e u s e d ) gave r i s e t o the increa s e in international r e s e rve s reg i s tered up to 1 9 8 0 ; in that year the total C entra l B ank re serves repr e s ented 6 8 percent of annua l imports o f goods . The rapid accumu l ation o f r e se rves had sub s tant i a l e f f e c t s on th e handl ing o f monetary a n d foreign - exchange pol ic ie s . Furthermore , the big capital movement s - -both tho se u s e d to f inance greater spending on imports and thos e that went to swe l l the international reserve s - meant that a very h igh proportion o f the total cred i t ava i l ab l e in t h e nat iona l economy orig inated f rom fore ign funds , and its cost wa s a s soc iated wi th the evolution o f the exchange rate . Th i s section i s devoted to the s e three topic s , ending with a summary o f t h e princ ipal di stortion s - -with the i r e f fects as regard s a s s ignment and d i s t r ibution- - c aused by the greater f inanc ia l openn e s s to t h e exterior . Monetary P o l icy and the C rowding out o f Dome stic C redit F rom 1 9 7 5 onwa rd , exchange operations ( ne t purcha s e s of foreign exchange b y t h e C entra l B ank ) con s t i tuted the ma in source of expan sion o f money i s sue . 9 As t ime went on th i s phenomenon wa S further inten s i f ied , and in the three-year period 1 9 7 8 - 1 9 8 0 the s e operations repre s ented over 1 0 0 percent o f the tot a l money i s su e . A s a l ready noted , the overwhelming proportion of net purch a s e s o f fore ign exchange by t h e Ce nt r a l Bank c ame f rom t h e pr ivate I ndeed , in some yea r s exchange operat ion s wi th sector . the pub l ic sector even had a contra c t ive e f fect . A s
362 regards the cred i t opera tion s o f the Central B ank , tho s e carried out with the pub l i c s ec to r showed a negat ive bal anc e f rom the year 1 9 7 5 onward , wherea s tho s e with the private s ec to r showed mod e st expans ion throughout the per iod . Th i s s ituat ion cont inued until 1 9 8 1 , when the s e r ious mac roeconomic d i s ad j u s tments that had been build up in th e C h i l ean economy began to emerge into the open , and the l o s s of international res erve s began . Correspond ing l y , the monetary e f fect o f exchange operations became markedly restrictive . As indicated in the f i r s t section , dur ing certain periods direct restric t ions were u s ed with regard to the i n f l ow of capita l , as an instrument of monetary pro gramming . One o f the s e r e s t r i c t ions wa s part icu larly d i rected toward contro l l ing th e monetary e f fect o f the i n f l ow of capita l , by l imit ing the amount of resour c e s that c ou l d be changed in t h e Centra l B a n k e a c h month . Th i s l imitat ion wa s enforced- -with succ e s s ive mod i f ica tion s in the max imum amounts o f exchange operations author i z ed - - f rom S eptemb e r 1 9 7 7 to Apr i l 1 9 8 0 . The se restriction s we re not su f f i c ient to keep the inf l ow of loans to th e pr ivate se c t o r down to a vo lume compatib l e with th e monetary expan s ion de s ired b y t h e economi c author i t i e s , h owever . C o nsequently , the latter took action regarding the other source s o f money i s su e and I n both c a s e s , there wa s a regarding the ex change rate . c rowd ing out o f the dome st i c economy by the economy a s soc iated with the ex terior . Dome s t i c credit wa s r e s t r i cted in the face o f the incre a s e in money i s sue th rough net foreign-ex change purcha se operat ion s . The exchange rate , for its part , wa s reva lued or l agged behind the actual s i tuation ( s ee the next section) in re spon s e to the accumu l ation o f reserve s , thu s c rowd ing dome s t i c producers o f tradabl e good s ou t of th e market . The goa l s in rega rd to the expans ion o f l iquid i ty rema ined in force a s l ong a s the c l o s ed- economy monetary approach predomi na ted . Sub sequently , in 1 9 7 9 , th e open economy monetary approach wa s adopted . Under thi s , th e nominal exchange rate was f ro z en , a " neutra l " monetary po l icy wa s expl i c i t l y adopted , and it was hoped that a proc e s s o f automatic ad j u s tment o f the money supply wou l d e n t e r i n t o force . Thu s , the va riations in the inter national re serves were to be the determin ing factors of the degree o f l iquidity o f the national economy , aga inst the background of a b a l anced f i s ca l budget and stable bank re serve rate s . T h i s monetary approach to the balance of payment s preva i l e d t o the ful l f o r three years , f rom mid- 1 9 7 9 to mid- 1 9 8 2 , with a " neutra l " monetary pol icy based on the do l l ar standard . Du r i ng the l a s t year in wh ich it wa s in force , a contract ive " au tomatic ad j u s tmen t " began to operate , with d i s a s trous e f f e c t s on empl oyment and national product ion . 1 o
363 Exchange p o l icy :
I n s tab i l i ty and Lag
Exchange pol icy a s sumed v a r ied forms dur ing the period under analy s i s . Up to June 1 9 7 6 , th e exchange rate wa s changed between one and four t ime s per month . F rom then o n , after a sudden reva lua t ion at that date and another i n March 1 9 7 7 , i t wa s deva lued dai l y according to a s c a l e f ixed every month in advanc e . Thi s arrange ment wa s kept up unt i l F eb ruary 1 9 7 8 , when a tab l e of da ily exchange- rate adj u s tments wa s f ixed for the r e st o f th e year . T h e same scheme wa s announced for 1 9 7 9 , but in June o f that year i t wa s interrupted when the exchange rate wa s deva lued to the nominal l evel tha t it had been programmed to reach at the end o f the year ( th irty- n ine Ch i l ean pesos per u.s. do l l a r ) . It wa s kept at th i s l eve l until 1 9 8 2 , when there wa s a n 18 percent devaluat ion . Th i s wa s fol l owed by the announcement o f a tab l e of min ideva lua tions , soon r ep l ac ed by a free rate � th i s l a sted only a short t ime and wa s then rep l a c ed by var iou s forms of min ideva luations according to dome st ic o r net inf l at ion . The e f fect of the s e min idevaluations on th e real exchange rate i s shown in Tab l e 1 3 . 5 . I have analyzed the exchang e �o l ic i e s appl ied in Ch i l e in deta i l in oth e r stud i e s . 1 Here , I sha l l l imi t my s e l f to stres s ing a very important f'e atur e of exchange pol icy that con s i s t s of th e notable d i s c repanc i e s between the real s i tuation and the monetary approach to the b a l ance o f payment s . It ha s been demon s t rated in practice that through th e i r po l ic ie s the author i t i e s can b r ing about notab l e var iations in the level of the real exchange I n other words , the s ingle-exchange- rate law , rate . even in an economy who se external trade i s a s l ib era l i z ed a s in the c a s e of Ch i l e s ince 1 9 7 9 , has very l imi ted I n particu l a r , the exchange rate l a g s can be va l idity . so l arg e that they invo lve ad j u s tments d iverg i ng f rom equ i l ibr ium for the space of severa l years , thu s generating erroneou s s igna l s , fau l ty a s s ignment o f resourc e s , a n d a l o w r a t e o f ut i l i z a t io n of produc tion capac i ty . The s e tenden c ie s were man i f e s ted very forc ibly in Chi l e , e spec ia l ly dur ing the per iod when the f ixed nominal exchange rate wa s th irty-n ine pesos per do l lar . Dur ing the three-yea r period when the exchange rate wa s fro z en , i t s real l evel deteriorated by c l o s e to one third . Dome stic inf l a t ion went down s ign i f i cantly , f rom over 3 0 percent per year to l e s s than 1 0 percent , but during the tran s i tion between the s e two l eve l s an imbal anc e of the s i z e mentioned wa s ac cumu l ated between domes t i c and external pric e s . Con s equently , in order to return to the initial l evel of the rea l exchange rate , wh ich wa s apparently cons idered by the government and its adv i s e r s as be ing c l o s e to equ i l ib r ium , 1 2 i t wou l d be n e c es sary f or i n f l ation in Ch i l e t o b e over thi rty percentage points l ower than th e interna tional l evel .
364 Tab l e 1 3 . 5
Ch i l e :
Rea l Exchange Rate and Wages
( Ch i l ean pesos per 1 9 7 7 U . S . do l l ar s )
Year
Real Exchange Rate Defl ated by Index of Wages Defl ated by Corrected and Salaries of National Consume r Price Index Statistical Institute
1974 23 . 40 2 7 . 90 1975 3 2 . 14 3 9 . 44 1976 2 5 . 89 29 . 89 1977 2 1 . 54 2 1 . 54 1978 23 . 81 2 1 . 48 1979 23 . 16 19 . 3 1 1980 20 . 09 15 . 41 1981 16 . 93 1 1 . 92 1982 13 . 86 19 . 63 Note : The annua l average nominal exchange rate was inf l ated by the external pri c e index . Source :
i
Central Bank , Bol e.t n Mensual , various i s sue s ; National
Stati stical Institute ,
Indice de Sueldos y Salario s ;
R. Cortazar
and J. Marsha l l , " Indi ce de Precios a l Consumidor en Chi l e : 1 9 7 0- 7 8 , " Colecc ion E s tudias CIEPLAN 4 , 1 9 8 0 ; and R . F f rench
Davi s ,
" Indice de Prec ios Externos para Calcular el Valor Rea l
no .
( Santiago :
d e l Comercio Internac iona l d e Chi l e ,
32
CIEPLAN ,
1981 ) .
1 9 5 2 - 8 0 , " -Nota s Tecni cas
Dur ing the l a s t months o f 1 9 8 1 and the f i r s t h a l f o f 1 9 8 2 there wa s a s l i gh t ad j u s tment o � r e la t ive pr ices i n th i s direct ion . 1 3 At the s ame t ime , howeve r , there wa s a viol ent incre a s e in open unem� l oyment and a rapid drop in manufacturi ng produc tion . 1 I t may b e noted tha t the segment of the economy with deb t s expre s sed in pesos ( nonread j u s tabl e ) woul d have had to s u f f e r an inc rea s e in i t s r e a l l iab i l i t i e s i f there h a d indeed b e e n a n inten s ive de f l a t ionary proc e s s . A s dome s t i c indebtedne s s wa s genera l i zed , the perturb ing e f fects o n the debtor enterp r i s e s wou l d have been sub stantia l . The p l a in tru th i s tha t , a f t e r some month s of automatic ad j u s tment , w i th a s l ight movement in the direction o f the requ i red read j u s tment o f relative price s , th e economi c r e su l t s were d i s a strou s . The eco nomic team did not succeed in achieving the impo s i t ion of the sugges ted plan to acc e l e rate the a dj u s tment through a redu c t ion by decree o f nominal wage s . I n s tead , the abrupt deva luation of June 1 9 8 2 took p l a c e . Throughout the ten- year period , the e f f e c t o f exchange- rate va r i a t ions on c a p i t a l f l ows prac tical ly did not f igure among the obj ectives tak en into account in determining exchange pol icy . The inf low o f externa l f inanc i a l re sourc e s , h owever , wa s cruc i a l in order to permit the handl ing of the exchange rate in the l ight o f ob j ec t ives other than tho s e o f the e f f ic ient a s s ignment
365 o f re sourc e s without ( up to 1 9 8 1 ) bring ing about a deteriorat ion in th e overa l l b a l ance of payment s . The use of the exchang e rate to gu ide exp e cta t ions ( in 1 9 7 6 - 1 9 7 9 ) and / o r to s e t a l imit on dome s t i c price r i s e s ( 1 9 7 9 - 1 9 8 2 ) d i d indeed resul t i n sma l l e r i n f l a t i on . The net in f l a t ion per s i stently went down more s l owly than the exchange rate , however : The l atter acted a s a var i abl e tending to repre s s i n f l ation , bu t devalued i t s e l f during the proc e s s . Th i s , together with the l ibera l i z a t ion of impor t s and the recovery in economic activity reg i stered between 1 9 7 7 and 1 9 8 1 , l ed to a s ig n i f icant curren t account d e f i c i t tha t amounted in 1 9 8 1 to 2 1 percent o f t h e GDP . 1 S At the same t ime , t h e g radual deterioration in the rea l exchange rate redu c ed the cost of externa l indebtedne s s , so that in 1 9 7 9 and 1 9 8 0 th i s c o s t wa s negat ive . Con sequently , the f l ows were a f fec ted by the var i a t ions in the real exchange rate , accentua t ing the probl em of th e compo s i t ion of the balance of payments : 1 6 the g rowing deter ioration in the current account de f i c i t and a l ik ewi s e g rowing surp l u s on the capital accoun t . Intere s t-Rate D i f f erent ia l s The o f f i c i a l approach expected both a sharp tendency toward a redu c t ion in f inanc i a l intermedi a t ion spreads and the level ing o f dome s t i c and foreign interest rate s , in response to the overa l l l ibera l i z ation of the f inanc i a l sys tem . However , throughout the period l a rg e d i f f erent ia l s per s i sted between the rates o f intere s t f o r l o a n s and depo s i t s on t h e dome s t i c f inanc i a l ma rket , wh i l e the l evel o f both rates wa s notab l y h igh . Furthe r more , in spite o f the b ig inf l ow s o f capital reg i stered , espec i a l l y from 1 9 7 9 onward , dome s t i c rates were con S iderably h igher than interna t iona l rate s , as shown by Tabl e 1 3 . 6 . The dome s t i c rate refers to the pre dominant s egment o f the market , cover ing transac tions for terms of th i r ty to e igh ty-n ine day s , and the international intere st rate i s tha t pa id for bank credits obtained under Art i c l e 1 4 , plus the c o s t in respect of compu l sory depo s i t s and the f i nanc ia l inter mediat ion marg i n , a l l converted into the ir peso equ iva l en t s . I t may be noted tha t th e ex po s t gap between the dome stic and external ra tes f or- loans never dropped below an annua l rate of e ighteen percentage point s . In th i s re spec t , th e tra d i t iona l explanations tha t the d i f feren t i a l is due to expec tation s of a b igger de va luation than the e f f e c t ive evo lution of the o f f ic ia l exchange rate do n o t seem t o b e val id . For examp l e , between 1 9 7 7 and 1 9 8 2 the para l l e l o r b la ck-ma rket rate wa s very s imilar to the o f f ic ia l rate . 1 7 The ea sy a c c e s s to the exchange market that ex i s ted at tha t t ime and the c a sh nature o f the para l l e l rate do not make
366 Tab le 1 3 . 6 Chi l e : Domestic and External Real Interest Rates Re f l e c t ing The i r Leve l with the Convers ion of External Tran sactions into Pesos
( annua l percentage s )
Dome s t i c (1)
1975 1976 1977 1 9 78
( second hal f )
1979 1980 1981 1982 Source :
121 . 0 51. 2 39 . 4 35. 1 16 . 9 12. 2 38 . 8 35 . 2
External
(2) -21 . 1 0. 2 3.8 -0 . 9 -8 . 0 12 . 4 45 . 0
D i f ferential
(3) 72. 3 39. 2 31 . 3 17 . 8 20. 2 26 . 4 -9 . 8
Prepared on the ba s i s o f data from the Banco Central ;
Instituto Nac i onal de Es tadi stico s ;
Libera l i zac ion a la Intervenc ion :
J . P . Are l l ano ,
" De la
El Mercado de Capita l e s en
Chi l e , 1 9 7 4 -8 3 , " Colecc ion CIEPLAN 1 1 , December 1 9 8 3 ; R. Cortazar and J. Marsha l l , " Indice de Precios a l Con sumidor en Chi l e : 1 9 70- 78 , " Colecc ion Estudios CIEPLAN 4 , 1 980 ; and R. F french-Davis and J . P. Are l lano , "Apertura Finan c iera Externa : La Experiencia Ch i l ena en 1 9 7 3 - 8 0 , " Colecc ion E s tudio s CIEPLAN 5 , 1 9 8 1 . In 1 9 8 2 ,
the "preferentia l " exchange rate f ixed by the government for ex i s ti ng debtors was used in cal culating the external interest rate .
it a prec i s e indicator a s rega rds expec tat ion s o f de va luation over twenty- f ou r month s , wh ich is the min imum term f o r the entry of capital under Art i c l e 1 4 , bu t th ey do r e f l e c t the preva i l ing a tmo sphere of a quiet market in wh ich there wa s continual sa l e o f fore ign exchang e by th e pub l i c over bank counte r s . I t i s po s s ib l e , howeve r , tha t despite the qui etne s s d i s p l ayed b y th e ma rk e t , debtors with th e ex terior d id not foresee th e lag repea tedly su f f ered by the real exchange ra te . L ik ewi s e , i t seems qu i t e po s s ib l e tha t t h e ma rke t wa s n o t very awa re o f the need t o make a n a d j u s tmen t f o r ex terna l i n f l ation when measuring the It is there fore probab l e that the real exchang e rate . expected " exte rna l intere s t rate , " comparabl e on the " ma rke t " with the rea l dome s t i c rate , wou ld be c l o s e r to its nominal l evel in do l l ar s than to the ex po st r a t e g iven in c o l umn 2 o f Tab l e 1 3 . 6 . Th i s nominal rate f l u c tuated between 14 percent and 23 percent between 1 9 7 6 and 1 9 8 2 . Con s equent l y , even u s ing th i s hypoth e s i s , there wou l d s t i l l b e a sub s tant ial gap wi th th e rate for dome s ti c c r ed i t . I n addit ion to the dome s t ic / ex ternal gap , there were sub s tant ial d i f f erent ial s between the dome st ic rate s for depo s i t s and for loan s . There were va r iou s reason s for these h igh spread s , and the i r s ignif icance wa s chang ing over th e c ou r s e o f th e per iod . Th i s top ic has been dea l t with e l s ewh ere . 1 8 I sha l l th erefore l imit my sel f here to men t ion ing some o f th e a spects tha t have the
367 grea t e s t impl ications fo r the c entra l analys i s , that i s to say , the sub j ec t o f the external debt and capital movements . Tradi t ional explanations put forwa rd are a s fol l ows : ( 1 ) the requ irement to ma intain bank reserves i s adduced as a determin ing factor in the gap between dome st ic inter e s t rates on depo s i t s a n d loans ( th e f inanc i a l intermedia tion spread) , ( 2 ) the f isca l d e f i c i t a n d the inel a s t i c demand for credit by pub l ic enterp r i s e s are indicated as be ing r e spon s ib l e for the high interes t rates on loan s , and ( 3 ) the re stric t ions on movement s of capital are said to b e respon s ib l e for the d i f f erent ia l between rf an d re ( F igure 1 3 . 1 ) . None o f these {X>ssible causes wa s o f s i gn i f i cant importance dur ing the who l e period , howeve r . The f i r s t of them wa s of some importance only in 1 9 7 5- 1 9 7 6 , becau s e o f the h igh requi rement s for non intere s t-bearing bank reserves and h igh in f l a tion ( over 3 0 0 percent per yea r ) . Neverthe l es s , very h igh level s o f f inanc ial intermediation spread , net of the c o s t s o f ma intain ing thes e reserve s , per s i s ted dur ing mo s t o f the per iod f rom 1 9 7 5 t o 1 9 8 2 . Moreover , the f i scal de f ic i t went down rap idly and sub stant ial ly ( to l e s s than 3 percent o f the GDP in 1 9 7 5 ) and became a surp l u s in 1 9 7 9 . F ina l ly , in s p i t e o f t h e per s i s tence of r e s t r ic t io n s on movement s o f capita l , such movement s reached very h igh l eve l s , a s wa s shown in the f i r s t se c t ion . Con sequently , t h e orthodox anal y s i s i s n o t capab l e o f expla in ing why , with net capital inf l ows equ iva lent to an average o f 7 . 7 percent of the GDP in 1 9 7 8 - 1 9 8 0 , th e gap b e tween dome s t i c and external intere s t rates stood at a n average of twenty - three percentage points per year ( see Tab l e 1 3 . 6 ) . I n th i s period , a s noted , i t wa s c l ea r tha t there were a s yet n o expecta tions o f a ma s s ive deva l uation . I t mu s t therefore have been other facto r s tha t carried greater we ight in exp l a in ing the behavior o f interest rate s a n d o f the f inanc i a l intermediat ion spread . Var iou s items o f in fo rmation sugg e s t that the bank ing system h a s been ine f f i c ient and tha t its operat ing c o s t s ro se a f t e r the reform . 1 . One o f the rea son s f o r th i s u p t o 1 9 7 7 wa s the under util i z a tion o f the in sta l l ed capa c i ty . Furth ermore , the fact that the sys tem h a s operated with such short terms for both depo s i t s and loans has con s t i tuted another cause of increased c o s t s . Thi s wou l d seem to expl a in why in 1 9 7 8 the co st l evel o f the sys tem wa s o f the order of 8 perc ent of total loans , a very high f igure by comparat ive interna tional standa rds . Neverthel e s s , even a f ter di scount ing the opera t ing cos t s , the f i nanc i a l intermediation spread s t i l l rema ins very high . The per s i s tence o f the s e h igh costs and pro j ects has been a s soc iated with the struc ture o f the f inanc ial ma rket and the degree and form o f compet it ion among the inst itutions in the sector .
368 2. The short term o f the ope rations fac i l itated the preval ence of h igh rates . 1 9 Appl icants who had no acc e s s to external credit had to face a s evere rece s s ion in dome s t ic demand s imul taneou s ly with the free ing of interest rate s . Aga i n s t a backg round o f heavy propaganda to the e f f ec t that the rec e s s ion wou l d only b e b r i e f , many bu s i ne s s peop l e resorted to expen s ive short-term c redit i n s tead o f c l o s ing down the ir operation s , expect ing I n the s e c ircums tanc e s , a rapi d reactiva tion of demand . debtor s did not vi ew thems elves a s tak ing out a loan a t a real i n t e r e s t r a t e o f 4 0 percent p e r year , b u t rather as borrowing for th i rty days at 3 percent , with the probab i l ity of renewing the loan for a f ew month s . E f f ec t ive demand , however , remained genera l ly depre s s ed ( and l agging behind aggregate demand ) , and In the intere s t rates cont inued to b e h igh and unstab l e . face o f the cont inu ing delay in the hoped - f o r react iva t i on , bu s in e s s peopl e engaged in suc c e s s ive renewa l s of the i r bank debt s , with the increa s ed r i sk tha t th i s invo lved . Th i s phenomenon wa s further strengthened by the demand for credit by a c t ivit i e s tha t were adver sel y a f fected by th e tari f f l ibera l i zation . I n spite of bu s ines s expecta t ions that it wou ld b e abandoned , th i s l ibera l i z a t ion proce s s wa s ma inta ined and even- -un expectedly , on a number o f occa s ion s - - further intens i f ied unt i l it culminated in a un i f o rm tari f f o f 10 percent in 1 9 7 9 . 3 . Certain opportu n i t i e s for highly pro f i tab l e " inve s tments " arose . Numerou s pub l ic enterp r i s e s were d i sposed of at p r i c e s s i g n i f icantly below normal market level s . S imi l a r opportun i t i e s were o f f e red by " inve st ment s " in rea l e s tate and movab l e a s sets , who s e prices rose notab l y in real terms : The secur i t i e s index in creased f ive f o l d in con stant va lues between 1 9 7 5 and 1 9 7 9 . The e l imination of regu l a t ions on the use o f c redit made po s s ib l e i t s rapid red i stribution towa rd the se u s e s , wh ich were good inves tment s f rom the pr ivate point o f view , a l though not f rom tha t o f the country a s a who l e . 4. In recent yea r s there ha s been a noteworthy inc rease in consumer cred i t , e spec ia l l y for imported consumer durab l e s . H ere , too , the suppr e s s ion of the previou s re strict ion s on bank credit for con sume r s f a c i l i tated t h e change in th e compo s ition of expenditure . Furthe rmore , the l ibera l i z a t ion o f imports a l so promoted the expa n s ion of demand for credit to be u s ed in the ma rke t ing or purcha se o f imported con sumer good s . Thus , the sav ings o f some nationa l s f i l tered th rough , by way of the f inanc i a l system , to th e con sumpt ion of imported goods . Th i s i s one exp lanat ion for the drop ob s erved in the rate of national saving . I n the th ree-year per iod 1 9 7 8 - 1 9 8 0 , wh ich wa s the period of a l l eged great suc c e s s of t h e economic mode l , the r a t e o f national saving , mea sured a s the g ro s s f ix ed-capital formation rate l e s s the rate o f ut i l i z a t i on o f fore ign cap i ta l , c ame to
369 barely 8 percent . 5 . The gradua l recovery in dome s t i c economi c a c t iv i ty and wage s f rom the very depre s sed l eve l s reached in 1 9 7 5 , together with the ma s s ive o f f i c ia l pub l ic i ty with in the preva i l ing authorita r ian framework , helped to create an image of a dynamic and rap idly g rowing economy . And a s the recovery on the b a s i s of the u t i l i zation of ex i s t ing i n s ta l l ed c apac ity began to c ome to an end , the aggregate demand wa s fed with the very b ig ex ternal credits tha t p ropped up th e s emb lance o f a boom period unt i l f a r into 1 9 8 1 . The a tmo sphere o f succ e s s c rea ted , toge th e r with the consequent expectat ions of g rowing income , induced consume r s and bu s in e s s e s to cont inue in creas ing the ir indebtedne s s wh i l e it prompted the bank s t o renew a n d rapidly expand the ir l in e s o f c re d i t . W ith in th i s contex t , the bank i ng inst itutions competed with each other , partly by reduc ing the c o s t of the i r s ervic e s ( th e f inanc i al intermedi a t ion spread ) bu t a l so b y reduc ing the secu r ity demanded f rom the i r borrowe r s . 6 . A s ignif icant prop �rtion o f the fund s invo lved were a s s igned by the bank s to bu s in e s s e s l inked to them as regards the i r owne rship . Thu s , for examp l e , in 1 9 8 2 the ma in bank o f the b igg e s t economic g roup i n the country had 4 4 percent of its port fol io l oaned to f irms tha t were openly and d i rectly related to tha t same g roup . Consequently , f inanc i a l tran sactions b ecame mere internal g roup operati on s , weakening appra i s a l c r i teria and procedures for recover ing debts . 7. I n th e context a l ready d e s c r ibed the high co s t of loans o n t h e dome st i c capital ma rke t he lped to increa s e t h e demand for them rather than t o reduce it . Thu s , th e factor s d e s c r ibed in paragraph s 2 through 6 tended to make the demand for c redit more inel a st i c , wh i l e a t the same t ime the h igh f inanc ia l co s t s caused an increa s e in the demand for fund s in order to pay intere s t commi tment s , with th i s e f fect predomina t ing over the pure price e f fect . The fact tha t cr ed i t , v i ewed a s j u st another produ ct , wa s t raded and u s ed i n the same unit as produ c t s proper , in contra st wi th transactions o f non f inanc ial goods and servic e s in a monetary economy , gave r i s e to th i s d i f f erent behavior o f demand ref erred to . The magnitude of the f inanc i a l co s t e f f e c t i s i l lu strated by t h e fact tha t between 1 9 7 6 a n d 1 9 8 2 a n average debtor p a i d exc e s s intere s t , over a n d above a rea l " norma l " rate of 8 percent per yea r , amount ing to In the equ iv a l ent of 3 0 0 percen t of the in i t i a l loan . other wo rd s , a borrower who e f fectively pa id the 8 per cent to th e c redi tor each yea r , renewed the pr inc ipa l , and capita l i z ed the intere s t commi tments in exc e s s of 8 percent woul d be l iabl e by the end of 1 9 8 2 for a debt over four t ime s the or ig inal amount , in money o f constant pu rcha s ing power . 2 0 It shou l d b e noted , in contra s t , tha t a debtor with the ex terior o n s imi l a r terms would b e l iable in 1 9 8 2 , j u s t b e fore the deva lua tion , for a
370 rea l debt 4 4 percent b e low tha t contrac ted in 1 9 7 6 . Con s equent ly , even a f ter a ma s s ive rea l deva luation o f 8 0 percent t h e debtor wou l d have ended up with a debt equa l only to th e o r ig inal amount ( and equiva l en t to only a quarter o f the l i ab i l i t i e s o f a per son having a debt expre s s ed i n pe so s ) . Th i s c a l c ul a t ion i s , o f cour s e , s en s i t ive to th e per iod taken for the start ing t ime . Thu s , for exampl e , " ta rdy" debtors who took out credits in fore ign currency only in 1 9 8 1 o r in the f i r s t ha l f of 1 9 8 2 s u f f ered a s e r iou s l o s s , tak ing into account the real devaluat ions r eg i s tered in the rema inder of 1 9 8 2 . Th i s i s i n sharp contra st w i th the c a s e o f " ea r l y " debtor s . 8 . Credit o f ex ternal o r ig in played a d i f f e rent ro l e f rom th e one that it had tradit iona l l y a s sumed . It is u su a l l y suppo sed tha t such funds entered an integrated ma rket charac ter i z ed by great sub s t i tutab i l i ty between resou r c e s of dome s t ic and ex ternal o r ig i n , so tha t both typ e s o f inter e s t rat e s wou l d th erefore tend to equa l i z e . I t i s p robab ly true tha t the externa l c redit did h e l p to rel ieve th e demand for funds o n t h e dome s t i c ma rke t . Neverth e l e s s , the e f f ec t s of the f a c to rs ment ioned earl i e r w e r e strong e r , a n d they therefore pushed up t h e dome s t i c r a t e o f intere s t on loan s . Th i s wa s becau s e of th e per s i s tent segmenta tion d i splayed by the marke t . In e f f e c t , on ly some of the debtor s c ou l d enter into indebtedn e s s directly with the ex terior o r gain a c c e s s t o c redit through the intermediat ion of local bank ing inst itut ion s . As a resul t , th e d i f f erenc e between the dome s t i c and ex ternal intere s t ra t e s reached notably h igh l evel s , f lu c tua t ing in the per iod 1 9 7 7 - 1 9 8 1 between e ighteen and forty perc entage points per year ( s ee Tab l e 1 3 . 6 ) . As a l r eady noted , th e expl anation for th i s doe s not l i e in th e expec tation s o f devaluation , s ince until f a r into 1 9 8 1 th e s e we re o f no s igni f icanc e , bu t i t i s to b e f ound rather in the ma rked segmentat ion that preva i l ed in th e f inanc ial market . Of c ou r s e th i s segmentation wa s not I n a cons iderab l e part of the ma rke t there ab solute . were borrowe r s who had s imu l taneou s access to both dome s t i c and externa l sourc e s o f funds , in proportion s that va r i ed accord ing t o the i r bank ing connection s . 2 1 Credit of external o r ig in wa s ava i l ab l e on a very l arge scal e , representing a s much a s some 4 0 percent of the to tal l oanab l e funds of th e f inanc ial sy s t em . The d i f f erent ia l s i n inte r e s t rates therefore had sub stant i a l e f fects , f rom th e point of view of both a s s ign Sma l l - and med ium- s i zed produc e r s ment and d i s t r ibution . we re mo stly rel egated to th e s egment where h i gh intere s t rates preva i l e d . I n con tra s t , en t i t i e s hav ing l ink s with the management of the f inanc ial in s t itutions and the ma in economic groups had easy a c ce s s to external c redi t , e i ther directly or through the intermediation of nat iona l bank s . Th i s no tewo rthy and prol onged segmenta t ion o f the ma rket h e l p s to expl a in the spec tacu l a r concentration of income a nd wea l th in the s e yea r s .
3 71 EXTERNAL VULNERAB I L I TY AND THE DYNAMI C S OF INDEBTEDNES S The conditions preva il ing i n th e wor l d economy and on the dome s t ic market promoted a proc e s s o f g rowing indeb tedn e s s tha t gave r i s e to g re a t vu l nerab i l i ty of the Ch i l ean externa l sector . Mor eover , the form a s sumed by th e tran s f e r of externa l resou rc e s and the incentives g iven by th e economic model cau s ed the externa l indeb ted n e s s to be accompan ied by a dec l ine in dome s t ic inv e s t men t and sav ing ( se e Tab l e 1 3 . 1 , c o l umn 3 ) and the c rowd ing out of national production . A s shown in the s econd section, f or s evera l yea r s the real externa l debt did not appear to be growing s trong l y , in sp i te of the g rowing def i c i t on current accou n t . The behavior of rea l net indebtedn e s s , the e a s e with wh ich new c re d i t s c ou l d b e obta ined , and the l ow real rat e s of inte r e s t on internationa l ma rk e t s led many countries to take a complacen t a t t i tude dur ing the 1 9 7 0 s and the early 1 9 8 0 s . Th i s wa s backed up by the opin ion preva i l ing i n dome stic of f ic ia l c irc l e s tha t , s ince the in debtedn e s s wa s predominantly o f a pr ivate n a tu r e , th e u s e made o f i t woul d natura l l y b e e f f ic ient . 2 2 The growing indebtedn e s s made po s s ib l e a gradu a l apprec iation in t h e exchange rate . Thi s , in turn , made i t s t i l l mo re a ttra c tive to resort to ex terna l l oans ; thank s to th i s apprec iat ion , the rea l co s t of fore ign cu rrency credit wa s neg a t ive dur ing a l mo s t the who l e pe r iod o f f inanc ial l ibera l i za t ion . The proc e s s wa s thu s s e l f - encourag ing , a c c e l e ra t ing the inf l ow o f cap i ta l , wh ich inc rea sed aggregate demand and permi tted the cont inua tion and inten s i f icat ion of th e proc e s s of exchange - ra te apprec iation . Th i s l ed to g rowing accommoda t io n of the n a t iona l e c o n omy to a ma s s iv e in f l ow o f f inanc ial cap i ta l . I n the produ c t ion system, howeve r , wha t wa s tak ing pla ce wa s the oppo s i te to wha t wa s ma inta ined by the o f f i c ia l vers ion . Bo th component s of the saving inve s tment proc e s s showed u n s a t i s f a c to ry b ehavior , with rates o f saving s inve s tment man i f e s tly b e l ow th e l evel s reached in the 1 9 6 0 s . An inc rea s ing proport ion of the resou r c e s wa s d i rected toward the c on sump t ion of imported good s , c rowd ing out spending on nationa l produc t s and dome sti c saving . There wa s d i s c ouragemen t o f inv e s tment , e specia l l y in the produc t ion o f tradab l e goods . The c l ea r e s t " compa rative a dvantage s " were in the purcha se of a s se t s on the dome s t i c market f rom deeply indebted bu s i ne s s peop l e a t depre c iated p r ic e s . Except for some sectors mak ing intens ive u s e of natural resourc e s , such as fruit product i on and f i sh e r i e s ( wh ich did indeed expand ) a nd l uxury con struc tion , inve s tment ran into the d i f f icul ty o f ident i fy ing comparative a dvantage s : The lag o r instab i l i ty o f the ex change ra te , the b ehavior of inter e s t ra te s , the d e l iberate runn ing down o f pub l i c production- support a c tivit i e s , the reduct ion o f pub l ic
372 inve s tment , th e ind i s c r imina te l ibera l i zat ion o f imports , the notewo rthy deteriorat ion in income d i s t r ibution- -a1 l c omb ined to provide a d i s courag ing environment for produc t ive inv e s tment . Para dox ica l l y , in spite o f the preva i l ing c l ima te of euphor i c succ e s s and the c l o s e c ommun icat ion between the government a n d the economic group s , th e accumu la tion proc e s s l angu i shed . Th i s wa s because o f the intrin s i c nature of the model , the f inanc ial b i a s g i ven to the nationa l ec onomy , and the d i f f icul ty of ident i fy ing opportuni t i e s for produc t ive inve s tment in a c ontext sub j ect to such dra stic change s and wi th no prov i s ion fo r the s tate to play an ac tive role in its function o f guid ing national development . Quite apart f rom the un s a t i s factory performa nce of the sys tem o f produc tion , i t wa s obviou s tha t the impetus impa rted to the ex ternal se cto r could not b e kept for l ong , even i f there were no change in th e ex terna l s i tua tion . Neverth el e s s th e of f i c ia l v i ew wa s tha t the proc e s s wou l d regul a te i t s e l f automa t ic a l ly . I t wa s ma inta ined tha t s ince th ere wa s no f i sc a l de f i c it , s ince mon ey i s su e wa s l e s s than the va lue o f the interna t ional reserve s , 2 3 and since th e mon e tary pol icy wa s " neu tral , " It i t wa s impo s s ib l e f o r an exchange c r i s i s t o a r i s e . wa s c on f i dently bel i eved tha t imports o f con sumer goods wou l d rapidly reach satu ra t ion l evel and tha t the a d j u s t ment capa c i ty of th e economy had been s t reng th ened by the In contra st with th e se po l icy impo sed s ince 1 9 7 3 . bel i ef s , however , when the internat ional f inanc ial prob l ems emerged in 1 9 8 1 , th e trade def i c i t amounted to 11 percent o f the GDP , and th e current account de f ic it Th e deterioration in the f inanc ial s tood a t 2 1 percent . and fore ign- trade s ituation thu s co inc ided with the ines capa b l e need to redu ce the s i z e of the externa l - sector imb a l ance and the exchang e - ra te lag . Th e d i f f icu l t i e s exper ienc ed by C h i l e in procur ing ex terna l c re d i t s coinc ided wi th a dome stic s i tuation in wh ich the re wa s a pre s s ing n eed for fr e sh resou r c e s and in wh ich the government had done away with economi c regu l ation mechani sms and rel ied on the automa t i c correc tions imp l i c i t in the do l la r standa rd . At th e same t ime th e sys tem o f produc t ion wa s weakened and deep Thu s , the ex ternal shock wa s mu l tipl ied a t th e in debt . l evel of th e dome s t ic economy and wa s refl ec ted in a dec l ine o f 1 4 percent in th e GDP in 1 9 8 2 , conc entra ted in the manu f a c tu r ing and cons tru c t ion se ctors ( wh ich decl ined together by 23 percent ) . In short , the ex terna l shoc k found Ch i l e in a h ighly vulnerab l e po s i t ion , and th i s mu l ti pl i ed i t s nega t ive ef f e c t s on the nat iona l economy . At the same time , Ch i l e ' s produc t i on ba s e wa s se r iou sly weakened . As a l ready demon strated , 2 � i f t h e va lue added in f inanc ia l activities and in th e trad ing of imported goods i s deduc ted , th e p e r capita nationa l product i n 1 9 8 1 , befor e th e e f f ec t s o f the shock , s tood only a t a l evel s imi l a r
3 73 to 1 9 7 4 . Th i s i s an unmi s takabl e s ign of s tagnation c ompa red with the growth of the re s t of the wor l d . Con sequently , the viol ent deterioration ob served in 1 9 8 2 c ame o n top o f a s ituation in wh ich the economy wa s a l ready function ing badl y . Ch i l e ' s acc e s s to f inanc i a l ma rk e t s wa s becoming increa s ing l y d i f f icu l t , wh i l e its internat iona l r eserve s , a l though s t i l l h igh , were go ing down rap idl y . After repea ted announcement s tha t it wa s not neces sa ry to renegotiate the country ' s external deb t , the Chi l ean government i n i t i a ted a long proc e s s , the f inal s tage of wh ich-- the s ign ing o f contra c t s b e tween d eb to r s and c redito r s --ha s s t i l l not been comp l e ted . The renegotiation was c a r r ied out by the government of Ch i l e , in spite of the fact that mo s t of the debt corresponded to the pr iva te sec tor and d i d not en j oy s ta t e guarantee s . Th i s i s not in the l e a s t surpr i s ing , o f cours e , bu t it i s in sha rp contra dic t ion with the a rguments pu t forward by the economic autho r i t i e s right up to 1 9 8 2 regarding the " ef f ic ienc y " of pr iva te indebted n e s s . The renegotiation covered the amo r t i z a tion payments due between F eb ru a ry 1 9 8 3 and the end o f 1 9 8 4 on th e bank debt o f pub l ic and p r iva te ent i t i e s domic i l e d in Chil e . I t covered about two- th irds of the tota l l iab il i t i e s f a l l ing due in th e per iod in respect of mediumand l ong -term deb t . As in th e c a s e of mo s t of the renegotiat ion opera tions c arri ed ou t in the l a s t two yea r s , th i s wa s pre c eded by an agreement with th e IMF . The terms regarding payment schedu l e s and intere s t rates agreed upon with th e c ommittee represent ing the hundred s of c reditor bank s were s imilar to tho s e reached in other c a se s , such as tho s e of A rg en t i na , B ra z i l , and Mex ic o . A t f i r s t s ight , there would not appea r to b e any sub stantial d i f f erenc e s in resul t obta ined by Chil e . Without wish ing to enter here into an examina tion of the ru l e s e s tabl i shed regard ing the princ ipl e of immunity f rom j u r i sdict ion and execution and th e undertak ing s entered into on dome st ic economic po l icy , h owever , I woul d l ike to emph a s i z e two dec i s ive d i f ferenc e s ob served in the c a s e o f Ch i l e . The s e concern the agreement w i th the IMF and the absence of any prior pub l i c guarantee in respect o f mo s t of the debt wi th the bank s . The agreement with the IMF i s particu l a r l y r e s t r i c t ive , the prov i s ion with the mo s t s e r i o u s con sequen c e s be ing tha t c onnected with the f i sca l de f ic it . Th i s wa s f ixed a t 1 . 7 perc ent f o r 1 9 8 3 , but a f ter only a short t ime it wa s nec e s sary to ra i s e i t to 2 . 3 percent . Th i s l evel meant tha t , despite the 1 4 percent drop in the GOP in the prec eding yea r , the dec l in e in product ion continue d in 1 9 8 3 . Th i s drop in the GOP wa s the determin ing facto r in the 1 9 8 3 trade su rp l u s of c l o s e to The c o s t i n terms o f th e l o s s o f production , 5 percen t . emp l oyment , and economic potential ha s been extremel y
3 74 h igh . There h a s been a n " ad j u s tment " it i s tru e , bu t � i t s e ems to b e c l ea r l y ine f f ic ient . 2 A s regards th e terms ag reed upon wi th the committee of bank s , th e s im i l a r i ty between the f inanc ing terms obta ined in th e d i f f e rent na t ional c a s e s doe s not take due account o f the f a c t tha t in Ch i l e the debt wa s pre dominantly w i thou t state gua rantee . Th i s f ea tu r e shou l d have represented a f a c tor of great weight in any re n egot ia t ion proc e s s , e spec i a l l y wh en th e private secto r in d e bt to the ex terior i s not in a po si tion to pay o f f it s l ia b i l i t i e s in the per iod covered by the renegotia t ion . The fact i s tha t the Ch i l ean government gave its gua rantee in r e spec t of the debt of national f inanc ial ent i t i e s tha t had previou s l y not en j oyed such back ing , but did no t , in spite of th i s , manage to ob ta in noticeably more favo rab l e c ond i t ions tha n other countr ie s . The l evel o f overindeb tedn e s s o f th e Ch i l ean economy i s so s e r ious tha t in spite of the renegot i a t ion proc e s s , payment s o f inte r e st and capital i n 1 9 8 3 were equival ent to a l mo s t 1 2 percent of th e 1 9 8 3 produc t . There i s a l so a tendency for th e probl em to g e t wor s e , s ince th e schedu l ed amo r t i z a t ion payments a r e du e to inc rea se enormou s l y in 1 9 8 5 . I n the two-year per iod 1 9 8 5- 1 9 8 6 they are du e to exc eed the amor t i z a tion payments prior to th e 1 9 8 3 - 1 9 8 4 renegotiation proc e s s by 50 percent . Th i s inc rea se i s du e ma inly to the matu r i ty of l iab i l i t i e s in r e spect o f th e credi t s u sed b e tween 1 9 7 9 a n d 1 9 8 1 . C l ea rl y , the mid- 1 9 8 3 renegotiat ion only tack l ed part of the prob l em generated by th e pre sent economic pol icy . Together wi th the deteriorat ion tha t ha s taken p l a c e in interna ti on al f inanc i a l ma rk et s , th i s l eaves ou t s tand ing a vo lume of debt- s erv ic ing l iab i l i t i e s tha t wi l l keep the national economy , year a f te r yea r , sunk in uncerta inty and ob l iged to g ive p r i or ity to f in anc ia l a spec t s at the expe n s e o f th e u rgen t and serious soc ial and produc tion prob l ems the c ountry i s suf f e r ing . SOME LES SONS OF TH I S EXPERI ENCE In th i s recapitu l a t ion I want to empha s i z e four l e s son s der iving f rom the f inanc i a l opening-up proce s s . They refer to the d i s tort ion s caused by ind i sc r imina te open ing up in rega rd to concentration and ine f f ic iency in the a l l oc a t ion o f re sourc e s : the a l t ernat ive way s in wh ich the dome stic and ex terna l f inanc ial marke t s cou l d be interre l ated : c r it e r ia regarding the regu l a t ion o f volume s of cap i ta l movement s : a n d th e chann e l ing o f fund s to inve s tment . The f inanc i a l opening-up proc e s s i s not neutra l concern ing th e a l location of re sourc e s , e spec i a l l y dur ing th e tran s i t i on f rom a c l o sed ec onomy to an open ec onomy , becau se of th e pres su r e s it gen erates on aspects such a s the compo s i t ion o f money i s sue , the level o f the exchang e
375 ra te o r ta r i f f protect ion , and pub l ic inv e s tmen t . During the tra n s i t ion i t is n ec e s s a ry to adapt the st ru c ture of aggregate supply and demand , as wel l a s to e s tab l i sh a b igger gap between expend i ture and dome s t ic produc tion . The key que s tions in th i s respec t concern the optimum pa th to be f o l l owed by the ad j u s tmen t and the que s t ion of whe the r the acc e s s to external funds and the i r c o s t w i l l b e s tabl e in the future . T h e f inanc ial ma rket opera t e s with very narrow horizons and doe s not take due account of th e repercu s s ion s on national product ive a c t ivity . Consequently , it i s e s s en t ia l tha t the opening up proc e s s shou l d b e regu l a t ed in a programmed manner . As rega rds the repercu s s ion s in the f inanc ia l sph e r e i t s el f , a c c e s s to ex tern a l cred i t i s not homogeneou s , not on l y b ecause o f dome s t i c regu l a t ions but a l so becau s e o f th e na ture o f the interna tiona l f inanc ia l ma rke t s . In pra c t ic e , th i s type of c redit ha s been ava il ab l e ma in ly to c e r ta i n s egment s of the nat ional economy such a s b ig import and export enterp r i s e s and f i rms a s soc iated with f o re ign f inanc ial in s t i tu t i on s . In the case of c redit f o r importer s , f or exampl e , the d i f f erenc e s in c o s t a l ready ana l y z ed meant tha t th e open ing-up proce s s con s t i tu ted yet another f orm of remova l o f protec t ion f rom tho s e engaged in impor t sub s titution . The d i f f er enc e s ob served b e tween d i f f erent appl icants regard ing acce s s to and co s t of externa l c redit a f fect not only th e e f f ic iency of r e sou rc e a l locat ion but a l so the d i s t r ibut ion of income and wea l th . In particula r , the open ing up o f the capital a ccount in Ch i l e prov ided sub s tantia l prof i t s for tho s e who were ab l e to ob ta in external c redit s . Th ere can be no doub t , however , that th e e f f ec t s and the i r d i s tr ibu t ion wi l l depend on the f o rms o f
r egu l a t ion and chann e l s
of
in t e rme d i a t i on
u sed . Thu s , f o r exampl e , the e f f e c t s on income d i s t r i but ion and the l evel of inve s tment c a n b e var i ed depend ing on whe ther the intermediat ion is carried ou t by enterpr i s e s , by commercial bank s , or through the C en tra l Bank or a pub l ic body respon s ibl e for promot ing pro duc t ive inve s tment ( such as the Development Corpora t ion- CORFO ) F rom anoth e r po int of view , the change f rom pub l i c t o pr iva te ent i t i e s a s th e d e s t ination o f f l ows o f funds and the c onc entra tion ob s e rved in the acc e s s to thos e fund s have h a d very noteworthy con sequen c e s i n the pol i t ic al sphere . F i rs t , th ey contr ibu ted to the spec tacu l a r c oncentra tion of ec onomic power ob served in rec ent years . S econd , they g enerated powerful anti devaluation f o rc e s tha t , tog ether with th e preva i l ing economic ideol ogy , helped to keep the exchange rate f ro z en for three yea r s ( f rom mid- 1 9 7 9 to mid- 1 9 8 2 ) , wh i l e i t s real va lue d i s played a p ronounc ed deteriora t ion ; in th i s connec t ion the antideva lua t ion pre s su r e s of the importers were r e in forced by tho s e o f th e economic groups tha t had taken ou t deb t s in fore ign cur rency . •
3 76 A secon d l e s son tha t emerg e s very c l ea r l y f rom the expe r i ence of Ch i l e and other coun t r ies in the Southern Cone i s tha t ind i s c r imina te l ib e ra l i za t i on is not a su i tab l e c on d i t i on for b r ing ing about the integrat ion into a s ing l e ma rke t o f funds o f dome st ic and ex terna l origin . Indeed , in rea l i ty th e oppo s it e took place . If a n ob j ec tive i s t o promote a n a l terna tive option l ea ding to an integrated market , func tiona l l y bene f ic ia l for nat ional deve lopmen t , important cond itions are seen to ( 1 ) channel ing ex ternal funds , exc ept for external be : trade and compen sa tory c redi t , into a c ommon pool with dome stic re sou rc e s � ( 2 ) e l iminat ing the exchang e r i sk borne by deb to r s with the ex terior by expr e s s ing in national currency th e ex tern a l r e sources tra n s f erred to th e domes t ic mark e t � ( 3 ) exp l i c i t l y pu shing the ma rket towa rd a ma tu r i ty s truc tu r e compa t ib l e with produc t ive inve s tmen t , wh ich ca l l s f o r l ong ma tur i t i e s � and ( 4 ) regu la ting real in tere st rates with the ob j ective o f avo id ing both neg ative rates and exc e s s ive l y h igh ra te s , s ince both extreme s are pre j ud i c i a l to th e e f f ic iency of inve s tmen t . A th i rd l e s son i s connected w i th the de s tab i l i z ing na tu r e of c ap i ta l movement s . In sma l l c ountr i e s and tho s e wher e th e dome stic ma rke t s are not f l u id a n d integra ted , th i s i n s tab i l i ty can b e very d i s tu rb ing to economic a c t iv i ty . It is not j u s t a qu e s t ion of the condit ion s tha t the f ree movement of capita l impo s e s on monetary , f i s c a l , and / o r ex chang e po l i c ie s . Another fea ture of g reat pra c t i c a l s ig n i f icanc e i s tha t the intern a t i ona l f inanc ial mark e t s su f f e r f rom f lu ctuation s tha t a r e promptly tra n smitted t o the dome st i c ma rk ets unl e s s th ere I n add i t ion to th i s overa l l i s s ome f o rm o f regul a t ion . feature o f ma rke t s , the supply o f new fund s ava i l ab l e t o each c ountry i n pa rticular i s sub j ec t t o abrupt chang e s i n respon s e to va r ia t ions in t h e l ender s ' perc eption o f tho s e coun trie s ' cr e d i tworth i n e s s o r i n connec tion with th e u s ing up of th e amounts of credit l enders are w i l l ing to mak e ava i l ab l e to each c ountry- -amoun t s tha t a r e re l ated more to the tota l amount of the debt than to th e vo lume of the net f l ows in each per iod . For the debtor c ountr ies , h owever , i t is the net f l ow and the corre spond ing current account f inanc ing that is the mo st pert inent variab l e for the i r short- term pol i cy . I n th e mac roecon omic l i terature , empha s i s i s u sua l l y p l a c ed o n regu l a t ions o n capital movements tha t operate exc l u s ively on r e l a t ive p r i ce s � among th e s e i s a tax on intere st des igned to c ompensate for certa in " externa l i t i e s . " I t i s qu ite true that th i s mechan i sm may mak e it pos s ib l e to tac k l e the particu l a r prob l em of a country tha t ha s a s tab l e supply of loans wi th a p o s i t ive trend . L ikewi s e , c erta in k inds o f tax e s can reduce short- term specu l a t ive movement s by mak ing them more expen s ive compa red with longe r - t erm movemen t s . The ex i s tenc e of ex te rna l in s tab i l i ty in th e supply o f fund s ,
377 however , mu s t b e tac k l ed wi th mechani sms a c t ing directly on th e volumes o f c red i t s . In oth e r word s , i t i s nec e s sa ry to e s tab l i sh mach inery to regul a te the tota l vo lume o f indeb tedne s s reg i s tered in e a ch period . W i th in th i s contex t , there may b e room, i n a comp l ementary capac i ty , for in s trument s a c t i ng on p r ic e s , such a s tax e s and c ompu l sory depos i t s . It mu st b e unders tood , however , tha t th e s e wil l c a rry out a fundamental ly d i s t r ibu t ive funct ion , tax ing the d i f f erentia l s b e tween intere s t ra te s . When , some day in the f u tu r e , an abundant bu t probabl y u n s tab l e supply of f inanc ia l credit aga in b ecome s ava i l ab l e , w e shou l d not f org e t th e l e s son provided by recen t y ea r s rega rd ing th e evi l s of exc e s s ive a n d d i s turb ing ex terna l indebtedne s s . A f ou rth l e s son i s tha t , exc ept i n th e c a s e o f f l ow s o f a c ompen sa tory natu r e , the regu l a tion o f capita l movement s shou l d provide f o r th e i r channel ing towa rd the proc e s s o f saving s / inv e s tment . I n so f a r a s th e s e funds a r e direc ted toward the dome stic f inanc ia l ma rket withou t any c l ea r guide l ine s as rega rds the i r de s t in a t ion , they can ea s i l y f i l ter through to con sumption . The experience of va riou s devel oping count r i e s sugg e s t s tha t th e f ina l u s e of funds i s determined t o a s ig n i f ican t ex tent by the way in wh ich th e in f l ow of capita l i s regu l a ted a n d channel ed . 2 6 NOTE S Th i s chapter presents a s tudy tha t i s part o f the C IEPLAN ( Co rporat ion for Economic Research for L a t in Ame r ic a ) research prog ram on Economi c s and In ternation a l Re l a t ion s , wh ich i s rec e iv ing the support o f t h e Ford Founda t ion . A study of th e f inanc i a l open ing-up proc e s s i n the period 1 9 7 3 - 1 9 8 0 i s made i n R . F f rench-Oav i s and J . P . Are l l ano , " Apertura F inanc iera Externa , " 1 9 8 1 . G ra t e fu l acknowl edgment i s made to J . P . Arel lano for his autho r i z a t ion to use in the present s tudy part of the ma terial c onta ined in tha t pub l i c a t ion . I w i sh to exp r e s s my g ra t i tude for the c omments by C I EPLAN research e r s J . E s teve z and C . Ma s sad and the c o l l abora t ion of J . A . Ru l z . S e e A . Fo x l e y and R . F f rench-Oavi s , " La t in 1. Amer ican Experime n t s in Neo-Cons ervat ive Economic s , " COl ecc i o n E studio s C IEPLAN 7 , March 1 9 8 2 , spe c i a l i s su e , a n d Unive r s i ty of C a l i f ornia P re s s , 1 9 8 2 . 2 . R . Corta zar , " C h i l e : Resul tado s O i s t r ibutivo s , 1 9 7 3 - 8 2 , " Nota s T e c ni c a s No . 5 7 , C IEPLAN , Sant iago , 1 9 8 3 . 3 . R . MCK i nnon , " Fo re ign Exchange pol icy and Economic L ibera l i za t ion in LOC s , " in Al ternat iva s de Pol it l c a s F inanc ieras en Econom l a s pequena s y Ab iertas a l Exterio r , E stud i o s Mon e ta r i o s 7 , San t iago , 1 9 8 1 . 4 . More deta i l e d informa tion on the regul a t ion s tha t hav e governed t h e movement of capita l i s g iven in a n
3 78 annex pub l i sh ed in C o l e c c ion E s tudios C IEPLAN 5 , Ju l y 1 9 8 1 , a n d in J . A . Rui z , " Regu l a c iones del Mov imiento de Capita l F inanc i e ro : C h i l e , 1 9 7 4 - 8 2 " ( C I EPLAN , 1 9 8 3 , mimeo . ) . 5. S . D e l a Cuadra , paper presented a t the seminar o rga n i z ed by the Fundac ion d e l a Facu l ta d de C ienc i a s Economi c a s de l a Univer s idad C a tol ica , in B a n c o C entral de Chi l e , B o l e t l n Men sua l , no . 6 2 7 , May 1 9 8 0 . 6. Inter-Ame r ican Deve l opment Bank ( I DB ) , Progreso E c onomico y S oc i a l en America L a t ina : E l S ec to r Ex terno , I n f orme 1 9 8 2 , Wa sh ing ton , D . C . , 1 9 8 2 . E . Bacha and C . D i a z -Al e j andro , " Mercado s F inanc iero s : Una V i s ion De sde la S emipe r i f eria , " and A. F i sh l ow , " La D euda Externa La t inoame r icana : Probl ema 0 S o l u c i on , " both in R. F f rench Davi s , ed . , Rel a c ion e s F inanc i e ra s Ex terna s y D e sa r ro l l o Nac ion a l e n Amer i c a L a t ina , Mex ico city , 1 9 8 3 c . 7. R . F f rench-Dav i s , ed . , " Una E s tra tegia de Apertura Externa S e l e c t iva , " Recons trucc ion E conomica para l a D emoc rac ia , Santiago , 1 9 8 3 a . 8 . R . F f rench-Davi s , " Indice de P rec i o s Ex ternos pa ra C a l c u l a r e l Va l o r Rea l del Comercio I n terna c iona l de Ch i l e , 1 9 5 2 - 8 0 , " Nota s Tecn ica s no . 3 2 , C IEPLAN , Santiago , June 1 9 8 1 . 9. R . F f rench- Dav i s and J . P . Arel l ano , "Apertura F inanc iera Externa : La Expe r i enc ia Ch i l ena en 1 9 7 3 - 8 0 , " C o l ec c ion E s tudios C IE PLAN 5 , Santiago , July 1 9 8 1 , tab l e 1 3 . 1 0 . J . P . A r e l l ano and R . Corta za r , " D el Mil agro a l a C r i s i s , " C o l e c c ion E s tudios C IEPLAN 8 , Sant iago , July 1 9 8 2 . 1 1 . A b r i e f summary i s g iven in F f rench- Dav i s and Arel lano , " Apertura F inanc i e ra Externa , " pp . 3 3 3 - 3 3 6 � and a deta i l ed anal y s i s i s made in R . F f rench-Davi s , " Ex chang e Ra te P o l i c i e s in Chi l e : The Experience with C rawl ing p eg , " C o l ecc ion E s tudios C IEPLAN 2 , Decemb er 1 9 7 9 ( and in J . Wi l l iamson , Exchange Ra te Rul e s , London , 1 9 8 1 ) . 1 2 . R . F f rench-Davi s , " Exchange Ra t e Pol i c i e s in Chil e . " 13 . Th e wh o l e s a l e p r i c e index a c tua l ly went down by 8 percen t , ma inly as regards agricul tu ral goods , between May 1 9 8 1 and May 1 9 8 2 , whe rea s the con sumer price index went down by 1 perc ent b etween F eb ruary and May 1 9 8 2 . By May 1 9 8 2 th e externa l p r i c e index had gone down by 2 percent in twe lve mon th s . 1 4 . Open unempl oyment in Santiago ro s e f rom 1 1 per c ent to 2 3 percent b e tween S eptemb e r 1 9 8 1 and June 1 9 8 2 . Manu f a c tu r ing p roduc tion went down by 2 2 percent in 1 9 8 2 . 1 5 . The increa s e in the def ic it wa s a s s o c i a ted w ith the increa se in impor t s and in the vo lume of indebtedne s s , the dec l ine in nontrad i t ional exports , th e r i s e in intere s t ra te s , and the deteriora t ion in th e price of copper . With regard to th i s l a tter item , it may be noted tha t th e sma l l er f i s c a l income in 1 9 8 1 f rom th i s
3 79 source compared with the average for 1 9 6 0 - 1 9 7 0 wa s equ iva l ent to U S $ 1 0 9 mil l ion ( US $ 2 6 6 mil l ion i f only th e period 1 9 6 5- 1 9 7 0 i s con s idered ) a t 1 9 7 7 pr ic e s , that is to say , . 7 perc ent ( 1 . 6 percen t ) o f the 1 9 8 1 GDP . Th e f igures ( a t current val ue s ) for the contribution made t o f i s c a l income by t h e l arge- sca l e copper-mining indu st ry wer e provided by the C omi s ion Ch i l ena del C obre � h ere they have b e en def l a ted by th e ex ternal p r ic e inde� . The deterioration in th e p r i c e o f coppe r wa s o f f s e t by the improvement in the pric e of molybdenum and the procure men t for Ch i l e o f the economic rent of the copper depo s i t s through the proc e s s o f nationa l i za t ion of the s e a c t ivit i e s . S ome of th e quantitative re stric tions u sed to 16 . control the i n f l ow o f capital helped to make movement s o f pr iva te c a p i t a l independent o f short- te rm f l u c tuation s in the exchange ra te . Ment ion shou l d b e made in particular o f the min imum l imit o f two year s for indebtedne s s and the c ompu l sory depo s it s , wh i ch went down in proportion to the term o f the loan . 1 7 . P . Mel l er and A . S o l imano , " I nes tab i l idad F inanc iera , Burbu j a s E spectacu l a t ivas y Tasa de Interes Rea l : Ch i l e , 1 9 7 5- 8 3 " ( C I EPLAN , Santiago , 1 9 8 3 , mimeo . ) 1 8 . J . P . Are l l ano , " De l a L ibera l i zac ion a l a Intervenc ion : E l Mercado de Capita l e s en Ch il e , 1 9 7 4 - 8 3 , " C o l e c c ion E s tudios C IEPLAN 1 1 , S ant i ago , December 1 9 8 3 . F french-Dav i s and Are l lano , " Apertura F inanc iera Externa . " 1 9 . A more traditional f a c tor , wh ich wa s o f s ome importanc e on severa l o cca s ion s , wa s the downward trend in the rate of i n f l a tion and the lag in th e ad j u s tment o f nomina l inter e s t rates . 20 . The s e c a l c u l a t ion s were made u s ing the corrected con sumer price index . If the o f f ic ia l con sumer price index had been u sed , th en the total amount of the " real " debt wou ld be 5 . 3 t ime s greater . The a ccumu l a ted " error " in th e c a l c u l a t ion o f the o f f ic ia l con sumer price index in the three-year per i od 1 9 7 6- 1 9 7 8 wa s c l o s e to 3 0 per c ent . S e e R . Corta zar and J . Marshal l , " Indice de P rec i o s a l Con sumidor en C h i l e : 1 9 7 0 - 7 8 , " C o l ec c ion E stud io s C I EPLAN 4 , Sant iago , Novemb e r 1 9 8 0 . 2 1 . Th ere wa s a l so s ign i f icant di spers ion with in th e dome s t i c market i t s el f . For exampl e , the average pub l i c l y o f f ered nominal inter e s t rates for loans exceeded the we ighted average rate c a l c u l a ted by the C entral Bank by f ive and ten perc entage points in 1 9 7 9 and 1 9 8 0 respec t ive l y . 2 2 . W . Rob i chek , " Some Refl ections About Externa l Pub l i c D eb t Management , " in Al ternat iva s de p o l l t i c a s F inanc i e r as en Economla s p equena s y Ab ierta s a l Exter ior , E s tudio s Moneta r i o s 7 , Santiago , 1 9 8 1 , pp . 1 7 1 - 1 7 2 . 2 3 . At the end o f 1 9 8 0 , the Central Bank r e s e rves amounted to U S $ 4 . 0 7 2 b i l l ion . The bank had l i ab i l i t i e s n o t taken into account i n the d e f i n i t ion o f " re serve s " •
380 for a tota l o f U S $ 9 4 5 mil l ion , however , wh i l e the banking sys tem had net l iabi l i t i e s equ ival ent to U S $ 3 . 2 6 0 b i l l ion . 2 4 . R . F f rench-Dav i s , " The Moneta r i s t Experiment in Chi l e : A Su rvey , " C o l ec c ion E s tudios C IEPLAN 9 , Santiago , December 1 9 8 2 ( and in Wor l d Development , Ox ford , November 1 9 8 3 ) . 2 5 . Fo r an a l ternat ive approach , see my art i c l e " Una E s tra teg ia d e Apertura Externa S e l e c t iva . " 26 . Ibid . B IBL IOGRAPHY Are l l ano , J . P . " Mac roeconomic S tabil ity and the Opt ima l Degree of Capital Mob i l i ty . " Journal o f D evel opmen t Economic s , J u n e 1 9 8 2 . " De l a Liberal i za c ion a la Intervenc i6n : El Mercado de Capita l e s e n Ch i l e , 1 9 7 4 - 8 3 . " C o l e c c ion Sant iago , December 1 9 8 3 . E s tudios C I EPLAN 1 1 . Are l l ano , J . P . , and R . Corta za r . " De l Milagro a l a C r i s i s . " C o l e c c i on E s tudios C IEPLAN 8 . Sant iago , July 1 9 8 2 . Bacha , E . , and C . D i a z-Al e j andro . " Mercados F inanc i e ro s : Una V i s i6n D e sde l a S emipe r i f eria . " Re l a c ion e s F inanc iera s Externa s y D e sa r ro l l o Nac ional en Amer ica La tina , ed i ted by R. F f rench-Davi s . Mex ico C i ty , 1983 . Bank for I n ternational Settl ements ( B I S ) . Annua l Report . Ba s l e , va rious yea r s . Sant iago , Banco C entral De Ch i l e . B a l a n z a de Pago s . annual pub l icat ion . Deuda Externa . Sant iago , annual pub l ication . E s tudio s Mon e ta r io s , no s . 4 - 7 . C enter for P l anning Re s earch and S tudies ( C IEPLAN ) . Reconstruc c ion Economi c a pa ra la Democ rac ia . S antiago , 1 9 8 3 . Corta z a r , R . " Ch i l e : Resu l tado s D i s tr ibut ivo s , 1 9 7 3 - 8 2 . " Nota s T i cn i c a s No . 5 7 . Santiago , June 1 9 8 3 . " I ndice de Prec i o s a l Corta za r , R . , and J . Ma r sha l l . 1 9 7 0- 7 8 . " Col ecc ion E s tudios Con sumido r en Ch i l e : Sant iago , N ovember 1 9 8 0 . C I EPLAN 4 . Paper p r e s ented at the s emina r D e l a Cuadra , S . organ i z ed by th e Fundac ion de la Facul tad de C ienc ia s Ec onomica s de la Univer § idad C a to l ica . In Banco Central de Ch i l e , Boletin Men sua l , no . 6 2 7 , May 1 9 8 0 . Devl i n , R . " Renegotiat ion o f Latin Ame r i c a ' s D ebt : An Ana l y s i s o f the Monopo l y Power o f P r ivate Bank s . " CEPAL Rev iew , no . 2 0 ( Santiago , Augu s t 1 9 8 3 ) . S omo s Rea lmente I ndependientes Grac i a s al D I P RE S . Santiago , 1 9 7 8 . E s f ue r zo de Todo s l o s Ch i l eno s .
381 F f rench-Qav i s , R . Econom i a I n ternac iona l : Teor i a s y Pol i t ic a s para el D e sarro l l o . Mex ico C ity , 1 9 7 9 a . " Exchange Rat e P o l i c i e s in C h il e : The Experience with Crawl ing P eg . " C o l ec c ion E studio s C I EPLAN 2 , Sant iago , Decemb e r 1 9 7 9 b ( and in J . Wil l iamson . Exchan2e Ra te Rul e s . L ondon , 1 9 8 1 . " I ndice de Prec io s Externos para C a l c u l a r e l Va l o r R e a l d e l C omercio I n ternac ional de C h il e , 1 9 5 2 - 8 0 . " Nota s Tecn ica s no . 3 2 , Santiago : C IEP LAN , June 1 9 8 1 . " The Mone ta r i s t Exper iment in Ch i l e : A Survey . " C o l e c c ion E s tud io s C IEPLAN 9 , Sant iago , December 1 9 8 2 ( and in Wor l d D evel opment [ Oxford] , November 1983 ) F f rench-Davi s , E . ( ed . ) . " Una E s trateg ia de Apertura Externa S e l ec t iva . " Rec ons trucc ion Economi ca para Santiag o , 1 9 8 3 a . la D emoc rac ia . " E l P rob l ema de l a D euda Ex terna en America Lat ina : Tendenc ia s y P erspectivas en 1 9 8 3 . " I nte2rac ion Lat inoamer icana . Bueno s Aire s , 1 9 8 3 b ( and in Inter-American Devel opment Bank [ IDB ] . P ro2reso Economic o y Soc ial en America Latina : E l S e c to r Externo , I n forme 1 9 8 2 . Wa shing ton , D . C . , 1982) . Relac ion e s F inanc iera s Externa s y D e sarro l l o Nac iona l e n Amer ica Lat ina . Mex ico C ity , 1 9 8 3 c . "Apertura F f rench-Davi s , R . , and J . P . Arell ano . F inanc iera Exte rna : La Exper ienc ia Ch i l ena en 1 9 7 3 - 8 0 . " C o le c c ion E stud i o s C IEPLAN 5 , Santiago , July 1 9 8 1 ( and in Relac iones F inanc iera s Exte rn a s y D e sa r ro l l o N a c i ona l en Amer i c a La tina , edited by R . F f rench-Davi s . Mex ico C i ty , 1 9 8 3 . F i sh l ow , A . " La Deuda Externa Lat inoamer icana : P robl ema o Soluc ion . " I n Rel a c ion e s F inanc i era s Externa s y D e sa rro l l o Nac iona l en Am�rica La tina , edi ted by R. F f rench-Dav i s . Mex ico C ity , 1 9 8 3 . Fox l ey , A . , a nd R . F f rench-Davi s . " La t in American Exper iments in Neo-Con s e rva t ive Economic s . " C o l ecc ion E s tudios C IEPLAN 7 , Sant iag o , Ma rch 1 9 8 2 , spec ia l i s sue ( and Univers ity of C a l i f ornia P re s s , 1982) . G r i f f i th-Jone s , S . " Th e Evo l u t ion o f Ex terna l F inanc e , Economic pol icy and D evel opment i n Ch i l e , 1 9 7 3 - 7 8 . " I n s t i tute o f Development S tudies ( I DS ) , S u s s ex Univer s i ty , England . Mimeo . 1 9 8 0 . Gua rdia , A . , J . E . H errera , A . Mar t in e z , C . Ominami , and C . Ro j a s . " Una Renegoc iac ion G l ob a l para una Nueva p o l i t i c a de la D euda Externa Ch i l ena 1 9 7 4 - 1 9 8 2 . " I n f o rme de C oyuntura E conomica . San t iag o , March Apr i l 1 9 8 3 . Gu tierre z , M . " Re f l ex iones Sobre Apertu ra F inanc iera : El C a s o Ch il eno . " E stud io s Economi c o s No . 1 4 . Sant iago , 1 9 8 2 . •
382 Herrera , J . E . , and J . Mora l e s . " La I nver s ion F inanc iera Externa : E l C a s o de Ch i l e , 1 9 7 4 - 7 8 . " Colecc ion Sant iago , Jul y 1 9 7 9 . E s tudios C IEPLAN 1 . Ma s sa d , C . " Th e Ex terna l Deb t and the F inanc i a l P rob l ems of Latin Amer ic a , " CEPAL Revi ew No . 2 0 , Sant iago , Augu s t 1 9 8 3 . McK innon , R . " La Intermediac ion F inanc iera y el Control Moneta r i o en C h il e . " Cuaderno s de Economia N o . 4 3 ( Santiago ) , December 1 9 7 7 . " Repres ion F inanc i e ra y el P robl ema de l a L ibera l i za c ion Dentro de l o s p a i s e s Meno s D e s a rro l lado s . " Cuadern o s de E conomia No . 4 7 ( Santiago ) , 1 9 7 9 . " Fore ign Exchange Pol icy and Economic L ib e ra l i za t ion in LDC s , " in A l t erna tivas de p ol i t ic a s F inanc iera s en E c onomla s p equena s y Ab iertas a l Ex terio r . E s tudio s Monetario s 7 . Santiago , 1 9 8 1 . Mel l e r , P . , and A . Sol imano . " I n e s tab i l idad F inanc iera , B uibujas E spec tacu l a t iva s y T a sa de Interes Real : Ch i l e , 1 9 7 5- 8 3 . " C IEPLAN . Sant iago. 1 9 8 3 . Mimeo . Min i s terio de H a c i enda . Expo s ic ion S ob re e l E s ta do de la Hac i enda Pub l ica . Annua l pub l ica tion . " D e l Colapso de la Ec onom i a de Endeudamiento Ominami , C . I n ternac iona l , a la N e c e s idad de una E s trateg ia de I ndependenc ia Nac ional . " Academia de Human i smo C r i s t iano , CERC . San t iago . November 1 9 8 3 . Mimeo . Rob ichek , W . " Some Ref l ec t ion s About Ex terna l .. Pub l ic D eb t Manag ement . " I n .. Al ternativa s de Po l itica s F inanc iera s en E conomia s p e�uena s y Ab ie rta s a 1 Exterior . E s tudios Mone ta r 1 0 S 7 . Sant iago , 1 9 8 1 . Ru l z , J . A . " Regu l a c ion e s del Movimiento de Capital F inanc iero : Ch il e , 1 9 7 4 - 8 2 . " C I EPLAN . Santiago . 1 9 8 3 . Mimeo . Sanfuente s , A . " Anteceden t e s Sobre l a D euda Externa C h i l ena . " E s tudio s Moneta r i o s 4 . Santiago , 1 9 7 8 . S j a a s ta d , L . , and H . Corte z . " E l Enfoque Moneta rio de l a Balanza de P ag o s y las Ta s a s de Interes en C h il e . " E s tudios de E conomia No . 1 1 , Uni vers idad de Ch il e , F i r s t s eme s te r 1 9 7 8 . " Apertu ra a l Merc a do F inanc iero I n terna c iona l . " Tapia , D . I n s t i tu c ional idad E conomica e Integra c ion F inanc iera Sant iago , 1 9 7 9 . con el Ex terior . " Repercu s iones Moneta r i a s y Rea l e s de l a Z ah l e r , R . El C a s o Ch i l eno , Apertura F inanc iera a l Ex te r ior : 1 9 7 5 - 7 8 . " Revi s ta de l a CEPAL , Apr i l 1 9 8 0 . •
14
Peru and Its Private Bankers: Scenes from an U n happy Marriage Robert Devlin Enrique de fa Piedra
INTRODUCT I ON I n the po s twa r period , P eru wa s one o f the f ir s t count r i e s i n Latin Amer i ca to develop a n a r t icu l a t ion with pr iva te c ommer c ia l bank s that went b eyond short- term trade credit s . I t s r e l a t io n sh i p with priva te bank s h a s n o t a lway s b een a happy one , however , a n d in the l a s t twenty yea r s it h a s h a d the d i s t inc tion o f go ing through three c omplete borrowing cyc l e s with the s e in s t i tution s , each with i t s boom period fo l l owed by a s evere c ra sh . Th i s chapter wil l a ttempt to tel l , in a synthetic way , the s to ry o f P e ru ' s exp e r i en ce with pr iva te bank s a nd then to exp l o re wha t l e s sons migh t b e drawn f rom i t . P e ru i s not unl ike othe r devel oping economi e s ; i t s underdevel oped economi c a n d s o c i a l s truc ture b r in g s forth a chronic shortfa l l o f internal saving s vi s -a - v i s inv e s t In o ther word s , there i s a va l id ment po s s ib i l i t i e s . and real need for capita l import s a nd ex terna l saving s . S inc e the mid- 1 9 6 0 s , an ever- g rowing po rtion of the s e extern a l saving s ha s h a d i t s sou r c e in p r ivate-bank loa n s ( see Tab l e 1 4 . 1 ) . Th i s fa cto r a lone wa s enough to inc rea s e the externa l vu l n erab i l ity o f the country s ince management o f inter fa ce with bank s i s con s iderab ly mor e cha l l eng i ng than tha t involv ing more tra d i t iona l sou r c e s Interest ra t e s a r e comme r cia l and sub j e c t o f f inanc e : to grea t va r iab i l ity ; amort i z a t ion p e r i o d s are rela tively short , thereby boo s t ing r e f inanc ing requ i r ement s ; and bank e r s ' private percept ion o f risk indu c e s a sharply procyc l i c l ending behavior on th e i r part . 1 Wha tever th e vul n e rab i l ity a s soc ia ted with a dominant role for pr iva te bank s in the f inanc ing o f development , i t wa s exa c e rba ted i n the c a s e o f Peru by what might be termed " overborrowing . " Th i s r e f e r s to a s i tuat ion- -character i s t ic o f the 1 9 7 0 s- - in wh ich the supply o f credit i s ex treme l y abunda nt and demand a d j u s t s i t s e l f t o ava i l ab l e supply rather than t o a rea l sav ing s gap per s e e I n o th e r wo rd s , demand for f inanc e become s del inked f rom the saving s / inve s tment mecha n i sm ; indeed , 383
384 Tab l e 1 4 . 1
Peru :
Sourc e of F i nance
Dis tribution of Ex ternal Pub l i c Debt by
(percentage )
Private Suppliers 1 9 6 5- 1 9 6 6
Banks
Bonds
41
11
5
America
20
11
8
1975-1976 Peru
Peru Latin
Latin America
14
42
10
45
1979-1980 Peru
14
37
Latin America
Note : a
4
Others
1
2
Official Mul tiBilateral
la te r a l
Tota l
23
21
100
23
37
100
9
35
1 00
19
21
100
11
38
100
a
7 56 7 17 13 100 �e da sh indicates an amount that is n i l o r n eg l ig ib l e .
May not sum to 1 0 0 because of rounding .
Source :
Inter-American Deve lopment Bank , Externa l Debt of the Countrie s (Washington , D . C . , 1 9 8 2 ) .
�American
any nomina l gap in saving s become s infla ted , or arti f ic i a l l y over stated , a s easy f inanc e gives rise to relaxation of th e interna l d i s c ip l ine needed to min imi z e the e f f ec t s o f th e ba s ic economic d i s equ i l ibria tha t a develop ing country i s expected t o fac e in a va riable and unc erta in ex tern a l economic env ironment . P e ru ' s ac tua l short fa l l of internal savings ha s i t s o r i g in s in two intractab l e f inanc ing gap s : the govern ment budg et and the balance of paymen t s . Even if P eru ha s been mo st imaginative and aggre s s ive in tackl ing the gaps when fore ign f inanc e wa s r e s t r i c ted , th e advent of abundant credit on ea sy terms u sua l l y cau sed th i s di scipl ine to unrave l a n d deb t t o bu i l d up t o unsu s ta in ab l e proportion s . B ecau se f inance came largely f rom th e procyc l i c a l l y incl ined pr ivate bank s , the debt bu i l dup wa s ext reme l y rapid and th e l a ter re strict ion very sever e , with unu su a l l y adverse con s equenc e s f o r th e country ' s devel opmen t . W i th regard to the government budget , s ince the ea rly 1 9 6 0 s P eru ha s confronted an a symmetry between rap idly g rowing demands on the state to perform economic , wel fare , and defen s e func tions and-- no t with s tand ing th e real ob s tac l e s to expanding the tax base of a develop ing country - - a perenn ial po l itical reluc tanc e to g ive it th e f inanc i a l wh erewitha l to ca rry out th i s mandate . 2 Consequently , pub l i c current expend iture s and inve s tmen t programs have been over s i z e d , tax pres sure ha s tended to lag , s tate enterpr i s e s have had to operate
385 on a l e s s than commerc i a l ba s i s , and th e de f en s e e s tabl i sh ment has become d i sproportiona l to th e l evel o f devel op ment of the c ountry . Th i s s i tuation has been po s s ib l e , in pa rt , b ecau se authori t i e s cou ld a l l too f requently sub s t i tu te f ore ign f inance fo r the ha rd pol it ical dec i s ions needed to g ive the s ta te the degree of f inanc ial autonomy it needed . Th i s a rrangement wou l d , of cour s e , be sa t i s f a c tory i f cont inued and exponentia l l y g rowing fore ign f inanc e cou l d be counted on , but the very pol i c i e s tha t gave r i s e t o a n e e d for fore ign f inance al so g ra dua l l y undermined th e creditworthine s s o f the s tate tha t wa s needed to sustain th e credit f l ows . As for the externa l account s , they have su f f ered f rom a l ong- term s tagna t i on in the export s ector , coupl e d with a h igh propen s i ty to import . The export sector ' s volume ha s been var i ou s l y handicapped by factors such as uncertain pol ic i e s regarding the role o f fore ign inve s tmen t in P e ru ' s a l l important minera l sub sector , unc ompetit ive exchange ra te s , and ecolog ical d i sa s t er s ( such as tho s e a f f ec t ing f i sh ing ) . O n t h e other hand , Peru ' s proc l ivity to import h a s been enhanced by over va l u ed exchange rat e s and direct sub s idie s , unrea l i z ed expec tation s regard i ng exportab l e petrol eum reserves in th e Ama zon j ungl e , ma s s ive a rms purcha s e s , oversca l ed inves tment pro j e ct s with h igh import content , s tagnant l oc al f ood produc tion , and- -more recent ly- - a ttemp t s to f ol l ow th e examp l e of Southern Cone n e ighbors to open up the economy . Fore ign f inanc e , rath e r than f i l l ing the commerc ial gap , has o f ten encouraged i t to g row by under p inning pol i c i e s tha t i n f l a ted externa l d i s equ il ibria . Once aga in , i f f inanc e were eterna l l y ava i l ab l e in exponent ia l ly g rowing amount s , th i s s itua t i on wou l d be p e r f e c t l y s a t i s f a c tory . U n f o r tu na t e l y , th e r i s e to dominanc e o f procyc l ic commerc ial -bank f inanc e b rough t an ever more s en s i t ive l ink b e tween trend s on the current ac count o f the bal ance o f payments and the behavior of capital f l ow s , mak ing the economy even mo re vulnerab l e t o c r i s i s a n d upheava l . The se th eme s wi l l recur throughou t the paper . A s to its organ i za t ion , th e n e x t three s e c t i o n s t r e a t P e ru ' s three modern borrowing cyc l e s with private bank s , each with its credit boom a nd sub s equent c ra sh : 1 9 6 5- 1 9 7 1 , 1 9 7 2 - 1 9 7 8 , and 1 9 7 9 - 1 9 8 4 . The 1 9 7 2- 1 9 7 8 cyc l e i s o f spec ial impo rtanc e becau s e it gave r i se t o the impre s s ive externa l debt tha t p lagu e s P e ru and i t s c red ito r s until th i s very day . The l a s t s e c t ion wi l l provide a mor e conc eptua l , or theo ret ica l , explanat ion o f Peru ' s prob l ems with i ts bank e r s , focus ing on a f l awed barga ining strategy both with regard to the country ' s contra c tion of new debt and the re schedu l ing o f o l d deb t .
386 THE F I RST ROUND OF INDEBTEDNE S S :
1 9 6 5- 1 9 7 1
A s ha s been ment ioned , P e ru wa s one o f the f i r s t c ountries in L a t i n America to e s tab l i sh a s ign i f icant a r t icula tion with pr ivate bank s ba sed on medium- term l end ing . Al though both the magnitude o f the indebtedne s s a n d the qua l i ta t ive r e l a t ions with the c reditors were very d i f f erent f rom wha t woul d f o l l ow in the 1 9 7 0 s and 1 9 8 0 s , i t i s wor thwh i l e to provide a b r i e f overv iew o f event s in th i s per i od . Peru ' s newly e l e c ted c iv i l ian a dmin i s tra tion , under the l eadersh ip o f F e rnando B e l aunde Terry , a s sumed power in mid- 1 9 6 3 . 3 I t wa s ac t iv i s t and reformi st in spiri t , represent ing a sha rp invers ion o f the pa s s ive r o l e tradi t iona l l y attribu ted to t h e s tate in an economy molded by l iberal pr inc iple s . � Pub l ic - s ec tor a c t iv ity expanded rela tively f a s t a s ref l e c ted by th e f a c t tha t expend iture ( ex c l uding amo r t i z a tion o f the deb t ) more than doubled over the period 1 9 6 3 - 1 9 6 5 , and g rowth - - even in real term s - - r ema ined sub s tantial a t more than 5 0 per c ent . 5 Th e governmen t enc ountered a lmo s t immed iate d i f f icul t i e s in the f inanc ial area . Wh i l e expenditu r e s were pushed upwa rd by an amb i t ious pub l i c prog ram , revenue s l agged due t o a narrow a n d r e l a tively ine l a s tic tax ba se and an extreme ly reca l c i trant cong r e s s that refu s e d to support the governmen t ' s prop o s ed tax re forms . The con s equenc e wa s a cons iderab l e expan s ion of the f i sc a l de f ic it ; the a c c ounts went f rom b e ing rough ly in balance in 1 9 6 2 - 1 9 6 3 to a def ic i t o f nearly 5 percent of GOP by 196 5 . Thi s , o f course , cont r ibuted to price instabi l i ty a s the rate o f inf l a t ion reached 1 6 percent in 1 9 6 5 , c ompared to the average rate of 7 percent for 1 9 6 1 - 1 9 6 4 . On th e externa l s ide , impor t s grew rapidly on account o f the government inves tment prog ram and th e overva lua tion o f the sol , wh i l e export performance s lumped- - a f ter the rela tive boom o f the early 1 9 6 0 s- - a s both volume and unit pric es s l a ckened . Consequen tl y , the trade ac coun t , wh ich h a d tended towa rd equ i l ib r ium a t the beg inning o f th e decade , reg i s tered a de f ic it equ iva l en t t o 1 2 per c en t o f expo rt earnings in 1 9 6 5- 1 9 6 6 ; meanwh i l e the current ac c ount def ic it rose f rom . 7 perc ent of GDP in the 1 9 6 0- 1 9 6 4 period to nearly 4 perc ent by 1 9 6 5 - 1 9 6 6 . The government made co n s iderab l e u s e o f foreign f inanc e . By 1 9 6 7 th e pub l ic externa l deb t a s a percentage o f produc t had nearly doub l e d i t s average o f 1 9 6 0 -1 9 6 4 , r i s ing f rom 6 . 5 percen t to 1 2 . 2 percent . P eru took rela tively heavy recou r s e to f inance f rom f ore ign suppl i e r s as r e f l ec ted in the fact tha t the par t ic ipa tion o f th e s e creditors in th e pub l ic externa l debt wa s 4 1 percent , c ompared to a La t in Amer ican average of 2 0 percent ( s e e aga in Tab l e 1 4 . 1 ) . O f f ic i a l government and mu l t i l a teral lenders h e l d another 44 percent of th e pub l ic deb t . P r ivate bank s ' partic ipation wa s rela tively sma l l
387 a t 1 1 percen t , but played a very important rol e a t the marg in o f even t s . Du r ing the per iod 1 9 6 4 - 1 9 6 8 pr iva te bank s provided c on t inuou s budgetary support to the government . In the mid s t of precar iou s f i sca l and balance- o f -payment s s i tuation s , bank e r s c ame forth with many short- term b ridge l oan s ( the exac t amount of which i s d i f f icu l t to determin e ) and medium- term c redi t s to the tune of rough ly U S $ 3 0 mi l l ion a nnua l l y . Th e terms of l ending were r e l a t ively sti f f : 1 . 5 0 to 1 . 7 5 percent over th e u . s . pr ime rate for loan s w i th a f ive-year ma tur i ty and grace per iods o f one or two years . Mos t of the l end ing wa s c onc entra ted in a handfu l of large , in ternat iona l l y exper i enced u . s . bank s . 6 Al though l ending b y U . S . bank s to LDC s wa s not yet in vogue , the s e i n s t i tutions were a ttracted to Peru by fami l i a r i ty ( there wa s a l ong and l a rge presence o f u . s . tran sna tional c o rpora tions- - TNC s- in th e country ) , th e governmen t ' s s ti l l r e l a t ively l ib eral economic reg ime , and the very a ttrac t ive price the author i t i e s were wil l ing to pay for the l oan s . At th e same t ime th e bank s wer e qu ite cautious l ender s : They u sua l ly in s i s ted on the e s tab l i shment o f e s c row accounts for l oan s to s emiau tonomou s government agenc ie s . The cont inued bui l dup of economic d i f f ic u l t i e s , c oupl ed with the reve r se repayment f l ow s t emming from th e r e l a t ively h a rd l ending terms of fore ign suppl i e r s and bank s , soon culminated in seriou s probl ems in 1 9 6 7 and open f inanc ial c r i s i s in 1 9 6 8 . The bank s , now somewhat committed to Peru becau s e of earlier outs tanding loans , continued to provide s uppo r t Short- term b r idg e to the government dur ing t h e c r i s i s . l o a n s we re awarded , a n d bankers r e s tructured the i r debt via the techn ique o f r e f inancing . Interest ingl y , the bank s a l so agreed to provide a new " s tandby cred i t " : U S $ 6 5 mi l l ion f rom u . S . bank s and U S $ 2 5 mi l l ion f rom European i n s t i tut ion s . Howeve r , the loan s ( never ac tua l l y drawn upon ) , in a dd i t ion to bear ing the s t i f f terms noted earl i e r , a l so carried some rather rugged cond itiona l i ty . The money wa s directly l inked to the ful f i l lment of the tough IMP standby agreement s s igned by th e government , and bank s imposed r e s t r i c t ions on pub l ic - sector foreign borrowing tha t were s imi l a r to the terms l a id down by the IMP i t s e l f . The IMF put a virtual ha l t on borrowing for matur i t i e s o f between 1 8 0 day s and 1 0 yea rs and p l a c ed strict l imits on loans with a matur ity o f between 1 0 and 1 5 years . An emergency economic l aw introduced in June 1 9 6 8 ( which included new tax mea sure s ) c ame too late to save the government , wh ich wa s suf f ering f rom an increas ing lack o f popu l a r i ty due to its economic prob l ems and to th e controversy over the handl ing of a long - l a s t ing I n October , the d i spute with an Exxon sub s idi ary . government f e l l v i c t im to a mil i tary coup headed by General Juan Vel a sco Alva rado .
388 The new government had a n inte r est ing obj ect ive : I t sough t wha t it termed to be " a th i rd way " to develop ment tha t woul d br idge the gap between capita l i sm and soc i al i sm . There wa s a dec l ared goal o f reduc ing fore ign dependenc e , reforming agricul ture , and indu s t r ia l i z ing via exports w i th empha s i s on internal saving s for invest ment . The government a l so showed intere s t in pur s u ing the stab i l i z ation e f fo r t i n i t iated in the l a s t day s o f the previous government . 7 Peru ' s bank e r s took a cautiou s , i f not h ost i l e , at ti tude toward the new government . After a l l , it wa s very intervent ion i s t and wa s engaged in vigo rou s d i sput e s with sub s idia r i e s o f u . s . enterpr i s e s a s wel l a s with the N ixon admini stration , which a ttempted to de f end th e i r intere s t s . Ma j or c ommerc i a l l ende r s awarded pra c t i c a l l y no new l o a n s to P e ru in the period 1 9 6 9 - 1 9 7 1 , th ereby tac i t l y , if not expl i c i t l y , cooperating with th e foreign f inanc i a l b l ockade organ i z ed by the u . s . admin i s tration . Bankers did agree to re f i nance the ir pa s t loan s , if for no other reason than fear tha t the new , more rad ica l gove rnment migh t default on i t s debt s . However , they did s o on very onerous terms : Spreads were 1 . 7 5 to 2 . 2 5 per cent over ba se intere st rate s , matu r i t i e s on l y 5 year s , and grace periods a Spartan- l ik e . 5 to 1 . 5 years . The pr ivate banke r s , did , howeve r , a l ter the i r view o f th e need for the protect ion of the IMF . The new mi l i ta ry government refused to renew the IMF s tandby ag reement s igned by the B e l aunde admin i s tration and set to exp ire in mid - 1 9 6 9 . F e a r s o f defau l t , coupl ed with s igns o f succ e s s ful s tab i l i z a t ion , encouraged New York bank e rs to accede to Peru ' s wi she s . However , they advanced c ondit iona l i ty of the i r own . E s sent i a l l y th i s con s i sted o f extreme ly strict l imits on debt contra c t ion through the f ir s t ha l f of the 1 9 7 0 s , thereby hamstr ing ing the f inanc ing of the government ' s amb i t ious inve s tment program . The mi l i tary authorit ie s , fac ing the N ixon admini s tra t i on ' s pres sure on o f f ic i a l l enders ( wh i ch a l so adve r s e l y a f f ec t ed guarantees for suppl ier s ' credit s ) and r e s t r i c t ions by private banker s , found themselves in a f inanc ial stra i t j acket . Intere s t ing l y , however , its stab i l i z a t ion e f fo r t s in th i s h o s t i l e externa l environ men t were relatively succes s f u l , r e storing a degree of balance to the f i sc a l and external ac count s , a l l wh i l e ach i eving respectab l e growth rates . 8 THE SECOND ROUND OF INDEBTEDNE S S :
19 72-19 78
During the per iod 1 9 7 2 - 1 9 7 8 , P e ru ' s total fore ign debt increa s ed two and a ha l f times with prac t i c a l l y a l l th i s growth b e i ng attr ibutab l e t o borrowing b y the pub l i c sector . Total debt a s a perc entage o f product over the period started out a t 6 9 percent , dipped to a l ow of 5 4
389 percent , and ended up a t 6 9 percent once again . There wa s , however , a drama t i c boo st o f the pub l i c sector ' s share , a s i t s debt a s a percentage o f product ro s e f rom 1 9 percent in 1 9 7 1 to 4 4 percent in 1 9 7 8 ( s ee T ab l e 1 4 . 2 ) . The heavy borrowing by the state r e f l e c ted events on both edges o f the Mar s ha l l ian s c i s sor s . On the demand s ide , the government as early as 1 9 7 1 had i n i t i ated an ambitious and now inward- o r i ented deve l opment strategy that imp l ied a s trong increa s e in inve s tment , l a rgely based on pub l i c pro j ects , many o f wh ich were now targeted i n product ive sector s . 9 Al so to p l ay an important part in the demand for forei w n f i nance wa s a vigorou s mi l i tary arms purcha s e program . 1 On the supp ly s ide , there deve l oped a ma j or turn around in P e ru ' s fortune s with foreign creditor s . After 1 9 7 0 , private bank s , sub j ect to very l iquid balanc e s in the Eurocurrency market and v i rtua l l y no restrictions on l ending f rom th i s p l a t form , began to expand the i r ho r i zons to deve loping area s . I n rea l i ty , LDC s - - and Latin Ame r i c a in par t i c u l a r--became the last f ront ier i n an extreme l y hec t i c interna t ional expa ns ion o f f inance cap i t a l that had been under way throughout the po s twar I n th i s expan s ion many o f the large , trad it iona l l y period . internat ional bank s that h a d contro l l ed l ending found the i r market share s b e i ng cha l l enged by other largeand med ium- s i zed i n s t i tutions that formerly had only been interes ted i n the ir dome s t i c market s . Thi s global expan s io n , coup led with severe competit ion for new market s , worked to Peru ' s favor . The I n i t i a l Years I n 1 9 7 2 Peru began to be the c enter o f a c omp e t i t ive strugg l e among the bank s . On the one hand , petrol eum depo s i t s had been found in the Ama zon region , wh ich gave r i se to rumors about P eru becoming one o f the l arge st oil producers in the wo r l d . On the other hand , the Ve l a s co reg ime enj oyed a l arge mea sure of po l i t i c a l powe r and had managed to imp l ement succ e s s f u l s tabi l i za tion e f fort s . As noted earl ier , prior to 1 9 7 2 Peru ' s acce s s to bank credit depended on the d i spo s i t ion o f a f ew l arge u . s . bank s th at were not very forthcoming with the new reg ime . However , some newcomer s to international lending--U . S . regiona l , European , and Japane se i n s t i tutions--were seek ing out ma rke t s not cornered by the big e s tab l i shed banks and began to l end to Peru . A ma j or actor in th i s regard wa s We l l s F argo o f C a l i fornia , wh ich intere sting l y had a forme r pub l i c se rvant o f the B e l aunde gove rnment as a high- l evel execut ive in the o f f i c e of international l end ing . The i n i t i a l loans were quite lucrat ive for the new , more aggre s s ive l enders : 2 . 2 5 percent over L I BOR for
19 . 9
Pub l i c debt/GOP
Exports
167
16 . 2
213
24 . 0
40 . 8
19 . 3
69 . 1
�:
PerU
219
23 . 2
35 . 6
19 . 6
63 . 1
1 , 46 2
433
38. 9
46 . 0
19 . 8
54 . 5
1 , 423
456
30 . 3
40 . 8
25 . 9
62 . 1
1 , 796
1 , 259
2 , 182
1 , 508 1 , 201
3 , 441
5 , 237
1974
2 , 709
4 , 132
1973
474
35 . 6
51 . 8
31 . 4
64 . 1
1 , 90 5
1 , 286
3 , 06 6
4 , 352
6 , 257
1975
do llars )
Banco Central de Re s e rva del
Peru ,
2 , 304
1 , 326
4 , 937
6 , 263
8, 56 7
1977
2 , 098
1 , 340
5 , 886
7 , 226
9 , 324
1978
485
36. 2
56 . 5
36 . 8
68 . 9
62 2
36 . 0
51 . 4
41 . 8
72 . 5
702
35 . 6
54 . 0
43 . 7
69 . 2
( percentage s )
Memorandum Items
2 , 134
1 , 311
3 , 939
5 , 250
7 , 384
1976
825
22.4
35 . 1
40 . 8
57 . 4
1 , 393
1 , 308
6 , 63 3
7 , 94 1
9 , 334
1979
1 , 756
54 . 0
72 . 7
35 . 4
51 . 3
1 , 466
1 , 507
6 , 665
8 , 172
9 , 638
1981
1978-1983
1 , 323
33 . 8
46 . 2
36 . 1
51 . 2
1 , 469
1, 372
6, 753
8, 125
9 , 594
1980
El Proceso de Renegoc iac ion de la Deuda Externa Peruana :
exc ludes Banco Centra l d e Reserva de l Peru
Exc ludes renegot iated s ervi ce payments
lnclude s Banco Cen tral de Re s e rva del
pre l iminary data
d Medium- and long- t e rm ;
c
b
a
dollars )
( mi l l ions of u . s .
Pub l ic debt service/ Exports d d Pub l ic debt service
25 . 1
74 . 2
Total debt/GOP
Total debt service/
1 , 49 1
Short- term
1 , 450
1 , 182
1 , 211
986
1 , 204
1 , 188
1 , 03 1
Private
2 , 370
3 , 832
1972
2 , 242
3 , 69 2
1971
( mi l l ions o f u . s .
2 , 190
1970
Tota l Exte rn a l Debt
3 , 68 1
Peru :
Medium- and long-term b Publ i c
14 . 2
Total external debt
Tab le
( L ima ,
1 , 491
48 . 6
69 . 7
40 . 2
58 . 6
1 , 818
1 , 664
7 , 615
9 , 279
1 1 , 097
1982
c
c
1984 ) .
1 , 257
26 . 3
49 . 5
62 . 4
70 . 8
1 , 491
1 , 603
9 , 324
10 , 9 2 7
1 2 , 4 18
1983
a
w � 0
391 matu r i t i e s between 4 � and 6 � years . The s e terms were cons iderably higher than tho s e that cou l d be contracted with mo re coveted Lat i n American borrower s where compet i tion wa s s t i f f � Bra z i l , for examp l e , could regu l a r ly attract loans at 1 . 5 percent over L I BOR for 1 0 -year matur i t i e s . However , a s more l ender s became attrac ted to P eru , terms were enhanc ed for the country � p r i c e cutter s s u c h a s We l l s F a rgo and Dre sdner Bank were instrumental in driving down the cost o f borrowing in the early 1 9 7 0 s ( see Table 1 4 . 3 ) . Table 1 4 . 3 Peru : Index of the Cost of Bank Borrowing , 1 9 7 1 - 1 9 7 6 ( 1 9 7 5=100 ) 1971 131 Note :
1972
1973
1974
99
57
36
1975
1976
100
146
Based on cons ideration o f the margin over LIBOR , the
maturity , and commi s s ions us ing the fol lowing formul a : [ ( C /A ) 1 1
+
M I l /A I
- 1 [ ( C /A ) + M l /A 0 0 o 0 where C represents average f lat fees , A equa l s the amorti zation per iod� and � the average margin over LIBOR , all weighted by the face value o f the loans . Source :
Based on data in Robert Devlin , L o s Bancos Transnac iona1es Externo de America Latina ( Santi ago , 1 980 ) .
y-e!:Financ iamiento
The euphor i a in bank ing c i r c l e s wa s such that a former pariah became the dar l ing of internationa l bank s , eventua l l y ranking s ixth among non- o i l - export ing deve loping- country c l ient s . The number o f commercia l lend e r s had r i sen f rom j u st twenty- s even in t he l a t e 1 9 6 0 s to nearly two hundred in t h e f i r s t h a l f of the 1970s. Net l ending expanded drama t i ca l l y f rom s l i ghtly negat ive f l ows in 1 9 7 0 - 7 1 to an average o f US $ 2 3 6 mi l l ion in 1 9 7 2 - 1 9 7 4 . Moreove r , terms had sh i f ted s t rongly in Peru ' s favor : By 1 9 7 4 the c ountry cou ld negotiate marg ins near 1 percent over L I BOR for matu r i t i e s o f ten year s , conditions only s l ightly l e s s favorable than tho se o f fered to pr ime deve loping-country c l ients l ike B ra z i l and Mex i c o ( s ee F igure 1 4 . 1 ) . Another advantage o f the compet i t ive s t rugg l e a round Peru wa s that it broke the grips of the a f orementioned f inanc i a l bl ockade . With a l l the new l ending coming f rom the bank s , the N ixon admi n i s tration ' s e f fort to f i nanc i a l l y strang l e Peru became increas ing ly fruitle s s . The Peruvian government used new loans f rom the upstart bank s to prepay the o l d loans granted by the b i g u . s . money center bank s that conta ined cond i t ional ity with re spec t to new i ndebtedne s s and hence handicapped the
F ig u r e 1 4 . 1 C omp a r i son o f Marg i n s and Matu r i t i e s on Bank C re d i t s for P eru , B ra z i l , Mex ic o , and B o l i v i a , 1 9 73-1979a Ma rg i n o v e r L IBOR Ma rg in
(%)
3.0
2.5
Bol
2.0
1.5
1.0
0.5
Pr 801 8r
801 Bol
Pr Br Mx
Pr
Br
Bot Mx
Mx
801 Br
Pr Br
8r
801 Pr
Mx
8r Mx
Mx
MX
1974
1973
1975
1976
1979
Amo r t i z a t ion P e r io d
Years -
r-
r-
r-
10
r-
r-
.....
r-
5
r-
r-
rr-
r-
r- ,
r-
r-
, -
.....
Br Mx Bo Pr B r M x Bo Pr Br Mx Bo Pr Br M x Bo Pr 8r Mx Bo P r 197 7b 1976 1975 1974 1973
�
B r Mx Bo Pr 1978b
r Mx Bo Pr 1979
Ave r a g e f o r pub l ic - s e c t o r b o r rowing weigh t e d by va lu e s . P e ru d i d n o t ob t a i n l o a n s in t h e s e y e a r s .
K e y to abbrevia t i o n s : Mex i c o ( Mx ) , P e ru ( P r )
B o l ivia
(Bo) ,
B ra z i l
(Br) ,
Mex i c o a n d B ra z i l : Wor l d B ank , B o r rowing S o u rc e : in I n t e r n a t i ona l C a p i t a l Ma rke t s , Wash ington , D . C . ( va r iou s numb e r s ) ; P e ru and B o l i v i a : Rob e r t D evl i n a n d M i c h a e l Mort imo re , L o s B a n c o s T ra n s n a c i o na l e s , el E s tado , y el Endendami e n t o en B o l iv i a , S a n t iago , 1 9 8 3 .
393 inve s tment program . Moreove r , the vo lume o f bank l ending became so large a s to d i lute the e f fe ct o f any restrict ion pl aced on o f f i c i a l government and mu l t i l ateral l ender s . F ina l ly , one by one , the big u . s . money center bank s , s ome more rap idly than o the r s , began to renew l ending to P e ru ; they did not l ike to see an erod ing share of the market in a country w i th a stab l e mi l i tary government and with pro spects of ma j or o i l export s . Al so , the U . S . government , now sens ing Peru ' s strategic importance a s a potent i a l o i l exporter , sought and achieved a s e t t l ement- on the who l e f avorab l e to p eru- - concern ing the inve s tment di sput e s with the Ve l a s c o regime . 1 1 The rel ation ship with the pr ivate bank s began to sour in mid- 1 9 7 5 . In e s s ence , what happened was that the deterioration of b a s i c economic indicators that had been hidden and in some re spe c t s f ac i l itated by abundant f inance now became more evident . Th i s , coup led with f a l s e expectations with regard to the extent o f petrol eum res e rve s , b roke the banker s ' conf idence in Peru , and new l ending wa s s topped . Not surpr i s ing ly , the country wa s in c r i s i s aga i n . On the f i s c a l f ront , the government l et tax pre s sure s l ide , in part because o f exemptions provided to the pr ivate s ector i n attempts to win its conf idence and induce i nve s tment . The incentive s , wh ich cou l d not over c ome the ideo logical contrad i c t ions between the inter vention i s t reg ime and pr ivate bu s i ne s s , help to exp l a i n why t a x revenu e a s a percent o f product s l i pped b e l ow the 1 6 percent of GDP ach i eved in 1 9 7 0 a s a resu l t o f t h e stab i l i z at ion e f fort then in f o r c e ( see Tab l e 1 4 . 4 ) . Meanwh i l e , central- government expend iture , pu shed upward by heavy inve s tment , mil itary expend i ture , and sub s id i e s on food a n d fue l s , increased f rom 1 7 . 5 percent o f product in 1 9 7 0 to 2 1 . 4 percent in 1 9 7 5 . The cons equence o f course wa s a cons iderably expanded d e f i c i t , f rom 1 . 4 percent to 5 . 6 percent o f product over the period 1970-19 7 5 . ( Fo r the consol idated pub l i c secto r the de f ic i t r o s e to 9 . 7 percent . ) The re laxed f i s c a l s i tua tion contr ibuted to the a c c e l eration o f the average yearly rate of price increa s e s , f rom the r e l a tively modest pace o f 5 percent at the turn o f the dec ade to one o f 24 per cent by 1 9 7 5 . The country ' s external po s i tion a l so eroded dur ing the period o f mas s ive i ndebtedne s s . On th e one hand , the value o f import s showed remarkab l e growth , reach ing an equ iva l ent o f 23 percent o f product in 1 9 7 5 , compared to 16 percent i n 1 9 7 0 ( see Tab l e 1 4 . 4 ) . Th i s g rowth wa s due prima r i l y to an over s i z ed pub l i c - inve stment prog ram : 1 2 the stagnation of local food product ion , sub s id i e s on e s sent i a l consume r items , the f ixing of the exchange rate for seven years ( 1 9 6 8 - 1 9 7 4 ) , tar i f f reba tes on capital imports , and mil itary out l ay s , wh ich some e s t ima t e s have put a s h igh as the equiva l ent of 3 0 perc ent o f export earning s in the period 1 9 7 3 - 1 9 7 5 . 1 3
394 The proc l ivity t o import wa s contra sted by a remarkably deteriorated export performance . Expor t s a s a perc entage o f product dec l ined f rom a n average o f 2 0 percent i n 1 9 7 0 to 1 3 percent by 1 9 7 5 ; indeed the c oe f f ic i ent reg i s tered in th i s l a tter year wa s two- f i fth s l e s s than the average recorded i n 1 9 6 0 - 1 9 6 4 ( s ee T a b l e 1 4 . 4 ) . Se v e ra l fa ct o r s we re beh ind th i s weak performance . F i r s t , the l ong g e s tation period of the government ' s mineral pro j ec t s , coup l ed with unc erta inty surround ing pol ic i e s vi s-a-vis fore ign pr ivate inves tment , wa s a f acto r . At the end o f the 1 9 5 0 s there were important inve s tments in the mining sector , and the i r coming on stream in the early 1 9 6 0 s contr ibuted to an export boom . But the impetus was not susta ined . During the 1 9 6 0 s a l l the pe r spectives f o r new fore ign inves tment were advers e l y a f fec ted b y government commi s s ions examining charg e s of exc e s s pro f i t s in foreign mining f i rms a nd by p l an s t o rev i s e the l iberal 1 9 5 0 Mining Code . Cons equent l y , a s Thorp and B ertram have put i t , an inves tment strik e i n the Gran Miner i a took p l a c e . 1 4 Just when uncerta int i e s w e r e beginning to d imi n i sh a n d inve stment prospects improved , the 1 9 6 8 coup took place and b rought with it a very nationa l i st i c po l icy on the sub j ect of foreign partic ipation in the economy , further s t i f l ing inv e s tment in th i s vital secto r . In spite of the agreement tha t the Ve l a s c o government eventua l ly reached with the U . S . - owned S outhern P eru Copper Corporat ion to deve lop a ma j or depo s i t and two pro j ec t s deve loped by s tate-owned mining compan i e s , Peru wa s l e f t with a " window o f vu lnerabi l ity " in i t s export sector unt i l the late 1 9 7 0 s because o f the very long g e s tation period of the se venture s . A second ma j or factor in the poor export performance wa s the al ready mentioned severely exaggerated expecta tions about petro l eum . The government prematurel y imp l emented a giant U5$1 b i l l ion trans-Andean o i l pipel ine only to f i nd out tha t ava i l ab l e petro l eum cou l d barely reach one-hal f o f p l anned throughput . With petro l eum fa i l ing to mater i a l i z e in expected vo lume s , a gaping h o l e wa s l e f t in t h e export structure . A third f eature unde r l y i ng s luggi sh exports wa s a l e s s than vigorous ded ication to export promotion . Ne i ther the f ix i ng of th e exch ang e rate nor h igh tar i f f wal l s encouraged export s , and preva i l ing sub s idy scheme s we re l e s s than adequate to provide a counter balancing st imulu s . F inal ly , Peru a l so suf f e red f rom a certain degree o f ecolog i c a l b a d luck in the d i s appearance of the anchovy , a very important fore ign- exchange earner . I t i s to be noted , howeve r , that some mea sure o f over f i shing took place in 1 9 7 0 - 1 9 7 1 . Added to the deteriorat ing trade per formance wa s a bu i l dup o f payments for factor servic e s . P e ru ' s heavy recours e to bank debt brought with it the relatively h igher intere st rates and shorter maturities that
-8 . 3 a _5 . 5
15 . 6
24 . 5
17 . 1
20 . 6
1982 1983
-0 . 6 -8 . 3
16. 0 17 . 0
23 . 2 24 . 3
17 . 4 16 . 1
27 . 0 20 . 3
1 98 0 1981
-1 . 5 6. 9 '
17. 9
82 . 6
78 . 3 82 . 0
87 . 8 88 . 5 82 . 2 72 . 9
86 . 5 90 . 1
83 . 0 84 . 9
76 . 5
tion
20 . 3
17 . 2 20 . 2
14 . 0 14 . 3
16 . 6 14 . 6
15 . 2 17 . 4
14 . 1 12 . 4 12. 7
I nve s tment
Dome stic Sector Fixed Con sump-
Sourc e :
B a s e d on data in the Memoria of the Banco Centra l de Re s e rva de l Peru
-6 . 9 -9 . 7 - 10 . 0 -9 . 8 -6 . 2 -1 . 1 -4 . 7 -8 . 4 -8 . 7 b -10 . 3
1 6 3 5
-3. -5 . -6 . -7 .
-5 . 1 -0 . 6 -2 . 9 -4 . 9 -3 . 9 b -7. 5
15 . 8 17 . 9 20 . 6 18 . 1 18 . 1
23 . 5 23 . 0 22 . 0
(various numbers ) .
20. 9 18 . 5
14 . 4 14 . 6
18 . 3 21.4 20 . 7 22. 1
16 . 1 14 . 8
17 . 5 18 . 7 15. 2 15 . 8
-1 . 5
Sector De ficit
-0 . 8 -4 . 6
14 . 2
Deficit
Pub1 i c -
-1. 4 -3.9
15. 7
diture
Income
Central Government Expen-
Th e dots indicate data that are not ava i l ab l e or not s eparate l y reported . Note : a unpub l ished Centra l B ank data c ited in the Andean Repor t , February 1 9 8 4 b unpub 1 i shed Central B ank data c i ted in the Andean Report , January 1 9 8 4
15 . 6
19 . 3
22 . 4 30. 5
1978 1979
18 . 1 20 . 3 19 . 2
11 . 0 13 . 0
12 . 4 16 . 7
1976 1977
-7 . 0 - 11 . 2 -7 . 8 -6 . 3
21. 5 22. 7
12. 5 12. 1
16 . 1 12. 9
1974 1975 20 . 8 15 . 6 14 . 5 11. 2 11. 3
2. 3 -2. 1
15 . 7 15 . 3
19 . 7 14 . 8 18. 7
-0 . 7 15 . 7 15. 1
20 . 9
19 . 7 14 . 2
22. 3
Current Account
1970 1973
Im120rts Current Rea l
Ex ternal Sector
S e l e c ted Expend iture as a Percentage of GDP
EXl20rts Rea l Current
Peru :
1960-1964
Tab l e 1 4 . 4
w � lJ1
396 accompany commerc i a l indebtedne s s . Th i s wa s re f l ected in the f ac t that the out f low of debt payments near ly trip l ed between 1 9 7 0 and 1 9 7 4 ; as a percentage of expor t s , pub l i c debt service r o s e f rom 1 6 percent t o 3 0 percent ( s ee T ab l e 1 4 . 2 ) . G iven the harsher terms o f indebted nes s , the new government had to se ek an exponent ial ly growing amount o f new credit j u s t to fac i l itate payment of old debt and avo id a net outf l ow of f inanc ia l resourc e s . The a symmetry between import and export trends , coup l ed with growing debt- service obligations , had it s c ounterpart in a bal loon ing current ac count de f ic i t , wh ich went from an ave rage o f prac t i c a l ly z e ro between 1 9 6 8 and 1 9 7 0 to 11 percent of GOP by 1 9 7 5 . Th i s s i tuation wa s made po s s ib l e only b y ma s s ive l ending f rom the bank s during the period , wh ich ma sked the underly ing deteriorat ion in the b a l an ce o f payment s . Moreover , the l ending wa s su f f ic i ently vo l uminou s not only to cover the de f i c i t but to ama s s nearly U S $ l b i l l ion of gro s s inter national r e s erves by 1 9 7 4 . Th i s , coup l ed with the r e l a t ively h igh g rowth rates of produc t ( se e Tab l e 1 4 . 5 ) , provided a s e n s e o f security and we l l -be ing concern ing the d i rec t i on of economi c po l i cy . I ndeed , in the mid st o f the o i l c r i s i s that rocked mo s t non-o i l - expo rting LOC s , government autho r i t i e s in early 1 9 7 6 expre s s ed sati s faction that the wor ld cr i s i s had not set foot into Peru . The 1 9 7 5 - 1 9 7 6 C r i s i s Had P eru been able t o sustain the ma s s ive l end ing f rom private bank s , a p o l i c y b e s t described a s one of s imu l taneou s pur s u i t o f gun s a n d b u t t er would have been perfectly f ea s ib l e . Howeve r , with the arriva l o f pr ivate commerc i al bank s a s the overwhelmingl y dominant sourc e of externa l f i nance , a new s e n s i t ivity devel oped between even ts on the current and c ap i t a l acc ount s . I n o the r word s , pr ivate bank s are procyc l i c l ender s ; onc e the i n i t i a l momentum of the eupho ric expansion wind s down , a country can b e l e f t vulnerabl e to a ma s s ive retreat by c reditors i f ec onomi c paramete r s have moved way out of l i ne and undermined the del i cate conf idence of pr ivate banke r s . Wha t perhaps detona ted P e ru ' s l atent c r i s i s was the f a i lure of Bank H e r s tatt o f Germany in mid- 1 9 7 4 , wh ich set off a semipan ic in international bank ing c i rc l e s . Even though the bank ruptcy wa s due to poor fore ign exchange management and unr e l ated to LOC loans , nervou s bankers restri cted c r ed i t , and the terms o f l end ing underwent severe deteriorat ion both with re spect to volume and cond i tions . This in turn made more transparent the f inanc i al veil tha t had been draped over the internal and exte rna l s t ructural weakne s s e s o f the P eruvian economy . The wor l d credit c r i s i s , together with the now evident
a
-7.0 -4. 9 6.8
18 . 1 28 . 6
-5 . 8 0.4 -6 . 7 16 . 7
Exports - 18. 3
a
44. 9 10. 0 -7. 7
-24 . 5 5.3
31 . 9 15 . 3 -22 . 8 -7 . 9
1 9 7 0 =1 0 0 ;
good s fob/ fob
1970 prices
Sourc e : Banco Central de Re serva del PerU , of S t at i s t i c s and Quantitative Ana lys i s . Memoria 1 9 8 2 ;
Based on B a n c o Central data c i ted in the Andean Report ,
Div i s i on
-12 . 8 3.2
11 . 5 - 18 . 4
-15 . 1 35. 1
4.2 -6 . 3
42 . 6 - 23 . 4
Terms of Trade 21 . 9
Economi c Commi s s ion for Latin America ,
February 1 9 8 4
January 1 9 8 4
64 . 5 d 111 . 1
59 . 2 75 . 4
57 . 8 67 . 7
33 . 5 38 . 0
16 . 9 23 . 6
a
dol l ar s )
Imports Inf lation 9.5 9.7
Dots indicate data that are not avai lable or not reported s eparate ly .
Ban c o Central data c i ted in the Andean Report ,
d
c
b
a
Note :
-8 . 3
30. 4 25. 2
6.8 1. 5 0.0
3.0 3.1 0.7 c _12 . 0
1980 1981 1982 1983
-1 2 . 8 12. 1
-6 . 7 -1 . 9
30 . 4 10 . 0
Inve s tment 17 . 2
-1 . 8 3.8
1978 1979
9.0 4.8
10 . 4
Consumption
a
Growth Rates of Selec ted Economi c Indicators ( b i l l ions of u . s .
-1 1 . 2 -22 . 4
a
1.6 -0. 3
3.0 -1 . 2
6.9 3.3
GDp 6. 2
P e ru :
1976 1977
1974 1975
I�
Tab l e 1 4 . 5 b
W \D ....J
398 overe s t imat ion o f the pro spects for petrol eum i n the Ama zo n and the depre s s ive e f f e c t s o f a wor l d rec e s sion , induced the bank ing sys tem a s a who l e to perceive that there wa s a prob l em in P e ru and b rought with it spec i a l attempts to rest r i c t expo sure in t h e country , s e rving t o deepen t h e c r i s i s . P eru had to confront i t s probl ems in the context o f an extreme dependency on i t s pr ivat e bank s , an ironic s i tuation g iven that one o f the government ' s ma j or ob j ec t i ve s - - and a fa cto r b eh ind the severe inves tment di spute s - -wa s a search for autonomy f rom " fore ign capital . " One ang le o f th i s dependency i s pres ented in T ab l e 1 4 . 6 . I t c an be s e en that by 1 9 7 5 the net tran s fer o f foreign f inan c i a l resources wa s equ iva l ent to mo re than 60 per cent o f the c ountry ' s " indigenous " foreign-exchange ea rning c a pa c i ty as repre s ented by expor t s ; in other words , a very h igh percentage o f th e country ' s import capac i ty depended on the t r icky bus ine s s of securing and ma intain ing net f l ows f rom foreign creditor s . A second indic ator of dependency is s een in Table 1 4 . 7 : By 1 9 7 5 th e gap between internal s avings e f forts and inve s tment rose to an ama z ing twelve point s , s ix t ime s greater than that preva i l ing i n 1 9 7 3 . But more importantly , it shou l d be not i c ed tha t t h e g a p wa s aggravated b y a con s iderab l e sub s t i tution o f foreign for dome s t ic saving s a s indicated by the marked dec l i ne in the internal saving s coe f f i c ient th rough 1 9 7 5 . What th i s imp l i e s i s that the P e ruv ian economy wa s in a poor s tate to weather the storm once c reditor s rep laced the i r enthu s i a sm with caution . I t can be seen f rom the data in Tab l e 1 4 . 8 that a fter 1 9 7 4 private bank s - b y now P e ru ' s mo s t important c reditor--began a prog r e s s ive and s e r iou s l y deb i l i tating redu c t ion of l ending to the government . Th i s nece s s itated an ad j u s tment on P e ru ' s part that , howeve r , wa s s l ow in coming and qu ite d i s o rgan i z ed . In August 1 9 7 5 the c r i s i s contributed to a pol i t i c a l change a s General F ranc i s c o Mora l e s B e rmude z rep l a ced General Vel a s co a s head o f s tate . With th i s , the " revolution" began to take on a more con s ervat ive tone . 1 5 Late in the yea r , a new team con s i s tent with the new o r ientation took control of the economy and attempted ad j u stment in face o f a ma s s ive US $ 1 . 5 b i l l ion current account d e f i c i t and the l o s s o f hal f o f the country ' s gro s s interna tional r e s e rves ( f rom US $ l b i l l ion at th e end o f 1 9 7 4 to l e s s than U S $ 5 0 0 mil l ion at th e end o f One o f i t s f i r s t mea sures wa s to deva lue the s o l 1975) . b y 1 6 percent a f ter s even yea r s at a f ixed rate . The c r i s i s wor s ened in 1 9 7 6 . At the beginning of th e year some add it ional ad j u stment mea sures wer e introduced . The gove rnment toyed with the po s s ib i l ity o f an IMF stab i l i z a t ion prog ram , but a f ter informa l contac ts with Fund o f f ic i a l s in Wa sh ington , author i t i e s dec ided tha t t h e Fund ' s requ i rements were h a r s h and
Peru :
413 . 6 725 . 5
1 , 1 37 . 7 1 , 753 . 2
- 36 . 0 - 1 85 . 7
451 . 0 -147 . 9
4 49 . 6 911 . 2
686. 7 1 , 90 1 . 1
1983
1 , 370 . 0
( 54 5 . 1 ) ( 54 2 . 0 ) ( 76 7 . 8 ) ( 8 94 . 2 )
( 3 68 . 4 ) ( 4 94 . 8 )
1 , 2 00 . 0
937 . 6 83 3 . 7 1 , 02 0 . 2 1 , 054 . 3
422 . 1 5 78 . 9
241 . 6 370 . 3
163 . 4 1 72 . 0
125 . 3 1 20 . 6
133 . 0
Tota l
(5)
4.0
733. 0 -363 . 7 -488 . 0 77. 5 -333 . 5 846 . 8
89 2 . 3
1 , 027 . 2
271 . 7 1 , 04 7 . 5
40 . 1
- 1 22 . 1
Dots indicate data that are not avai lable or are not separately reported .
( 392 . 5 ) ( 29 1 . 7 ) ( 2 52 . 4 ) ( 160. 1 )
( 53 . 7 ) ( 84 . 1 )
( 227 . 0) (326. 5)
( 73 . 9) ( 83 . 5 ) ( l29. 9)
(75 . 2)
(60. 0)
(4)
Interes t
I (1) - (4)
170. 0
117 . 5 6 98 . 9
- 5 24 . 0 - 1 08 . 2
620 . 3 - 3 10 . 8
97 5 . 3 8 36 . 6 565 . 8
- 1 06 . 2 - 50 . 0 2 30 . 0
-31 . 0
Ba s ed o n data supp l ied b y Economic Commi s s ion for Latin America ,
Errors and omi s s ions of the ba lance o f payments
Exports
o f Good s
-11 . 9 1.7 -8 . 2 20 . 9
34 . 4 -15 . 2
60 . 8 51 . 2
20 . 2 56 . 9
-11. 5 3.5
(8) 0. 3
4.6
2.9 17 . 2
- 12 . 8 -2 . 3
29 . 1 - 13 . 0
49 . 5 32 . 4
-10 . 0 -4 . 3 17 . 1 53 . 0
(9 ) -2 . 5
Ratio
(6) / (7)
Ratio
(5) / (7)
Divis ion o f Stati s t i c s and Quantitative Ana lysi s .
3 , 680 . 0
4 , 054 . 8 4 , 06 0 . 5
4 , 1 01 . 1 4 , 64 9 . 7
2 , 131 . 0 2 , 400 . 6
1 , 84 1 . 2 1 , 68 8 . 9 1 , 744 . 2
1 , 34 3 . 5
1 , 06 7 . 2 1 , 153 . 0
(7) 1 , 2 24 . 0
and Services
dol lar s )
II (3 ) - (4 ) (6)
Transfer of Resources
(mi l l ion s of u . s .
Equiva lent to the capital account be fore considering the effect of unregis tered transactions
�:
b
a
Note :
1 , 04 2 . 4 2 68 . 1
1979 1980 1981 1982
-112 . 7 52. 9
1 , 155 . 1 2 15 . 2
1977 1978
( 79 . 9 ) (42 . 1 ) ( 14 . 6 ) (43 . 8)
393 . 4 1 , 147 . 3
1 , 078 . 2 93 6 . 1
-4 1 . 7 -72 . 2
435 . 1 1 , 2 19 . 5 1 , 2 68 . 8 1 , 26 2 . 6
1974 1975 1976
- 1 90 . 6 - 3 26 . 5
3.1 1 60 . 7
1973
( 73 . 0 )
Pro f i t
Net Payment of
Pro f i t s and Interes t
( 50 . 1 ) (46 . 7 )
Account (3)
Capital
B ala nce on
1 02 . 0 19 . 1 70 . 6
(2) -35 . 0 16 . 0 - 90 . 1
tered Trans a ctions
Unreq is-
Net Capital I n f l ows and Transfer of Financ i a l Re sources
1970 1971 1972
137 . 0
(1)
Inflow o f capita 1 a
E f fe c t ive
Table 1 4 . 6
IN \0 \0
400 Tab le 1 4 . 7
Peru :
Savings / Inve s tment Coe f f i c i ents INTERNAL SAVINGS GOP
INVESTMENT GOP
1970
15 . 9
12. 9
1974
12 . 3
19 . 5
1976
10 . 1
1978
11 . 2
(1)
1973
1975 1977
1979 1980
1981 1982
Source :
13 . 9 8.5
(2)
(1) - (2) 3.0
16 . 0
-2 . 1
20 . 8
-12 . 3
17 . 9
8.2
14 . 1
19. 9 16 . 5
13 . 5 17 . 1
11 . 5
18 . 9
12 . 9
DIFFERENCE
12 . 5
20 . 7
-7 . 2
-7 . 8 -5 . 8
-1. 3
6.4 -0 . 6 -7 . 8
-7 . 4
Banco Central de Re s e rva del Peru , Memoria 1 9 8 2 .
pol i t i c a l l y r i sky fo r the new and somewhat uncertain reg ime . 1 6 Hence , the author i t i e s approached th e i r ma j or u . s . bank creditors in a mee t ing in N ew Y ork orga n i z ed by Manu facturers H anover Trust and attended by sta f f membe rs from B ank o f Amer ica , C i t icorp , Wel l s In F� , Cha s e Manhattan , and Mo rgan Gua ranty Trus t . They the meeting the Peruvi ans made a novel propo s a l : sought a U S $ 3 5 0- 4 0 0 mil l ion ref inanc e credit ( termed a b a 1 ance-of- payment s loan ) and propo sed a stabi l i z a tion program tha t wou ld b e impl emented withou t th e IMF . The bank s at f i r s t we re re luctant to acc ede to the On the one hand , other LDC borrowe r s we re al so reque s t . confront ing d i f f icu l t ie s , and exten s ion of f inanc ing without the presence o f the IMF wou ld e s tabl i sh an un comfortab l e prec edent . Moreover , there wa s concern abou t how the bank s might monitor the program . But some inst itutions such as C it icorp f e l t that they could hand l e th i s mon i toring proc e s s � there a l so wa s conc ern that un l e s s they supported the new reg ime , the Ve l a sco f orc e s might regain contro l o f th e government and/ or author i t i e s wou ld enter into d e fau l t . S everal inst itu t i on s re s i sted the propo s a l , but in the end the C i t ibank coa l it ion preva i l ed . Having won the support of a l l U . S . bank s in Jul y , the government wa s then i n a po s i t ion t o gain the support o f European , Canadian , and Japan e s e i n s t itutions . A bank ing committee wa s formed with r epre sentat ive i n s t i tutions from each regional b loc . Total f inanc e wa s to b e U S $ 3 8 6 mi l l ion under the very severe terms of 2 . 2 5 percent over L I BO R , for f ive-year ma tu r i t i e s with f l a t f e e s of 1 . 5 perc ent . The bank s approached the mon itor ing prob l em in the f o l l owing way . The large bank s in the commi ttee were l arg ely re spon s ib l e for eva luat ing the prog re s s of the
148
102 199 160
48 259
384
1981 1982
Banco Central de Re serva del pe rU , Sourc e : 1 9 7 8 - 1 9 8 3 ( Lima , 1 98 4 ) •
1 , 305
416 643 3 77 389 995
514 665
697 793
122 320
69 28
Total
El Proce s o de Renego c i ac i o n de l a Deuda Externa Peruana :
Dash i n d i c ate s an amount that is n i l or n e g l i g ib l e . Note : a not include ad j us tment for exchange -rate var i a t ions p r e l iminary data tha t do
1983
354
147
56 -50
87 78 249
18
247 498
1 9 80
a
69 12 1
36 73
202 118
1978 1979
105 -12
92 379
23 63
165 206
31 137
203 -120 -36 266
1976 1977
109 198
97 125
1974 197 5
24 17
14 27
19 7
48 62 177 253
- 16 -20 -8 22
57
244 407 376
197 2
15 20
26 20
1973
39 -8
-11 -4
S oc i a l i s t Countri e s
Internation a l Organi z ations
We stern Governments
1970 197 1
Supp l i e r s
Net Flows of Medium- and Long-Term Loan Capi ta l by Type of Credi tor d o l lars )
Private B anks
Tab l e 1 4 . 8 Peru : (mi l l ions o f u . s .
"'" o t-'
4 02 government ' s prog ram . An arrangement wa s made whereby the government wou l d vol unta r i l y provide th e nec e s s a ry report s and data for the eva luat ion o f the stab i l i z at ion e f f ort . A sense o f cond i t iona l ity wa s g iven to the agreement by providing for a two-tranche d i sbursement . The f i r s t t ranche wou l d be d i sbursed upon s i gn ing and the s econd in January 1 9 7 7 , with the l atter b e ing contingent upon approva l o f 75 percent o f the creditor s , weighted by the amounts author i z ed . For P eru , the agreemen t - - a l though expen s ive- - a l l owed i t to avo i d the IMF . I t s s tab i l i zation plan 1 7 had a l l the trapp ing s of an IMF program- - i t inc luded a 4 4 percent deva luation , budge t cut s , price ad j u s tment s , and so on- and wa s pres ented to the bank s a s being a f a i r equ iva l ent . But in fact it wa s a good deal softer than any such prog ram . At l e a s t impl i c i t l y the bank loans a l s o were cond i ti oned by the requ irement that the government settle recent inve s tment di sputes with two U . S . f i rms , but the new government wa s d i sposed to a settlement in any event and the bank cond i t i ona l i ty mere l y accelerated the proc e s s . 1 8 As for th e pr ivate bank s , they did a 3 6 0 -deg ree turn . During the c redit boom o f th e early 1 9 7 0 s , conditiona l ity on private-bank loans had a l l but d i s appeared . Its appearanc e in 1 9 7 6 mark ed a return t o prac t i c e s o f the 1 9 6 0 s . Nor wa s the dec i s ion to extend cond i t ional credit wi thout the IMF a new one : As noted in th e section on 1 9 6 5 - 1 9 7 1 , f rom 1 9 6 9 to 1 9 7 1 bank s provided condi tiona l f i nance to Peru on th e i r own . What wa s novel wa s tha t bankers took it upon themselves t o monitor t h e who l e economy and n o t j u st a f ew parameters l ike ex ternal debt . A l though some large bank s had the abi l ity to mon itor the economy , and as a group bank s ob j ectively en j oyed cons iderab l e l everag e over government po l icy , the foray into IMF terri tory f a i l ed . Out s ide c r it i c i sm o f the ven ture wa s strong and arose f rom concern about hav ing pr iva te prof it-mak ing i n s t i tutions mon itor ing the a f f a i r s of a sovere ign government . The pos s ib i l ity for con f l icts o f intere st obviou s l y l oomed l arge . A l s o , g iven the magn itude of the d i s equ i l ibrium upheld by th e previou s l y abundant f inanc e , a s we l l as the l ing er ing popu l i sm in the pol i t i c a l structure , author i t i e s were unab l e to mu ster the po l it ic a l cohe s ion nece s sary to make th e hard economic dec i s ion s tha t banker s wanted so tha t foreign ex change could be made ava i l a b l e for the payment o f debt . W ith the stab i l i zat ion e f fort fal l ing short o f i t s target s , a n d t h e c r it i c i sm about t h e role o f the c ommerc i a l bank s in the economy mount ing , the s e i n s t i tu tions withdrew the ir support for t h e government . Thu s the Mo ra l e s Bermude z reg ime entered into a second pha s e whereby th e bank s returned t o more fami l iar terrain and ins i s ted that Peru a rrange a standby credit program wi th the I MF a s a cond i t ion for the ref inanc ing o f the
4 03 priva te debt . 1 9 7 7- 1 9 7 8 :
The C r i s i s Deepens
Once the bank s i n s i sted on an IMF " g reen l ight , " the government pa s s ed down a long , c ircuitou s , a nd of ten In 1 9 7 7 the h ighly con f l ict ive road to an agreement . foreign-exchange c r i s i s deepened 1 by the s econd quarter gro s s internat ional r e se rves had f a l len to only about one month of import cover , and l arge upcoming payments we re due to c redito r s . Reach ing an accord with the IMF proved exceeding ly d i f f icul t . In mid- 1 9 7 7 new au s ter i ty mea sure s were introduced 1 they met with strong pub l i c r e s i stance , however , and th i s brought the rapid f a l l of a In late 1 9 7 7 a new re cently i n s tal l ed f inanc e min i ster . economic team- -under severe pre s sure f rom bankers , who refused a l l c redit except for l a s t-minute short-term ro l l overs to avoid a techn i ca l defau l t - - reached an agreement with the IMF implying a d j u s tment s tha t were extreme ly amb itiou s . F o l l owing the agreement , bank s con sented to the exten s ion of new ref inance credit s . However , a s many expected , the IMF program targets were not met , and in early 1 9 7 8 both the IMF and the banks withdrew the i r f i nanc i a l support again . Faced with embarra s sment over th e IMF f ia s co , continuou s strikes and demonstrations ove r austerity measure s , and an ex treme scarc i ty o f fore ign exchang e ( the country wa s now tak ing recourse to par t of i t s go l d reserves 1 9 ) , th ere wa s another change o f the economic team in May 1 9 7 8 . With the introduction of new auster ity mea sure s , street riots b roke out in L ima . I n order to stern the drawdown of gold re s erve s , the new economic min i ster quickly arranged U S $ 2 6 0 mi l l ion in " swap s " f rom fr iendly Latin American c entral bank s . 2 o A f ter midy ear , broader inter nat iona l support wa s obtained . A compen satory f inanc e agreement and a more real i s t ic s tandby accord provided US $ 3 l l m i l l ion o f re sourc e s f rom the IMF , and the private bank s agreed to ro l l over for 1 8 0 day s US $ 1 8 6 mi l l ion in debt- serv i c e paymen t s . 2 1 Toward the end of the year the economic team , now e n j oying a degree of credib i l ity with respect to its economic prog ram , arranged a Par i s C lub meeting that resul ted in the reschedu l ing of 9 0 percent o f the payments of princ ipal owed to OECD government s for 1 9 7 9 a n d 1 9 8 0 ( US $ 2 l l mi l l ion a n d U S $ 2 4 8 mil l ion , respectively ) . D eb t s o f U S $ 1 5 4 mi l l ion du e to the socia l i st c ountr i e s in 1 9 7 8 - 1 9 8 0 and U S $ 3 5 mi l l ion due to Vene zuela in 1 9 7 9 were r e s t ructured as wel l . 2 2 F i na l ly a ref inanc ing accord wa s reached with the pr iva te banks for matu r i t i e s f a l l ing due in 1 9 7 9 and 1 9 8 0 , f o r a total o f U S $ 7 2 2 mi l l ion ( see Tab l e 1 4 . 9 ) . By the end of 1 9 7 8 P eru wa s we l l on i t s way to o rder ing i t s f inanc ial a f f a ir s . However , the country had paid a very h igh p r ic e . Mo reove r , Daly h a s shown
P e ru :
( 1980 )
( 19 7 9 )
do l la r s )
359
363
U.S.
( mi l l ions o f
Amount
1
6
7
( years )
Maturity
3
3
( years )
Period
Grace
1 9 7 8 Re s t ruc turing of Commerc i a l Bank Debt
1 . 75
b
1 . 87 5
( % over L I BOR)
Rate
Interes t
F l at
Deuda Externa P e ruana :
grace )
1981 )
at 1 . 2 5
Desarro l lo and El Pro c e s o de Renego c i a c i6n de l a
B anco C entra l de Res e rva d e l P e ru ,
1984 ) .
( Lima ,
1 98 3 ) l
( L ima ,
1968-1979
1 9 7 8- 1 9 8 3
de la Deuda Externa Pe ruan a ,
Sourc e : International Monetary Fund , �n k Creditors ( Wa s hington , D . C . ,
( four years '
Recent Mul t i l a teral Debt Reschedu l ings w i th O f f i c i a l
U S $ 3 4 0 mi l l ion w e r e ref inanced over s i x y e a r s pe rcent ove r L IBOR and . 3 7 5 percent in f lat commi s s ions .
maturi ties :
b
Da s h indicates
0. 5
Commi s s ions
Subsequently Peru renegotiated t h e entire package f o r 1 9 8 0
fee payed on f a c e value of the c redi t
nil o r n e g l i g ib l e .
b we re t o b e n e go t i a ted i n 1 9 8 0 .
a
tha t the amount is
1 9 7 8 and due Janua ry 1 9 7 9 Note : Dots i n d i c a te data that a r e not ava i l ab l e or not s eparate ly reported .
over in June
mi l l io n ro l l ed
50% o f US$186
and 1980
due in 1 9 7 9
rities
90% o f matu fa l l ing
Cove rage
Tab l e 1 4 . 9
a
"'" o "'"
4 05 that the ad j u stment over 1 9 7 5- 1 9 7 8 wa s rather perverse and ach i eved to a l arge extent by exogenou s factor s . 2 3 P e ru ' s balance-of -payme n t s s i tuation wa s greatly a ided by the f a l l in aggregate demand b rought by f a l l ing rea l wag e s , cutback s in inve s tment and impo rt s , and nega t ive growth o f product ( see Tabl e 1 4 . 5 ) . Al though there a l so wa s an enhanc ement o f export performanc e , th i s r e s ted to a l arge degree on the coming on s tream o f investment pro j ec t s in the copper and petro l eum sectors init iated we l l before the ad j u stment e f fort . Meanwh i l e , net negative tran s f e r s o f f inanc i a l resources were rece ived from pr iva te bank s dur ing the heat of the c r i s i s ( see Table 1 4 . 8 ) , an event that undoubtedly contr ibuted to the forced and d i s o rderly nature o f the ad j u s tment proc e s s . I t may be noticed f rom the data in Tab l e 1 4 . 8 that the sharp inve r s ion o f bank f inanc e in 1 9 7 7 - 1 9 7 8 was to some degree o f f set by new supp l i e r s ' credits and govern ment loans . However , the s e loans did not provide much re l ie f ina smuch as they were largely for the purcha s e o f a rms abroad ; indeed in 1 9 7 7 - 1 9 7 8 the s e purcha s e s were a s large a s i n th e previou s four-year per iod . I n 1 9 7 7 they more than doub l ed with respect to 1 9 7 6 due to the acqui s i t ion of Soviet wa rp lane s . Even though such pur cha s e s f e l l in 1 9 7 8 a l ong with other import s , they re mained approximaely 4 0 percent above th eir 1 9 7 6 level and had increased the i r partic ipation in impor t s f rom 1 3 percent to 2 3 percent . THE TH I RD ROUND OF INDEBTEDNESS :
1 9 79-1 9 8 4
P e ru ' s f ortune s turned around drama t ic a l l y i n 1 9 7 9 . Al though erratic and negat ive in character , the economy did ach i eve an a d j u s tment over the period 1 9 7 6 - 1 9 7 8 . Moreove r , a s ment ioned earl ier , output f rom min ing inve s tment s wa s now on s tream , and petrol eum f rom the Ama zon , a l though we l l b e l ow expectations , wa s now be ing produced at a rate of about 1 3 5 , 0 0 0 barre l s a day , a l l ow ing P eru to become a net exporter to the tune of approx i mately 6 0 , 0 0 0 barre l s a day . 2 4 When OPEC prices under went the ir second ma j or a d j u stment o f the decade in 1 9 7 9 , The petro l eum Peru exper ienced a large windf a l l pro f i t . bonan z a , coupled with better prices for a lmo s t a l l ma j or mineral exports , contributed t o a 3 5 percent r i s e i n t h e terms o f trade i n 1 9 7 9 a f ter a fal l o f 2 0 percent in the two preceding yea r s ( see Tab l e 1 4 . 5 ) . The improvement o f the purch a s ing power o f exports ( wh ich incorpora tes the e f f ec t of vo lume as wel l as pric e s ) rose even more dramati c a l ly : 5 4 percent . The sudden and unexpected bur s t o f foreign-exchange earn ing s , c oupled with the stemming o f dol l ar out f lows via the ea rl ier debt renegot iations , produced an extremel y l iquid bal ance o f payment s : T h e current account r a n its f i rst surp l u s since 1 9 7 0 ( US $ 9 5 3 mi l l ion ) and the overa l l
406 balance o f payments had a surpl u s o f US $ 1 . 6 b i l l ion . The expo rt boom a l so had a strong po s it ive e f fect on publ ic savings a s non f inanc ial pub l i c - secto r revenues ro s e by 25 perc ent in real terms . (As a proportion of GDP they increased f rom 42 percent in 1 9 7 8 to 4 7 percent Th i s o ccurred s imul taneou s l y with the s tag in 1 9 7 9 . ) nation o f private con sumpt ion , cau s ing inte rna l saving s to swe l l to 2 0 percent o f GDP ( more than doubl e the level o f 1 9 7 7 ) , g iving rise to a cons iderab l e exc e s s o f saving s over inve s tment for the f i r s t t ime in severa l years ( s ee Tab l e 1 4 . 7 ) . With the new inf lux o f l iquidity Peru cou l d onc e aga in increa s e import s ( th e i r vo lume r os e by 5 perc ent ) , and the economy grew by 4 percent ( see Tabl e 1 4 . 5 ) . De spite what had ' been an extreme ly con f l i c tive r el a tion sh ip with privat e bankers dur i ng the 1 9 7 6 - 1 9 7 8 c r i s i s , the s e i n s t itution s , sens ing the turna round , now once again began to a c t ively court Peru a s a c l i ent . U S $ 4 6 3 mill ion o f new pub l i c i z ed Eurocurrency credits were organ i z ed for the government . 2 5 Typical cond itions were 1 . 3 7 5 percent over L I BOR for ma tu r i t i e s of f ive yea r s . P e ru ' s l iqu i d i ty s itua t i on wa s such tha t auth o r i t i e s took some bold in i t ia t ives on th e debt . F i r s t , they wa ived the renegot iat ion of 1 9 8 0 matu r i t i e s wi th the Par i s C lub . Then th ey prepa id in January 1 9 8 0 th e US $ 3 6 3 mil l ion loan related to the bank r e f inancing o f 1 9 7 9 matur i t ie s ; at the same t ime , prac t i ca l ly a l l short-term foreign C entra l Bank debt wa s paid ( US $ 3 0 4 mil l io n ) . Furthermore , a new agreement wa s reached wi th pr ivate bankers to the terms o f the re f inan c i ng of 1 9 8 0 matu r i t i e s ( s ee footnote b o f Tab l e 1 4 . 9 ) . T h e strategy wa s related to two ob j ec t ive s . F i rs t , the prepayment of the 1 9 7 9 loan a l l owed the government to get rid o f a re l atively c o stly credi t ; the renegotiation o f the terms o f the 1 9 8 0 re f inanc ing repres ented P e ru ' s u s e o f i t s improved bargain ing p o s i t i on to ga in better cond itions . S econd , it wa s reported in j ou rna l i s t i c c i rc l e s that the autho r i t i e s wanted t o reduc e externa l l iquidity at a time wh en apparentl y th ere were pres sures f rom th e mi l i ta ry to pu rsue more a rms pu rcha se s . I n Ju ly 1 9 8 0 , a f ter twe lve yea r s of mi l i tary ru l e , a new c iv i l ian government , headed aga in b y F ernando B e launde T erry , a s sumed o f f ic e . Th i s brought with i t an economic po l icy tha t bu i l t on and inten s i f ied the ma rke t ( a nd the apertura o r l ibera l i z at io n ) orientation tha t be gan to tak e hold dur ing the Mo ra l e s Bermud e z reg ime . The fundamen tal short- term ob j ec t ives were the curbing o f i n f l a tion (a prob l em tha t wa s never overcome in the Mo ra l e s Bermude z period ) , incentives for renewed dynami sm and l eadership on th e part o f the p r ivate sec tor , and l ibera l i zat ion o f imports as a way to improve the competitiven e s s and e f f ic iency o f P eruvian indu st ry . The new government a l s o had another inter est ing ob j ec t ive : pu rsuit o f a mor e cautious borrowing strategy ,
407 sugge s t ing that countr i e s do le a rn f rom bad experienc e s . Author i t i e s seemed to recogn i z e the d i sorderly and c ounterproduc t ive nature of foreign indebtedne s s in the 1 9 7 0 s , hence the ra i s ing of intern a l sav ing s , the � ante programming o f debt contra c tion , the s eek ing out o f l onge r matu r i t i e s and s o f t e r cond i t ion s , e spec ia l l y v i a more a c t ive u s e o f o f f ic ia l a nd mul t i l ateral sour c e s o f debt , a n d a general reduc t ion o f the we igh t o f the debt in the economy were guidel ine s for pol icy . 2 6 I n th e f a c e of th e cons iderabl e externa l l iqu idity of 1 9 7 9 - 1 9 8 0 ( g ro s s reserve s were nearly U S $ 2 b il l ion by mid- 1 9 8 0 ) , author i t i e s - - in contra s t to the 1 9 7 0 s- -pu r sued an anti cyc l ic s tanc e and contracted only U S $ 1 8 mil l ion o f net bank deb t , wh i l e short-term obl igations showed very modes t growth ( see Tab l e s 1 4 . 2 and 1 4 . 8 ) . Moreover , in Apr i l 1 9 8 1 , the government - - a iming to reduce the c o s t o f externa l debt , t o improve the s truc ture o f amo r t i za t ion , and to enhance P e ru ' s f inanc i a l image--dec ided to prepay U S $ 3 5 9 mi l l ion corre spond ing to the ref inanc ed 1 9 8 0 matu r i t i e s with the bank s and replaced them w i th credits on better terms f rom Morgan Gua ranty ( U S $ 1 5 0 mil l ion ) , Wel l s Fargo ( U S $ 1 2 0 mil l ion ) , a nd Manu f a c turers Hanover ( U S $ 1 2 0 mi l l ion ) . C oncomitant with th i s s trategy wa s an e f fort to mob i l i z e loans f rom o f f ic ia l and mul ti l atera l l ender s that culminated in a Jul y 1 9 8 1 Wor l d B ank C on su l ta t ive Group meet ing in Par i s for support of the 1 9 8 1 - 1 9 8 5 pub l i c inve s tment prog ram compr i s ing US $ 4 . 5 b i l l ion in ex ternal f inanc ing . Th i s b ehav ior wa s not only cons i s tent with the more prudent borrowing strategy , bu t it a l so was concordant with the anti- inf l ationary strugg l e tha t had a h igh priority in economic pol icy . There cou l d as we l l have been the addition a l motive of d i s couraging a rms purcha s e s . In any event , the s trategy back f ired somewhat a s the buoyant ex terna l s i tuation began to fade . On th e one hand , p r ic e s for ma j or export produc t s s l umped ( the terms o f trade f e l l by 1 8 percent in 1 9 8 1 ) and the l ibera l i za tion program , coup led with a sharp deter iora tion o f the rea l e f f ec t ive exchang e rate , 2 7 provided more pre s sure to import ( va lue ro se by 23 percent and vo lume by 1 0 percen t ) . On the other hand , world interest rat e s began the i r unprecedented e s c a l a t ion ( L I BOR ro se to 5 perc ent in real terms ) , and net intere st payments in c reased 4 2 percen t , absorb ing ful ly 19 percent of th e nation ' s export earning s . 2 8 Meanwh i l e , new loan s f rom interna tional agenc i e s - - earmarked for pro j e c t s - - encounter ed delays , induc ing balance-of-payments d e f i c i t s ; by the third qua rter o f 1 9 8 1 gro s s r e se rve s had f a l l en by hal f to j u s t US $ l b i l l ion , l e s s than th ree month s ' import cover . The advent of l e s s buoyant ex terna l cond it ions expo sed the somewhat c o smet i c nature o f the a d j u stment prog ram of previou s yea r s ; exogenou s and temporary factors had we ighed heav ily in the turnaround o f the economy , and
4 08 when th e s e favorab l e cond i t ions d i s s ipated , the same o l d structur a l prob l ems in t h e P e ruvian economy reappea red . Just wh en the government ' s inve s tment program wa s gear ing up ( con sol idated pub l i c - sector inve s tment ro s e f rom 6 percent t o 1 0 percent o f GOP between 1 9 7 9 and 1 9 8 1 ) , revenu e s g rowth became s l ug g i sh : the overa l l pub l i c - s ec tor de f ic i t bal l ooned f rom 1 percen t o f GOP in 1 9 7 9 to more than 8 perc ent in 1 9 8 1 . L ik ewi s e , internal saving s s l umped , and the saving s / inves tment gap widened to magnitudes not un s imi l a r to tho s e o f th e Vel a sco period . 2 9 F ina l l y , a s ment ioned earl i e r , the real e f fe c t ive exchang e rate accel era ted i t s move in an uncompeti tive direction , having deter i o rated by 2 4 percent with r e spect to it s l eve l o f 1 9 7 8 . 3 0 The s e events w e r e accompanied b y a ma j or turnaround in the f o re ign borrowing stra tegy : I n the l a s t qua rter of the year the government inten s i f ied borrowing and contracted new l oans o f U5 $ 7 3 4 mi l l ion ( compared to a total o f U5 $ 1 . 1 5 4 b i l l ion in th e prev iou s three � uarters ) , 7 5 perc ent of wh ich came f rom pr ivat e bank s . 1 Th e d i f f ic u l t yea r o f 1 9 8 2 proved to be the be g inn i ng o f the wo r s t economic c r i s i s in th e po s twa r period . Th e pers i s tent internal structura l d i s equ i l ib ria in t he P eruvian economy were aggravated by a deepening o f th e r ec e s s i on in th e DECO a rea ( th e terms o f trade decl ined by another 13 percent ) , the per s i stence of very h igh real rate s o f inte r e s t in the Eurocu rrency ma rke t , and the outb reak o f a genera l i zed f inanc i a l c r i s i s in Latin America tha t adve r s e l y a f fected a cce s s to bank c redi t . I n 1 9 8 2 the government ' s attention s h i f ted f rom the control of i n f l a t ion to bal anc ing th e external accounts . Early in the yea r , autho r i t i e s approached the IMF abou t the po s s ib i l i ty o f a standby agreement ; it wa s f e l t that an IMF program , a l though pol i tica l ly cost l y , wou l d f ac i l itate th e a c c e s s to bank credit tha t wa s needed to c l o se the now l a rge current a c count de f ic i t . Al so the exchange rate , wh ich had been adj u sted cautiou s ly but cont inuou s l y , began to b e deval ued a t a notic eab l y a c c e l era ted pace . 3 2 At th e same time a very r e s t r i c t ive monetary po l icy wa s introdu c ed , caus ing the sol share of the money supp ly to f a l l by 9 percent in real terms . 3 3 However , there wa s no su c c e s s in redu c ing th e current account de f i c i t , in part becau s e imports were r e s i stant to compre s s ion on a ccount o f pub l ic- sector inve stment ( now 1 1 percent of GOP ) and in part becau se of purcha s e s o f mi l i ta ry equ i pmen t . With the Mex ican f ina nc ial c r i s i s o f Aug u s t 1 9 8 2 , private bank s became reluc tant to l end to Latin Ame r i c a general ly , detonating unmanageab l e payment s probl ems i n mo s t c ount r i e s that h a d a n y degree o f rel iance on p r ivate c redit . Mex ico ' s initia t i on o f a debt reschedu l ing with its pr iva te bankers wa s f o l l owed by a wave of p e t i t ions f r om o ther Latin American borrowe r s , overwhe lmed as they
4 09 were by the c ombination o f record debt- service payments , and by a near hal t in new net l end ing , wh ich des troyed the rol lover mecha n i sm that had f a c i l i ta ted payment throughou t the 1 9 7 0 s . P eru t r i ed to i s o l a te i t s e l f f rom the r e s t o f the troubled borrowe r s in L a t in America . I t wa s the s econd of wha t wa s to become s ixteen Latin Amer ican count r ies ( exc lud ing Jama ic a ) to a gr e e to submit to an I MF ad j u s t ment prog ram , 3 � prov id ing bank e r s with the secur ity of Fund conditional ity a n d a symb o l o f P e ru ' s s e r iou sne s s with regard t o a d j u s tment . Then , i n the mid s t o f a l l the petition s to reschedu l e L a t in American deb t , the P e ruvian economic team attempted to d i stance the country f rom the phenomena by dec l a r ing on nume rous o c c a s ions tha t it woul d honor i t s obl igat ion s punctua l ly and wou l d not f o l l ow the examp l e o f o ther count r i e s tha t were s eek ing to r e structure obl igat i on s . Undoubtedly the economic autho r i t i e s - several o f whom h a d very c l o s e t i e s t o Wal l S treet- a l s o thought tha t the i r pro f e s s iona l connec tions in wo rld f inanc ial c ir c l e s might h e l p in s t i l l conf idenc e in foreign banke rs and permit P e ru to d i s t ingu i sh i t s e l f f rom th e pack o f s ink ing debtor countr i e s in th e reg ion . I ronical l y , in the face of i t s deteriorat ing external accounts and a widespread state o f internal di sequ i l ib r ium , the onl y way Peru could , in fac t , honor it s deb t s wa s by c ontrac t i ng new l oans f rom the bank s to pay its o l d debt . Th i s strategy became inc rea s ing ly f ru it l e s s a s the country cou l d not avo id the genera l i z ed f inanc ial depre s s ion fac ing Latin Ame r ica f rom mid- 1 9 8 2 onward . 3 s However , for 1 9 8 2 a s a who l e , a con s iderab l e amount of net borrowing wa s suc c e s s fu l ly undertaken with t h e bank s ( Tabl e 1 4 . 8 ) , and a s i z ab l e net tra n s f er o f fore ign f in a n c i a l
r e sourc e s wa s a c h i eved
( T abl e 1 4 . 6 ) .
B u t th i s
wa s done at the expen se o f a s evere aggravat ion o f P eru ' s ongo ing debt prob l em , a s loans cou ld be secured only on increas ing l y onerou s terms . For in stanc e , in Janua ry 1 9 8 2 P e ru wa s charged L IBOR p lu s . 7 5 percent for a s even-year U S $ 3 0 8 mil l ion l oan l ed by Morgan Gua ranty Tru s t . At the end of May 1 9 8 2 a U S $ 3 2 0 mi l l ion l oan organ i z ed by We l l s Fa rgo carried an average 1 . 3 7 5 percent spread f o r s ix-year matu r i t i e s . By the end o f December , however , P e ru wa s paying 2 to 2 . 2 5 percent over L IBOR fo r f ive- yea r ma tu r i t i e s . Moreover , med ium- term c redit wa s inc rea s ingly d i f f icu l t to secure , nec e s s i ta ting a bu i l d up o f short- term debt ( se e Tab l e 1 4 . 2 ) , a l etha l event for a country t rying to avo id a reschedul ing s ince th i s a c c e l e rates the reve r s e f l ow o f debt payment s . By ea rly 1 9 8 3 , P e ruvian autho r i t i e s were fu l ly drawn into the Latin Amer i c an c r i s i s . Smal l U . S . bank s and Japane s e i n s t i tu t ion s were now c l o s ing down short term l in e s o f credit as the ir conf idenc e in the country waned and they perce ived P eru li a s j u s t another one o f th e 11 3 6 h a l f - c o l l a p s e d e c o n om i e s of L a t i n America . Intere s t ing l y , Peruvian economic autho r i t i e s res i sted re schedu l ing
410 to th e end a nd i t wa s C i ticorp and Cha se Manha ttan Bank , Peru ' s two l a rge s t commerc i a l c reditor s , tha t forced th e government ' s hand . I n e f fe ct , the s e i n s t i tutions worried that the Japane s e and smal ler bank s--with l e s s of a commitment to internat iona l l ending- -wou l d wi thdraw f rom Peru and tran s f e r the r i sk s o f the country ' s s ituation to the b ig bank s in who s e portfol io Peruvian ob l ig a t ions carried relatively mo re weigh t . I n fact the two bank s " coun seled" author i t i e s to dec lare a u n i l atera l mora tor ium on debt payments so tha t retreating inst itut ions wou l d be " l ocked in to " th e c ountry ' s fate . The plan c a l l ed for a forced ref inanc ing of short- term deb t : S ta rting on March 7 , 1 9 8 3 , a l l amo r t i z a t i on payment s were deferred . Short- term trade rel ated debt fal l ing du e between Ma rch 7 and May 3 1 ( a round U S $ 5 0 0 mil l ion ) wa s def erred for 9 0 days b eyond the o r ig inal da te of matu r i ty : pub l i c - enterpr i se wo rk ing capital deb t ( U S $ 1 . 2 b i l l io n ) and pr ivate-bank short-term debt ( U S $ 3 0 0 mil l ion ) f a l l ing due between Ma rch 7 , 1 9 8 3 , and Ma rch 7 , 1 9 8 4 , were def erred for 3 6 0 days . The cond i t ion s o f the operation were 1 . 5 percent over L I BOR and f l a t commi s s ions o f . 3 7 5 percent , plus 1 . 5 percent for c ommerc ial credit l ines . At the same t ime P e ru reschedu l ed US $ 4 0 8 mi l l ion o f medium- term debt payment s f a l l ing d u e between Ma rch 7 , 1 9 8 3 , and Ma rch 6 , 1 9 8 4 . Addit iona l ly , the bank ing commi ttee- - l ed by C i ticorp and inc luding Cha s e Manhattan , Manu factu rers Hanover T ru s t , Banco Central ( Spa in ) , Bank o f Nova Scotia , Bank o f Tokyo , C redit Lyonna i s , Crocker Nationa l Bank , and Na tiona l we s tmin s ter Bank- -were to o rga n i z e new loan s of U S $ 4 5 0 mi l l ion . The co st of th e s e opera t io n s wa s 2 . 2 5 percent over L IBOR for e ight-year ma tu r i t i e s ( th ree yea r s ' g ra c e ) and f l a t commi s s ions o f 1 . 2 5 percent ( an und i s c l o sed agent ' s fee wa s a l so paid) Th e terms o f the agreement were extremely s t i f f : equ a l to th e mo s t onerou s borrowing cond it ion s recorded through th e th ree aforementioned borrowing cyc l e s . H ow ever , the agreement f e l l within the general f ramework of the rescue packag e s arranged by the bank s for othe r La tin American. c ountrie s , wh ich w e r e character i z ed b y a ma rked r i s e in the c o s t o f debt upon reschedu l ing obl igation s . A comp a r i son o f th e cond i t ions of medium term synd ica ted bank cred i t s in 1 9 8 0 - 8 1 with tho s e of th e 1 9 8 3 reschedu l ing sugg e s t s a deterioration of the " negotia ted c o s t " o f borrowing of 9 7 percent for P eru , wh ich , a l though l owe r than tha t experienced by sever a l other borrowe r s in Latin Ame r ica , wa s neverthe l e s s very drama t ic ( s ee Tab l e 1 4 . 1 0 ) . As suming a L I BO R of 5 per cent in real terms , th e deterioration over the same period with re spect to real f inanc ia l c o s t wa s a h e f ty 1 9 percent ( s ee f ootnote d o f Tab l e 1 0 ) . Notwith s tand ing the re scue package f rom the bank s , a US $ l b i l l ion P a r i s C l ub re schedu l ing l a ter i n the yea r , •
2 . 13
2 . 13
0 . 91
Chi l e
Uru2!:!a�
2 . 25
2 . 25
2 . 50
2 . 13 2 . 25
8.2
7.6
8.0
5.0
7.6 6.0
7.5
8.5
(1)
8.0
9.0
8.0
8.5
8.0
7.0
8.0
(2)
6.0
7.0
5.0
8.0
B as ed on the
1 . 25 1 . 25
1 . 25 1 . 50 1 . 25
AC
�ge )
97
181
28
146
44 125
(2) : (1)
(percen
Column s headed AC re l a te to
terms
a s shown in the note to Tab l e 1 4 . 3
20,
Sourc e :
no.
Robert Dev l i n ,
Augus t 1 98 3 .
=
commi s si on s ,
P
=
amorti zation period ,
and M
=
marg i n .
Ave rag e s are
" Renegotia tion of Latin America ' s Deb t :
A n Ana l y s i s o f the Monopoly Power o f P r ivate Banks , "
CEPAL Review,
For Pe ru one f inds a financ ial cost-of 6 . 2 5 p er cen t for 1 9 8 0 - 1 9 8 1 a n d 7 . 4 1 percent for the 1 9 8 3 rescue package .
o f commi s s i ons and marg ins by the formula C / P + M where C
we ighted b y v a l ue s . d weighted average
23 . 5
18 . 6
19. 9 26. 1
9.3 21 . 6
( increas e )
Rea l Terms c
C o s t of
Cre d i t i n
for additional credits .
are n i l or neg l i g ib l e .
1.0 1 . 25
(2)
show average credit terms in 1 9 8 0
1 . 07
0 . 70
1 . 25 1 . 25
1 . 50 1 . 25
R
ticn
of Terms
Deteriora-
face va lue of the l oans and repre sent a f l a t payment a t the time of s igning the lo a n contracts
R rel ate to reschedu l e d maturi t ie s .
Columns headed 1 9 8 0 - 1 9 8 1
index of the c o s t components o f credit that are sub j e c t to nego tiation ,
the
C o l umns headed
3.0 2.0
3.0
0 . 88 0 . 97
0 . 81 1 . 23
1 . 09 2 . 01
(1)
1980-1981
a
Assumes a LIBOR i n real te rms o f 5 percent for 1980-1981 and for the reschedu l e d debt/new loans o f 1 9 8 2 - 1 9 8 3 and adds the e f fe c t
c
b
a Cal culated as p e r c entages of
and the f i r s t ha l f o f 1 9 8 1 .
d
4.0
3.0 2. 5
AC
commi s sions
Dashes indicate that amounts
3.0 2.0
4.0
2.0
3.2
3.0
4.0
3.0 2.5
( number of �ea r s ) 1980-1981 R (1) (2)
1 98 2 - 1 98 3
Grace Period
8.0 8.0 2 . 25 9. 1 0 . 98 2 . 25 6.0 6. 0 indicate data that are not ava i l abl e or not separately reported .
2 . 25
(2)
AC
The in forma ti on in the tab l e i s provis ional and sub j ec t to revision .
Note :
Dots
1 . 12
1 . 88
Peru
Mex ic o
2 . 25
0 . 65
0 . 74
Ecuador
2 . 25
2 . 25
1 . 00
1 . 13
Cuba
Costa Rica
1 . 62
2 . 50
0 . 67
Bra z i l
(1)
Argentina
Country
AC
( number of �ears ) 1980- 1 98 1 R
R
Period
(I!ercenta2e )
L l BOR
Amortization
Provi s i onal Data o n Terms o f Debt Reschedul ing :
Ma rgin over
Latin Ame r i c a :
1 98 0 - 1 9 8 1
Tabl e 14 . 1 0
412 and th e support o f the IMF , P e ru ' s economy went into a t a i l spin . I ntere s t payments a l one repre sented more than 3 1 percent o f 1 9 8 3 export earning s , and a l though the bank s e f f e c t ively r e f i nanc ed part o f th e s e payments wi th th e so-ca l l ed new loans , P e ru had to generate a trade surp l u s to help f inanc e the ba l a nce o f the s e payment s . Th e surp l u s ( e s t ima ted at U S $ 1 3 0 mi l l ion ) 3 7 had to b e e f fec ted in an envi ronment o f depre s s ive wor l d trade and severe natural d i s a s te r s in P e ru ( f l oods in the north coa s t , drought s in the A l t ip l a no ) , and the we igh t of a d j u s tment f e l l on impo r t s : E s t imat e s h a v e it tha t I t i s not sur volume dec l ined b y 2 7 percent in 1 9 8 3 . pr i s ing tha t per capita inc ome f e l l by an ama z ing 14 per cent ( to th e l eve l reco rded in 1 9 6 2 3 8 ) , underempl oyment exc e eded 50 percent o f the work forc e , and- - i n the f a c e o f an average r a t e o f i n f l a tion o f I I I percent- - rea l wag e s f e l l sha rp l y . Al s o , the government wa s unab l e to c omply with the I MF program targe t s ; at the end of 1 9 8 3 i t had to beg i n negotiations for a new agreement . P e ru entered 1 9 8 4 fac ing severe soc ia l unr e s t of both a po l i tical and an economic natur e . Furthermore , in the mid st of the s e d i f f ic u l t i e s there were repor t s man i f e st ing another o f P e ru ' s perenn i a l prob l ems : The mil itary wa s seek ing to purcha s e f igh ter pl ane s worth U S $ 7 0 0 mi l l ion . F i na l l y , in F ebruary 1 9 8 4 P eru reached a tentat ive settl ement with i t s 2 8 0 pr iva te bank s for payment s f a l l ing due tha t year . P e ru ' s advisory commi ttee had apparently agreed to res tru c ture US $ 1 . 5 6 b i l l ion . Th i s invo lved U S $ 9 5 0 m i l l ion o f short- term working-capital ob l igations tha t were to b e converted into medium- term debt and another U S $ 6 1 0 mi l l ion o f matu r i t i e s f a l l ing due in the period Ma rch 1 9 8 4 - - J u l y 1 9 8 5 . The terms wou l d be nine yea r s o f amort i za t i on includ ing f ive yea r s ' gra c e , at 1 . 7 5 percent over L I BOR ( informa tion i s not ava i l abl e on c ommi s s i on s ) . At th e same t ime , trade r e l a ted short-term c redit l ines were to be ro l l ed over unt i l November 1 9 8 5 . 3 9 Th e s e c on d i t ion s , for r ea sons to be expl a ined in th e nex t section , a re much softer than tho se in e f f ec t in the first round o f reschedu 1 ing s . PERU AN D THE BANKS : SOME THEORETICAL AND PRAC T I CAL I S SUES Th i s sect ion wi l l b r i e f l y addre s s some of the conc eptual i s su e s behind P e ru ' s debt probl ems . The f ir s t p a r t wi l l outl ine wha t i s f e l t t o have b e e n an erroneou s borrowing stra tegy by the V e l a sco reg ime that wa s re spon s ib l e for the initial debt bu i l dup that ha s under lain much o f Peru ' s current d i f f icu l t ie s . The second part wi l l sugg e s t tha t Peru ( a s we l l as other Latin American countr i e s ) perhap s mi s interpreted the proper theore t i ca l f ramework for undertak ing the reschedul ing
4 13 ex erc i se s . Suppl y- Led I ndebtedne s s I n dea l ing with pr ivate bank s , borrowe r s mus t remember tha t commerc i al l ende r s are very expo sure con s c iou s . � o Thu s bank s a re e spec i a l l y a ttracted to wha t might b e termed " virgin b o rrower s , " count r i e s tha t mee t some minimum standa rd of creditworth ine s s bu t have l i t t l e o r no expo sure with the l ending i n st itu t i on . For a bank , a dec i s ion to l end under the se c ircums tan c e s i s an ex tremely easy one : Portfo l io diver s i f icat ion mean s the c o s t o f runn ing the r i s k of a new loan is nomina l , wherea s the p ro f i tab i l i ty o f the l oan can be cons iderab l e s ince new borrower s o f ten mu st p a y st i ff premiums on the i r loans ( a s did P e ru in 1 9 7 2 ) unti l the i r recognit ion factor is h ighe r and comp e t i t ion among the bank s f l atten s out the pr i c e stru c ture o f cred i t . But a s the borrower ' s pa rt ic ipa tion in the portfol io o f the bank r i s e s , the l ender can be c ome more consc iou s of exposure con s idera tion s , and enthu s ia sm for new loans sh i f t s into greater In th e s e c i rcumstanc e s barga ining deg r e e s o f reticenc e . power s l owly sh i f t s to the l ender : As the eagern e s s to l end become s relatively l e s s pronounc ed , the eagerne s s t o borrow i s o n the r i s e , i f f o r n o other rea son than to rol l over th e exponen t ia l ly growing debt- servic e payment s to the bank s . Th e s e exposure con s ideration s--and the consequent ero s ion of the barg a in ing power of the borrower - - c an be o f f s e t only by an improved imag e of creditworth ine s s , an expa nded supply of depo s i t s in international f inanc i a l mark e t s , new entra nt s to inter national l end ing tha t inten s i fy compet i t ion , or new premiums on th e price of the loan . But even here the re i s a l imit to the grant ing o f credit g iven any capital and res erve s truc ture o f the l end ing inst itu tion . Th i s evo l u t ion o f bargain ing powe r i s i l l u strated in F igure 1 4 . 2 . The f igure repre sents two potent ia l po ints in th e borrowing cyc l e , l ab e l ed a and b . It is a s sumed tha t the numb e r o f l ende r s , the-l evel-of inter nat ional l iqu i dity , and the perceptions of c reditwor th i n e s s rema in uncha nged throughout the cycl e . On the hori zonta l ax e s there i s borrowing B by a country and l ending L awarded to it by the banks in �t ) ; on the vertical ax e s are period ! ( obviou s lY ' -� t the borrowing requ irements and loan ava i l ab i l i ty for the country in th e sub sequent period t + 1 . On the ba s i s o f the amount borrowed and l ent-in period t , a c e rta in pr i c e for credit i s e s tabl i shed; at th i s-g iven price future borrowing and l end ing become a func t ion of the previou s period ' s borrowing and l ending . The second der iva tive o f the borrowing function is po s i t ive , r e f l e c t ing th e f a c t tha t there i s an increa s ing =
o
L2
14 . 2
Borrowing
B = B o rrowing
L=Lending
B I L
1 + 1
the
Figure
(a)
B,
+ 1 >
F(B,1
L B
Evo l u t i o n o f
Cyc l e
The
Power
B I L
1 + 1
B a r g a i n ing
In
(b)
Bn
I
+ 1 >
_
B,
F(B,1
415 propen s ity to borrow a s a re su l t o f expanding ab sorptive capac i ty in th e country and the g rowing requ i rement s for the ref inanc i ng o f o l d debt . For the bank s , however , the second derivat ive i s negative , re f l ec t ing expo sure and r i sk con s iderations as the country ' s po s i tion in the bank s ' l oan portfol io r i se s . S egment ( a ) o f F igu re 1 4 . 2 depic t s an ea rly pha s e in t h e borrow ing c yc l e . I n period t t h e country h a s borrowed B , a n d th e bank s h a v e le nt an ident ical amount �l ' the trl nsaction b e ing c l ea red at a g iven market pr � c e . For reasons o f the a s ymmetry o f scale between the bank 1ng sys tem and an individu a l borrowing country at th i s g iven pric e , wha t the bank s a re abl e to l end in period t + 1 (� 2 ) i s cons iderab ly more than wha t the country is a b l e to e f f e c t ively demand (� 2 ) . Th i s i s n o t a stab l e s i tuat t ion . I n e f f ec t , private commerc ia l bank s are very concerned about the i r market po s it ion v i s -A-vis compet ing ins t itutions � bank s wi l l therefore s eek to g a in a foot ing in the demand-constra ined c redit f l ow . Thu s , in the the i n i t i a l periods of borrowing where � t+ l > �t+l country can a f fect the terms o f credit ( bo th the price and nonp r i c e component s ) . I n other wo rds , the country ' s bargain ing po s it ion i s potent ia l ly very st rong . T o the extent tha t th ere are new entrants to international l ending ( a s wa s the case in the 1 9 7 0 s � 1 ) the barga in ing powe r o f th e bor rower is further enhanced . C eter i s par ibus , the country ' s s i tuation c an deteriorate a s the demand for credit r i s e s . S egment ( b ) o f F igure 1 4 . 2 d i splays a po ten t i a l po s i t ion i n an advanced stage of the borrowing cyc l e . Here the demand for c redit ha s been pushed b eyond point 0', and negotiat ing powe r has dec i s ively sh i f ted in favo r-of the l ende r s a s future borrowing n e e d s ex ceed ava i l ab l e loan s . The terms of credit ( both p r ice and nonpr i c e ) can now severely deteriorate for the borrowe r s imu l taneou sl y with a restrict ion in supp ly . In v iew of the f orego i ng , an advantageous s trategy for the borrowe r dur i ng the cou r se o f a cred i t cyc l e i s t o locate i t s e l f in or around th e area F ' G ' - - the max imum divergenc e between demand and ava i lable-supp ly of c redit and henc e th e s tronge st barg a in ing po s i t ion-- and sti l l ma inta in a n adequate growth o f the f l ow o f c redit for inves tment an d f inance need s . One po s s ib l e strategy i s to a s suage t h e growth o f t h e demand fo r fore ign credit via increa sed dome s t i c saving s , thu s sh i f t ing the curve OOB downwa rd and to the right and enhanc ing t+ l overal l barga in ing power . But there a l s o i s a " d ividend" to th i s strategy : Ra i s ing dome s t i c sav ing s wi l l probabl y improve th e image o f c reditworth ine s s a nd sh i f t t he curve OOL upward and to th e l e f t , as would any po l icy tha t t+ l The net e f fe ct , then , i s a broaden improve s that imag e . i ng o f th e opportun ity for new borrowing under favorab l e
416
terms . Wha t we po s i t here i s wha t might be termed an active and " de f en s iv e " borrowing strategy v i s -a.-vis the bank s . In th e face o f a rap idly expanding suppl y o f bank l oans , a c ountry should attempt to keep the bank s " on the hook " by minimi z ing the share o f foreign commerc i a l re sour c e s in t h e f inanc ing o f deve l opment . Th i s i s done th rough the ra i s ing of dome s t i c saving s , the promo tion of export s , the e f f ic ient min imi z ing of foreign content in pro j ec t s , the e s tab l i shment o f extremely contro l l ed interface with c ommerc ia l creditor s , and so on . E s sentia l ly wha t i s b e ing exp l o ited h e r e i s th e pr inc iple tha t private bank s are mos t eager to l end to bo rrowe r s that do not need the resource s . Peru , during the Ve l a s c o reg ime , pursued po l ic i e s that were n o t i n accordance with such princ ipl e s , a n d i n t h e absence o f some prec i s e counterva i l ing st rategy th e country eventua l l y put i t s e l f into th e deteriorat ing bargain ing po s it ion p i c tured to the r ight o f point D in F i gure 1 4 . 2 . The reg ime correc t l y viewed the bank loans a s a new and time ly instrument to support it s ob j ect ive s , yet it did not rea l i z e that the in strument cut s two way s and that when emp l oyed care l e s s ly , i t cou l d actual ly run counter to obj ectives and undermine an entire po l i t ica l program directed at reduc ing fore i gn dependency . I n s tead o f e s tab l i shing a carefu l l y p l anned defen s ive relat ion sh ip with the bank s , the pub l i c author i t ie s , in moments o f obj ect ive bargaining strength , became engu l fed by the forc e s o f the market , thereby l e tt ing enthu s i a s t i c bankers dictate t h e volume o f credit . In fac t , once author i t i e s rece ived favorab l e s igna l s f rom the c ommerc i a l bank s , they d i d not estab l i sh a res erved borrowing po sture , bu t rather read i l y accepted a l l the credit ava i l ab l e to them regard l e s s of whethe r it cou ld be depl oyed e f f i c iently or not . Moreove r , the s i tuat ion wa s aggravated by th e fact that private bank s evident ly do not seriou s ly eva luate government-guaranteed pro j e c t s and tha t they di spl ayed an ama z ing wi l l ingne s s t o extend free d i s po s ition c red i t s dur i ng th e Ve lasco period ( s ee Tab l e 1 4 . 1 1 ) , � 2 all o f wh ich e s sent i a l l y a l l owed borrowing t o be d e l i nked f rom e f fect ive absorpt ive capa c i ty . 4 3 A s a consequence , overborrowing took p l ac e , tha t i s , borrowing i n exc e s s o f absorptive capac i ty ( produ c t ive u s e o f re source s ) . When overborrowing occu r s , fore ign capital doe s not nec e s s a r i l y tran s l ate i t s e l f into a l a rger economic surp lu s , but rather can encourage a m i s a l locat ion and wa s tage of resourc e s through increased con sumption and imports , specu lat ion and in f l at ion , a s we l l a s capital f l ight . It al so can culminate in l o s s o f creditwo rth ine s s and economic c r i s i s . I n e f f ect , a ma s s ive i n f lux o f loans tha t exceeds product ive po s s ib i l i t i e s can convert i t s e l f into an opiate that provides a f a l s e s en s e o f security and hides the need for ad j u stment in economi c po l i cy . Ju st prior
417 Tab le 1 4 . 1 1
Peru :
Dis tribution of Commerc ia l Bank Loans
According to Purpose ,
Capital Goods
Other
Imports
Imports
Re finance Credits
0.1
2.0 Note :
1971- 1976 Fre e Dispo sition
48 . 6
Credits 27 . 8
Pro j ects
14 . 7
Nationa 1 i z ations
Other
Total
6. 1
0.7
1 00 . 0
Exc lude s loans with export c red i t guarantee s
Source :
Robert Devlin ,
Los Bancos Transnaciona1es y e 1
Financiamiento Externo de Amer ica Latina : 1 9 6 5 - 1 976
( Santiago , 1 9 80 ) , p.
86 .
L a Exper iencia del PerU ,
to ga ining acce s s to credit f rom internat iona l b ank s the Ve l a sco reg ime d i spl ayed a credib l e performance in stabi l i z ing th e internal and externa l account s . However , � th i s e f fort s lackened cons iderably once authorities confronted a s eeming ly end l e s s f l ow o f bank loans . Con sumption went on the r i se ; export coe f f i c ients dec l i ned dramatica l ly in the face o f expanding import coe f f ic i ent s ; tax pre s su r e s tagnated or f e l l wh i l e pub l ic - sector de f i c i t s reached h ighl y i n f l a t ionary l eve l s and exchang e - rate par i t i e s encountered marked deterioration . Al l th i s was susta inab l e a s long a s f l ows o f comme rc i a l bank loans and interna tiona l commod ity p r i ce s were h igh . However , the latter are notor iou s ly tran s i to ry , and the vo lume of bank loans i s itself very s e n s i tive- - a l be i t with a decept ive l a g - - to the l evel o f the se p r ices and current account de f i c i t s more genera l l y . The current account , of cour s e , i s in tu rn adver s e l y a f f ected by the r e l axa t ion o f mon e t a ry ,
f i scal ,
and exchang e - rate d i s c ip l i n e
tha t the bank loans themse lve s f ac i l i tated . I n sum , author i t i e s f a i l ed to rea l i z e the contradiction between ma intenance o f the growth o f bank loans and deterioration of ba s i c economic parameter s . Eventua l ly the cont ra dict ion between eroding creditworth i ne s s and growing expo sure l ed the bank s to react , and only then did the l atent economic c r i s i s come into ful l focu s . O f cou rs e the s econd Be launde admin i strat ion attempted to correct th i s s ituation . But the mountain of debt had a l ready been a ccumul ated , mak ing the t a sk a d i f f ic u l t long-term venture . Moreove r , attemp t s to rec t i f y the s i tuation were based to a l a rge extent on very favorabl e external factor s that were unl ike ly t o per s i s t , and the advent of a pro l onged wor l d rec e s sion and r e s t r ic t ions on acce s s to new credit qu ickly put Peru back in the so c a l l ed debt trap with its consequent pol itical and socio economic c o s t s .
4 18
The C o s t o f Re schedu l i ng :
A C a s e o f Monopo ly Rent s
I t i s common prac t i c e 4 4 for p"r ivate bank s t o sharply ra i s e the pr ice o f credit when forced ref inancing / re schedu l ing exerc i s e s are undertaken . 4 5 Th i s happened to Peru in 1 9 6 9 - 1 9 7 1 , 1 9 7 6 , 1 9 7 8 , and 1 9 8 3 . The bank e r s hav!3 g iven various market-or iented arguments to j u s t i fy the practice , among them : ( 1 ) the ma rket pe rc e ive s mo re risk in the country and therefore demands a h igher p r i c e for t h e r ight to r e s chedul e � ( 2 ) competition had dr iven the price o f credit too l ow , there fore nec e s s i tating an a d j u s tment by the bank s du r i ng the r e l i e f exe rc i s e � ( 3 ) the payment o f a h igher price f o r c redit i s viewed a s t h e best way to induce th e bank s t o reschedu l e a n d to grant future credit f l ows , and ( 4 ) the bank s mu s t be re imbursed for the t ime and money spent on a r e s chedul ing exerc i s e . P e ru and mo st c oun tries in Latin America have trad it iona l l y acc epted the s e arguments and when f aced with a r e s chedu l ing , they have acted a s i f they were in a mark et s i tuation where the price o f credit ha s ri sen s imply a s a result o f an upwa rd sh i f t in the supply cu rve . Th i s wou l d appea r , howeve r , to be a mi sconception that has serious rami f i cations for po l icy dur ing a r e s chedu l i ng exerc i se . I t mu s t be remembered tha t pr ivate bank s devel op l oan port f o l i o s under a s sumptions of r i sk . R i sk i s eva luated and taken into account i n two way s : port fol io d iver s i f ication and r i sk premiums . Thu s , when a bank l ends it incorpora tes a r i sk premium into th e price of the credit ba sed on its evaluation o f the r i sk invo lved . Theo r e ti ca l l y , shou l d a borrower be unabl e to pay , an e f f i c ient bank would have incorporated th e r i sk into i t s port f o l io and wou ld be in a po s i t ion t o draw o n the premiums if and when the r i sk materia l i z e s . Mo reove r , in a c ompetitive market s itu ation , bank s wou l d have to accept the l o s s e s invo lved with having c l ients unab le to pay , and bank s that had i ne f f i c iently evaluated r i sk wou l d go bankrupt becau se the premiums c o l l ected ( and dive r s i f i c at i on ) wou ld not b e adequate to absorb the mate r ia l i z ed r i sk . Th i s i s what happened in the 1 9 3 0 s . Wh en deve loping c ountry borrowe rs were unab l e to l i quidate the i r bond obl igation s , c redito r s took heavy l o s s e s and some went bank rupt . Today , however , bank e r s can do some th ing tha t di spersed and anonymou s bondho lders cou ld not do at that time : coordinate th e i r act ion v i s- a-vi s a borrower th rough the s o - c a l l ed b ank ing advi sory committee . Mor e ove r , there i s a strong inc ent ive for cooperat ion among the bank s g iven th e b inding nature of the c ro s s-default c l au s e s present in prac t i c a l l y a l l loan agreement s . I n other wo rd s , the bank s can group together in a bloc and e f fect a re schedu l ing o f the debtor ' s ob l i gat ion s to avo id a defau l t and l o s s e s . S een f rom th i s ang l e , a
419
re schedu l ing , rath e r than b e ing the curse tha t bankers o f ten imp l y a s they j u s t i fy the h igh price of such an ex erc i s e , i s a great " h i storica l privilege" that a l l ows bank s to e lude the l o s s e s tha t a competitive ma rket wou l d impo se on them . The s ame per spective a l l ows one to better under s tand the bank s ' s trategy : The inc rea s e o f the price o f c redit upon r e s ch edu l ing i s an e f f ec t ive ex po s t ad j u s tment o f terms tha t pa s s e s t h e c o s t o f an erroneous evaluat ion o f r i sk onto the borrowe r . Th i s , o f cour se , cou ld not b e done in a c ompet i t ive mark e t environment . Furth e rmore , countr i e s l ik e P e ru cou l d have exp lored way s to avo id th i s h igher c o s t becau se th e extra charge s o n a reschedu l ing a re a monopo ly rent that in theory and prac t i c e can be reduc ed . I n reschedul ing a loan there i s no rea l c redit transact ion with a supp l y price s i nce the operation s imply con s i s t s in the admin i strat ion o f a loan a l ready granted and not immed iately recoverab l e . Nor does re schedu l ing impl y add i t iona l r i sk s or c o s t s for the bank s since the a l t e rnat ive i s a s toppage o f payment s and l iqu idat ion o f part of the portfo l io � indeed , the bank s gain add i t i onal security and lower r i sk in the form o f IMF ag reements a n d state guarantee s on private debt . In pract ice , the n , re schedu l ing e f fectively redu c e s the r i sk o f defau l t and therefore o f ma j or l o s s e s . As for the outlays on t e l ex , c ab l e s , trave l , and so on connected with the negot i a t ion o f a re schedu l ing operation , the s e are expen s e s that shou ld a l ready have b een incorporated in th e r i sk premium paid for by the country when it origina l ly contracted the debt . Thu s , any increa se in the ma rgin over the base intere st rate and payment of commi s s ions on the amount o f reschedul e d debt s ignif i e s rent � that i s , it const itute s an income in exc e s s of economic c o s t s , wh ich i s g enerated b y vi rtue of the bargain ing power o f the f ew l a rge bank s that control ac c e s s to cred i t for a country of que s t ionab l e c redit wo rthine s s . I n oth er words , the bank charg e s extra for an admini strat ive operat ion ( th e r e s chedul ing o f debt service ) nec e s s a ry in any event to avo id l arge lo s se s � the refore , the additiona l income i t rece ive s o n re prog ramming the debt i s an " ex c e s s pro f it . " The so- ca l l ed new c redi ts o f f e red to P eru in th e 1 9 8 2 - 8 3 round of reschedu l ings in Latin Amer ica mu s t be viewed in the s ame perspect ive . Th e new c red i t s were extended to e f f ec t ively r e f i nance about 6 0 percent o f the interest paymen t s to the bank s th at othe rw ise wou l d be in I n other wo rd s , the new loans are an integra l arrea r s . part o f the admini stration of o l d debt : They are a di sgu i sed re schedul ing o f inte r e st payments that permi t s the country t o keep current i t s interest payments o n pa st debt an d thereby permits t h e bank s to avo id having th eir a s s e t s c l a s s i f i ed a s nonperforming b y the i r local bank ing supervi sors . I n sum, the s e loans too are nonma rk et
420
transaction s . Wha t one f a c e s in a re s chedul ing exer c i s e i s rea l ly a b i l ateral monopol y ; the country on one part and the bank s on the o ther negot iate to determine how l o s s e s on a weak port fo l io wi l l b e sha red . The price of credit i s not a ma rket-determined p r i c e b u t rather a negotia ted pr i c e tha t is indeterminate and depends on the cat-and mou s e game o f a b i l ateral monopo ly . Neverthe le s s , the prac t i c e that the bank s have of sharp ly boo s t ing the c o s t o f c re d i t upon r e schedul ing i nvo lves rent s , a n d Peru cou l d have a ttempted t o c apture some o f the s e . Wha t are the l im i t s o f t o l e rance o f bankers ? Thi s i s ha rd to say , but the banke r s ' evident reluctance to dec l a r e a defau l t on borrower s even in the face o f a l a rge ac cumu l ation o f arrears sugg e s t s that their f ear o f the precedent of de f au l t and ac count ing l o s s e s cou l d have been better exp l o ited . I t mu s t be remembered that the bank s ' marg inal c o s t o f funds i s the L IBOR and any intere s t rate above th i s enter s into the terrain o f prof i t s . I n other word s , a bank coul d very we l l r e s chedu l e at , for examp l e , 1 perc ent over L I BOR for f i f teen-year matur i t i e s and s ti l l b e much better o f f than i f i t had t o dec l a re a defau l t on the borrowe r . 4 6 The bank bene f i t s becau s e it avo id s account ing l o s s e s ; indeed i t s book s wi l l show a prof i t , a l b e i t pro f i t s much reduced f rom tho s e ach i eved i n the f irst round of re s chedul ing and probably even with r e spect to tho se on the origina l l y contracted debt . The country a l so bene f i t s becau se it ga i n s a re s chedul ing tha t ha s terms more consonant with a po s i t ive a d j u s tment proce s s , that i s , one that f a c i l itates devel opment and growth and minimi z e s co s t s - - economic , s o c i a l , and po l i tica l . Moreover , s ince the bank s avo id account ing l o s s e s - - even wh i l e mak ing real s ac r i f ic e s - - the country in a l l l ikel i hood will f ind a renewed a c c e s s to autonomous cred i t f l ows f rom t h e bank s once i t s economic s i tuat ion improve s ( the l ik e l ihood o f wh i ch i s enhanc ed by a more equ i tab l e re schedul ing exerc i s e ) . I n a l l f a irne s s to P e ruvian author i t i e s , however , the f inanc i a l c r i s i s o f 1 9 8 2 erupted suddenl y , and the precedent of the higher c o s t of debt upon r e s chedu l ing wa s on the s ide of the bank s . Thi s , coup l ed with the tremendous power wie l ded by the bank ing c ommittee and the fact tha t Peruvian author i t i e s ( a l ong with the r e s t o f the i r L a t i n American counterpart s ) acted- - e rroneou s l y - a s i f they w e r e c ompet itors with other count r i e s for bank c redit , h e l p s to exp l a in th e h igh c o s t o f the 1 9 8 3 re s chedu l i ng . Fortunate l y , P e ruvian autho r i t i e s were c l ever in re schedu l i ng only one year o f ma tu r i t i e s i n s tead o f t h e two year s s ought b y many other count r ie s : The marg ins and commi s s ions invariably charged by the bank s on r e s chedul e d 1 9 8 2 - 8 3 debt in Latin Amer i c a were equ ival ent to th e high e s t ever impo sed on a commerc ia l tran saction 4 7 ; thu s there wa s very l i tt l e chanc e of the c o s t r i s ing in 1 9 8 4 and a good probab i l ity tha t it wou l d
421 fall . I ndeed , con s terna t i on in inf luen t i a l c i r c l e s of the North and S outh about th e exc e s s ive c o s t o f the 1 9 8 2 - 8 3 re schedul ings in Latin Ame r i c a induc ed a wi l l ing ne s s on the part of the bank s to l ower the c o s t o f re schedul ing - r e f inance exerc i s e s in 1 9 8 4 , an event that , a s ment ioned earl ier , P eru i t s e l f apparently i s tak ing I t a l s o i s intere s t ing to note in c l o s ing advantage of . that the s o f tened terms in 1 9 8 4 have occurred at a t ime when mo st of the count r i e s bene f i ted are deeper in c r i s i s and many have accumu l a ted sub stant i a l a rrear s ; thi s i s good emp i r i c a l evidenc e o f the rent s c aptured b y the bank s in the f i r s t round o f r e s chedul ing s in Peru and Latin Ame r i c a more general ly . NOTES The views expre s sed in th i s chapter are tho se o f the authors and not nec e s s a r i l y tho s e o f ECLA . 1. See Devl in ( 1 9 8 3 b ) ; and F f rench -Dav i s ( 1 9 8 3 ) . 2. S e e F it z gerald ( 1 9 7 9 , chap . 7 ) ; and Thorp and Bert ram ( 1 9 7 8 , chap . 1 4 ) . 3. For a mo s t intere s t ing " in s ider ' s " account o f economi c pol i cy o f t h e B e l aunde admi n i s t ration , see Kuc zynsk i ( 1 9 7 7 ) . A l so see D ev l i n ( 1 9 8 0 ) . 4 . Howeve r , autho r i t i e s rema ined wi th in the l imi t s o f the tradit iona l l iberal stat e , re s t r i c t ing activities to infras truc ture and the l ik e , leaving commerc i a l l y produ c t ive a c t ivit i e s t o t h e private sector . 5 . C a l c u l ated on the ba s i s of f i scal data in Kuc zynsk i ( 1 9 7 7 ) , de f l ated by the consumer pri ce index . 6. I n total there were only twenty- seven commerc i a l bank s l en d i ng t o Peru . The mo s t important med ium- term lenders were Manufacturers Hanover T ru s t , Bankers Tru s t , Bank of Amer ica , Cha s e Manhattan , C it ibank , and Cont inental I l l ino i s , i n s t i tution s that provided 72 percent of a l l med ium- term loan s . 7. For the ana l y s i s o f economi c pol icy in th i s period s e e P into and A s s a e l ( 1 9 8 1 ) ; and S chydlowsky and Wicht ( 1 9 8 3 ) . 8. The r e su l t s o f the 1 9 6 9 - 1 9 7 1 s tabi l i z a t ion e f fort are reviewed in C abrera ( 1 9 7 8 ) . 9. The plan c a l l ed for a r i s e in the g l obal inve s tment coe f f i c ient from 13 percent in 1 9 7 0 to 2 1 percent by 1 9 7 5 ; the partic ipation o f the pub l i c sector in tota l inve s tment wa s to rise f rom 3 6 percent to 5 8 percent over the s ame per iod . 1 0 . A deta iled ana l y s i s o f Peruvian mi l i tary expend itu r e s i s to be found in Encinas d e l P ando ( 1 9 8 3 ) . 11 . The negotiations were initi ated in mid- 1 9 7 3 by a delegation headed by Jame s Greene , a former vice-pres ident of Manufacturers Hanover T ru s t . The end result wa s a US $ 1 5 0 mi l l ion payment f rom the Peruvian government to i t s u . S . counterpart to be d i s tributed by th e latter a s
422 i t saw f i t among the a f f e c ted enterpr i s e s . Much o f the payment wa s f inanced by a U S $ 7 6 mi l l ion synd icated loan- on terms very f avorab l e to P eru--organ i z ed by Morgan Gua ranty T ru s t . 12 . See F i t zgerald ( 1 9 7 6 , 8 9 ) . 13 . S ee Enc inas del Pando ( 1 9 8 3 , 8 5 ) . 14 . S e e Thorp and B e rt ram ( 1 9 7 8 , chap . 1 1 ) . 15 . S e e S ta l l ing s ( 1 9 8 3 ) . 16 . S e e S t a l l ing s ( 1 9 7 9 ) . 1 7 . The ent i re plan i s repub l i shed in Devl in ( 1 9 8 0 , annex 5 ) . 1 8 . The deta i l s on the d i s pu t e s are found in D evl in ( 19 8 0 , 1 71-172 ) . 1 9 . Banco Centra l de R e s e rva del P eru ( 1 9 8 1 , 1 1 ) . 20 . S ee S i lva Ruete ( 1 9 8 1 ) . 2 1 . Banco Centra l de Re serva del P e ru ( 1 9 8 1 , 1 1 ) . 2 2 . Banco Centra l de Re serva del P e ru ( 1 9 8 4 ) . 23 . S ee D a l y ( 1 9 8 3 , chap . 4 ) . 2 4 . Total output f rom a l l sour c e s in 1 9 7 9 wa s 1 9 0 , 0 0 0 barre l s a day , and local consumpt ion wa s 1 3 0 , 0 0 0 barre l s a day . S e e Ponton i ( 1 9 8 1 , 2 1 ) . 25 . S e e Wor l d Bank ( 3 d and 4 th quarters 1 9 7 9 ) . I nterestingly , there i s evidence once again o f a " P eruv i an connec tion" in the renewed intere s t of the bank s . One o f the earl ier loan s to P eru c ame f rom L IBRA B ank whe re a forme r pub l ic servant h e l d a h igh execu t ive po s t . Howeve r , P e ru ' s good reception apparently wa s no t uni form : Ugarteche ( 1 9 8 3 ) argu e s tha t a l though U . S . and Canadian bank s were qu ite d i spo s ed to l end to P e ru , European and Japan e s e ins t i tutions were relat ively more r e s t r i c t ive . 26 . See B anco Centra l de Re serva del P eru ( 1 9 8 1 ) and Banco Central de Re serva del Peru , Memo r ia , 1 9 8 2 . 27 . S e e Ec onomic C ommi s s ion for Latin Ame ri ca , Economic Survey for Latin Ame r i c a , 1 9 8 2 , tabl e 4 2 . 2 8 . A coe f f i c ient o f 2 0 percent i s cons idered a s ign o f troub l e by banker s . 29 . S e e Banco Central de Re s e rva del P eru , Memo r i a , 1 9 8 2 ; and De l a P i edra ( 1 9 8 3 ) . See E c onomic Commi s s ion for Latin Ame r i c a , 30. Economic Survey for Latin Ame r i c a , 1 9 8 2 . S e e Banco C entra l de Re s erva del P e ru , Re sena 31. Econ6mic a , March 1 9 8 2 . I n f lation in 1 9 8 0 - 1 9 8 2 wa s rough ly 7 0 per c ent 32. annua l ly on a Decembe r to December ba s i s ; on the s ame ba s i s the exchange rate wa s ad j u s ted 3 7 percent in 1 9 8 0 , S e e Banco 4 8 percent in 1 9 8 1 , and 9 5 perc ent in 1 9 8 2 . Central de Res erva del P e ru , Nota S emanal , no . 3 3 , 1 9 8 3 ; and E conomic C ommi s s ion for Latin Ame r i c a , E conomic Survey for Lat in Ame r ic a , 1 9 8 2 . 3 3 . At the same t ime , however , the do l l a r share of th e money supply grew by 31 percen t , speeding up the so c a l l ed do l l a r i z a t ion proc e s s of the economy . Henc e , the partic ipation o f s o l e s in the dome s t i c money supp ly
423 d ipped f rom 7 2 percent o f the total a t the end o f 1 9 8 1 See Banco C entra l to only 6 5 percent a t the end o f 1 9 8 2 . de Re se rva del P eru , Nota S emana l , no . 3 3 , 1 9 8 3 . 34 . I n June 1 9 8 3 P e ru s ig ned an SDR 7 3 5 mi l l ion Extended Fund F a c i l i ty c redit and a c ompensatory For data on P eru f i nanc ing agreement for SDR2 2 5 m i l l ion . and oth e r La t i n American countr ie s , see E conomic C ommi s s ion for Latin America , E conomic Survey for Lat in Amer ica , 1 9 8 2 , tab l e 4 6 ; and Ground ( 1 9 8 4 ) . 35. S e e Chapter 4 by I g l e s ia s in th i s book . 36 . S e e the Andean Report , Apr i l 1 9 8 3 , p . 5 7 . 37. S e e Chapter 4 by I g l e s i a s in th i s book . 3 8 . Accord ing to data furni shed by ECLA ' s D iv i s ion o f Stat i s t i c s and Quant i t a t ive Ana ly s i s , National Accoun t s S e c t ion . 39 . S e e P eru Economic o , F eb ruary 1 9 8 4 . 4 0 . A mor e e labora te analy s i s o f the f o l l owing po ints can b e f ound in Dev l in ( 1 9 8 3 a ) . 4 1 . E st imate s have p l a c ed th i s a t s ixty new bank s per yea r . See Bank for I nternat iona l S e t t l ement s , P r e s s Review , November 2 , 1 9 8 3 , no . 2 1 4 , pp . 1 - 6 . 42 . I n terms of the l ack o f ser iousne s s in evaluation o f pro j ec t s , th i s wa s mo s t evident in the loans to the petrol eum secto r . It also shou l d be ment ioned that ref inance loans c an have an e f fect s imi lar to free d i s po s i t ion cred i t s ina smuch a s they free re sour c e s tha t otherwi s e wou ld be d e s tined for debt- s erv i c e payment s . 43 . I t shou l d b e noted tha t freely d i sposab l e re sourc e s a r e c l ea rl y a b l e s s ing f o r a country w i th adequa te ab s orpt ive c apac i ty and a cohe rent program of ad j u s tment , but in the ab sence of the s e two cond i t ions they can become a vice a s re sourc e s f ind the i r way into a c t i v i t i e s o f qu e s t i o na b l e me r i t . P re c i s e l y becau s e o f th i s latter prob l em , P eru ' s dependency on the fore ign bank s became extreme , and the regime pa id a high pol i t i c a l and s o c i a l c o s t when the bank s l o s t con f idenc e in the economic program and dec ided to re s t r i c t the i r expo sure in t h e country . 44 . Th i s i s e l aborated on in greater detail in Dev l in ( 1 9 8 3 c ) ; and Economic C ommi s s ion for Latin Americ a ( 1 9 8 4 ) . 4 5 . The d i f f erence between a forced ref inanc ing and a re schedu l ing is only a c o smet i c one . 46. Peru a l s o shou l d attempt to u s e i t s ba rga in ing power to ach i eve a 9 0 percent r e f i nanc ing of intere s t payment s . 4 7 . For information on the terms and condit ions of the f ir s t and second round o f re schedu l ing , s e e Economi c Commi s s ion for Latin America ( 1 9 8 4 ) . -----
4 24 B IBLIOGRAPHY Ame rican Expre s s Bank . Amex Review . London . Monthl y publ icat ion . The Andean Report . L ima . Month ly pub l icat ion . Banco C entral de Re s erva del P e ru . Nota S emanal . L ima . Week ly publ ication . Memo r i a . L ima . Annual pub l i c a t ion . Res efia Economica . L ima . Qua rterly publ i c a tion . 1981 . D e s a rrollo de l a Deuda Externa P e ruana , 1968-19 79 . Re search Document no . 1 . L ima . 1984 . El P roceso de Renegoc iac ion de la Deuda Externa P eruana : 1 9 7 8 - 1 9 8 3 . L ima . Cabrera , .. C e s a r Humberto . 1978 . " Pe ru : La C r i s i s y l a Serie Mater ia l e s de P o l itica d e E s tab i l i z a c i6n . " Traba j o no . 1 7 . L ima . 1983 . The P o l i t i c a l Economy o f Deva lua Da l y , Jorg e . t ion : The Case S tudy o f P eru , 1 9 7 5 - 1 9 7 8 . Bou l der , Colo . De l a p iedra , Enrique . 1983 . " Peru : Debt and C r i s i s , 1 9 7 7- 1 9 8 3 . " Santiago , United Nations ECLA , E conomi c Deve lopment D ivi s ion . Mimeo . Devl in , Robert . 1 9 78 . " External F inance and Commerc i a l Bank s : The i r Ro l e in Latin America ' s Capac i ty to Impo rt B e tween 1 9 5 1 and 1 9 7 5 . " CEPAL Rev iew , no . 5 ( S antiago ) . F ir s t seme s ter . 1980. Lo s Banco s Transnac iona l e s y el F inanc iamiento Externo de America Latina : La Ex er ienc i a del P e rd , 1 9 6 5- 1 9 7 6 . Santiago . 1 83a . " Banca P r ivada , Deuda y Capac idad Negoc iadora de la P e r i f eria : Teoria y Prictica . " Nota s Tecnica s , no . 6 0 . Sant iago , November . 1983b. " La Banca P r ivada I n terna c ional y e l Endeudami ento de Ame r i c a Latina . " Comerc io Exterior , vo l . 3 3 , no . 7 ( Mex ico ) . Ju l y , pp . 6 4 1 - 6 4 3 . 1983c . " Renego t i a t ion o f Latin America ' s D eb t : An Ana l y s i s of th e Monopo l y P ower of P rivate Bank s . " CEPAL Review , no . 2 0 ( S antiago ) . Augu s t . Devl in , Robert , and Michael Mo rtimore . 1 9 8 3 . L o s Banco s Transnac iona l e s , el E stado , y el Endeudamiento en B o l ivia . E s tudios e I n f o rme s no . 2 6 . S an tiago . Economic Survey E conomi c Commi s s ion for Latin Amer ica . Sant iago . Annual pub l i cation . for La tin Ame r i c a . Po l ic ie s on Ad j u s tment and Ren ego t i a t ion of 1984 . Santiago . E /CEPAL / SES . 2 0 / G . 1 7 . the External Deb t . " The Ro l e of Mil itary 1983 . Enc ina s del Pando , Jo s e . Expenditure in the Development P roc e s s : P e ru , a C a s e S tudy , 1 9 5 0 - 1 9 8 0 . " Ibero-Amer icana , Nordic Journa l o f Latin Amer ican S tudi e s , vo l . 1 2 , no s . 1-2 . F f rench -Dav i s , Ricardo . 1983 . " E l P rob l ema de la D euda Externa en Ame r i c a Lat ina : Tendenc i a s y P e r spec t iva s I nt egracion L atinoamer i c ana , no . 8 3 . en 1 9 8 3 . " S eptember .
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425 F it zg e ra l d , E . V . K . 19 76 . The State and Economic Peru S ince 1 9 6 8 . C amb r idg e . Development : 1979 . The P o l i t i c a l E c onomy of P eru 1 9 5 6 - 1 9 7 8 : E conomic D evel opment and the Res tructur ing of C apita l . Cambridg e . Ground , Richard Lynn . 1984 . " Lo s Programa s Ortodoxos de A j u ste en Amer i c a Lat ina : Un Examen y una C r i t ic a de l a s p o l l t i c a s del Fondo Monetario I nternac iona l . " Santiago . United Nation s ECLA , E conomic Deve l opment D ivi s ion . Mimeo . I g l e s ia s , Enriqu e . 1983 . " Re f l ec t ions on th e La t in American Economy in 1 8 9 2 . " CEPAL Review , no . 1 9 , Apr i l . " External D eb t P robl ems of Latin Ame r i c a , " Chapter 4 in th i s book . I nt er-American Development Bank . 1982 . External Debt o f th e Latin Ame r ican C ountrie s . Wa sh ing ton , D . C . 1983 . Recent Mul t i l ateral I nterna tiona l Monetary Fund . Debt Reschedu l in g s with O f f ic ia l a n d B ank C reditor s . Occa s ional Paper no . 2 5 . Wa sh ing ton , D . C . Kuc zynsk i , P edro- Pab l o . 1 9 7 7 . P eruvian D emo c racy Under Economic S t re s s . P r inc e ton , N . J . P e ru Econ6mico . L ima . Monthly pub l i c ation . 198 1 . Peru 1 9 6 8 - 1 9 7 8 : P into , Anibal , and Hector A s sa e l . La p o l i tica E conomica en un P ro c e so de Camb io G l obal . E s tudio s e I n f o rme s no . 2 . Santiago . Ponton i , Alberto . 1 9 8 1 . Transnac iona l e s y P e troleo en e l Peru . L ima . Schydlowsky , Dan i e l , and Juan Wicht . 1983 . " The Anatomy of Economic F a ilure . " I n The Peruv ian Expe riment Recons idered , edited by Cynth i a McC l intock and Abraham F . Lowenthal . P r inc eton , N . J . ( Ab r i dged f rom t h e S pa n i sh v e r s ion Ana tom l a d e u n F r a c a s o Economico : P e ru 1 9 6 8 - 1 9 7 8 . L ima , 1 9 7 9 . ) S i lva Ruete , Javier . 1981 . Yo A suml e l Act ivo y e l L ima . P a s ivo de l a Revoluc ion . S ta l l ing s , Barbara . 1 9 79 . " P e ru and th e U . S . Bank s : The P r ivati zat ion of F inanc ial Re l a t ions . " In S t a t e and Capita l i sm in U . S . -Latin American Rela S tan ford , C a l i f . t i on s , edited by Richard Fagen . " I nternat iona l Capita l i sm and th e P eruv ian 1983 . M i l itary Government . " I n The P e ruvian Exper iment Recon s idered , edited by Cynth i a McC l intock and Abraham F . Lowenthal . P rinc eton , N . J . Thorp , Ro semary , and Geo f f rey Bertram . 1 9 78 . Peru 189 0-19 7 7 : Growth and Pol icy in an Open Economy . New York . Ugarteche , O s ca r . 1 9 8 0b . La Banca Transnac iona l , l a L ima . Deuda Exte rna , y el E s tado : P erU 1 9 6 8 - 1 9 7 8 . 1 9 8 0a . Teoria y Practica de l a Deuda Externa en el P eru . L ima . 1983 . " Concentrac ion del C redito y F rag i l idad F in a n c i era . " A c tua l i da d Economi c a . L ima . Augu s t .
4 26 wor l d Bank . Borrowing in Interna tional Capital Marke t s . Wa sh ington , D . C . P e r iodic publ ication .
15
The Role of External Debt Problems i n Central America Jorge Gonzalez del Valle
INTRODUCTION The f ive Central American countries ( Co sta Rica , E l S a lvador , Guatema l a , Hondura s , and N icaragua ) have trad i t iona l ly been rather cautious and con s e rvat ive as far a s fore ign borrowing is concerned . T h i s is probab ly a r e s u l t o f the long - l a s t ing unfavorab l e experienc e s ari s ing f rom t h e f a i lure t o service external debt s arranged in the f i r s t three decades of th i s century . S ome o f tho s e count r i e s ( Guatema l a and E l S a lvador ) had to pay dearly for the re f i nanc ing of such debt s , and N icaragua actua l l y s u f f e red foreign mi l i tary intervent ion prompted by the exc u s e o f f i nanc i a l defau l t . Another important reason for the l imited rel iance of the Central Ameri can count r i e s on external f inanc ing appears to be a genera l ly cons ervat ive a t t i tude of governmen t s and central bank s a s regards f i s c a l po l icy , foreign- exchange management , and dome s t i c c r e d i t regula tion . I t i s we l l known that in the Latin Ameri can context the Central Ame rican countrie s have for a l ong t ime been able to ma intain stable exchange rate s , po s i t ive net international r e s e rve s , and l ow rate s o f i n f l a t ion . Thu s capital format ion has been f inanced prima r i ly with dome s t i c saving s and whatever long- term foreign inve s tment i s attracted by economic growth and s tabi l i ty in the region . S t i l l another factor that exp l a i n s the l imited ro l e o f external debt in Central America ' s economi c per formance i s the s t rong inf luence o f o f f i c ia l deve lopment f inanc i ng based on rather l iberal terms in the l a s t twenty year s . I t may be rec a l led that t h e Central American integration program , which began in 1 9 6 1 , wa s particularly attract ive to the nove l conc e s s iona 1 l end ing of the A l l iance for P rogre s s agenc i e s and the s o c i a l progre s s f u n d o f t h e I nter-Ame r i c an Deve l opment Bank . Moreover , the Central Ame r i c an countr i e s in 1 9 6 1 e s tab l i shed the i r own regional development bank ( the C entra l American Bank for E conomic I ntegration) with the 427
4 28 spec i f i c purpo s e of mobi l i z ing long- term , low- intere s t foreign borrowing t o f inance both pub l i c and private priority pro j e c t s . I n fact i t i s only in rec ent years that the externa l debt burden and ref inanc ing have become important in Central ��er i c a ' s economic po l i cy . Even so , except in the c a s e of Costa Rica , such prob l ems have not exerted a dec i s ive i n f luence on the d i r e c t ion o f the ad j us tment po l i c i e s adopted by a l l count r i e s to minimi z e the adver s e e f f e c t s o f t h e economic rece s s ion . T h i s i s probably due to the relatively succ e s s fu l combination o f exchange contro l s , trade r e s t r i c t i on s , and reserve ut i l i z ation in the context o f a depre s s ed economic performance that has d i s couraged new inve s tment and reduced import demand . I n short , the externa l dependence of th e Central American economy i s more a prob l em o f international markets for primary goods than a probl em o f foreign f inanc ing for capital format ion . FORE I GN DEBT STRUCTURE AND TRENDS It was e s t imated that by the end o f 1 9 8 3 the overal l external debt of the f ive Central American count r i e s wou l d amount to some US $ l O b i l l ion , only about 3 percent o f the Latin Ame r i c an total . Thi s i s s l ightly h igher than the 2 . 5 percent that the f ive countr i e s ' combined GDP repre sented with in L a t i n Ame r i c a in 1 9 8 1 and the refore c l o s e l y corre spond s to the i r economic importance in the subcontinent . On the other hand , there are s i gni f i c ant d i f ferences as compared with other Latin American coun t r i e s regarding the pattern o f debt accumu l a t ion , the sources of external f inanc ing , average c o s t burden , and apparent abi l ity to pay . The Trend of D ebt Accumu l a t ion For the Central American region a s a who l e , foreign indebtedne s s doubled between 1 9 8 0 and 1 9 8 3 , r e f l e c t ing a marked and progre s s ive deter iorat ion of the externa l secto r a s a re s u l t o f the wor l d economi c rece s s ion . It mu s t b e rec a l led that i n spite o f important achi evements in the indu s t r i a l i z at ion proc e s s du ring the last ten to f i fteen year s , the f ive count r i e s s t i l l depend heav i l y ( pe rhaps u p to 7 0 percent ) o n t h e exportation of a f ew primary produ c t s that are sub j ec t to pronounced rec e s s ion induced short f a l l s in international markets , such as c o f f e e , banana s , cotton , sugar , and f r e sh meat . The pace o f debt ac cumul ation wa s r e l a t ively more a c c e l e rated in Guatema l a , E l S a lvado r , and Hondura s , who s e aggregate external debt ac counted for l e s s than 3 7 percent o f the region ' s tota l in 1 9 7 7 but increased to more than 5 0 percent in 1 9 8 3 . Moreover , the average
429 ratio o f externa l debt to GOP o f the three countr i e s wa s 3 1 percent at the end o f 1 9 8 3 , a s compared with only 1 2 percent i n 1 9 7 7 . O n the other hand , the external debt o f both Costa Rica and N i caragua incre a s ed in a rather norma l f a shion dur i ng the s ix-year period ( see Tab l e 1 5 . 1 ) . Table 1 5 . 1 Central America : ( mi l l ions of u . s . do l l ars >
b Costa Ric a E l Sa lvador Guatema la Honduras b b Nic aragua Total
A s percent of GDP
External Debt Outstanding
1977
1979
1981
1983
1 , 160 360 270
1 , 750
2 , 240
2 , 6 40
610 5 90
860 1 , 30 0
590 870
880 1 , 1 10
3 , 250 21 . 6
4 , 940 27 . 4
1 , 330 1 , 980 8 , 710 41 . 5
1 , 400 1 , 960 1 , 670 2 , 38 0
a
10 , 050 43. 7
a Estimated b
Long- term debt only
Source :
Wor ld Bank and International Monetary Fund .
To i l lu strate the s evere impact of the wor l d rece s s ion on t h e externa l po s i t ion o f t h e Centra l American count r i e s it may be appropriate to point out a few key macroeconomic indicator s . F i r s t , wherea s the annual growth of the reg ion ' s real GOP averaged 2 . 9 per c ent in the per iod 1 9 7 7 - 1 9 7 9 , the average annual short fall reached the depre s s ion l evel o f - 7 . 9 percent in the per iod 1 9 8 1- 1 9 8 3 . S econd , net aggregate internationa l a s s e t s ( in u . S . dol lars ) f e l l f rom 1 , 0 9 0 mi l l ion in 1 9 7 8 to - 5 7 0 mi l l ion i n 1 9 8 1 and further to - 1 , 0 4 0 mi l l ion in 198 3 . Th ird , the reg ion ' s d e f i c i t on current account increased f rom 2 8 percent o f exports in 1 9 7 8 to 49 per cent in 1 9 8 1 and then f e l l to 3 6 percent in 1 9 8 3 only because impo rts we re reduced by 18 percent in the two year period . I t i s evident therefore then the accumu l a t ion of extern a l debt in Central American has been qu ite abnorma l s ince 1 9 7 9 and i s d i rectly r e lated to the reg ion ' s overa l l economic deterioration . Th i s in turn wa s prec ipitated by the world rece s s ion , but there i s l it t l e doubt that t h e pol i t i c a l event s in both N i caragua and E l S a lvador a l s o p l ayed an important ro l e . In Nicaragua , for instanc e , rea l GOP f e l l by 2 6 percent in 1 9 7 9 , the year in wh ich a viol ent change i n government took place ; in El S a lvador real GOP f e l l by 1 9 percent in 1 9 7 9 and 1 9 8 0 a s the c iv i l war took an initial , de s truc t ive impu l s e .
430 The Matu r i ty and Interest-Rate Terms The predominant rel iance on borrowing f rom inter national f i na n c i a l i n s t i tutions h a s helped the Central American countr i e s to avo id the c omp l icated a ccumu l ation o f service payments a t d i f f i c u l t t imes that many Latin American count r i e s have faced in the last two year s . Borrowing f rom such i n s t itutions i s norma l ly l inked to the f inancing o f long- term deve l opment pro j e c t s and to intere s t charges somewhat l ower than tho s e of th e f inanc i a l mark e t s . I n connec t ion with the matu r i ty pro f i l e , the average long- term external debt to o f f i c i a l creditors inc rea sed up to 70 percent o f th e total debt out s tanding by the end of 1 9 8 3 f rom about 54 percent in 1 9 8 1 . This improve ment wa s particu l a r l y marked in El Salvador , Honduras , and N icaragu a , who s e b i lateral debt to foreign govern ments a lmo s t trebled a f t e r 1 9 8 0 . On the other hand , Guatema l a sub s tant i a l ly inc reased i t s borrowing f rom private creditor s , wh ich wa s vi rtua l l y nonex i s tent in 1 9 8 0 ( s ee Tab l e 1 5 . 2 ) . Table 1 5 . 2 Central Ameri ca : Long-Term External Debt to O f f i c i a l Creditors ( percent o f total outstanding )
Costa Rica El Sa lvador Guatema l a Honduras Nic aragua Average a
1977
1979
1981
1983
40 . 8 80. 7 96 . 3 76 . 9 51 . 8 60 . 1
40 . 2 76 . 5 99 . 5 76 . 3 . 62 . 3 62 . 1
37 . 6 88 . 4 66 . 3 76 . 4 61 . 2 53 . 9
45 . 1 90 . 2 52 . 0 81 . 9 75 . 8 70 . 0
a
Es timated
Source :
Wor ld Bank and I nternational Monetary Fund .
The ro l e o f b i lateral externa l debt h a s probabl y b e e n enhanced in E l Sa lvador a n d N ic aragua a s a r e su l t o f the spec i a l a i d granted tho s e count r i e s b y d i f f e rent government s to f inance economic recon s tru c t ion a s soc iated with the internal mil itary a c t ivity . I n N i c aragua externa l f inanc i ng f rom pr ivate source s vi rtua l l y c ea s ed in 1 9 8 0 , shortly a f ter the revolutionary government took over , and b i l ateral borrowing bec ame the ma in factor in the ex ternal debt s truc ture . I n the c a s e of E l Salvador a s imi lar trend in debt a ccumu l a tion began in 1 9 8 1 , so that b i l a teral borrowing n ow represents 41 percent o f the total debt outs tanding , a s compared with 2 4 percent in 1 9 8 0 . As far a s th e c o s t o f external debt i s concerned , the Centra l American count r i e s have been unab l e to avo id th e impact o f h igh international intere s t rate s dur ing
431 the wor l d rec e s s ion . O n the average , however , the ratio o f payments abroad on ac count o f int e r e s t and other charge s to total debt outs tanding ha s been moderate by Latin Ame rican s tandard s . Th i s appear s to be prima r i l y du e to t h e sub s tantial increa s e o f l ow- intere s t b i l ateral loans received by E.l S a l vador b e tween 1 9 8 1 and 1 9 8 3 , as we l l a s to the doub l ing o f Gua tema l a ' s debt to inter nat iona l f i na n c i a l i n s t itut ion s in th e same period , in c luding the use o f I MF c redit for th e f i r s t t ime in many years ( see T ab l e 1 5 . 3 ) . Tab l e 1 5 . 3 Centra l Ameri c a : Debt a ( percent per annum)
Costa Rica E l Salvador Guatema la Honduras Nicaragua Average a
b
Apparent Overal l Cost of External b
1977
1979
1981
1983
5.9 8.8 11. 8 7.1 5.7 6.9
8.0 11 . 8 7.8 8. 2 5.6 8.0
c 13 . 7 d 7.4 8.4 9.5 6.1 7.3
c 20 . 6 d 4.5 6.6 10 . 7 10 . 8 10 . 8
Investment income payments abroad ( except on direct foreign inves tment ) as percent of total external debt outs tanding at the end of year Estimated
c
probably overs tated because of interes t payments on short-term debt for which no data are avai l able d Main1y b i l ateral o f f i c i a l credits on concess iona1 terms Sourc e :
Internationa l Monetary Fund .
The exceptiona l c a s e of abnorma l inc rea s e s in external debt costs in Costa Rica since 1 9 8 0 requ i re s some expl anation . I n the f i r s t place , C o s t a Rica is the on ly country in the region who s e rel ianc e on p r ivate international f inanc ing has exceeded 5 0 percent o f tota l ' debt outs tanding , wh ich means a sub stant ial vul nerabi l ity v i s - a. - v i s the evolut ion o f market intere s t ra tes . In the second plac e , the ratio o f externa l - debt intere s t payments t o debt out standing i s probably ove r s tated in the c a s e o f Costa Rica becau s e o f the impac t of intere s t charg e s on an undetermined ( but perhap s con s ider ab l e ) amount o f direct pr ivate foreign deb t . F ina l l y , there are indications that a s a resul t of th e complex combination o f exchange- rate devaluat ion and exchange contro l s adopted in 1 9 8 1 , payments abroad on account of external debt ou t standing include unspec i f ied ref inanc ing and / o r default charge s .
432 The Repayment C apa c ity P o s i t ion In the absence of c omprehens ive ly rel i ab l e data on the repayment schedu l e s of the Central Ame r i c an externa l deb t , e s t imat e s on the evolution o f the i r ab i l ity to pay F rom thi s s tandpoint are r e s t r i c ted to intere s t charge s . i t is evident tha t the reg ion ' s ratio of intere st pay ments to exports has deter iorated mark edly s ince 1 9 8 0 , but i s s t i l l f a r b e l ow the Latin Amer ican overa l l l eve l , wh ich i s e s t imated at 4 0 - 5 0 percent . There a re , however , s igni f icant d i s c repanc i e s among the f ive countries that corre spond to the varied cha racter i s t i c s o f each coun try ' s external debt pro f i l e ( see Tab l e 1 5 . 4 ) . Tab le 1 5 . 4
Central America : Apparent External Debt Burden on Intere s t Ac count ( percent of merchandise exports )
Costa Rica E 1 Sa lvador Guatemal a Honduras Nicaragua Average a
1977
1 97 9
1981
1983
8.2 3. 3 2.8 7.9 7.8 5.4
14 . 9 6.4 3.8 9. 5 11 . 5 8.6
29 . 9 8.1 9.1 16 . 2 24 . 2 16 . 5
50 . 2 8.3 11 . 0 22 . 9 34 . 0 25 . 3
a
Es timated
Source :
International Monetary Fund .
On the one hand , the intere st-payments burden of C o s ta Rica appear s to approach a critical point , the ma in rea son b e ing a threefold inc rea s e o f debt- r e l a ted pay men t s abroad from 1 9 8 0 to 1 9 8 3 , s ince the value of exports a c tu a l l y recorded an 8 percent growth in the per iod . Th i s in turn i s a r e s u l t o f the exc e s s ive r e l ianc e on both pub l i c and private borrowing f rom comme r c i a l banks and import suppl i e r s , wh ich re f l ec t s the abnorma l in crea s e s in market intere s t rate s . On the other hand , E l Salvador ' s intere s t �payments burden ha s stab i l i z ed a t a very favora b l e l o w l evel despite a c ru sh i ng 2 9 percent short f a l l in the value o f exports f rom 1 9 8 0 to 1 9 8 3 . The obvious reason beh i nd th i s performance i s the over whelming inc idence o f bo th in s t i tut ional and b i l ateral borrowing from o f f i c i a l c reditors with i n the debt s t ru c tur e . I n pa rtic u l a r , i t i s pre sumed tha t the f a s t growing importance of fore ign a id in the form o f bi latera l loans a l so c a r r i e s an intere st- sub s idy e l ement . The unfavorab l e trend o f the intere st- payments burden in Guatema l a , Hondura s , and N ic aragua is the r e s u l t of a comb inat ion o f incre a s ed debt charges and weak expor t pe r formance . Wherea s Guatema l a a n d Honduras su f f ered export va lue short f a l l s o f 24 percent and 8 percent f rom 1 9 8 0 to 1 9 8 3 re spec t ively N ic a ragua en j oyed an 1 1 percent
433 inc rea s e . Howeve r , i n the same period payments abroad rel a ted to th e ex ternal deb t increased by 79 percent in Hondura s , 39 percent in Guatema l a , and 13 percent in Nicaragua . DEBT -RESCHEDUL ING EFFORT S E f fort s by the Central American countries to restru c ture their ex ternal debt have been go ing on s ince 1 9 8 0 , when the adverse e f f e c t s o f both the world economi c rec e s s io n and the internal pol i t i c a l d i s turban c e s began to seriou s ly weaken the i r externa l secto r . Such e f forts , howeve r , have not f o l l owed any uniform pattern in the reg ion and are conduc ted i n s t ead in a pragma t i c f a sh ion by the nat ional autho r i t i e s according to the ir own needs and pos s ib i l i t i e s . The mo s t pub l ic i z e d c a s e s o f debt re s chedul ing and ref inanc ing are tho se o f N ic aragua in 1 9 8 0 - 8 1 and C o s ta Rica in 1 9 8 2 - 8 3 , but both Honduras and El S a l vador have a l so undertak en s imilar e f forts invo lv ing sma l l portions of the i r ex ternal debt to private c reditor s . The debt- re schedu l ing package of N ic a ragua i s notab l e on three a c c ount s : ( 1 ) it took p l a c e a t a t ime when the externa l - debt prob l em had no t reached any c r i t i c a l proport ions in t h e L a t i n Ame r i c an contex t ; ( 2 ) it involved a comprehe n s ive rev i s ion of matur ity , amorti z ation , and inter e s t-rate conditions of both pub l i c and pr ivate deb t ; and ( 3 ) i t wa s ba sed o n j o int negot i a t ions with the pr ivate c redi tor s with a view to s tanda rd i z ing the re schedu l ing terms . The negotiat ion s l a sted a lmo s t two year s , involved about 6 5 percent of N ic a ragua ' s externa l debt outstanding a t the e nd o f 1 9 7 9 , and were a rranged in four d i f f e rent s tages in accordance with the type o f borrowe r . I t i s no secret tha t N ic a ragua ' s suc c e s s ful externa l debt renegot iat ion wa s he lped by the priva te c reditor s ' rea l i z a t ion that the new revo l u tiona ry government had the option to s impl y d i s regard foreign obl igations for wh ich i t had no respon s ib i l i ty , particularly in v i ew o f the abundant accusat ions o f corrupt ion and immoral ity that be f e l l the former d i c tatorsh i p . Mor eover , the nationa l i z a t ion o f bank s , f inanc ial ent itie s , and l arge agricu l tural and indu s t r i a l holdings a fter the deva lua t ion c l early left the foreign c reditors in a weak bargain ing p o s i t ion . I n the end , the N i c a raguan government wa s able to ref inanc e a sub stant ial part o f th e overa l l debt to pr ivate internationa l lende r s on the ba s i s o f a ten-and more years' matu r i ty , average f ive-year grace period , and a 7 percent f ixed interes t rate . However , the direct obl igations of f o rmer pr ivate bank s and pr iva te enter pr i se s we re r e f inanced a t variable ma tur i t i e s and intere s t rate s , depending o n the original l oan cond i t ions and the
434 expec tation o f further f inanc ing from the interna t ional c reditors . As a ru l e , the new debt schedu l e s were l inked to the pro j ected payment capa c i ty of the government and the nationa l i z ed borrowe r s . C o s ta Rica ' s ex terna l -debt renego t i a t ion took p l a c e in a radica l l y d i f ferent envi ronment a s rega rds b o t h the interna tional f inanc i a l condi t ions and the ba rga in ing po s i t ion of the borrower . Among o ther thing s , by the t ime nego t i ations s tarted , C o s t a Rica had sub s tanti a l l y deva lued t h e nat ional currency , exhau sted interna t iona l re s erve s and short- term foreign credits , e s tab l i shed a comp l ex exchange- control sys tem , and incurred con s iderab l e debt- s erv ice arrear s . Mo reover , b e c a u s e o f t h e change in government , n ego tiations had to be del ayed until the second ha l f of 1 9 8 2 , prec i s e l y the period when inter na tional l ending wa s drying up , intere s t rates were r i s ing to record l eve l s , and fears o f a wo rld debt muddl e were spreading . Nego t i a t ion s we re a l so conduc ted by stages and on the ba s i s o f j o int ag reements wi th the c reditor s . The P a r i s C lub resch edu l ing wa s comp l eted in early 1 9 8 3 the po stponement o f and had the convent ion a l outcome : amo rt i z at ion payment s fal l ing d u e in t h e short run with out a fu l l r e s t ru c tur ing o f o f f ic ia l b i l ateral ob l iga tion s . N everth e l e s s , it repre s ented about 10 percent o f th e overa l l ex te rna l debt out s tanding at t h e end o f 1 9 8 2 . On the othe r hand , i t mu s t be noted tha t both of f ic i a l a n d pr ivate c reditor s in s i s ted that negot iations wer e l inked t o C o s ta Rica ' s performanc e under a s tandby arrang ement with the IMF , wh ich in turn woul d r e l e a s e f r e sh balance-of- payments f inanc ing . C o s t a Rica ' s nego t iations with private international bank s took longer , we re d i f f icu l t mo s t o f the t ime , and were not compl eted until the end of 1 9 8 3 . Re schedu l ing of external debt held by such bank s invo lved about 4 5 p e r c ent of the total debt ou t s t anding at the end of 1 9 8 2 and wa s i ntended to l ink service payment s to the pro j ec t ed capa c i ty to pay o f th e C o s t a Rica government in th e med ium term . Amort i z a t ion pa yments may be pos tponed by up to three years and invo lve some r e f inanc ing o f overdue inte r e s t paymen t s . However , the c o s t o f reschedu l ing is h igher than origina l l y expected due to the uniform app l i cat ion o f th e h igher mark e t inter e s t rate s , p l u s r e f i nanc ing f e e s a n d commi s s i ons . The debt- r e s ch edu l ing opera t ions of Hondura s , E l S a lvador , and Gua tema l a a r e rather ins ign i f icant by compa r i son with the previous two c a s e s . Honduras under took a l imited r e s chedul ing o f government-guaranteed deb t in 1 9 8 3 due to c e rtain spe c i f ic prob l ems of the o f f ic ia l f ina nce corpo ra t ion t h a t might a f fect adve r s e l y to government ' s f i s c a l po s it ion . ' Th i s ope ration wa s r e l a ted to a smal l group of pr ivate internat ional bank s and in no c a s e wou l d represent more than 13 percent of the total ex ternal debt outs tand i ng at the end o f 1 9 8 2 . The de ta i l s of th e agreement reached with the bank s have not
435 been pub l i c i zed . F ina l l y , neither in Guatema l a nor in E l S a l vador doe s the extern a l debt prob l em appear to have reached the point at wh ich an ove ra l l re schedul ing po l icy i s requ i red . The s t i l l mode s t importance o f externa l debt to priva te creditor s ( 5 percent in E l S a l vador , 8 percent in Guatema l a ) is the ma in rea son , and whenever there is a need to avo id an unf avorabl e concentrat ion o f service payment s the nationa l author i t i e s appa rently favor a c a s e by- c a s e approach ba sed on direct and inf ormal arrange ments with their creditor s . However , the pos s ib i l i ty o f re schedu l i ng po l i c ie s might become greater i f t h e ex ternal po s ition of both countr i e s doe s not improve in 1 9 8 4 . THE PROBLEM OF INTRAREGIONAL DEBT S ince 1 9 6 1 the Cen tra l Ame r i c an count r i e s have s e t t l ed a l l payments a r i s ing f rom intra regional trade through a c le a r ing hou s e . Unt i l 1 9 8 0 th i s mecha n i sm operated norma l l y , but a s soon a s g l obal balance-of payments d i f f icul t i e s began to appear debtor countrie s were unab l e to honor the i r obl igation s . In order to avo id an unmanageab l e a ccumu l a t ion o f such balanc e s , the f ive government s agreed to e s tabl i sh a new reg iona l f inanc ial en t i ty ( the C entral American Common Market Fund--CACMF ) spec i f i c a l l y des igned to ra i s e med ium- term fore ign loans that ref inance intraregional o f f ic ia l debt s . Unfortunately th e CACMF wa s una b l e to borrow more than US $ 5 0 mi l l ion in 1 9 8 1 , wh i ch proved quite insu f f ic ient a s ou t s tand i ng balanc e s continued to accumulate rapidly in 1 9 8 2 . As o f the end o f 1 9 8 3 unsettled intraregional deb t s amounted to some U S $ 3 0 0 mi l l ion , o f wh ich abou t 8 4 percent corre s ponded to N ica ragua ' s share of unpa id ob l igat ion s ( equ iva lent to about 1 0 percent of N icaragua ' s total external deb t ) . On the other hand , the agg regate c l a ims of C o sta Rica and Guatema l a accounted for 94 percent o f total intrareg iona l debt s ; abou t one - th i rd of such c l a ims h a s not been schedu l e d , and negot iations on po s s ib l e repayment prog rams are s t i l l go ing on ( see Tab l e 1 5 . 5 ) . G iven the pra c t i c a l impo s s ib i l ity of further foreign borrowing by the CACMF to ref inanc e out stand ing intra regional debt s , an agreement to re s chedu l e ex i s t ing ob l igations in accordanc e with th e pro j ec ted payments capac ity o f debtors wa s reached in January 1 9 8 4 by th e C en tral American Monetary Counc i l , which coord ina tes the c entra l bank po l ic i e s o f the f ive countr i e s . Th i s renegotiat ion involved some U 8 $ 2 3 5 mi l l ion , and the s tandard arrangement wa s based on a new s even-year ma turity inc l uding a two-year grace period . From a broader point of view , the Central Amer ican count r i e s a r e determined to react iva te intrareg iona l
436 Tab le l S . S End 1 9 8 3
Central America :
Intraregional Debt Posi tions ,
( mi l l ions of u . s . do l l ars ) Scheduled Debt
Costa Rica El Salvador Guatema l a Honduras Nicaragua Total Sourc e :
92. 6 -36 . 6 102 . 1 lS . 6 -217 . 1 -43 . 4
Uns cheduled Debt 63 . 8 -lO . S 23 . 4 2.1 -3S . 4 43 . 4
Total outstanding l S6 . 4 -47 . 1 12S . 5 17 . 7 -252 . S ( 2 99 . 6 )
Centra l American Monetary Counc i l .
trade and therefore to avo i d the inconven ience of deb t accumu l a t ion in the context o f the c l ear ing sy stem . With th i s ob j e c t ive in mind , a j o in t prog ram o f action tha t i n c l u d e s fore ign borrowing by t h e CACMF h a s b e e n agreed upon with the support o f the Inter-American D evel opment B ank . Such borrowing , howeve r , wou ld be l imited to the f inanc ing of a mode s t portion ( perha p s up to one- th ird ) of new u n s e t t l ed b a l anc e s within the c l ea ring sy stem . I t h a s b e e n under stood that both the c reditor a n d the debtor count r i e s woul d f inanc e th e rema inder in equal part s .
16
Where Do We Go from Here? Miguel S. Wionczek
The pro spect s o f a ma j o r [ debt ] default i s j u st l ik e a nuc l ea r war : No one wan t s to talk about wha t woul d happen i f the bomb went o f f . - -P h i l ip Wel l on s , H a rva rd Bu s ine s s School l THE OUTLOOK IN 1 9 7 7 The quote with wh ich thi s conclud ing chapter start s did not o r ig inate with j u st any H a rvard B u s ine s s S chool prof e s so r . I t c ome s f rom an academic expert on the LDC extern a l i ndebtedne s s who pub l i shed in 1 9 7 6 under the OECD o f f ic ia l auspices an almo s t s ix-hundred-page s - long study on borrowing by deve lop ing countr i e s on the Eurocurrency market in the mid- 1 9 7 0 s . 2 In contra s t , I p l ea d gui l ty to having organ i zed in Oc tober 1 9 7 7 , under the a u sp i ce s o f E l C o l eg io de Mex ico in Mex ico C ity , a c l o s ed international s eminar on LDC external debt and the wor l d economy , with partic ipa t ion of s ome th i rty expert s and pract i t ioners in the f ie l d of North- South f inanc i a l r e l a t io n s f rom a l l over the wor l d . Th e meeting wa s attended by peo p l e f rom internationa l agenc i e s ( Wo r l d Bank , OECD , OPEC , and UNCTAD ) and f rom central bank s of c red itor and borrowing countri e s , a s wel l a s by executives o f l a rge p r ivate bank s f rom both s ides o f the Atlantic a n d academic economi s t s f rom the United S ta te s , C an ada , Mex i co , B r a z i l , and Ch i l e , a l l partic ipa t ing in the ir individual capa c i ty . The f a c t tha t s ix year s later , i n 1 9 8 3 , one o f t h e part i c ipant s o f tha t s eminar occupied the po s t of a vice pres ident o f the Wor l d B ank , two were f inance mini sters , one a deputy fore ign min i s te r , and one a key adv i s e r at the C ommonwea l th S e c retariat wou l d sugg e s t that the gathering wa s not exactly a random soc i a l get- toge ther of a bunch of rad i c a l f r i ends with an amat eu r i sh knowl edg e of the sub j ec t . Careful reading i n the winter o f 1 9 8 3- 8 4 o f the f ina l report of the 1 9 7 7 s eminar wa s sort o f depre s s ing . Al though the correct and det a i l ed d i agno s i s o f where the 437
438 LOC s were inexorab ly heading in a not too d i s tant future and a set o f concrete propo s a l s for preventive action as wel l emerged f rom tha t meeting , prac tica l ly nothing happened dur ing the f o l l owing s ix years that might have s l owed down , or a l leviated a t l e a s t , the g e s tat ion of the ful l - f l edged c r i s i s o f g l obal proportions both in respect to the s tate o f the world economy and the LOC indebted ne s s . As I migh t b e accused o f b i a s , l e t two quotations f rom a report that emerged a t the meeting speak for themse lve s . The f i r s t dea l s with th e d iagno s i s o f the LOC debt s i tu a t ion : . the views s e emed to coinc ide in a number o f important point s inc lud ing : a) the LOC externa l debt prob l em mu s t b e hand l e d w i t h i n a la rger f ramework wh ich recogn i z e s global interdependenc e and cove r s ba l ance- o f payment s ad j u s tment s , LOC devel opmen t needs , o f f ic i a l deve lopme n t a s s i s tanc e , " s tag f l ation " in the LOC s , international trade and wor l d economic recovery ; b) f inding solutions t o the debt prob l em i s the j o int respon s ibi l ity o f the LOC borrower s and t h e O C l ende r s ; c) th e LOC ' s ex ternal indebtedn e s s i s only one face of the genera l prob l em o f ensur ing " ac c eptab l e " growth rates in th e LOC s ; d) up ti l l now , the probl em o f the debt and dec l in ing net f inanc ial f lows to the LOC s has been treated in a piecemea l and hap ha z ard ex-po s t way ; the LOC debt bu i l t u p in 1 9 7 4 - 1 9 7 6 c annot e) b e repeated- -not so much becau s e o f i t s aggregate s i z e but becau s e of i t s s tructure [ i tal ic s added ] ; f) l ink ing short- term stab i l i z ation and ad j u s t ment w i t h long - t e rm economic growth and deve l opment f inance would mak e it po s s ib l e to combine t h e genera l i z ed a n d t h e c a s e-by c a s e approach ; the combination o f the genera l i z ed and the g) c a se-by- c a s e approach mu s t tak e into cons ideration the d i f f erent s ituations of the poor and the midd l e - income LOC s ; the b a l ance-of -payment s ad j u s tment f ac i l i t i e s h) ava i l ab l e to t h e LOC s need t o b e s trengthened and expanded ; exc lu s ive empha s i s on short term f inance for ad j u s tmen t purpo s e s is not enough ; i n add i t ion to expanded ad j u stment f ac i l i t ie s , i) the poore s t LOC s need a continuou s increa s e in long- term of f i c i a l conc e s s ionary a s s i stanc e ;
439
j)
k)
1)
m)
the debt o f the midd l e - income LDC s might b e handl ed by increa sed o f f ic i a l l ending at non-conc e s s ionary terms and by internationa l pr ivate capital mark et s , but only i f ther e i s a speedy recovery in t h e wor l d economy ; i t wou ld b e much ea s ie r to so lve the midd le income LDC debt prob l em i f new mechan i sms were devised to recyc l e mor e OPEC surplu s e s into capital format ion , through - - inter a l ia- more OPEC inve s tments in midd l e - income LDC s ; even i f a d j u s tment f ac i l i t i e s were s t rengthened and devel opment f i nanc ing inc rea sed , the trade po l ic i e s of the deve loped countr i e s , pa rticu l a r l y on nontradi t iona l ( manu f a c tured ) LDC export s , wou l d have to be l iberal i z ed ; and a s at i s factory solut ion to the prob l em of LDC indebtednes s and deve l opment f inanc ing depends heav i l y upon the pace o f worl d economic recovery . 3
Reca l l ing the guide l ines e l aborated a l ready in 1 9 7 5 i n Geneva by the a d hoc UNCTAD Group o f Governmental Exper t s on D ebt P robl ems o f D evelop ing Count r i e s , even more app l icab l e to the 1 9 8 3 - 8 4 conditions than to tho s e preva i l ing in 1 9 7 7 , the second quote f rom the same report sugg e s t ed that : a)
D eb t re-org ani z a t ion shou l d tak e into a ccount the development pro spects o f the debtor coun try , to enab l e i t to continue debt s e rvic ing payments and r e s tore i t s c redi t-wo rth ine s s .
b)
R e - o r g an i z a t i o n
c)
d)
s h o u l d b e condu c t e d w i t h i n
the c u stomary mul t i lateral f ramework with the a im of conclud ing an agreement as speed ily a s pos s ib l e to avo id pro l onged unc erta inty regarding the ava i l ab i l ity o f fore ign exchange . The terms of debt re l i e f , such a s con s o l ida tion , repayment , gra ce periods and intere s t rate s , should t a k e i n t o ac count bo th the ant i c ipated long - term debt s ervic ing capa c i ty of the debtor c ountry and the legit imate intere s t s of the c r ed itor s . Debt re-organ i z ation arrangements shou l d provide for f l ex ib i l ity t o review t h e s i tua t ion at the end of the con sol ida tion period in the l ight o f unforeseen c i rcumstanc e s . They shou l d a l so provide for a c c e l e rated repayment s in an agreed upon manner i f the debtor ' s economic s i tuat ion improve s more rap idly than antic ipated . �
440
Moreover , the report s t r e s sed , again r e f l e c t ing consen su s , that the deve loped l ender countries mu s t keep in mind that the prob l em o f LOC indebtedne s s can be managed in the long run only if LOC s are a s sured a constant f l ow o f development f inanc e on terms and con d i t i on s that are in a c cordanc e with the goal of " ac c eptab l e " growth rate s and that take into account the i r repayment c apac ity . The LOC s ' repayment capac ity wil l depend not only on the s e terms and condition s but a l so on wor l d trade that , in turn , w i l l depend to a great extent upon the g rowth rate o f the advanced economi e s . Que l l e sage s s e- -Vo l t a i re ' s C andide wou l d have said in 1 9 8 3 - -que l l e s age s s e ! THE OUTLOOK IN 1 9 8 4 The abs o l ute l a ck . of such el ementary sage s s e among a l l actors o f the international indebtedn e s s game , wh i ch b rought mos t debtors countrie s , some creditor countr i e s , and the who l e fabric o f the internationa l f inanc ial sys tem to the brink o f di s a s ter by 1 9 8 2 - 8 3 , has been convinc ingly documented in th i s book by f i f teen expe r t s o f many nationa l i t i e s w i t h va r i e d expe r i enc e s a t g loba l , I n spite o f large d i f fer regiona l , and nat ional leve l s . enc e s between individua l contributors ' approache s , the content o f the volume mak e s even more depre s s ing reading than the resul t s o f the 1 9 7 7 Mex ico C ity exerc i s e , independent ly o f whe ther the pre sent au thors have a back ground in international f inanc ial agenc i e s , have been or are actu a l ly invo lved in central and private bank ing ac t iv i t i e s , o r are competent academi c s f rom the soc i a l s c i e nc e s . I f any sort o f con sensu s emerges f rom th i s book i t c a n perhaps be summari z ed in four point s . F i r s t , the pro spec t s for the wor l d economy and the LOC s o f gett ing out of the present me s s , which i s . more s e r iou s than i s genera l ly though t , a r e unc erta in . S econd , al though the debt- s e rvice burden of al l LOC s but the poor e s t one s continues to increase even in the f ew c a s e s o f " suc c e s s fu l " debt renego t i a t ion s , the inf l ow o f new net pub l i c and pr iva te capital re sour c e s t o t h e who l e deve loping worl d has prac t i c a l l y been brought to a s tand s t i l l , forc ing the LOC debtors into a reverse tran s f er o f their sav ings abroad to pay j u s t a part of the intere s t a c c rued on th e accumulated ex ternal deb t . Third , a l l the ma j or actors ( interna t ional agenc i e s ; nat iona l government s of the c reditors and the debtor countr i e s ; actu a l l ende r s a n d borrowe r s , whether pub l i c or private ; a n d pr ivat e f i nanc i a l intermed iarie s ) s h a r e re spon s i b i l i ty for th e debt c r i s i s . Fourth , a t internat iona l opera t iona l l evel s , a l l th e s e ma j or actor s cont inue bu s i ne s s a s usual under the mo s t optimi s t i c a s sumptions about the pro spect s for wo r l dwide economic recove ry , the sub s equent expans ion of
441 internat i ona l trade , and the orderly func tion ing o f the internat i ona l f i nanc ia l system in spite of the imp re s s ive growth o f c ompetent l iterature que s t ion ing convinc ing l y a l l the s e a s sumption s . Al though it i s n o t t h e purpo s e o f th i s conclud ing chapter t o treat with detai l the s e four key character i s t i c s of th� p re s ent s i tuation , some add i tional evidence support ing them may be in order . THE CON TINUING DEBT C R I S I S with 1 9 8 4 be ing a n e l e c t ion year i n the United S tate s , much h a s been made o f the recovery of the U . S . economy f o l lowing three yea r s o f Reaganomi c s . O f f ic ia l f oreca s t s made pub l ic at the beginn ing o f 1 9 8 4 put rea l GNP g rowth for the who l e year at c l o s e to 5 percent with price incre a s e s of only about 4 . 5 percent and a cons ider ab l e decl ine in unempl oyment . Along s ide a rather strong consen sus in U . S . f inanc ial c i r c l e s and among bu s ine s s economi s t s that th e admi n i s tration ' s economic performanc e targ e t s f o r 1 9 8 4 are atta inab l e , there i s , paradox i c a l l y , a s i z ab l e numbe r o f nonparti san observers who e xpre s s mo s t s e r i ou s doub t s about the duration o f the U . S . recent s trong recove ry beyond 1 9 8 4 . As a p r e s t ig i ous and widely read month ly , the Morgan Gua ranty Survey , put it in late 1 9 8 3 : Aga in s t the background of ma j or surpr i s e s in 1 9 8 3 , continued advance in the economy--wh i l e t h e mo s t l ik e l y expectation--cannot be taken for granted . One obvious source o f concern i s the f rag i l e debt cond i t i on o f developing coun t r i e s . Another is the po l ic y d r i f t in Wash ington on way s to narrow ma s s ive budget de f ic i t s . A further uncerta inty i s the st i l l unsettled state o f Federal Re serve p o l i cy . s Any careful and constant reader of U . S . f inancial j ou rna l s and mag a z in e s i n ea r l y 1 9 8 4 d i scovered that the minority concern abou t th e pos s i b i l ity of a new cyc l ic downturn o f the U . S . economy in 1 9 8 5 wa s inc rea s ing stead i l y I n a survey of the current ins tead o f d imi n i s h ing . thinking about the U . S . economic prospe c t s a very rel iab l e source noted tha t a g rowing mino rity of �na l y s t s b e l i eves that t h e optimi stic ma j or i ty consensus h a s no sol id and convinc ing base and " some are even pred ict ing a new rec e s s ion before the year is out . " S But regardl e s s of who wi l l prove to be r ight in the pres ent controve r sy abou t the du rat ion of the U . S . recovery , the OECD made i t c l ea r in late December 1 9 8 3 tha t even strong recove r i e s i n 1 9 8 4 i n the United States ( and Japa n ) wil l not b e suf f i c i ent to bring an equ iva l ent re surgenc e in West European countr i e s who s e economi e s , i n ma rked contra s t , wi l l g row very l i ttle i f a t a l l , one
442 more year and where unemp loyment wi l l cont inue to r i s e . The weak We s t European performanc e means tha t the re covery in the who l e nonsoc ial i s t indu s trial world wi l l rema in di sappoint ingl y s l ow . The OECD wa rned , a s i t h a s done regu l a r ly in p a s t f ew foreca s t s , t h a t the l a rge u . s . budget def i c i t s , tog ether wi th the h igh intere s t r a t e s a n d t h e s t rong do l l ar they cau s e , rema in a th reat to the economic recovery of th e United S ta t e s and to the upturn in the re s t of the OECD reg ion . 7 One may add , not for the purpo se o f spread ing more g loom but in the way of suppo rt ing evidenc e for th i s po int , that a number o f private res earch centers in Japan and the key Wes tern countr i e s relea s ed foreca s t s for 1 9 8 4 and beyond tha t are con s i derably more pe s s imi s t i c than even the OECD l a t e s t f igure s . I n Japan , the economic re search depa rtment of one of the larg e s t bank s forec a s t for t h e next th ree y e a r s ( 1 9 8 4 - 1 9 8 6 ) an average annual growth rate o f 2 . 8 percent in rea l terms a s aga inst the OECD ' s 4 percent . 8 The Nationa l I n s t i tute of S t at i s t i c s and E conomic S tudie s in P a r i s h a s predic ted that the French economy cou l d rema in s lugg i sh - - a t c l o s e to a z e ro growth rate- - for another f ive yea r s . 9 Moreover , reports from We s t Germany s t r e s sed that despite some po s i tive s i gna l s a pecul iar sense of frag i l ity hang s over th e recovery . Real intere s t rate s , pushed up by centra l bank s seek ing to stem capital out f low s to the United State s , rema ined uncomfortably h i gh , c r imp ing inve stment s . Export order s , despite the 1 9 8 3 autumn upswing , rema ined rough l y a t 1 9 8 2 ' s depr e s s ed l evel s . And tough wage negot iations we re approach ing , with the th reat of h igher produc t ion co s t s and reduced prof i t s . 1 o •
I n the face of a l l th i s evidence it tak e s hero i sm or wishful think ing to a s s ert that the recovery of Wes tern indu s t r i a l economi e s is in the cards for th e mid- 1 9 8 0 s , thu s becoming the eng ine o f growth for the LDC s through the expan s ion of international trade . Wha t mu s t be kept in mind is th at under the renegotiation arrangement s s igned in 1 9 8 2 and 1 9 8 3 and tho se ( th e ma j o rity) that are s t i l l pending , the LDC debt- r idden economi e s wi l l have to increa se by 1 9 8 5 - 1 9 8 6 the repayment not only of accumu l ated in tere s t charg e s but al so o f s i zable po rt ion s of the princ ipa l of the ir external deb t . Nobody seems to know how the s e amb i t ious targe t s tha t we re the base of a l l renegotiat ions arrangements in proc e s s through 1 9 8 4 wi l l be reached . In 1 9 8 2 , the " bad boy s " who were unab l e or unwi l l ing - - ac cording t o d i f ferent school s o f thought in the cred i tor countri e s - - to pay the i r ex terna l ob l igations on t ime were Latin Americans and a f ew soc i a l i s t economie s like P o land and Yugo s lavia . I n 1 9 8 3 the " debto r s c rowd
443 o n the b r ink " expanded t o al l lat itude s by the add i t ion to the l i s t , among the other s , o f the Ph i l ippines and potent i a l l y S outh Korea in A s i a ; N igeri a , Ivory Coa st , Morocco , and Sudan , without count ing the hope l e s s c a s e o f Z a i re , i n A f r i c a ; portuga l in Western Europe ; and I srae l , who s e external per capita deb t happen s to be the h ighe s t in the world . The l it t l e-known fact tha t France ' s externa l debt i s e s t imated a t about U S $ 5 0 b i l l ion sugge s t s that the l i st o f " bad boys " may grow even more i n the years to come . Ask ing h ims e l f in the f a l l of 1 9 8 3 how s e r i ou s wa s the internationa l debt c r i s i s , the ch i e f economi c commentator o f t h e New York T ime s s a id " Th e short an swer i s ' Ve ry ' . ,, 1 1 Th e chapt e r s in th i s b ook by such contr ibuto r s a s D rago s l av Avramovic , senior advi s e r t o the UNCTAD S e c retary General ; Albert F i sh l ow from th e Unive r s i ty o f C a l i fornia at B erkeley ; Enr ique I g l e s i a s E . , sec retary g eneral o f the UN Economic C ommi s s ion for L a t in Ame r i c a ; and Pedro-Pablo Kuc zynsk i , the former minis ter o f energy o f Peru and p re s ident o f F i r s t B o s ton Internationa l , together with the seven Latin American c a s e s tudi e s , provide a lmo s t exc e s s ive detai l ed factual evidenc e that the debt c r i s i s i s not only very ser iou s but very , very s e r ious indeed . S ince the c r i s i s doe s not l imi t i t s e l f on ly to Latin Americ a , even such conservat ive source s a s the Wa l l S treet Journal comp l a in abou t the fact that within l e s s than a year a f t e r the beginning o f the present debt c r i s i s in Augu s t 1 9 8 2 the c r i s i s a tmo sphere has faded and a rou t ine ha s set in . Bank s work out comp l icated plans to postpone debt repayment s and l e nd new •
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mon e y .
Count r i e s b o r row f rom th e
I nt e r na t i ona l
Monetary Fund , too , agree ing in return to change the ir economic po l ic ie s . I nternation a l bankers a s sure everyone that everyth ing i s under con trol The re sul t i s that a second debt c r i s i s , or " second wave " i s beg inning and i s l ik e l y t o become more pronounced soon . The s econd wave is s impl y d e f ined as what happen s whe n the i n i t i a l rescue package s f a l l apart . 1 2 .
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THE LAT IN AME RICAN SCENE Aga inst the vo i c e s that c l a im tha t in Latin Ame r i c a t h i n g s are gett ing s l owly under contro l , t h e l a t e s t devel opments sugge s t that t h e progre s s in t h e region presents not only a very comp l i cated and di f f i c u l t p i c ture but on the deb t - r e s chedu l ing f ront is ex treme l y l imi ted in spite of h igh economic and soc ial c o s t s . Argentina ' s external debt a t the beg inn ing o f 1 9 8 4 wa s o f f ic ia l ly e s t imated at US $ 4 3 . 6 b i l l ion a s c omp a r e d with U S $ 3 8 7 mi l l ion avai l ab l e i n foreign-exchange reserve s . Becau s e
444 o f the lack o f long overdue data on s ome debts contracted out s ide the country and the fact that about US $ l b i l l ion o f the private and s tate agenc i e s ' debt had not been properly reg i s te red with central -bank autho r i t ie s , i t i s quite probable that the Argentine total debt i s o f the order of US $ 4 5 b i l l ion rather than the 4 0 b i l l ion u s ed S ince Argentina ' s a s a ref erence f i gure throughout 1 9 8 3 . arrears in i t s externa l -debt repayments amount to c l o s e to US $ 3 b i l l ion , the new pre s ident o f Banco Centra l , Enrique Garcia Va zque z ( g iven th i s po s t by the A l f o n s i n government , t h e f i r s t c ivi l i an government s ince 1 9 7 6 ) , announced that Argentina wou l d not be able to renegotiate i t s foreign debt o r to pay intere s t on i t unt i l mid- 1 9 8 4 but wou l d s eek a new agreement with the IMF for an immediate loan o f U S $ 9 0 0 mi l l ion . The d e l ay o f rene gotiations is exp l a ined by the fact that the new govern ment needed t ime to determine wh ich borrowings by the I n the mean fo rmer mi l itary reg imes were l e g i t imate . t ime , the new economy mini ster , Bernardo Grin spun , held periodic t alks in Washington , D . C . , with the pres ident o f the Wor l d Bank , A . W . C l ausen ; the manag i ng directo r o f IMF , Jacque s de Laros s iere ; and high u . S . Trea sury o f f i c ia l s and told the u . S . commercial bankers in New York that Argent ina would need a cons iderab l e amount o f short-term trade credit to meet pre s s ing import requi re ments i f i t wa s expected to r a i s e foreign exchange to pay inter e s t on the outstand i ng external debt . Al though the international private bank ing community doe s not foresee Argentina ' s forma l dec l aration o f uni l a teral moratorium on debt payments , European bank s are pre sumably very wary of extending the country add i t ional short-term trade f i nance , and the d i s c u s s ions on thi s relatively minor but impo rtant point may l a s t quite a time . F o l l owing three and a h a l f months of travel ing the wo rld over to per suade private credi tor bank s to part i c i pate in B ra z i l ' s f inanc ing program f o r 1 9 8 4 , t h e coun try ' s min i s ter of pl anning , De l f im Netto ; mini ster o f f i nance , E rnane Galvea s ; and pres ident o f Banco Central do Bras i l , Al fon so C e l so P a s tore , at the end o f January 1 9 8 4 i n New York s i gned another four-part package agree ment with more than 5 5 0 commercial banks that inc luded the reschedu l ing of about US $ 5 b i l l ion of loans that mature in 1 9 8 4 , the ma intenance o f US $ 1 0 . 3 b i l l ion o f shortterm trade f i nanc ing , US $ 6 b i l l ion o f interbank credit l ine s , and a US $ 6 . 5 b i l l ion " j umbo- loan " o f " fresh money . " A U S $ 5 . 4 b i l l ion loan program f rom the IMF wa s expected to f o l low the agreement with private bank s . S i nce s ome 1 5 0 U . S . , Spani sh , Latin American , and Midd l e E a s t bank s with r e l a t ively sma l l expo sure opted out of the " j umbo loan " operation s , it took the B ra z i l ian negotiating team supported by h igh IMF o f f i c i a l s a lmo s t two months to r a i s e the US $ 5 0 0 mi l l ion needed to reach the " j umbo loan " targe t . For the loan to be adequate to meet foreign exchange needs in 1 9 8 4 , Bra z i l commi tted i t se l f to fol low
445 a n ad j u s tment program even tougher than i n the previous year , inc lud ing a US $ 9 b i l l ion trade surp l u s . A dra s t i c r educ tion in impor t s wa s cruc ial in Bra z i l ' s abi l i ty to run a US $ 6 b i l l io n trade surp lu s in 1 9 8 3 . I n the f a l l of 1 9 8 3 Bo l ivia defaul ted on the US $ 3 0 mi l l io n debt- inter e s t payme nt agreed o n previou s l y a s a precond i tion for a fur ther r e s c hedu l ing o f US $ 4 5 0 mi l l ion in foreign debt f a l l ing due in 1 9 8 4 and 1 9 8 5 . The country ' s total foreign debt i s o f the order o f US $ 3 bi l l ion , bu t i t s extreme shortage o f foreign exchange continu e s to be exac erba ted by the ina b i l ity o f Argentina to pay for Bo l ivian expo r t s o f natural gas . Bo l iv i a ha s been nego tiat ing a US $ 3 5 0 mi l l ion extended fund f ac i l i ty with the IMF , a f ir s t s tep toward r e s c hedu l ing i t s commerc ial loan obl i gations , wh ich have b e e n techn i c a l l y in de faul t s inc e September 1 9 8 2 . P r ivate foreign banks demand that the country repay a l l the intere s t due before any ser iou s d i s c u s s io n s of debt r e s truc tur i ng take place . C h i l e in ear ly 1 9 8 4 wa s in the mid s t of pro trac ted nego tiations wi th the I MF , wh ich wa s no t showing any wi l l ingne s s to accept the country ' s r eque s t to ra i se the publ i c The sec tor d e f i c i t from 2 . 3 percent t o 5 percent o f GOP . delays in the I MF approval of r e f l a tionary po l i c i e s in the country , who s e GOP dropped by 14 percent in 1 9 8 2 and an add i t ional 5 percent in 1 9 8 3 , ca s t serious doubt s about I t s centra l Chi l e ' s acc e s s to " new money " f rom abroad . bank e s tima tes i n tha t r e �pe c t amoun ted t o about US $ l b i l l io n . I n 1 9 8 4 Ch ile i s due to pay US $ 1 . 8 bi l l ion in intere s t o n i t s foreign publ ic debt of US $ 1 8 b i l l ion . Ecuador , who s e external debt s tand s a t US $ 6 . 6 b i l l io n ( US $ 4 . 7 bi l l ion publ ic and 1 . 6 b i l l ion pr iva te ) , ha s been reported to have accep ted the mter e s t ra te set at 2 . 2 5 poin ts above LI BOR or 2 . 1 2 5 po i n t s over u . s . ba nk pr ime rate . However , the a c tu a l agreement with foreign bank s s igned a t the end o f January 1 9 8 4 cover ed only US $ 3 0 0 mi l l io n f a l l ing due i n the f i r s t ha l f o f the year . Short term trade c r ed i t s tota l i ng some US $ 7 0 0 mi l l io n were extended through ind iv idua l agreements between the Ecua dorian government and pr iva te c r ed i tor bank s tha t r e s e rved to them s e lv e s the r ight to c hange the rec ipients o f the s e cred i t s . About ha l f of the p r iva te - se c tor d e b t i s be ing conver ted i n to obl igations of the c entral bank . Peru , with i t s externa l debt e s tima ted at US $ 1 2 . 8 bi l l ion a t the e nd o f 1 9 8 3 , expec ted to s ign a s tabi l i zation agreement with the IMF in the spr i ng of 1 9 8 4 . The agr eement wou ld pre sumably pave the way for r e f inanc ing and ro l l ing over o f about U S $ 3 bi l l ion o f s hor t- and long- term debt and for d i s bu r s emen t o f some US $ 2 5 0 - 3 0 0 mi l l ion o f " f r e s h money " from the fore ign commer c i a l bank s . T h e country ' s net in terna tional foreign-exchange r e s erve s dropped in early 1 9 8 4 to US $ 5 0 0 mi l l ion , su f f ic ient o n l y f o r two months ' impor t s . The dra f t l e tter o f i nten t , pre sumabl y agreed to in pr inc iple by Peru and the IMF , provided , among o ther things , for the reduc tion
446 o f the pub l i c - sector de f i c i t f rom 1 0 . 3 percent o f GDP in 1 9 8 3 to 4 percent in 1 9 8 4 and the cutting o f the i n f l a t ion rate f rom over 1 0 0 percent to 70 percent . The country ' s GDP decl ined in real terms by 1 1 percent in 1 9 8 3 , the sharpe s t drop in Latin Ame r i c a , and the government ' s f a i lure to me et the targets o f i t s US $ 7 0 0 mi l l ion ex tended f ac i l i ty program with the IMF l ed to the delay in about US $ 5 0 0 mi l l ion o f c red i t , inc lud ing US $ 2 0 0 mi l l ion from the Wor l d Bank for spec i f i c inve s tment p ro j ects . F i na l l y , in the expec tat ion of the change of govern ment in Vene zue l a in ear ly F ebruary 1 9 8 4 , negot i a t ions on the debt i s sue were su spended for many month s . Af ter having taken o f f i c e , the new pres ident of Vene zue l a , Ja ime Lus inchi , declared immediately that h i s country wou l d repay the debt , e s t imated conservatively at US $ 3 3 b i l l ion , " to the l a s t cent . " The Vene zuelan debt re nego t i a t i on s wi l l be comp l ic ated , a s wi l l be tho s e in other countrie s , by some three-quarters ( US $ 1 8 . 4 b i l l i on ) of the pub l i c - sector debt f a l l ing due i n 1 9 8 3 and 1 9 8 4 , neither intere s t nor principal having been paid recently on the private debt o f s ome US $ 8 b i l l ion , and Vene zuelan o i l - exports value having dec l ined f rom the peak reached in 1 9 8 1 o f U S $ 2 0 b i l l ion to US $ 1 4 b i l l ion in 1 9 8 3 . Adv i s e r s to the new government int imated that Venezuela wi l l seek exten s ion o f debt repayment over e ight to ten years with a three- to four-year grace period on the re payment o f princ ipa l . For a number o f reasons the proc e s s o f inve s t igating the s i z e o f the private debt and settl i ng it i s expected to take a s long a s one year . The only Latin American country doing better than a l l othe r s seemed to be Mexico . Thi s re s u l t s partly f rom such f a c t s as that i t s debt c r i s i s c ame after four yea r s of a very rapid o i l - fed economi c growth , i t w a s the f i r s t t o recogn i z e t h e s e r iousne s s of t h e s i tuation , and i t s f inanc i a l negot iators proved to be expe rts o f the f i r s t o rde r . L a s t but not l e a s t , the country ' s s i z e and i t s c l o sene s s t o the united S tates forced i t s powerful ne ighbor--at the s ame t ime i t s large s t creditor-- into a i s the c a s e o f the re s t more conc i l i atory stance tha n o f the subcont inent . B u t even i n Mex ico nobody rea l ly knows what may happen i f a l l the optimi s t i c externa l a s sumptions go awry in 1 9 8 5 and 1 9 8 6 unl e s s a broad longer- t ime reschedu l ing o f the debt payments due between 1 9 8 5 and 1 9 8 8 goe s th rough . A NEED FOR WORLDWIDE SOLUT IONS At the international l eve l the pres ent routine is of a negat ive k i nd . Al though on the one hand aft er several years o f the predominanc e o f international private inter med i a r i e s in the f i nanc i a l f l ows to LDC s , the I nter national Monetary Fund recovered i t s leadership role in setting the conditions of acce s s to external dwindl ing
447 private re sourc e s , 1 3 the toughne s s o f the IMP ad j u s tment programs , on the other hand , has not been accompanied by the adequate expan s ion o f the IMP l endab l e re sourc e s . I n the aftermath o f the d i f f i cu l t i e s that aro s e in the U . S . Congre s s in 1 9 8 3 in respect to the increa s e of its I MF quota by US $ 8 . 4 b i l l ion a s a part o f a general round of the expans ion o f the member countr i e s ' contri but ions to the IMP ( di f f i cu l t i e s tha t took s everal month s to overcome ) , the IMP Execut ive Board forma l ly approved in early January 1 9 8 4 a l imitation in the amount of loans that needy countr i e s may obtain . Under the previous pol icy , a member country cou l d borrow up to 1 5 0 percent of its IMF quota with a c e i l ing o f 4 5 0 percent over thre e years . The new rul e r educe s the s e c e i l ing s to between 1 0 2 and 1 2 5 percent a yea r , or 3 7 5 percent over three years , depending on -how s t ringent an austerity program a country adop t s " to put i t s economy in order . " Further more , a new l imit has been put on the amount the membe r count r i e s may borrow f rom the IMP compensa tory f inanc ing fund , de s i gned to h e l p debtor count r i e s o f f s e t the impact o f f a l l ing commod ity price s , to 8 3 percent o f the i r quot a s rather than 1 0 0 percent a s wa s t h e c a s e before . And the borrowing l im i t on a companion bu f f er stock fund wa s reduced to 4 5 percent o f a quota f rom 50 percent . F inal ly , the IMF agreed to inc rea s e gradu a l l y the intere s t i t pay s coun t r i e s who s e money i t u s e s f o r l o a n s t o debtor countri e s . P r e s ent rate s , wh ich s tand at 8 5 percent o f preva i l ing market rate s , amount to 7 . 3 9 percent annua l l y . They wi l l be inc rea s ed between 1 9 8 4 and 1 9 8 7 by a t l e a s t 3 . 3 percentage points a yea r unt i l the rate is j u s t be l ow mark e t rate s by 1 9 8 7 or shortly later . Even though the l a t e s t r e s t r i c t ions on the IMP lending s e em to be relatively sma l l , they s end several di squ iet ing s igna l s : the expectat ion that the number o f t h e countr i e s th at wi l l come to t h e IMF t o negotiate s tab i l i z ation agreement s wi l l inc rea s e very cons iderably in the near future , the concern a t the IMF in respect to the po s s ib l e rapid exhau s t ion o f its loanab l e re sourc e s in sp i te o f the mo s t recent overa l l inc rease i n the IMF quota s , and the awa rene s s o f the fact that the next round o f genera l quota inc rea s e s wi l l be very di f f icult and w i l l take a l ong t ime unl e s s there is a su s ta ined recovery o f the indu s t r i a l c ountr i e s ' economy accompanied by the unlikely d i s appearance of the i r national budgetary d i f f icu l t i e s . I n the pa s t , under much ea s ie r internat ional cond i t i on s , i t u sed to take about f ive years f rom the initial propo s a l to ra i se IMF quot a s to th e a c tual rat i f ication o f their increa se by all member countrie s . P r e s ent l y , th e prospects for i n i t i a t ing a new round o f incre a s e s are very d i m both on po l i t ic a l and economi c ground s . Bringing the IMP l end ing inte r e s t level to preva i l ing market rate s , expre s s ly asked for by the U . S . Congre s s a s one o f the cond i tions o f the approval o f the increase in the U . S . quota , e l iminates any conc e s s iona l
448 e l ement f rom the IMF stab i l i z at ion agreement s and may inc rea s e the debt- serv i c e burden- -albeit s l ightly- - i f internat ional interest rates c ont inue a s h igh a s they are now . Here again no good news for the debtors can be exp ected e i ther f rom the United S tates or We s tern Europe . I t i s o f common knowl edge tha t during 1 9 8 2 - 8 3 a l l debt -reschedul ing negotiations with internat ional private bank s we re accompanied by an increase in the total c o s t o f debt s ervi c i ng through augmented spreads over L I BOR or the U . S . bank pr ime rate and through addit iona l charg e s and commi s s ions known in the interna t iona l banking parlance a s f ront- loading or up- f ront f ee s , impo sed by c redito r s on the debtor countrie s . Al though no g l obal e s t imat e s of the s e add i t ional c o s t s exi s t be cau s e private bank s general ly do not d i s c lo s e how much they earn f rom loan res chedu l ing , the ava i l ab l e scant information strongly sugge s t s tha t the tota l amounts are substant i a l . Debtor count r i e s argue correctly but without succe s s that spread s shou ld f a l l ins tead o f r i s ing , becau s e re f inanc ing arrangement s improve the qua l i ty o f the port f o l i o s o f loans and the s igning of a r e s chedul ing agreement doe s not involve any add i t ional r i s k s for the pr ivate banks . Consequently , renegotiators f rom the debtor count r i e s in Latin America and e l sewhere expre s s with growing f requency ( at l e a s t pr ivate l y ) opinions that by tak ing undue advantage of the weak negotiating po s i t ion o f debt-burdened countr i e s , internat iona l private bank s The work in the l ong run aga i n s t the ir own intere s t s . extra costs o f debt s e rvice might become in some c a s e s a burden that debtor count r i e s wi l l n o t be ab l e to bear . But s ince bu s ine s s i s bu s ine s s , private c reditors a s in the past care only about fatten ing the i r immediate p ro f i t s . Thu s , for examp l e , Albert F i shlow , one of the contr ibuto r s to th i s vo lume , e s t imates that the nine l arge s t U . S . bank s together earned between US $ 7 0 mi l l ion and US $ 1 3 0 mi l l ion extra in 1 9 8 3 thank s to s t i f fer terms and up- f ront f e e s on debt - r e s chedu l ing ope rations with seven Latin American countries inc luding Argentina , Braz i l , and Mex ico . The s e wind f a l l pro f i t s contr ibuted between 14 and 2 6 percent o f the 1 9 8 3 pro f i t gain of th e same bank s , wh ich at the s ame time were abl e to cut th e i r exposure to develop ing count r i e s ( inc l uding seven Latin Americ an debtor s ) by about U S $ 5 0 0 mi l l ion in the f i r s t ha l f o f 1 9 8 3 . 1 4 Moreover th e same trend s c a n b e ob served o n t h e g l obal s c a l e . A t the very end o f 1 9 8 3 OECD reported th at the non-OECD borrowing ( both bank loans and bond i s su e s ) on the international capital ma rk et amounted to s l ightly over US $ 2 5 b i l l ion in that yea r . 1 S Once the OPEC members ' borrowing of US $ 9 bi l l ion is exc l uded f r om th i s tota l , some US $ 1 6 b i l l ion only corre sponds to the non-OPEC LDC s and the soc i a l i s t bloc , with the largest part represent ing several " j umbo loans "
449
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450 Even i n the face o f the potential magni tude o f th i s prob l em , t h e low-key d i s cu s s ion in international agenc ie s and pr ivate f inanc i a l centers o f · the i s sues invo lved l imi t s i t s e l f a s y e t t o sugg e s t ions o f a po s s ib l e intere s t - ra t e re l ie f f o r " needed countr i e s " i f , o f cou r s e , they b ehave . Speak i ng l a t e l y before internationa l f inanc e audienc e s in the uni ted S tates and Wes tern Europe , both t h e pr e s i dent o f t h e Wor ld Bank , A . W . C lau sen , and the manag ing director of the IMF , Jacqu e s de Laro s s i ere , c a l led for " re a sonab l e terms " on credits to heav i l y indebted coun t r ie s . C l a u s en noted that a l though in 1 9 8 1 p r ivate capital source s in the deve loped ma rke t - economy countrie s had made a net tran s fer o f US $ 1 6 b i l l ion in medium- and long - t e rm l ending to the LDC s , the negat ive t ran s f e r of some US $ 7 b i l l ion f rom LDC s to the credi tor count r i e s took p l a c e in 1 9 8 2 a n d inc rea s ed to over US $ 2 1 b i l l ion in 1 9 8 3 . In the Wor l d B ank pre s ident ' s word s " P rodu c t ive inve s tmen t y i e l d s a return and foreign inves tors should get back more than they inve s t . But i t i s premature for deve loping countr i e s , as a group , to be tran s f erring re sourc e s to the h igh income countr i e s on th i s s c a l e . " I S S en ior economi s t o f Morgan Guaranty Tru s t R immer de Vries went one s tep f a rther in an interview granted in mid-December 1 9 8 3 to the I nternat iona l Herald Tr ibune in P a r i s by sugg e s t ing that l a rg e p r ivate bank s f rom indu s tria l c ount r i e s may see thems elves forced to " reduce sub s tanti a l ly , " by two to three percentage poin t s , inter e s t rates to countri e s l ike Argentina and Bra z i l i f the s e coun t r i e s " are ever t o become c redit wo rthy . " Rate rel i e f - - added the s ame N ew York banker- -woul d b e app l ied di sc riminately to countr i e s that have no other way out o f the debt trap and that have the dome s t i c po l i c ie s needed- - tho se a imed a t inc reas ing exports and a t s o l i c i t ing fore ign direct inve s tment- - a l ready in place . 1 7 The s e s ign s of concern about the LDC " debt trap , " an expre s s ion co ined in the mi d - 1 9 7 0 s by radical economi s t s and a c cepted by now by a t l e a s t some banke r s , are accompanied by a g rowing number o f c al l s f rom the LDC s for a wor l d f inanc ial and monetary conferenc e . Such a conf erence woul d inc l ude in i t s agenda four c l o s e l y interrel a ted top i c s : debt reorgan i z at ion , recon s truc tion o f the internat iona l monetary sy stem , reform o f deve l op ment f inanc e , and reorgan i z a t ion o f international f inanc ial i n s t i tu t ion s . A l l th e s e LDC init iat ive s and exhortat ion s , howeve r , fal l on the dea f ears o f the powe rful Group o f Ten con s i st ing o f the United S tate s , Canada , Japan , and ma j or We s t European nation s . The i r depu t i e s met in Pari s in mid-November 1 9 8 3 for j u s t one day , agreeing on ly to seek in th e next f ew month s new contributions by the IMF , B I S , and DECD to further anal y s i s of interna tiona l monetary prob l ems . The agenda for the nex t Group of Ten meet ing to be held in the spr ing of 1 9 8 4 , once aga in a t the deputy l evel , wa s to cover t h r e e po int s : po s s ib l e
4 51 step s to stab i l i z e currency value s , way s to h e l p the IMF t ighten d i s c ip l ine over the economic pol i c i e s of the mem ber countr i e s , and way s to ma intain suf f i c ient wor l dwide l iqu idity to continue f inanc ing the emerging economi c recovery . P re s s reports f rom the P a r i s meet ing made it c l ear tha t i t concentrated on c on f l ic t s between We s tern Europe and the u n ited s tates with regard to the u . s . budgetary and f i sc a l pol i c i e s and did not dedicate any attent ion to the LDC debt prob l ems and the i r inter national ec onomic impl icat ions . Within th i s pol it i c a l framework , wha t 1 9 8 4 c o u l d b ring to the L D C c reditors , i f anyth ing , wa s some " interest- rate r e l i e f . " I t i s obviou s that whatever intere st- rate re l i e f i s f ina l l y granted b y interna t iona l p r ivate c reditors t o LDC debtor s , it w i l l aga i n be equiva l ent to trea t ing a very serious and protracted d i s e a s e with a s p i r i n . As the content of th i s vo l ume amply demonstrate s both a t g l obal and nat ional l evel s , becau s e o f the i r short-term approach the " re scue packag e s " o f 1 9 8 2 and the sub sequent debt reschedu l ing operations are not l inked in any way wi th a much wider range of worldwide economic , f i nanc ial , and monetary i s su e s who s e adequate solutions cannot be po st poned inde f initely . A s a U . S . bank er quoted in the open ing chapter by Drago s lav Avramovic put i t bluntly in the spring o f 1 9 8 3 , Th e f l aw in the current strategy i s tha t there is not enough direct [ ita l i c s in the tex t ] emph a s i s o n the LDC growth . W e a r e a l l talking abou t g rowth , but there i s too much r i sk that current pol i c ie s won ' t be suf f i c i en t . Wi thout f a s t e r g rowth , we are buy ing not only economi c and f inanc i a l chao s , in my view , but de facto defau l t s on the o rder not yet seen . 1 8 F a c i ng such pro spec t s , it i s not enough to a sk the ques t ion , How much austerity can Latin Ameri ca tak e ? and t o answer i t w i th another que s t ion t o the e f f ec t that " re scue , in the form of economic growth , cou ld come as the wor l d e conomy s l owly recover s , but wi l l it come soon enough ? " 1 9 Ne i ther i s i t o f great help to arrive a t the conc lu s i on that the c r i s i s is c l early going to l a s t a long t ime , and that becau s e the s i tuat ion wi l l be g loomy , " it i s conce ivabl e that peopl e wi l l become r e s igned to l ow growth a s the only ava i lable option , and re f inanc i ng negotiation s wi l l become inst i tutiona l i z ed , s o tha t a new norma l c y wi l l appear . ,, 2 0 Under th e demograph i c , pol i t i c a l , and social con ditions p reva i l i � g in mo s t o f Latin America , anal y z ed in th i s volume by Victor L . Urqu idi , chanc e s for a " new norma l c y " of th i s sort in the medium and long run seem to be c l o se to n i l . I n the 1 9 3 0 s under the impact o f the Great Depre s s ion , a l l the subcont inent , except Mex ic o , f e l l into the hands o f mil i tary d i c tatorsh ip s . F i f ty •
•
•
452 years later , in the mid- 1 9 8 0 s , the contrary po l i t i c a l wave i s taking p l a c e j udg ing by t h e recent deve l opment s in Argentina , N i ca ragua , and B ra z i l and th e g rowing chal l enge to the authoritarian regime s in Ch i l e , Uruguay , and C entral Americ a . I n the f inal ana ly s i s , supported by the contents o f th i s volume , wha t i s at s take i s n o t whether t h e private and not so private creditors o f Latin America and of other LOC regions as we l l wi l l recover or to what ex tent th e i r f inanc i a l inve stments wi l l be repaid through techni c a l l y i ngeniou s monetary b a i l out opera tion s , revo lving debt- reschedu l i ng agreements and intere s t- rate r e l i e f mea sure s , supported by str ingent IMF stabi l i z a tion programs . F rom t h e Latin American viewpo int t h e i s su e s invo lved form a key p a r t o f t h e d i l emma of how t o reconc i l e t h e s t i f f auster i ty programs requ ired b y the IMF and international private creditors in spite of the worl dwide economi c c r i s i s with the r i s ing popu l a r and far f rom rad i c a l demand s in the region for rel i e f f rom negat ive economic growth and wide spread d i s t r e s s . No s a t i s f ac tory s o l ut ion for th i s d i l emma ha s been found any p l a c e as yet , if only becau s e in the indu s t r i a l North - a n d not only in La tin America a n d e l s ewhere in the South - - a l l rul e s of economi c , f i sc a l , and f inanc i a l rational behavior have b e e n viol ated many t ime s over during the past ten years to the detriment of a l l pa rtie s invo l ved . Without expanding further on thi s l a s t sub j ec t , wh ich wou l d mer i t at l ea s t another vo lume , it may be worthwh i le to reca l l only that world mi l itary expend itur e s in 1 9 8 3 surpa s s ed t h e who l e L O C external out s tand ing debt . Al though in many quarters the debate cont inue s a s t o whether t h e LOC debt i s sue i s that o f temporary i l l iqu idity or o f more b a s i c l ong - run insol vency , I may as we l l c l o se th i s conclud ing chapter with the quotation o f f ered at i t s beg inning f rom the 1 9 7 7 d i agno s i s of the " The LOC wo rld economy i l l s and the LOC indebtedne s s : externa l debt prob l em mu s t be handl ed within a larger framework wh i ch recogn i z e s global interdependence and cove r s b a l ance-of-payments ad j u s tment s , LOC deve lopment need s , o f f ic i a l deve lopment a s s i s tance , ' s tag f l ation ' in the LOC s , internat ional trade and world economic recove ry . ,, 2 1 As long a s th i s general propo s i tion i s not tran s l a ted into meaningful po l i cy at internationa l , reg iona l , and nat iona l l eve l s , one can expect on ly the wor s t for the not so d i stant future in Latin Ame ri ca and e l s ewhere . As far a s Latin America i s concerned , a f ir s t- a l b e i t l imited- - s tep in t h e r ight d i re c t ion might have been the imp l ementation of a common s tra tegy- -not to be confused with a " debtor cartel " - - propo sed in Septembe r 1 9 8 3 j o intly by ECLA a n d SELA ( Latin American Economic S y s tem ) , a c on SU l tat ive body formed by the government s o f the reg ion . S tart ing with the warning that th e IMF ,
4 53 the Wor l d Bank , and the Inter-Amer ican Development B ank re sourc e s wou ld not be su f f ic ient to meet the demands made on them in the near future by the LDC borrowe r s , the propos a l sugge sted a new Latin Ame r ican strategy compos e d o f s ix ma j or po ints : ( 1 ) the c reat ion o f a new tranche o f Spec i a l Drawing Righ t s by the IMF to be a s s igned to devel op ing countries ; ( 2 ) an institut ional i z ed procedure for the res tructur ing o f the debt in the form o f a j o int e f fort by the IMF and the World Bank ; ( 3 ) reschedu l ing , wh ich wou l d e f f e c t ively trans form s ome countr i e s ' short-term and med ium- term debt into long- term obl igation s ; ( 4 ) the prov i s ion of additional resourc e s to a l low c ount r i e s to s e rv i c e the i r accumu lated debt and at the same t ime to continue thei r normal internat ional trade ; ( 5 ) rel i e f f rom the present h igh c o s t s o f ref inanc ing ; and ( 6 ) acce s s to add itional pub l i c credit t o s t imu late economic deve lopment . 2 2 The fact tha t mo s t o f the sub stance o f the s e propo s a l s wa s d i luted b eyond recogn i t io n at t h e Latin Ameri can E conomic C on f e rence held in Quito in early 1 9 8 4 strong ly sugge s t s that not only internat iona l agenc i e s a n d creditor countr i e s b u t L a t i n Ameri can d ebtors a s we l l s t i l l g ive pref erence t o bu s ines s a s usual o n the debt f ront in spite of a l l i t s obvious l onger- term r i sk s . Que l l e sage s s e ! - -Vol ta ire ' s C andide woul d say again , th i s t ime iron i c a l ly--que l l e sage s s e ! POSTSCRIPT--LATE 1 9 8 4 The ma in body o f thi s f inal chapter wa s wr itten in early 1 9 8 4 when the LDC indebtedne s s looked particu l ar l y grave a s w i t n e s s ed by t h e deta i led g loba l a n d reg iona l ana l y s i s and the s even Latin American c a s e s tudi e s contained i n th e book . I n the f a l l of 1 9 8 4 when th i s vo lume goes t o pre s s the indebtedne s s s i tuation o f a f ew ma j or Latin Ame r i can debtor count r i e s look s somewhat l e s s b l eak in short and medium terms , e spec i a l ly f rom the c reditor s ' viewpo int . The l imited but painful debt renegot i a tion progre s s achieved by Mex ico and B ra z i l doe s not warrant , however , the wave o f optimi sm in the l ending count r i e s that accompan ied the agreement in princ iple on th e r e s ch edu l ing in early S eptembe r of about ha l f o f the Mex i c an pub l ic debt and the agreement reached at about the s ame t ime ( a l so in pr inc ipl e ) on the content o f the B ra z i l ian letter o f i ntent depo s i ted at the IMF . A l though some of the ru l e s o f th e debt- r e s chedu l ing game underwent certain ad j u s tment s , the genera l approach toward the indebtedne s s prob l em continu e s wi thout ma j or change , and the pa rameters o f the global economy perhaps look even wor s e than a year ago . What seems a s sured i f other conditions are ful f i l led ( the wor ld wide reasonably s t rong economic recovery , the compre s s ion
4 54 o f the u . s. dome s t i c budget de f i c i t , and the overal l dec l ine of intere s t rate s , among other s ) i s that the private c reditors of Latin America wi l l be paid--over one decade o r so-- intere s t on the outs tanding debt , intere s t s l ightly l ower th an that in force dur ing the debt c r i s i s years o f 1 9 8 2- 1 9 8 4 . And s inc e internat iona l bank s l ive f rom pro f i t s and not f rom the debt repay ments , they may f e e l quite re l i eved by the di sappearance o f the sudden moratorium threat hang ing over th e i r heads and o f its pyramid ing consequence s for the who l e inter national f inanc ial s y s tem . Look ing with more detachment at the agreement s a l ready reached in princ i p l e with Mex ico and B ra z i l o r emerging f rom t h e current d i s c u s s ions with Argent ina and Venezue l a , one c ome s to two inescapab l e conc l u s ion s . The f i r s t i s that the price pa id by creditor s for a l l the s e dea l s i s rather l ow . S econd , the new arrangements amount only to once aga in buying more time by both creditor s and debto r s . No serious attempt to adopt the more stab l e approach to the underly ing nonviab i l i ty of interna t iona l economi c , f inanc ia l , and trade relations between the indu s t r ia l i z ed and the unde rdeve l oped wor l d s c an be detected in the 1 9 8 4 reschedu l ing exerc i s e s . I n other terms , wh i l e PedrO- Pab l o Kuc zynsk i ' s exp l i c i t predictions i n Chapter 6 t o the e f f e c t that the " second a c t " o f debt nego t i a t ions in Latin America wou l d be accompan ied by great d i f f i cu l t i e s p roved correct , the " th i rd a c t " ( po s tponed for a wh i l e ) wi l l be--one c an pred i c t s a f ely- even more compl icated than the second one . Even before the second a c t ended , the que s t ion s be ing a sked rai sed some s e r ious doub t s about its suc ce s s ful con c l u s ion . Three such que s t ion s were a sk ed by The E conomi s t in early S eptembe r 1 9 8 4 , a f ew day s a f ter B ra z i l agreed on a new l etter of intent with the IMF and a f ew days before the terms of the longer-term r e s chedul ing agree ment with pr ivate creditors were made pub l ic by Mex ico and be fore Vene zuela d i s c l o sed i t s renegot i a t ion pro I f the negotiat ion s are to end succe s s f u l l y , pos a l s . c ertain que s t ions have a s y e t t o b e an swered , accord ing to th i s inf luent ial B r i t i sh source speak ing for Latin America ' s c reditors f rom a l l over the wor l d . How much new money wi l l the pr iva te bank s put up ? Wha t to do with short-term loans made to the bank s of the debtor s ' countr i e s , l oans known in technical j argon a s interbank c redi t s ? Who wil l mon itor the debtor countri e s ' economie s a f ter Mex ico ' s IMF agreement exp i r e s in December 1 9 8 5 and B ra z i l ' s in F eb ruary 1 9 8 6 and wh i l e Vene zue l a i n s i s t s on renegot i a t ing i t s debt without IMF intermedi a t i o n ? The s e three que stions o f pol i t i c a l a n d technical charac ter are o f very tal l order . The i r c lumsy hand l ing by both the pr ivate creditor community and the pub l i c debtor s may break the deal s made " in princ ipl e . " There
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are reasons t o a s sume that the debto r s ' negotiators b e l i eve that f rom the creditor s ' viewpo int the c o s t s o f " no dea l " wou l d b e very much h igher than tho se o f coming c l o se r to the p o s i tion of the countr i e s in debt . B r inkmanship and suspense wi l l not be absent from the r e s t of the s econd act nego t i a t ion s , particularly as it s eems qu i te obvious that the l e s so n s o f the s e r i e s o f regional c onsu ltations started with the C a rtagena meet ing of June 1 9 8 4 wi l l be put to the b e s t u s e by La t in Amer ican s . The not yet an swered que s tions o f The Economi s t dea l with t h e short-term hori zon . A n impres sive l i s t o f longer-term i s su e s a nd prob l ems appears in t h e mo st recent ove rvi ew o f t h e s ituation , written by Wi l l iam R . C l ine of the I n s t i tute for I nternational Economi c s ( e stabl i shed i n early 1 9 8 2 in Wa shington , D . C . , t o s tudy world economic and f i nanc i a l probl ems with emph a s i s on internationa l deb t ) . In h i s l a t e s t contribut ion on the pro spec t s o f LDC indebtedne s s , C l ine i s f a r f rom opt imi s ti c by stat ing that in spite of the " impre s s ive c a s e s o f recovery in Mex ico and B ra z i l " the 1 9 8 0 s wi l l amount t o the " lo s t decad e " i n terms o f Third Wor l d growth and devel opment . 2 3 Th e same h igh l y regarded author put s the re spon s ib i l ity fo r such present and future dev e lopment s in the LDC s on the door s t ep s of the Reagan admin i s tration . I n h i s opinion the present U . S . f i sc a l and budgetary po l icy wi l l mo s t probably l ead to the further increa s e o f dome s ti c a n d internation a l inter e s t r a t e s tha t , i n turn , may cancel a l l recent growth r a t e improvements in LDC s and in mo st o f them may b ring aga in pre s sures- impo s s ib l e to contain-- in f avor o f a moratorium o f payments on account o f external debt . According to C l ine , if one demands f rom p o l i t i c a l l eaders of develop ing c ountr i e s the app l ication o f h ighly unpopu l a r measure s o f economic ad j u s tment , i t i s impo s s ib l e not t o demand f rom l eaders o f advanced nat ion s t h e correct ion o f budgetary d i sequ i l ib r i a and of o ther economic erro r s who s e e l imination wou l d o f f er the only road to inter national susta ined and b a lanced e conomic growth . With th i s admonition , I may a s wel l end th i s vo l ume . NOTES 1 . Quoted in Art P in e , " Theodore Roo s eve l t Knew How To C o l lect on Defaul ted Loan s--He Woul d S end the Ma rines to Protect U . S . Bank e r s f rom ' Deadbea t ' Nations , " Wa l l Street Journa l , January 1 2 , 1 9 8 4 . 2 . P . A . Wellon s , Borrowing by Developing Coun tries on the Eurocurrency Ma rket , P a r i s , 1 9 7 6 , p . 5 8 5 . 3 . Miguel S . Wionc z ek ( ed . ) , LDC Ex ternal Debt and the World Economy , Mex ico C ity , 1 9 7 8 , pp . 4 4 5 - 4 4 6 .
456 4. I b id . , p . 4 5 7 . 5 . Morgan Guaranty Tru s t , Morgan Guaranty Su rvey ( N ew York ) , November 1 9 8 3 . 6 . Al fred L . Ma l abre , Jr . , " G l oomy Minority- -More Ana l y s t s Doubt Consensus Predict ion o f B r i sk 1 9 8 4 G rowth , " Wa l l S treet Journa l , January 1 9 , 1 9 8 4 . 7 . Organi za t ion for E conomic Cooperation and D evel opment ( OECD ) , E conomic Outlook ( s emiannual survey ) , P a r i s , December 1 9 8 3 . 8. DKB Economic Report , vol . 1 3 , no . 1 ( Tokyo , D a i - I ch i Kangyo B ank , Janua ry 1 9 8 4 ) . 9. " F rench S tudy S ay s Economy May S tay S lugg i sh for 5 Years " ( d i spatch f rom P a r i s ) , Wa l l S treet Journal , January 1 7 , 1 9 8 4 . 10. John Tagl iabue , " Recovery Cautious for West Germany" ( di spatch f rom Bonn ) , New York T ime s , January 26, 1984 . 11 . Leonard S i lk , " Economic S c ene- - D eb to r s C rowd on the B r i nk , " N ew York T ime s , Oc tober 5 , 1 9 8 3 . 12 . S . K arene Witcher and Lawrenc e Rou t , " The S econd Wave- -New C r i s i s Has B egun in Internationa l D eb t , Banking Experts Warn , " Wa l l S treet Journa l , June 8 , 1 9 8 3 . 1 3 . According to F inanc ial T imes Wash ing ton , D . C . , corre spondent , " No detail o f an adj u s tment prog ramme with even the sma l l e s t member , be it F i j i or H a i t i , can b e agreed without the Laro s s iere ' s persona l impr imatur . " Anato l e K a l e t zky , " Where the World ' s C redit I s Rated , " F inanc i a l T ime s , September 2 3 , 1 9 8 3 . 14 . Federal F inanc ial I n s t itut ions Examining Body , A Survey of the U . S . Bank s Expo sure , January-June 1 9 8 3 , Wash ington , D . C . , D e c ember 1 9 8 3 . 15 . " I nternational Loans F e l l by 1 9 % in ' 8 3 , OECD Anal y s t s S ay , " Wal l S treet Journa l , December 3 0 , 1 9 8 3 . 16 . As quoted in Jonathan Carr , " World B ank Ch i e f S eek s E n d to ' Nega t ive Tran s f e r s , ' " F inanc ial T ime s , January 2 7 , 1 9 8 4 . 1 7 . Carl G ewi r t z , " B ank ers May Cut Rat e s on Latin Loans , " Internat iona l H e ra l d Tr ibune , December 1 2 , 1 9 8 3 . 18 . J e f f rey E . G a s ten f rom Lehman Broth e r s Kuhn Loeb I nc . , N ew York , " Sovere ign Debt : N ext S tep , " I nternat iona l Monetary C onf erenc e , Bru s se l s , May 1 8 , 1983 . 19 . " How Much Au sterity Can Latin America Take ? " The E conomi s t , July 1 6 , 1 9 8 3 . Thoma s O . Enders and Richard P . Mat t ione , 20. The C r i s i s o f Debt and Growth , B rook ing s Latin America : D i scu s s ion Papers no . 9 , wa shing to n , D . C . , December 1983 , p . 78 . 21. S e e Note 3 . 22 . Economic C ommi s s ion for Latin America / L a t in American E conomic S y s t em ( ECLA / SELA ) , B a s e s for L a t in Ame rican Reply to the International E conomic C r i s i s ( C a raca s , Augu s t 1 9 8 3 , mimeo . ) .
457 Sy stemic 2 3 . Wil l iam R . C l ine , I nternational D eb t : R i sk , and Pol icy Re sponse (Wash ington , D . C . , 1 9 8 4 ) . SELECTED B IB L I OGRAPHY Abbo tt , George C . I n ternational I ndebtedn e s s and the Developing C ountr i e s . London , 1 9 7 9 . Adl e r , John E . ( ed . ) . Capit a l Movements a n d Economic D evelopment . N ew York , 1 9 6 7 . Avramovic , Drago s lav . Debt S e rv i c ing Capac ity and P o s twar G rowth in I n ternationa l I nd ebtednes s . B a l t imore , 1 9 5 8 . Avramovic , Drago s l av, et a l . E conomic G rowth and External Debt . B a l t imore , 1 9 6 4 . B e l l , Geo f f rey . The Euro-D o l l a r Market and the I nter nat ional F inanc ial Sy s t em . New York and Toronto , 1 9 73 . B indert , Chr i s t ine . " D ebt : Beyond the Quick F ix . " Th i rd Wor l d Quarterly ( L ondon ) , vo l . 5 , no . 4 ( O c tober 1 9 8 3 ) . B i tterman , H enry J . The Re funding o f I nternat i ona l Deb t . Durham , N . C . , 1 9 7 3 . Bol in , W i l l iam H . , and Jorge del C anto . " LDC Deb t : B eyond C r i s i s Management . " Fore ign Af f a i r s ( N ew York ) , vol . 6 1 , no . 5 ( Summer 1 9 8 3 ) . I nternationa l Debt and the S tab i l ity C l ine , Wil l iam R . o f the Wor l d Economy . Wash ington , D . C . , S eptember 1983 . C l evel and , Haro l d , and W . H . Bruce B r i tt a in . "Are the LDC s in over The i r Head s ? " Fore ign Af fa i r s , vo l . 5 5 , no . 4 (July 1 9 7 7 ) , pp . 7 3 2- 7 5 0 . Col l yn s , Charl e s . Al te rnat iv e s to the C en t ra l B ank in the Devel oping Wor l d . O c c a s ional Paper no . 2 0 . Wa sh ington , D . C . , Ju ly 1 9 8 3 . Cuddy , John . " Th i rd Wor l d L iqu i d ity Needs , 1 9 8 4 - 8 6 . " Th i rd Wor l d Quarterly ( London ) , vol . 5 , no . 4 ( Oc tober 1 9 8 3 ) . Dale , Richard S . , and Richard P . Mat t ione . Manag ing G l obal D eb t . Wash ington , D . C . , 1 9 8 3 . Dhonte , P ie rre . " D e s c r ib ing External Debt S i tuation s : A Ro l l- over Approa ch . " I nterna tional Monetary Fund S ta f f Paper s , vol . 2 2 , no . 1 , Ma rch 1 9 7 5 , pp . 1 5 9 - 1 8 6 . Ender s , Thoma s 0 . , and R i chard P . Ma ttione . Latin America : The C r i s i s o f Debt and Growth . B rook ing s D i s cu s s ion Papers in I nt ernational E conomic s , no . 9 . Wa sh ington , D . C . , December 1 9 8 3 . Ferreira , Lu i s P into . C ap i t a l s E strage i ro s e D ivida Externa do B ra s il . S ao p au l o , 1 9 6 5 . F f rench-Dav i s , R . " E l P rob l ema de l a Deuda Ex terna en Ame r i c a La t in a : T endenc ia s y P e r spec tiva s in 1 9 8 3 . " I n tegra c ion Lat inoamericana ( INTAL , Bueno s Aire s ) , ano 8 , no . 8 3 ( S eptembe r 1 9 8 3 ) .
4 58 F riedman , I rv ing S . The Emerg ing Rol e of P r ivate Bank s i n the Devel oping Wor l d . N ew York , 1 9 7 7 . G roup o f Th i rty ( Co n su l ta t ive Group on I nterna t i ona l E conomic and Moneta ry A f f a i r s ) . Annua l Report . N ew York , 1 9 8 3 . H e l l e iner , G . K . ( cha i rman ) . Towa rd s a New Bretton Wood s : Cha l l eng e s f o r t h e Wor l d F inanc i a l and Trading System . Report by a Commonweal .th S tudy G roup . London , 1 9 8 3 . Kuc zyn sk i , P edro- Pab l o . " La t i n American Debt . " Fore ign A f f a ir s , vol . 6 1 , no . 2 ( Winter 1 9 8 2 - 1 9 8 3 ) . L i e f t inck , P ieter . Ex terna l Debt and D ebt-B ear ing Capa c i ty o f D evel oping Countrie s . P r inc eton , N.J. , 1966 . Nac ione s Unida s , C on s e j o Economico y S o c i a l . B a l ance P r e l iminar de l a Economla Lat inoamer icana Durante 1 9 8 3 , CEPAL , C omi s i6n E c on6mi c a p a r a America Lat ina , Documento I n f o rma t ivo , December 1 6 , 1 9 8 3 . Nogue i �a B a t i s ta , J r . , Paul o . Mito e Rea l idade na D ivida Externa B ra s i l e ira . Rio de Janeiro , 1 9 8 3 . Paye r , Cheryl . The Debt Tra : The I nterna t iona l Monetary Fund a n d the T i rd Wor l d . N ew York and Londo n , 1 9 7 4 . Saddy , F ehmy . " OPEC Capital- Surp l u s Funds and Th ird Wo rld I ndebtedne s s : The Recyc l ing S trategy Recons idered . " Third Wor l d Quarterly ( L ondon ) , vol . 4 , no . 4 ( October 1 9 8 2 ) . S a rgen , N . P . " C ommerc i a l B ank L ending to D eve l op ing Count r ie s . " Federal R e s e rve Bank of San F ranc i sco E conomic Revi ew , Spring 1 9 7 6 . S o l omon , Robe rt . " A P e r spect ive on the Debt o f D evel o ping Count r i e s . " B rooking s Papers on Economi c Ac t iv i ty 2 ( 1 9 7 7 ) . UN Conf erence on Trade and Devel opment ( UNCTAD ) . " The Current Wor l d Economic C r i s i s . " T rade a nd D eve l op ment Report , 1 9 8 3 . Report by the S e c retaria t o f the U n i ted Nation s Conf erence o n Trade and Deve lopment , Gen eva , S eptember 7 , 1 9 8 3 ( UNCTAD / TDR/ 3 ) . Debt P robl ems in the C ontex t o f Development . Report by UNCTAD Secretariat , N ew York , 1 9 7 4 ( Un ited Nations pub l ication TD / B / C . 3 / l 0 9 / Rev . l ) . Mul t i l a tera l Debt Renegot iations- -Expe r i ence of S tudy prepared by the Fund Memb er s , 1 9 7 1 - 1 9 7 4 . s ta f f o f the I nterna t iona l Monetary Fund , note by th e UNCTAD Secretaria t , T rade and D eve l opment Board , C ommittee on I nv i s ib l e s and F inanc ing Rel a t ed to T rade , Ad Hoc G roup o f Governmental Experts on the Debt P rob l em s of D evelop ing Countr i e s , 2 d s e s s . , Geneva , December 1 1 , 1 9 7 4 ( TD / B / C . 3 /AC . 8 / R . 2 ) . T rade Pro spec t s and Capital Needs of Deve loping Report by the UNCTAD Countr ie s , 1 9 7 6 - 1 9 8 0 . S e c retaria t , Trade and D evel op�ent B oard , and C ommittee on I nv i s ib l e s and F inanc ing Rela ted to
b
4 59 T rade , Apr i l 1 5 , 1 9 7 6 ( TD / B / C . 3 / l 3 4 ) . Wat son , Paul M . D eb t s a nd the Develop ing Countr i e s : N ew Prob l ems and N ew Actor s . Ove r s e a s Development C ouncil D evelopment Paper no . 2 6 , NIEO S e r ie s . Wa shing ton , D . C . , Apr i l 1 9 7 8 . Wel l on s , P . A . Borrowing by Deve l o ing Countr i e s on the Eurocurrency Market . paris , 1 7 6 . Interna t ional Capital Marke t s , wi l l iams , Rich a rd, et a l . Developments and P r o spect s , 1 9 83 . Occa siona l Paper no . 2 3 . Wa shington , D . C . , July 1 9 8 3 . Wionc z ek , Miguel S . " La Deuda Externa de l o s P a 1 s e s de Menor D e sa rro l l o y los Eurome rc ado s : Un P a s ado Impre "l ionant e , u n Futuro I n c i e rto . " C omercio Exterior ( Mex ico ) , vo l . 2 7 , no . 11 ( November 1 9 7 7 ) . " Ex te rna l I ndebtedn e s s o f L e s s Developed Countrie s . " I n The Year Book o f Wor l d A f f a i r s 1 9 8 1 . London , 1981 . Wionc z ek , Miguel S . ( ed . ) . I nterna tional I ndebtedn e s s a n d Wor l d Economic S tagnation . London , 1 9 8 1 . LDC External Debt and the Wor l d Economy . Mex ico C ity , 1 9 7 8 .
§
Acronyms ASEAN BCRA BIS CACMF CEPAL CETES C I EPLAN CORFO DRI ECLA EEC GAB GATT GDP GNP G-l O IDB IDS I ISS IMF LAFTA LAIA LDC L IBOR NAF INSA NIC OECD OPEC PEMEX RECAD I RIAL
As soc iation of Southeast As ian Nations Banco C entral de l a Repub l ica Argentina Bank for In terna t iona l S e t t l ements C entra l American Common Ma rket Fund C omi s i6n E con6mi ca Para America Lat ina Trea sury C e r t i f icates Corpora tion o f E conomic Res earch for Latin America D eve l opment Corporation Data Resou rc e s , Inc . UN Ec onomic Commi s s ion for Latin America European Economic Community General Agreemen t to Borrow General Agreement on Ta r i f f s and Trade g ro s s dome s t i c produ c t g ro s s nat iona l product G roup o f Ten Inter-American Devel opment Bank I n s t itute o f Development S tudi e s , Su s s ex Univer s ity , Engl and I nternational I n s t itute o f s trateg i c S tu d i e s I nterna t ional Mone tary Fund Latin American Free Trade As sociat ion Latin Ame r ican I ntegrat ion A s soc iat ion l e s s developed country London Inter-Bank O f f er Rate Nac iona l F inanc iera n ewly indu s tr i a l i z ing country Organ i zat ion for Economic Coopera t ion and Deve l opment Organ i z a t ion of P etrol eum Exporting Coun t r i e s Petro l eo s Mex icanos O f f ic e for the S y s tem of D i f f erent ial Exchange Rates P rog ram for Joint S tudies on Latin Amer ican I nternat iona l Relations
460
461 SBM SDR SELA SEPAF IN TNC UNCTAD UNESCO
supernat ional bank money S pe c i a l D rawing Right La t in American Economic Sys tem Min i s try o f National Prop e r t i e s and I ndu s trial D evel opment transna t ional c orporat ion UN Conference on Trade and Devel opment UN E ducat iona l , S c ient i f ic , and Cul tural Organ i z a t ion
About the Contri butors D F a g o s Z a v A V F a m o v i d i s a former o f f i c i a l of the Wor l d Bank , former d i rector o f t h e Sec retariat o f the I ndependent Commi s s ion on I n ternational Devel opmen t I s su e s ( th e B randt C ommi s s ion ) , and senior adv i s e r to th e UNCTAD S ec reta ry Genera l . H e i s the author o f D eb t S e rvic ing Capac i ty and Po s twa r Growth in InternatIOnal I ndebtedne s s ( 1 9 5 8 ) and Ec onomic G rowth and Externa l Debt ( 1 9 6 4 ) .
s erved a s an executive director o f the Internat iona l Monetary Fund f rom 1 9 7 8 - 1 9 8 2 and i s currently deputy directo r o f the Bank o f Mex ico i n charge o f interna tional o rgan i zations and agreemen t s . H i s recent publ ications incl ude " IMF F inanc i a l P rogram and Cond i t iona l ity , " Journa l of Development Economi c s , vo l . 1 2 , no . 1 / 2 ( F ebruary -April 1 9 8 3 ) 1 The Mex ican Exchange C r i s i s and Adj u s tment P rogram , I n s t itute for I nternat iona l E conomi c s , Wa shington , D . C . , 1 9 8 3 1 and On the Nature and D i re c t ion o f I n terna t ional Monetary Ref orm , Group o f Twenty- F our , 1 9 8 3 . A F i e Z B u i Fa
-
EnF i q u e de la Pi e d Fa ha s been work ing s ince 1 9 8 0 in th e un i ted Nations E c onomic Commi s s ion for L a t in America ( ECLA ) , f ir s t a s an expert in the United Nat ion s Devel opment p rog ram/ ECLA p ro j ec t on c r i t ic a l poverty and a f terward a s economic a f f a i r s o f f ic e r in the E conomic Devel opment D iv i s ion . He h a s drafted s evera l papers on th e sub j ec t o f poverty and i s re spons ib l e for the prepara t ion o f the su rvey on P e ru for ECLA ' s annual economi c su rvey of Latin Amer i ca .
i s economic a f f a i r s o f f i c e r o f the Economic Devel opment D ivi s ion of the Un i ted Nations E conomic Commi s s ion for Latin Amer ica . He h a s worked for a numb er of yea r s on the sub j ec t o f foreign debt and p r ivate bank s and has wr itten book s on the exper ienc e s o f P e ru a n d Bol ivia ( the latter with Michael Mort imo re ) , a s wel l a s a number o f a r t i c l e s on th e sub j ect .
Ro b e F t D e v l i n
462
463 i s a n Arg entine indu s t r ia l i s t and economi s t . H e i s the author o f Doc trina s Econ6mi ca s , D e sa r ro l l o e I ndependenc ia ( 1 9 7 3 ) and " La E s tructura P roduc tiva D e s equ iU.brada y e l T ipo de Camb io , " D e sarro l l o E conomico (1972) .
Ma r oe l o D i a m o n d
i s a l terna te executive di rector o f the I nterna t ional Monetary Fund . He ha s been d i rector of th e International E conomic S tudies Department o f the Min i s try of Economy , F inanc e , and Trade of Spa in and has s e rved as f inanc i a l a na l y s t to several Spa n i sh pr ivate agenc i e s . Jose Luis Fei to
M. Ffrenoh- Davis i s d irector of the Corporation o f E c onomic Research for Latin America ( C IEPLAN ) . P ro f e s so r o f economic s a t the Unive r s i ty o f Ch i l e until 1 9 7 3 , he ha s been a v i s i ting f e l l ow at Ox ford and B o s ton univer s i t ie s . H e is the author o f Economla Internac iona 1 : Teorla s � po1 1 ti c a s p a r a e1 D e sa r ro l l o ( 1 9 7 9 ) , po1 itic a s Econom1cas en Chil e , 1 9 5 2- 7 0 ( 1 9 7 3 ) , and numerou s a rticl e s o n development , economic pol ic i e s , trade , and internationa l f inanc e .
Rio ardo
i s p ro f e s so r o f internat iona l economic s a t the Unive r s i ty o f C a l ifornia-B erkel ey , the author o f many book s and artic l e s o n the U . S . economic h i s to ry and L a t in Amer ican devel opment prob l ems , inc lud ing American Ra i l roads and the T rans f o rma t ion of the Ante B e l l um Economy ( 1 9 6 5 ) and Rich and Poor Na t ives in the Wo rl d Economy ( 1 9 7 8 ) . Alber t Fis h l ow
Go n z a l e z de l Va l l e i s an economi s t a t Univers idad de San C arl o s , Guatema l a , Col umb i a Unive r s i ty , Y a l e Unive r s i ty . H e wa s the directo r o f t h e C enter o f Mone tary S tudie s f o r Latin Ame r ic a ( CEMLA ) and f rom 1 9 6 8 to 1 9 7 8 executive secreta ry of the Moneta ry C oun c i l f o r Central Amer ic a . F rom Apr i l t o December 1 9 8 3 h e wa s pres ident o f the Banco de Gua t ema l a . Jorge
Enrique V. Ig l e s ias wa s cha i rman of the C en tra l Bank o f U ruguay a n d i s currently sec retary general o f the United Nations Economic C ommi s s ion for Latin Ame rica . He is a memb er o f the Th i rd Worl d Foundation , the Soc iety for Interna tional Development ( S ID ) , the North- South Round Tabl e , and other deve l opmenta l i n s t i tutions .
i s p r e s ident o f F i r s t B o ston Interna tional and a m anag ing d irector o f the F ir s t B o s ton C o rporat ion . F r om 1 9 8 0 to 1 9 8 2 , he wa s Min i s ter o f Energy and Mines o f P e ru . P reviou s l y , h e s e rved a t the Worl d Bank , the Internat iona l Monetary Fund , a n d the Interna tional F inance Corpora t ion , and in the pr ivate sector h a s been a partner of Kuhn , Loeb & C o . I nter na t iona l and the p r e s ident of Ha1co Min ing , I nc . , in p it t sburgh . H e is the author of P eruvian D emo cracy under Economic S tr e s s : An Account of the B e l aunde Administration , 1 9 6 3 - 6 8 . Pedro - Pab l o K u o z y n s k i
464 Edu a r d o Ma y o b r e i s deputy min i s ter o f f inanc e for Ven e zuela , f o rme r l y directo r general o f th e Min i s try of F inanc e , a dvi s e r to the Coun c i l of National E conomy , execut ive director o f the Interna t iona l Monetary Fund , execut ive director of the Wor l d Bank , and director o f ec onomic r e s earch o f t h e Min i s try o f F inanc e . D a n i e l Na s z e w s k i
i s a n Arg entine economi s t .
Pau l o N o g u e i ra B a t i s t a � Jr . � i s pro f e s sor o f economi c s a t C a thol ic Unive r s ity o f Rio de Janeiro ; a member o f the re s earch s ta f f at th e C enter for Monetary S tud i e s of the Getu l io Varga s F 9unda tion ; and author o f the book Mitoe Rea l idade na D iv ida Ex terna B ra s i l e ira [ My th and Rea l ity o f the B ra z i l ian External Deb t l , Rio de Jan e i ro , 1 9 8 3 . T o ma s s i n i wa s formerly an adv i s e r to th e pre s ident o f the Inter-Amer ican Devel opmen t B ank ( IDB ) . He i s now a consul tant f o r the United Nations Economic C ommi s s ion for Latin Ame r i c a and coord inator o f the P rogramme o f Joint S tud i e s on Latin American I nterna tional Relations ( RIAL ) , as wel l as the editor of the j ou rnal E s tud io s In ternac iona l e s . Among other work s , he edi ted Relaciones I nternac iona l e s de l a America Lat ina , F ondo de Cultura E conomica , Mex i c o , 1 9 8 1 . Luaiano
Vi a t o r L . Ur q u i d i i s pres ident o f E l Colegio de Mex ico , f o rme r pres ident o f the In ternational E conomic A s socia tion , and a member o f the C l ub of Rome . H e i s author and e d i tor o f a number o f book s on g l obal and L a t in American economic devel opment prob l ems . S . Wi o n a z e k i s a senior r e s earch f e l l ow and director of the Energy Res earch P rog ram at El C o l eg io de Mex ico . H e i s author and editor of many book s on prob l ems o f devel opment , includ ing Some K ey I s sues for the Wor l d p e riphery ( 1 9 8 2 ) and Worl d Hydroc a rbon Current S ta tu s , P ro ' ec ted Pros e c t s and Ma rke t s : Future Trends ( 1 9 8 2
Mi g u e l
•
de L e o n i s direc tor of the Tru s t Fund f or Coverage o f Exchange R i s k s ( F ICORCA ) of Banco de Mex i c o , where previou s l y he served as deputy manager o f th e economi c r e s earch department . He teache s interna t iona l ec onomi c s a t E l C o l eg io d e Mex i c o . Ern e s t o
Z e d i l l o Po n a e
I ndex · Ad j us tment proces s , 90-92 , 9 3 - 94 , 1 1 0 , 1 30 , 1 3 5 , 1 3 7 , 1 4 6 , 1 5 3- 1 5 4 , 1 8 0 - 1 8 1 , 18 3 , 2 0 6 - 2 0 7 , 2 0 8- 2 1 0 , 2 2 3 , 2 8 5 - 2 8 8 , 4 38 . See also International Monetary Fund , ad j ustment package s ; Mexico , Economic Ad j us tment Program Aero 1ineas Argentinas , 2 6 0 , 2 6 1 , 272 Afghan i stan , 5 5 Afri ca , 1 1 , 50 , 5 1 , 64 , 1 4 9 , 1 5 2 . See a l s o individual countries A1emann , Roberto , 2 5 3 , 2 5 5 A1 fonsin , Raul , 1 2 8 Algeria , 8 ( tab1e ) , 2 7 - 2 8 ( tab1es ) , 30 ( tab1 e ) , 1 0 2 - 1 0 3 ( tab1 e ) , 1 5 0 ( tab l e ) Alliance for Progre s s , 4 2 7 A1zamora Traverso , Carlos , 1 7 Amortization , 9 , 1 0 , 2 3 - 2 4 , 2 6 , 8 2 , 8 6 , 94 , 1 0 9 , 1 3 0 , 146 , 1 6 0 , 1 7 7 , 188 , 1 9 0 , 4 1 1 ( tab le ) Amp1iac iones pre supuesta1es , 3 12
capital inf low , 2 4 6 , 2 5 4 capi tal out f low , 1 3 , 1 1 1 , 2 3 1 , 2 4 2 , 2 4 6 , 2 4 7 ( tab 1e ) , 2 4 8 , 249 , 2 5 3 , 269 consumption , 106 , 2 3 1 , 2 3 2 ( tab1 e ) , 254 current ac count , 1 8 , 24 , 2 4 3 , 246 , 2 5 5 debt payments , 7 7 , 1 5 2 , 1 5 5 , 2 3 2 - 2 3 3 , 2 4 3 , 2 5 3 , 2 5 4-2 5 5 , 256 , 260 , 2 6 2 , 270 , 290 debt p e r capita , 7 , 2 7 ( table ) debt proportion of exports , 3 2 5 debt renegot iations , 1 7 5 - 1 7 6 ( tab le ) , 2 5 7- 2 6 2 , 2 6 5 , 2 7 0- 2 7 2 , 4 1 1 ( tab 1 e ) , 4 5 4 debt- s ervice ratio , 9 , 30- 3 1 ( tab1es ) , 1 5 1 devaluation , 1 5 3 , 2 3 1 , 2 38 , 2 39 , 240 , 245 , 250 , 2 5 1 , 252-25 3 , 256 domestic market , 1 6 6 , 2 5 6 economy , 40 ,
Anchovy d i s appearance , 39 4 Andean Pact ( 1 96 9 ) , 3 9 , 1 6 5 Apertura , 406 .
balance o f trade , 2 4 7 ( tab1 e ) , 248 , 252 banks , 2 4 6 , 2 5 4 brain drain , 2 3 3
98 , 2 3 1- 2 3 2 , 2 3 3 ,
2 34 , 2 4 0 , 2 4 3 - 2 4 6 , 2 4 8- 2 5 1 , 2 5 5- 2 5 6 , 2 6 6 , 2 7 0 , 2 7 3
See also Open
exports , 2 3 5 , 2 3 6 , 2 3 8 , 2 4 6 , 248 , 2 5 1 , 2 5 2 , 2 5 9 , 267-268 ,
economie s Argent ina agriculture , 2 3 5 , 2 3 8 , 2 3 9 ,
271 external debt ,
240 , 245 , 2 5 2 , 267 , 268-269 balance o f payments , 2 3 4 ,
7,
8 ( tab 1e ) ,
2 8 ( tab1e ) , 48 , 4 9 , 7 3 , 7 4 ( tab 1e ) , 7 6 ( tab1e ) , 98 ,
2 38 , 2 4 1 , 2 4 2 , 2 4 3 , 2 4 5 , 2 4 6 , 2 4 7 ( tab1e ) , 2 5 1 , 2 5 9
1 0 2 - 1 0 3 ( tab1e ) ,
1 1 0 , 1 2 8 , 1 2 9 , 1 3 1 , 148 , 1 5 0 ( tab1 e ) , 2 3 2 , 2 3 3 , 2 3 5 ,
465
466 Argentina ( cont inued ) 2 3 6 ( tab le ) , 2 3 8 , 2 4 2 - 2 4 3 ,
terms of trade , 2 4 2 , 2 4 9
2 4 6 , 2 4 7 ( table ) , 2 4 9 , 2 5 2 , 2 5 5 , 264 , 326 , 443-444 f loods , 2 6 4 and foreign loans , 1 3 , 2 3 8 , 2 4 0- 2 4 1 , 2 4 9 , 2 5 9 , 2 6 2 , 2 6 3 ( tab le ) GOP , 2 3 1 , 2 3 2 ( tab l e ) , 2 3 3 , 2 4 3 , 244 , 255 , 259 GNP , 1 5 3 government , 2 7 3 , 2 7 4 , 4 5 2 and Great Britain , 1 9 , 2 5 4 , 255 , 257 and IMF , 1 4 6 , 2 38 , 2 5 7 , 2 5 8 - 2 6 2 , 2 6 3 ( table ) , 2 6 4 , 2 6 5 , 270 , 271 imports , 1 9 , 8 4 , 2 3 8 , 2 3 9 , 2 4 6 , 248 , 249 , 2 5 2 , 2 5 4 , 259 , 2 7 1 , 445 import substitution , 2 3 8 , 2 5 2 , 267 industry , 1 7 , 4 3 , 2 3 5 , 2 36 , 2 3 9 , 241 , 243 , 244 , 245 , 246 , 249 , 2 5 5 , 2 6 7 , 268 inflation , 4 0 , 1 3 0 , 15 3 , 2 3 1 , 2 38 , 2 3 9 - 2 4 0 , 2 4 4 , 2 4 5 , 2 4 6 , 2 5 1 , 2 5 2 , 2 5 3 , 2 56 , 263 , 264 interes t rates , 2 3 1 , 2 3 9 , 2 4 0 , 241 , 244 , 249 , 2 5 0 , 2 5 1 , 255 , 256 , 269 internal debt , 1 3 0 midd le c l as s , 2 3 2 mi l itary purchases , 1 3 a s NIC , 6 5 and oi l , 3 8 po litic s , 2 38 , 2 5 5 , 2 5 7 , 2 7 3 , 274 price contro l s , 2 4 4 private sector , 2 5 4 , 2 5 5 , 2 5 6 pub l i c sector , 1 5 3 , 2 4 2 , 2 5 3 , 258 rece s s i on ,
231 ,
2 3 2 , 2 38 ,
240 , 243 , 254 , 255 , 264 , rura l , 2 38
2 39 , 266
s avings , 2 6 9 stabi l i z ation po licies , 2 38-242 , 243 , 245 , 250 , 2 5 2 , 2 5 3 , 264 state enterpri ses , 2 6 0 , 2 6 1 subsid ies , 2 6 9 tari f f s , 2 4 4 , 2 4 5 , 267 taxation ,
268 ,
269
246 , 2 5 2 ,
tourism, 2 4 7 ( tabl e ) , trade surplus , 8 5 urban , 2 3 8 and U . S . , 2 0 , 4 4 8
249
value-added , taxe s , 2 5 3 wage s , 2 3 2 , 2 38 , 2 3 9 , 2 4 0 , 2 4 3 , 244 , 252 , 253 , 255 work ing c l a s s , 2 3 8 See a l s o under Venezue l a Artus , J . R . , 3 2 1 ASEAN . See Assoc iation o f South east Asian Nations Asia , 1 1 , 1 2 , 50 , 5 1 , 6 4 , I l l , 1 1 6 ( tab le ) , 1 3 9- 1 4 0 ( tab les ) , 1 5 2 , 1 5 9 , 1 6 7 , 2 0 3 , 2 0 4 ( table ) . See a l s o individual countries Asian Deve lopment Bank , 1 6 2 Assoc iation of Southe ast Asian Nations ( ASEAN ) , 1 2 Atlantic a l l i ance , 54 , 5 5 Aus terity programs , 1 2 7 , 1 2 8- 1 2 9 , 130 , 145 , 158 , 165 , 447 , 451 , 452 Austra l i a , 9 Authoritarian regimes , 1 2 7 , 1 2 9 , 451-4 5 2 Avramovic , Drago s l av , 4 4 3 Balance of payment s , 1 8 , 4 0 , 4 1 , 6 1 , 6 9 , 8 3 , 8 5 - 8 6 , 8 7 , 88 , 9 1 - 9 2 , 100 , 1 0 1 , 104 , 1 0 9 , 1 1 3 , 1 1 4 , 1 1 9 ( tabl e ) , 1 2 2 , 1 2 3 , 1 2 5 , 126 , 149 , 170 , 1 7 2 , 181 , 1 8 4 , 1 8 5 , 2 0 9- 2 1 0 , 2 3 7 - 2 3 8 , 2 8 5 , 4 3 8 , 4 5 2 . See a l s o under individual countries Balas s a , Be l i , 301 Bananas , 4 2 8 Banco Central (Argentina ) , 2 4 6 , 248 , 255 , 256 , 257 , 261 , 264 , 266 , 444 Banco Central ( Spain ) , 4 1 0 Banco Central d o Bra s i l , 2 8 1 , 285 , 444 Banco de l a Nacion Argentina ,
254
Banco d e l o s Traba j adore s de Venezue la , 3 2 7 , 3 3 1 Banco d e Mexico , 3 2 0 Banco d o Bras i l , 2 8 1 Bank capital , 1 9- 2 0 , 2 1- 2 2 . See also Internationa l bank loans
467 Bank for Internationa l Settle ments ( B I S ) (Base l ) , 1 6 , 8 7 , 9 8 , 1 3 2 , 133 , 151 , 173 , 178 , 179 , 20 9 , 2 6 2 , 2 6 3 ( tab le ) , 2 8 0 , 2 8 4 , 3 1 6- 3 1 7 , 3 5 6 , 4 5 0 Bank Herstatt ( Germany ) , 3 9 6 Bank o f America , 4 0 0 Bank o f England , 1 1 Bank of Nova Scotia , 4 1 0 Bank o f Tokyo , 4 1 0 Bank shares , 2 2 Bank surcharge s , 9 2 BelaUnde Terry , Fernando , 3 8 6 , 406 Bertram , Geof frey , 394 Bipo l ar wor l d , 54, 56 , 58 B I S . See Bank for International Settlements Bol ivar , 3 3 2 - 3 3 3 , 3 3 4 . See also Venezue la , deva luation ; Venezue l a , overva luation Bolivia and Argentina , 445 debt payments , 7 7 , 445 debt renegotiation s , 1 7 5 - 1 7 6 ( tab l e ) debt-service ratio , 3 l ( table ) exports , 4 4 5 external debt , 74 ( tab l e ) , 76 ( tabl e ) and foreign loans , 1 3 , 3 9 2 ( f ig . ) natura l gas , 4 4 5 oi l , 3 8 Bond s . S e e Zero-coupon bond s Brain drain . See under Argentina Brandt Commi s s ion report s , 5 1 , 63 Braz i l ad j u s tment program , 4 4 5 automotive exports , 1 2 balance of payments , 8 1 , 1 1 0 , 2 3 8 , 2 7 8 , 2 7 9 ( table ) , 2 90 balance of trade , 2 7 9 ( tab le ) , 288 , 289 bank s , 2 8 0 , 2 8 3 ,
1 1 0- 1 1 1 , 1 5 4 , 2 7 8 , 4 5 5 exports , 1 9 , l 1 6 ( table ) , l 3 9 ( table ) , 1 5 2 , 2 7 8 , 2 8 9 external debt , 7 , 8 ( tabl e ) , 2 0 , 2 5 , 2 6 , 48 , 4 9 , 7 3 , 74 ( tabl e ) , 7 6 ( tab le ) , 9 8 , 1 0 2 - l 0 3 ( tabl e ) , 104 , 1 1 0 , I l l , 1 3 1 , 1 4 8 , l 5 0 ( tab l e ) , 1 7 1 , 2 7 7 , 2 8 0 - 2 8 1 , 286 , 289 , 326 and Federa l Repub l i c o f Germany , 1 9 foreign inves tment in , 2 8 5 , 2 8 9 and foreign loans , 1 3 , 2 0 , 1 5 1 , 1 7 1 , 2 7 8 , 2 8 4 , 2 90 , 3 9 1 , 3 9 2 ( f i g . ) , 444-445 GNP , 1 5 3 government , 1 2 8 , 4 5 2 and IMF , 2 0 , 4 9 , 99 , 1 3 2 , 1 4 6 , 1 5 8 , 2 7 7 , 2 78 , 2 8 0 , 2 8 l ( tab l e ) , 284 , 285 , 286 , 287 , 288 , 289 , 453 , 454 imports , 1 9 , I l l , 2 8 7 , 4 4 5 import substitution , 3 6 indus try , 17 , 4 6 inflat ion , 40 , 1 3 0 , l 4 0 ( tab l e ) , 1 5 3, 288 , 291 interna l debt , 1 3 0 interna l migration , 4 6 international reserves , 280 , 2 8 l - 2 8 3 ( tabl e s ) , 2 8 6 , 2 9 1 inves tment s , 1 8 , 1 0 5 , 2 8 8 labor market , 45 as NIC , 64 , 100 o i l imports ,
37-38
pub l ic sector , 1 5 3
286
capi ta l inflow , 1 6 5 , capital out f low , 1 3
debt proportion o f GNP , 8 , 2 5 , 2 8 ( tab le ) , 1 0 5 debt renegotiations , 1 7 5 - 1 7 6 ( table ) , 2 7 7 - 2 7 8 , 2 8 1 , 2 8 3- 2 8 8 , 2 9 1 , 4 l l ( table ) , 4 5 3 , 4 5 4 debt- service ratio , 30- 3 l ( tabl e s ) , 151 deva luation , 1 5 3 dome stic market , 1 6 6 economy , 3 7 , 3 8 , 98 , 1 0 0 , 1 0 5 ,
289
consumption , 106 ( tab l e ) , 2 8 9 current account , 18 debt payments , 8 1 , 1 5 2 , 1 5 5 , 158 , 284 , 288 , 2 9 1 debt per capita , 7 , 2 7 ( tab le ) debt proportion of exports , 3 2 5
terms of trade , l 1 6 ( table ) , 1 4 0 ( tabl e ) trade surplus , 8 5 , 28 5 , 4 4 5 tran s fer o f resources , 2 8 8 , 289 , 291 and U . S . , 2 0 , 2 7 7 , 448 See a l s o under Mex ico Bretton Woods sys tem ( 1 944 ) , 1 8 , 1 3 6 , 200 , 2 1 3 , 214 , 2 1 5 , 217 , 2 2 0
468 Bridge loans , 284 , 387
259,
260 ,
280 ,
Buenos A i r e s ( Argentina ) , Bus i ne s s cyc l e phenomena , 1 95 ( tab l e ) , 201-207 ,
CACMF .
197 ,
198 ,
218 , 2 1 9 ,
154 193 ,
199,
222,
223
See Central Ameri c an
Common Market Fund Calvo doctrine , 1 8 6 Canada , 9 , 1 5 7 , 4 0 0 , 4 1 0 , Capital ac cumulation ,
contro l s ,
export s ,
198 ,
13,
11
199,
Ill ,
18 3 , 1 8 7 , 4 4 9 formation , 1 3 , 1 0 5
- good s exports ,
202
166 ,
18 ,
90 ,
153 , 177 ,
105 ,
237 ,
248
78 , 86 , 87 , 88 , 8 9 ,
126 , 146 ,
6,
109 , 190 ,
7,
110, 193 ,
13,
1 5 1- 1 5 2 ,
14 ,
133, 199 ,
206 , 207 , 2 1 1 , 222 , 350-351 , 357 , 439
65,
161 , 200 ,
302 ,
82 ,
165 , 203 ,
markets growth , 1 7 0- 1 7 2 Carbon- steel imports , 1 2 1
Car ibbean , 3 7 , 1 4 8 , 1 5 1 , 1 5 2 , 1 5 6 . See a l s o individua l
countri e s Caribbean Common Market ,
39
Cava l lo , Domingo , 2 5 5 , 2 5 6 Celso Pastore , Alfonso , 4 4 4 Centra l African Repub l i c , 1 7 5 - 1 7 6 ( tab l e )
Central Amer ica , 46 ,
37 ,
41,
7 7 , 427-4 3 6 , 452 .
44 , 4 5 ,
�
Centra l American Bank for
Economic Integrat ion , 4 2 7
Central American Common
Market , 3 9 Central American Common
( CACMF ) , 4 3 5 ,
Centra l American Monetary Counc i l , 4 3 5 Centra l Bank (Chil e ) , 3 6 1 , 36 2 , 3 7 5
98 , 1 0 0 , 2 1 8- 2 1 9 ,
132 , 220,
346
15 ,
3 58 ,
Centra l Bank o f Vene zue l a ,
17-18 ,
209 , 221 ,
24,
2 14 , 222,
217 , 223 ,
246 , 3 1 9 , 403 , 406 , 442 Cerea l s , 3 9
83 ,
CETES . See Treasury Certificates Chase Manhattan Bank , 3 3 5 , 4 0 0 , 410 Chemi c a l s , 3 6 , 6 4 Chi l e adj us tment ,
3 6 4- 3 6 5 ,
374
balance o f payments , 365
238,
c apital inflow , 361 , 365 , 367 ,
354 ,
353 , 371
362 ,
3 6 0 ( tabl e ) , 359 ,
c apital movements , 3 5 3 - 3 6 0 , 3 6 7 , 376, 377
consumer cred i t , 3 6 8 consumption , 1 0 6 , 3 7 1 , current account , 3 5 4 , 3 56 , 3 6 1 , 3 6 5 , 3 7 2 debt payments , 4�
152,
377
3 5 5 ( table ) ,
155 ,
356 ,
debt per capita , 7 , 2 7 ( tab l e ) debt proportion o f exports , 3 2 5 debt proportion o f GNP , 8 , 2 8 ( tabl e ) debt renegoti ati ons , 1 7 5 - 1 7 6 ( tab le ) , 3 5 0 , 3 7 3 , 3 7 4 , 4 1 1 ( tab 1e ) , 4 4 5 debt- service ratio , 3 0 - 3 1 ( tab le s ) , 3 5 5 ( tab l e ) deva luation , 1 5 3 , 3 6 3 , 3 6 4 , 365 ,
369,
371,
376
362 ,
369 ,
370 ,
domestic market ,
a l so individua l countries
Market Fund 436
339,
banks , 3 5 3 , 3 5 4 , 3 5 6 , 369, 370 , 375 , 445
156-15 7 , 1 5 9 , 164 , 165 , 1 7 8 , 1 8 4 , 1 8 6 , 18 9 , 1 96 ,
237 markets , 107 , 170,
23 ,
179,
78
- goods imports , 6 2 , inflow ,
450
3 3 3- 3 3 4 ,
Centra l bank s ,
economy , 4 0 ,
375
350 ,
362 ,
3 4 8- 3 5 0 , 3 6 0- 3 6 1 ,
3 7 2- 3 7 3 ,
exports ,
3 5 5 ( tabl e )
48 , 4 9 ,
7 4 ( tabl e ) ,
374
external debt , 8 ( tab1 e ) , 1 3 , 1 0 2 - 1 0 3 ( tab l e ) ,
1 5 0 ( tabl e ) ,
3 5 3- 3 5 4 ,
326 ,
7 6 ( tabl e ) ,
110 ,
356-357 ,
349,
129 ,
350 ,
148 ,
3 5 8 ( tabl e ) ,
359 , 360-361 , 367 , 371-374 foreign investment in , 3 5 3
and foreign loans ,
370 , 371, 375 GOP , 3 5 3 , 3 5 6 , 3 6 1 , 372 , 373 , 445 go l d ,
360
356,
365 ,
359, 367 ,
469
Chi l e ( cont inued ) government , 1 2 8 , 3 4 8 , 4 5 2 and Great Britain , 1 9 and IMF , imports ,
Commodity price s , 1 7 2 , 196 , 2 0 3 , 2 1 9 , 4 1 7
146 , 3 7 3 , 445 19 , 84 , 1 1 0 , 3 4 8 ,
372 industry , 1 7 , 3 4 9 , 3 7 1 infl ation , 40 , 3 5 2 , 3 6 3 ,
349,
365 ,
367 intere st rate s , 3 4 9 , 3 5 0 , 3 5 3 , 365- 3 7 0 , 3 7 1 internationa l reserves , 3 5 4 , 360, 361 , 362 , 373 inve s tment , 3 5 1 , 3 5 5 ( tab le ) , 368 , 3 7 1 - 3 7 2 , 3 7 5 , 3 7 6 nati ona l i zation , 3 5 4 private sector , 3 4 8 , 3 5 0 , 3 5 2 , 3 5 8 ( tabl e ) , 3 6 0 , 3 6 2 , 3 7 3 pub l i c sec tor , 3 5 9 , 3 6 0 ( tab l e ) , 361-362 savings , 3 5 0 , 3 5 2 , 368 , 3 7 1 taxation , 3 7 7 trade , 8 5 , 3 4 8 , 3 7 2 , 3 7 3 wage s , 3 6 4 , 3 6 9 China , Peopl e ' s Repub l i c of , 101 , 161 Citibank ( U . S . ) , 1 3 1 Citi corp ( U . S . ) , 1 3 2 , 4 0 0 , 4 1 0 C ivi l soc iety , 5 6 C l arin ( Buenos Aires ) , 2 5 9 A . W . , 444 , 450 Cline , W i l l i am R . , 1 1 , 2 0 , 2 2 , 23 , 112 , 114 , 117 , 118 , 119 , 120, 122 , 455 Cl othing and footwear , 6 4 Club o f Rome , 5 9 Coffee , 4 4 , 8 4 , 2 3 5 , 4 2 8 Cold war , 5 4 Colombia balance of payments , 2 3 8 coffee , 4 4 consumption , 1 0 6 ( tab l e ) debt-s ervice ratio , 3 1 ( tab l e )
CIaU;en ,
expend iture s , 1 0 6 external debt , 8 ( table ) , 2 7 - 2 8 ( tab l e s ) , 7 4 ( table ) , 7 6 ( tabl e ) , 1 4 9 labor market , 4 5 and o i l , 3 8 Commerc ial banks . See International bank l oans Commodity Credit Corporation , 316
1 9 5 ( tabl e ) ,
export , 6 , 1 0 , 1 4 , 1 5 , 84 , 1 1 8- 1 1 9 , 1 2 4
78 , 7 9 ,
do l lar pri ce index , 1 5 Consumer goods , 4 2 , 6 0 , 6 2 , 78 , 248 Consumption ,
11 ,
40,
82 .
See
also under individual countries Coope r , Richard N . , 1 2 7 CORFO . See Deve lopment Corporation Costa Ric a , 1 3 ,
37 , 49,
7 4 ( tab le ) ,
7 7 , 1 7 5 - 1 7 6 ( tab l e ) , 4 1 1 ( tabl e ) , 4 2 8 , 4 2 9 ( tabl e ) , 4 3 0 ( tabl e ) , 4 3 1 , 4 3 2 , 43 3 , 434 , 435 , 4 3 6 ( tab le ) Cotton , 3 8 , 4 2 8 Coun c i l of Economic Advi sers (U . S . ) , 2 5 Credit , 2 3 , 2 5 , 6 5 - 6 6 , 6 7 , 7 9 , 8 2 , 98 , 104 , 1 3 1 , 1 7 1 , 1 7 2 , 1 7 7 , 185 , 1 8 7 , 202 , 207 , 2 3 7 , 2 90 , 4 1 8 bridge , 2 5 9 , 2 6 0 demand , 7 7 , 7 8 , 1 7 1 , 2 0 1 , 3 6 8 domestic , 1 2 5 export , 2 3 , 1 5 2 , 1 8 5 insurance , 1 6 5 , 1 6 6 , 186 , 2 5 6 long- term , 9 medium- term , 9 , 4 0 private bank , 1 7 1 , 1 8 6 short-term , 9 , 4 1 , 9 7 , 1 0 5 , 4 4 4 stand-by , 3 8 7 , 4 0 2 supply , 2 06 trade , 9 , 1 9 , 6 9 , 1 0 9 , 1 5 2 tranche drawings , 1 7 9 Credit Lyonnai s , 4 1 0 Crocker National Bank , 4 1 0 Cuba , 1 3 , 3 1 ( table ) , 7 7 , 1 7 5 - 1 7 6 ( tabl e ) , 4 1 1 ( tabl e ) Current account s , 1 2 2 deficits , 1 8 , 2 2- 2 3 , 4 0 , 68 , 8 3 , 8 5 , 1 0 8 ( tab l e ) , 1 0 9 , 1 1 0 , I l l , 1 1 4 , 1 1 9 ( table ) , 1 7 1 , 1 7 7 , 188 , 203 , 274 financing , 1 7 1 surplus , 1 0 0 S e e a l s o under Gro s s domestic produc t ; Latin America ; individual countri e s
470
Dagnino Pas tore , Jose Mar i a , 255 , 256 , 257 Daly , Jorge , 4 0 3 Data Re sourc e s , Inc . ( DRI ) , 1 2 0 Deadwe ight debt , 1 0 Debt-export ratio , 1 1 3 , 1 1 9 , 1 2 0 Debt- led growth , 1 00- 104 Debt- income rati o , 1 2 9 Debt- service rati o , 8 , 9 , 2 9- 3 1 ( tab l e s ) , 104 , 1 0 9 , 1 5 1 , 1 9 5 ( tab l e ) , 204 ( tabl e ) l imi t , 1 9 0 ( n 2 ) De f l a tion , 6 , 1 5 , 1 7 , 181 , 196 , 197 , 200 , 341
78 , 1 3 0 , 2 1 9 , 340 ,
D e Laro s s iere , Jacque s , 444 , 4 5 0 Depre s s i on , 18 , 1 9 , 1 9 4 , 206- 2 0 7 , 214 , 2 2 3 , 301 Detente , 5 5 , 5 6 Devaluation s , 1 7 , 3 6 , 8 3 , 8 8 , 89, 123-124 , 1 2 5 , 127 , 153 . See a l so under Dol l a r ; individual countries Deve loping countr i e s ,
6,
7-8 ,
9 , 1 0 , 1 1 , 1 2 , 14 , 29 ( tab l e ) , 5 5 , 61-65 deb t , 9 7 , 9 9 , 1 0 2 - 1 0 3 ( tabl e ) , 1 7 2 , 1 7 3 , 1 7 4 ( tabl e ) non- oi l ,
14 ,
15,
19,
2 9 ( table ) ,
78 , 1 0 0 , 1 1 6 ( tab l e ) , 1 2 2 , 1 3 9- 1 4 0 ( tabl e s ) , 1 7 2 , 1 7 3 , l 7 4 ( tab l e ) , 1 7 7 , 1 9 5 ( tabl e ) trade , 1 2 1 See a l s o Latin America ; Le s s deve loped countrie s ; Low- income countrie s ; Middl e-income countri es ; individual countr ies Deve l opment , 4 0 , 4 4 - 4 8 , 4 9 , 50,
54 ,
55 , 5 8 , 6 2 , 63 , 67 ,
8 2 , 8 3 , 96 , 1 3 8 , 1 5 9 , 1 6 7 , 184 , 4 3 8 financ e , 1 7 0 , 1 7 8 , 1 8 0 , 1 8 9 , 452 , 453 Deve lopment Corpora tion ( CORFO ) ( Ch i l e ) , 3 7 5 DeVries , Rimmer , 4 5 0 Diesel fue l , 4 2 Disinfl ation , 1 2 5 , 1 2 6 Do l l ar ( U . S . ) apprec iation , 14 , 1 9 , 1 1 7 , 1 1 8 , 1 2 1 , 1 4 0 ( tabl e ) , 1 9 6- 1 9 7 depreciation , 1 1 7 , 1 1 8 , 1 1 9 devaluation , 1 14
Domestic marke ts , 44 , 6 2 , 6 3 , 1 5 3 , 1 6 6 . See a l so under individual countries Domini can Repub l i c , 74 ( tab l e ) , 76 ( tab le ) Dresdner Bank , 3 9 1 DRI . S e e Data Re sourc e s ,
Inc .
Eastern Europe , 1 9 , 5 2 . See a l so individual countri e s Echeverr ia , Lui s , 2 9 5 , 2 9 7 , 3 0 4 ECLA . See United Nations Economi c Commi s s ion for Latin America Economi s t , 1 2 8 , 3 0 0 , 454 Ecuador , 17 debt payment s , 7 7 , 1 5 2 , 1 5 5 debt proportion o f exports , 3 2 5 debt renegotiation s , l 7 5 - 1 7 6 ( tabl e ) , 4 1 1 ( tab l e ) external debt , 7 4 ( tab l e ) , 7 6 ( tabl e ) , 1 4 8 , 3 2 6 , 4 4 5 oil , 3 8 private sector , 4 4 5 trade surplus , 8 5 EEC . S e e European Economi c Community Egyp t , 8 , 18 , 2 7- 2 8 ( tabl e s ) , 3 0 ( tabl e ) , 1 0 7 E ighth General Review of Quo ta s , 178 , 210 Electric ity , 4 2 E l Sa lvador , 74 ( tabl e ) , 7 6 ( tab l e ) , 4 2 7 , 4 2 9 , 4 3 0 , 4 3 1 , 4 3 2 , 4 3 4 , 4 3 5 , 4 3 6 ( tab l e ) Ene rgy , 4 2- 4 3 , 5 6 , 59 , 6 0 demand , 1 7 2 pr ic e s , 8 9 , 1 9l ( n4 ) Environment , 4 6 , 5 6 , 5 9 Equi l ib r ium , 1 9 7 - 1 9 8 , 2 0 1 , 208 , 210 , 213 , 217 , 221 ,
207 , 237,
265 , 274 , 321 , 3 2 2 , 3 5 2 Escape- c l ause actions , 1 2 1 Eurocredit syndicates , 3 0 8 Eurocurrency marke t , 66-67 , 81 , 99 , 1 0 0 , I l l , 1 5 5- 1 5 6 , 1 7 1 , 2 0 0 , 2 0 3 , 2 0 7 , 2 9 9 , 3 00 , 3 0 8 , 331-33 2 , 389 , 406 , 408 Eu rodo l l ar interbank rate , 1 5 7 Eurodol l ar marke t s , 1 7 0 Europe , 1 1 , 1 2 , 1 3 , 1 8 , 4 3 , 5 5 , 6 0 , 64 , 100 , 1 2 1 , 1 5 2- 1 5 3 , 1 5 7 , 3 8 7 , 3 8 9 , 400 , 4 5 0 . See a l s o Eas tern Europe ; individua l countries
471 European Economic Community ( EEC ) , 5 0 , 1 2 1 Exchange contro l s , 3 6 Exchange rate s , 1 3 , 2 6 , 8 3 , 1 1 8 , 1 2 3- 1 2 4 , 1 26 , 1 9 8 , 2 0 0 , 2 1 5 , 2 3 5 , 241 , 2 5 2 , 253 , 259 , 269 , 2 9 7 , 3 0 0 , 3 0 2 - 3 04 , 3 1 2 , 3 1 3 , 3 2 1- 3 2 2 , 3 3 2- 3 3 3 , 3 3 4 , 3 6 3 devaluation s , 1 5 3 , 2 5 6 overva lued , 1 6 7 Exchange reserve s , 9 , 1 6 0 , 2 4 2 , 2 80 , 2 8 1- 28 2 ( tab1 e s ) , 2 8 3 - 2 8 4 Exchange shortage , 1 9 Exchange surplus , 2 6 5 Export Devel opment Fund , 1 6 6 Export-Import Bank ( U . S . ) , 1 6 6 Export manufactures , 1 0 , 1 1- 1 2 , 3 6 , 3 7 , 6 3 , 64 , 1 1 5 - 1 1 7 Exports , 9 , 1 8 - 1 9 , 6 3 , 8 3 , 84 , 8 9 , 9 5 , 1 0 0 , 1 0 5 , 1 0 7 , 1 08 ( tab1 e ) , 1 1 5- 1 2 0 , 1 2 5 , 1 4 9 , 1 5 2 , 1 5 9 , 180, 182 , 183 , 197 , 4 3 9 crisis , 1 7 price s , 1 1 4 , 1 1 7 - 1 1 8 , 1 1 9 , 1 2 1 , 122 , 348 revenue s , 14 , 1 5 , 1 1 0 , 1 3 4 , 149, 151 , 188 value , 8 5 , 8 6 , 1 1 7 S e e a l so under individual c ountri e s Extended fami ly system , 1 54 Externa l debt service , 6- 7 , 8- 9 , 1 0 , 1 3 , 1 4 , 5 6 , 6 5 , 69- 70 , 1 0 7 , 1 0 8 ( tab1 e ) , 1 2 7- 1 2 8 , 1 3 4- 1 3 6 , 1 5 1 , 1 5 6 , 1 5 8- 1 6 8 , 1 7 5- 1 7 6 ( tab 1e ) , 1 8 1 , 2 7 4 , 2 7 5 , 448 and bank s , 1 7 7 , 1 8 7 , 1 9 7 , 2 0 5 cri s i s , 6 , 7 , 9 , 1 5- 1 8 , 2 3 , 112 , 193 , 205 fund use , 1 0- 1 3 , 3 7 7 long-term , 7 , 8 ( tab 1 e ) , 9 , 1 0 , 14 , 8 1 , 1 3 0 , 1 6 5 - 16 7 , 1 8 0 , 189 medium- term, 7 , 8 ( tab 1e ) , 9 , 10 , 14 , 164 , 180 outlook , 4 4 0- 4 4 1 per capita , 7 , 2 7 ( tabl e ) and pol i t ic s , 1 - 2 , 6 , 1 8 ,
7,
2 2- 2 6 , 184- 1 8 8 ,
4 3 9- 4 4 0 , 4 4 9 - 4 5 3 reschedul ing , 1 8 0 , 1 8 1 - 1 8 3 , 4 4 9 , 4 5 2 - 4 5 3 . See a l s o individual countries , debt renegotiations short-term, 7 , 8 ( tab 1 e ) , 9 - 1 0 , 1 6 , 6 6 , 81 , 1 8 0 soc i a l costs , 1 , 2 , 6 , 1 8 , 2 3 , 6 5 , 70 , 1 3 3 , 1 4 7 , 1 90 total , 7 , 9 7 , 9 9 and trade surplus , 1 8 1 S e e a l s o Amorti zation ; Debt service ratio ; Interest ; under individua l countries and region s , debt payments Exxon sub s idiary ( Peru ) , 3 8 7 Falklands c r i s i s ( 1 9 8 2 ) , 2 5 4 , 255 , 257 , 330 Fami ly planning , 4 5 Federa l Depo s itors ' Insurance Corporation ( U . S . ) , 21 Federal Repub l i c of Germany , 1 7 , 1 8- 1 9 , 6 9- 7 0 , 44 2 . See also under Braz i l ; Mexi c o ; Venezuela Federa l Reserve ( U . S . ) , 2 1 , 9 8 , 99 , 319 , 441 Financ ial Times , 3 3 1 F i sh l ow , Albert , 44 3 , 4 4 8 Food , 3 8 - 3 9 , 5 9 Franc e , 4 4 2 Free- trade pol i c ie s , 1 3 Furtado , Ce1 s o , · 2 6 GAB . S e e Genera l Agreement to Borrow Gabon , 1 7 5- 1 7 6 ( tab1 e ) Ga 1tieri , Leopo1do , 2 3 2 , 2 5 3 , 2 5 5 Ga1veas , Ernane , 444 Garc i a V�zquez , Enrique , 4 4 4 GATT . See Genera l Agreement o n Tar i f f s and Trade GOP . See Gro s s dome s tic produc t Geari ratio , 1 6 1
ng-
Gene ral Agreement o n Tari f f s 23 ,
65 , 68 , 1 28-1 2 9 , 1 4 7 , 190 a s proportion o f GOP , 6 5 , 1 7 7 , 429 a s proportion of GNP , 2 8 ( tab1 e ) , 9 7
propo s al s ,
8,
and Trade ( GATT ) , 5 0 , 5 1 Secretaria t , 1 0 , 1 3 Genera l Agreement t o Borrow
( GAB ) , 9 8 , 1 6 0 , 1 7 9
Germany , 2 3 6 , 3 4 5 . S e e a l s o Federa l Republ i c of Germany Ghana , 1 7 5- 1 7 6 ( tabl e )
472 GNP .
See Gro s s national
4 3 6 ( tabl e ) Hong Kong , 64
product Gold , 2 8 1 ( tab l e ) , 3 2 6- 3 2 7 , 331 , 360 , 403 s tandard , 2 1 7 , 2 1 8 ,
Hungary , 65 Hurtado , Osva1do , 2
220
Gome z , Vicente , 3 4 5 Gonzalez d e l Sol ar , Jorge , 2 6 1
Gran Miner i a ( Pe ru ) , 3 9 4 Great Britain , 1 9 , 2 6 , 2 0 0 ,
236 .
See a l s o under Argentina Great Depre s s ion ( 1 9 3 0 s ) , 136-13 7 , 451 Greec e , 3 0 ( tab 1 e ) , 6 5 Grinspun , Bernardo , 4 4 4 Gro s s domestic produc t ( GOP ) , 1 2 2 , 1 9 5 ( tab 1 e ) , 1 9 6 , 2 04 ( tabl e ) capi ta l import share , 1 8 6 current account proportion of , 1 2- 1 3 , 1 8 6 - 1 8 7 inve s tment share , 1 2 manufacturing share , 1 1 See a l so under Latin America ; individual c ountries Gro s s nation a l produc t ( GNP ) , 1 0 6 , 1 9 6 . See a l so Exte rna l debt s e rvice , as proportion o f GNP ;
indiviuua 1 countrie s ,
debt proportion o f GNP ;
under individua l countrie s Group of Seventy- Seven , 5 1 , 5 5 Group o f Ten , 1 7 9 , 2 2 5 ( n 7 ) , 291 (n3 ) , 450 Group o f Twenty-Four , 9 3 Growth- led debt , 104- 1 0 7 , 1 1 1 Growth rate , 1 1- 1 2 , 1 7 , 2 2 , 50 , 5 9 , 6 2 , 63-64 , 114 , 119 , 1 2 1 , 1 2 4 , 1 3 9 - 1 4 0 ( tab 1es ) , 1 4 5 , 1 8 7 , 1 8 8 , 190 , 1 9 4 , 4 5 1 fore c a s t , 4 4 2 and indebtedne s s , 8 2 , 1 0 1 , 1 3 4 , 1 5 7 , 1 8 4- 1 8 5 , 2 04 ( tab 1 e ) , 4 3 8 , 4 4 0 , 4 5 5 Gua tema l a , 74 ( tab l e ) , 7 6 ( tab1 e ) , 4 2 7 , 4 2 9 ( tab1 e ) , 4 3 0 , 4 3 1 ( tab 1e ) , 4 3 2 , 4 3 3 , 4 3 4 , 4 3 5 , 4 3 6 ( tab 1 e )
Iglesias , Enrique V . , 1 7 , 4 4 3 I l l iquidity , 1 12 , 1 5 9 , 2 3 8 , 2 6 4 IMF . See Internationa l Monetary F�d Imports , 1 3 , 6 2 , 1 1 4 , 1 2 1 , 1 2 2 , 1 9 6- 1 9 7 , 2 3 7 contro l s , 3 6 , 8 3 expans ion , 1 0 1 , 1 3 3 prices , 1 1 7 , 1 1 8 , 1 2 5 reduction s , 84 , 8 7 , 88 , 89 , 1 1 0 , 146, 152, 156 va lue , 8 5 Import substitution , 3 6 , 3 8 , 4 2 , 5 1 , 6 1 - 6 2 , 1 2 2 , 1 24 , 2 3 7 Income d i s tribution , 44 , 4 5 , 6 2 , 1 2 9 growth , 1 1 7 nationa l , 1 0 , 1 2 6 per c apita , 9 , 1 1 , 6 3 , 64 , 1 0 1 , 146 , 154 real , 6 , 5 0 , 1 2 4 , 1 5 4 rura l , 3 9 , 4 4 urban-rural di f ferential , 3 9 India , 7 , 8 , 1 2 , 2 7 - 2 8 ( tab l es ) , 3 0 ( tab l e ) , 51 , 6 5 , 1 0 1 , 1 7 5- 1 7 6 ( tab l e ) Indonesia , 7 , 8 ( tab l e ) , 1 8 , 2 7 - 2 8 ( tab1 es ) , 3 0 ( tab 1 e ) , 1 0 2 - 1 0 3 ( tab1 e ) , 1 06 , 1 4 9 , 1 5 0 ( tab 1e ) , 3 3 2 Industri a l i zation , 1 1- 1 2 , 5 5 , 6 1 , 6 2 , 6 3 , 64 , 1 6 7 , 2 3 4 , 2 3 5 , 2 36 - 2 3 7 I n f l ation , 9 , 4 0 , 6 7 , 7 8 , 7 9 , 8 2 , 88 , 96 , 1 0 9 , 1 1 4 , 1 1 7 , 118 , 1 1 9 , 121 , 123 , 126 , 1 3 0 , 14 7 , 1 5 3 , 1 5 4 , 1 7 2 , 194 , 1 9 6 , 205 ,
214 ,
2 2 1 , 2 2 3 , 300 , 359
exchange rate ,
239,
252
S e e a l so �der individua l countries Inso lvency , 1 5 9 , 2 3 4
Guyana , 7 4 ( tab1 e ) , 1 7 5- 1 7 6 ( tab l e ) Institute for Internationa l Ec onomi c s ( Washington , D . C . ) , Haiti , 7 4 ( tab1e ) , 76 ( tabl e ) 455 Hegemony , 5 7 , 5 8 Institute o f Internationa l Hondura s , 1 3 , 7 4 ( tab l e ) , F inance , 2 4 7 6 ( tab1 e ) , 4 2 9 ( tabl e ) , 4 3 0 , Inter-American Deve l opment Bank , 4 3 1 ( tab 1e ) , 4 3 2 , 4 3 3 , 4 3 4 ,
4 6 , 68 , 94 , 1 5 6 ,
161 , 4 2 7 , 436 , 453
473 IADB ( continued ) Fund for Special Operation s , 161 , 162 Interdependenc e , 4 8 , 56 , 97 , 137, 157 , 438, 452
198-200 , 2 2 2 , 2 2 3 ,
Intere s t payments , 1 7 , 2 3 , 24 , 2 6 , 8 1- 8 2 , 8 6 , 9 1 , 1 0 9 , 1 2 8 , 14 5 , 1 4 7 , 1 4 9 , 1 5 1 , 1 56 , 159 , 168 , 177 , 183 , 188 , 450
73, 129 , 157 , 290 ,
payments , export value o f , 7 3 , 7 6 { tabl e ) , 1 4 7 , 1 5 1 rate reduction , 4 5 0 , 4 5 1 rate s , 6 , 7 , 1 0 , 14 , 1 5 , 1 7 , 2 2 , 24 , 25 , 40 , 65 , 67 , 8 1 , 8 3 , 8 5 , 88 , 8 9 , 104 , 1 0 7 , 1 08 { table ) 114 , 1 2 0 , 121 , 1 2 5 ,
7 7 , 78 , 79, 90 , 9 1 , 9 2 , , 109 , Ill , 127 , 138 ,
1 4 0 ( tab l e ) , 1 4 5 , 1 4 8 , 1 4 9 , I S S , 157 , 162 , 163-164 , 171 , 1 7 7 , 1 8 3 , 1 8 9 , 1 9 6 , 2 0 1- 2 0 2 , 2 0 3 , 2 0 5 , 2 06 , 2 0 7 , 2 5 1 , 2 6 0 , 2 6 9 , 2 7 5 , 2 9 0 , 3 4 8 , 3 6 5- 3 66 , 4 0 7 , 4 4 2 , 4 4 8 , 4 4 9 , 4 5 4 , 4 5 5 . See also under individua l c ountries rate subsidie s , 94 , 1 6 7 re financ ing , 7 3 , I S S , 1 5 9 , 1 6 6 , 291 International b ank loan s , 4 0 , 6 8 , 6 9 , 7 3 - 7 4 , 7 7 , 7 9 , 8 2- 8 3 , 87 , 1 3 1 - 1 3 2 , 1 3 5 -1 3 6 , 1 3 7- 1 3 8 , 1 4 5 , 1 4 6 , 148 , 1 4 9 , 1 5 1- 1 5 2 , 1 5 4- 1 5 5 , 1 5 7 , 1 5 8 , 1 6 0 - 1 6 4 , 171 , 1 7 3 , 184 , 207- 208 , 2 5 7 - 2 5 8 , 2 5 9 , 2 7 2 , 2 8 0 , 284 , 2 8 6 , 2 9 0 , 3 2 6 , 3 9 6 , 4 0 1 { tab le ) , 4 1 0 , 4 1 3- 4 1 6 , 4 3 0- 4 3 3 , 4 3 4 - 4 3 5 , 4 4 8 - 44 9 . See a l s o Bank f o r International Settl ements ; Inter-American Development Bank ; Inter nationa l Monetary Fund ; World B ank ; individual countries , and foreign loans I nternational credit c runch ( 198 2 ) , 6 , 1 7 3 , 396 , 441-443 International Deve l opment Association , 1 6 1 International economic c r i s i s , 1 , 2 , 1 5- 1 8 , 5 3 , 5 4 , 5 8 - 6 1 ,
90 , 99 , 1 1 1 - 1 1 2 , 1 7 0 , 1 9 4 , 197 , 234 , 274 International F inanc i a l Stati s t i c s ( IMF ) , 3 2 2 International financ ial sy stem , 7 , 1 7 , 1 8 , 53 , 6 9 , 83 , 1 37 , 1 7 3 , 1 7 7 - 1 7 8 , 1 8 8- 1 8 9 , 1 93 - 1 94 , 2 0 8 , 2 1 0 , 2 1 6- 2 2 2 , 4 4 0 , 4 4 1 , 450 , 454 International Herald Tribune , 4 5 0 International Monetary Fund ( IMF ) , 2 , 1 5 , 1 6 , 1 7 , 1 8 , 6 8 , 7 3 , 8 7 , 90 , 9 3 , 1 0 6 , 1 1 2 , 1 1 8 , 120, 1 2 2 , 137 , 163 , 173 , 178 , 185 , 189 , 208 , 213-214 , 256 , 3 2 2 , 4 3 1 , 4 3 4 , 4 4 3 , 444 , 4 4 6 - 44 8 , 450 , 452 , 453 ad j us tment package s , 9 8 , 9 9 , 1 2 2 - 1 3 0 , 1 3 2- 1 3 3 , 1 4 6 , 1 4 9 , 1 6 5 , 1 7 9 , 209- 2 1 0 , 4 4 7 , 4 5 2 compensatory c redit fac i l i ty , 337 General Res ources Accoun t , Occas ional Paper , 1 0 7
213
quota s , 1 3 5 , 1 5 8 , 1 6 0 , 1 7 8- 1 7 9 , 2 1 0- 2 1 1 , 2 1 2 , 4 4 7 S e e a l so Spe c ial Drawing Rights ; under ind iv idua l c ountries Internationa l Monetary System Board of Governors , 2 1 0 International re serve s . S e e under B ra z i l ; Chi l e ; Peru ; Vene zue la International sys tem , 5 4 - 5 8 International tabular s tandard , 2 19- 2 2 0 , 2 2 1 , 2 26 { n1 7 ) Intraregiona1 debt . See Central Amer ican Common Market Fund Inves tment dome s ti c , 1 1 , 1 2 , 1 7 , 1 9 , 2 4 , 4 0 , 4 1 , 6 7 , 8 3 , 8 8 , 90 , 94 , 1 0 5 , 1 06 , 1 3 0 , 1 4 6 , 1 6 6 , 2 0 2 , 206 equity ,
126
fore ign , 8 6 , 1 1 4 , 1 84 , 1 8 5 , 191 {n5 ) private , 1 4 6 , 1 6 5 , 1 7 0 rate , 6 6 , 1 4 5 , 1 8 0 , 1 8 1 S e e a l s o under individual countries I ran , 6 5 , 3 3 2 Iran- I raq war , 1 0 7 I s rae l , 7 , 8 , 2 7 - 2 8 { tab1 e s ) , 6 5 , 443 Italy , 3 4 5
474
Ivory Coa s t ,
3 0 ( tabl e ) , 4 4 3
Jamaica , 1 7 5 - 1 7 6 ( tabl e ) Japan , 4 3 , 5 0 , 6 0 , 1 2 1 , 1 5 2 , 4 4 1 , 442 , 450 bank s , 1 3 , 1 5 7 , 3 8 9 , 4 0 0 , 4 0 9 , 410 Keynes , John Maynard , 1 3 2 , 1 3 6- 1 3 7 , 2 1 8- 2 2 0 , 2 2 1 Keynes ian economic s , 4 0 , 2 1 4 , 2 2 3 - 2 24 ( nl ) , 2 6 6 Korea . See South Korea Kramer , -pfnto , 2 6 1 Kuc zynski , Pedro-Pab l o , 4 4 3 , 4 5 4 Labor force , 1 7 , 4 5 -4 6 , 1 6 7 , 2 3 7 . See a l s o Segmented labor market s ; Unemployment ; Wages LAFTA ( Latin American Free Trade Association ) . See Latin American Integration Associa tion LAIA . See La t in Amer ican Integration Associa tion Latin America agricul ture , 3 8- 3 9 , 44 banks , 4 4 4 birthrat e , 4 5 , 4 7 current accounts , 1 3 , 8 3 , 8 5 , 146 , 1 5 6 , 164 economi e s , 3 9- 4 1 , 5 3 , 5 4 , 5 8 , 5 9 , 67 , 8 2 , 83 , 87-88 , 9 1 , 153 , 167 , 452 education , 4 4 , 4 5 , 4 6 - 4 7 export prices , 7 7 external debt , 1 - 3 , 4 9 , 5 3 , 54 , 6 5 - 7 0 , 7 3 - 7 7 , 8 1 , 8 2 , 8 6 , 87 , 8 9 , 9 2 , 93-94 , 9 6 , Ill , 1 4 5 , 1 4 8 , 1 4 9 , 1 5 0 ( tab le ) , 1 74 ( tabl e ) , 4 4 2 foreign inve s tment in , 6 6 , 1 5 6 GOP , 3 6 , 4 1 government s , 4 5 1 -4 5 2 heal th , 44 , 4 5 , 4 7 - 4 8 import s , 1 5 2 industriali zation , 4 2- 4 3 , 44 , 4 6 , 5 1 , 64 infras tructure , 4 4 , 1 6 7 manufac turing , 1 1 , 1 2 , 3 6 , 1 6 7 mi l itary expenditure s , 4 5 morta l i ty rate , 4 6 net avai labl e financ ing , 7 5 ( table )
o i l - exporting countries , 3 8 . See a l s o ind ividual countries pol itical instab i l i ty , 41 private sector , 1 5 3 , 1 5 7 recovery pol i c ie s , 9 2 - 9 6 regional integration , 3 9 - 4 0 , 49 , 9 2 , 95 rural , 3 9 , 44 , 4 6 savings , 1 2 , 1 5 6 s oc i a l securi ty , 4 5 , 6 7 and Third Worl d , 5 0 - 5 2 trade surplus , 8 7 , 8 9 , 9 2 , and U . S . , 1 5 2 S e e a l s o Southern Cone ; individual countries
183
Latin American Economic Con ference-. See Qui to economic conference Latin American Economi c Sys tem ( SELA ) , 2 , 4 1 , 4 9 , 5 1 , 4 5 2 Latin American Free Trade Assoc iation (LAFTA ) . See Latin Amer ican Integration Associa ti on Latin American Integration Association ( LAIA ) , 3 9 Law for Investment i n the B a s i c Sector s of Produc tion ( Venezue l a ) , 3 4 6 L a w f o r the Nationa l i zation o f the O i l Indus try ( Venezuela ) , 346 LDC s . S e e L e s s devel oped c ountries Less developed countries ( LDC s ) , 1 6 , 1 7 , 1 5 0 ( tabl e ) , 1 7 1 , 1 7 7 , 1 8 0 , 2 0 3 - 2 0 5 , 4 3 7 - 44 0 , 4 4 8 , 4 4 9 , 4 50 , 4 5 1 - 4 5 3 , 4 5 5 Lever plan , 1 9 1 ( n 7 ) L iber i a , 1 3 , 1 7 5 - 1 7 6 ( tabl e ) L IBOR . See London Inter-Bank Offer Rate Lips chi tz , L . , 3 2 2 Liquidity , cri s i s ,
211 ,
177,
212 ,
215
178 , 179 , 180,
183 ,
1 8 9 , 1 96 , 1 9 7 S e e a l s o I l l iquidity Loan purchas es , 1 3 4 Locomo tive theory , 90 London Inter-Bank Offer Rate ( LIBOR) , 1 0 , 1 4 , 2 2 , 7 9 , 80 ( f ig . ) , 1 04 , 1 3 1 , 1 5 5 , 1 6 4 , 3 00 , 3 0 8 , 3 1 9 , 3 2 1 , 3 3 1 , 3 8 9 , 3 9 1 , 400 , 406 , 4 0 7 , 409 , 4 1 0 , 4 1 1 ( tab l e ) , 4 1 2 , 4 4 5 Lope z , Antonio ,
246
475 L6pez Porti l l o , Jo se , 2 9 4 , 3 1 0 , 3 1 2 , 3 17 Low- income countrie s , 8- 9 , 2 9 ( tab1 e ) , 64 , 1 0 1 , 1 0 2 - 1 0 3 ( tab l e ) Lusinchi , Jaime , 4 4 6 Madaga scar , 1 7 5 - 1 7 6 ( table ) Malawi , 1 7 5 - 1 7 6 ( tab le ) Ma lays ia , 6 5 Ma lnutrition , 1 4 7 Malta , 6 5 Manufacturers Hanover Trust ( U . S . ) , 2 0 , 400 , 407 , 4 1 0 Martinez d e HOz , Jos e , 24 2- 24 3 , 249 , 2 5 1 Mea sures for International Economic Stab i l i ty ( UN ) , 2 1 5 Meat , 2 36 , 2 4 8 , 4 2 8 Meta l s price s , 1 5 , 7 8 Mex ico balance o f payment s , 3 0 1 , 3 1 4 , 315, 320 bank s , 3 1 4 , 3 1 6 , 3 1 7 , 3 1 9 , 3 2 0 b irthrate , 4 5 boom ( 1 9 7 7 - 1 98 1 ) , 4 5 and Braz i l , 2 8 0 budget , 3 1 2 , 3 1 3 capital inflow , 1 6 5 c api tal outflow , . 1 3 , 1 1 1 , 1 6 6 , 300 , 302 , 3 1 3 , 314 , 3 1 5 , 3 1 7 and Centra l America , 4 6 consumption , 1 06 ( tab 1e ) , 1 5 3 cotton , 3 8 current account , 4 0 , 1 2 2 , 2 96 ( tab1 e ) , 2 98 ( tab1 e ) , 2 9 9 , 3 0 0 , 3 0 2 , 3 0 3 ( tab1e ) , 3 0 5 , 3 0 7 ( tab1e ) , 3 0 9 ( tab1 e ) , 3 1 0 , 320 debt payments , 7 7 , 8 1 , 1 5 1 , 1 5 2 , 1 5 5 , 2 7 8 , 2 90 , 2 9 8 ( tabl e ) , 2 9 9 - 3 00 , 3 1 7 , 320 debt per capita , 7 , 2 7 ( tab l e ) debt proportion of exports , 3 2 5 debt proportion of GDP , 2 9 9 debt proportion of GNP , 8 , 2 5 , 2 8 ( tab1 e ) , 1 0 5 debt renegotiations , 1 7 5- 1 7 6 ( tab1e ) ,
3 1 9- 3 2 1 ,
3 3 0- 3 3 1 , 4 0 8 , 4 1 1 ( tab1 e ) , 446, 453 , 454 debt-servi ce ratio , 3 0 ( tabl e ) , 151 , 299
devaluation , 1 5 3 , 3 0 2 , 3 1 5 , 3 2 1 dome s t i c market , 1 6 6 , 3 1 2 Economi c Adjus tment Program , 316 , 318 , 321 exports , 3 8 , 3 0 1 , 3 0 2 , 3 1 0 , 313 , 318 , 320 external debt , 7 , 8 2 5 , 4 8 , 49 , 7 3 , 74 7 6 ( tab1e ) , 9 7 , 98 , ( tab l e ) , 1 0 4 , 1 1 0 ,
( tab 1e ) , 1 9 , ( tabl e ) , 1 02- 1 0 3 1 28 , 1 2 9 ,
1 3 1 , 1 4 8 , 1 5 0 ( tab 1e ) , 1 5 3 , 1 7 1 , 2 9 4 - 2 9 5 , 2 9 7- 2 9 9 , 3 0 1- 3 0 2 , 3 0 5 - 3 08 , 3 1 1 ( tab1e ) , 3 1 4 , 3 1 5 , 3 1 7 , 3 26 and Federa l Republ i c of Germany , 1 8 - 1 9 food imports , 38- 3 9 and foreign loan s , 1 3 , 1 9- 2 0 , 1 7 1 , 294 , 297 , 299 , 3 0 2 , 308 , 3 1 0 , 3 1 4 , 3 1 6 , 3 2 1 , 3 9 2 ( fi g . ) GDP , 2 9 5 , 2 9 6 ( tab 1e ) , 2 9 8 ( tab1 e ) , 3 0 0 , 3 0 3 ( tab 1e ) , 304 , 3 0 5 , 3 0 7 ( table ) , 3 0 8 , 3 1 0 , 3 1 3 , 3 1 7 GNP , 1 5 3 and Great Britain , 1 9 and IMF , 3 0 2 , 3 1 8 - 3 1 9 imports , 1 8- 1 9 , 3 8 , 84 , 1 1 0 , 301 , 3 0 2 , 305 , 310 , 3 1 2 , 314 , 318 import substitution , 3 6 income , 1 4 6 , 1 5 4 industry , 1 7 inf lation , 40 , 1 30 , 1 5 3 , 1 5 4 , 2 9 5 , 2 9 6 ( tab 1e ) , 2 9 7 , 300 , 3 0 2 , 3 0 3 ( tab1 e ) , 3 1 2 , 3 1 7 , 3 2 1 intere s t rates , 3 0 0 , 3 1 8 internal migration , 4 6 inves tment , 1 8 , 1 0 5 , 1 5 3 , 3 0 2 , 3 0 3 ( tab1e ) , 3 0 4 , 3 0 5 l abor market , 4 5 , 4 6 , 3 0 5 l i teracy , 1 5 4 national i zation , 3 1 7 a s NIC , 64 , 1 00 oil , 37 , 38 , 4 1 , 4 2 , 4 3 , 97 , 3 0 3 ( tab1 e ) ,
304 ,
305 ,
308 , 3 1 0 ,
3 1 1 ( tabl e ) , 3 1 2 , 3 1 3 , 3 1 7 , 4 4 6 . See a l s o Petr61eos Mex icano s overvaluation , 3 1 2 pol itical system , 4 1 , 1 5 4 private sector , 4 1 , 3 0 8 ,
315,
3 1 7 , 3 1 9- 3 2 0 publ i c expend i ture , 2 9 5 , 2 96 ( tab le ) , 2 9 8 ( tab 1e ) , 2 9 9 , 3 0 4 ,
476 Mex ico ( c ontinue d )
pub l i c expendi ture 305 ,
317,
3 0 7 { table ) ,
319,
3 21
National Bureau o f Economic
( cont . )
308 ,
312,
and regional integration , savings , 1 06
39
s tab i l i zation po l i c i e s , 1 2 9- 1 3 0 , 1 4 6 , 1 5 3 , 3 0 2 subs idie s , 4 5 , 3 i 5
taxation , 4 5 ,
305 ,
318
305 ,
wage s , 3 0 5 , 3 1 5 Mex ico C i ty , 4 6 , 1 5 4
318
Michigan National Bank , 1 3 2 Middle Eas t , 1 1 , 1 8 , 54 , 1 5 2 , 444 Middl e-income countrie s ,
405 , 408
145
Min i stry o f National P rope�ti e s a n d Industrial Deve lopment ( SEPAF IN ) ( Mexico ) , 3 1 3 Mode rn i zation , 5 8
M . See Money sto 7k I Monetar1. s t econOm1 C model , 348 ,
3 5 0- 3 5 2
Money creation , 2 0 2 Money s tock ( M ) , 1 9 5 { tab le ) , l 196 , 199, 253
Mora l e s Bermudez , Fran c i sco , 3 9 8 Morgan Guaranty Survey , 4 4 1 Morgan Guaranty Tru s t Company of New York , 1 1 2 , 1 1 8 ,
1 20 ,
400 , 407 , 409 , 4 4 9 , 4 5 0 Morocc o , 8 , 2 7 - 2 8 { tabl es ) , 3 0 { tabl e ) , 4 4 3
Mul t i lateral Deve lopment Bank , 157
Mul t i l ateral government guaranteed fund ,
185
Nacional Financiera ( NAF INSA ) ( Mexi co ) , 3 1 6
NAFINSA . S e e Nac ional Financiera National and International Measure s for Full Employment ( UN ) ,
215
( Paris ) ,
442
National Wes tminster Bank , 4 1 0
264 , 4 1 2
Newly indus trializ ing c ountries ( NIC s ) , 8 , 1 1 , 2 9 { tabl e ) , 5 5 , 64 - 6 5 ,
133
100 ,
1 0 1 - 1 04 ,
121 ,
Newly Industria l i z ing Countries and the Ad j us tment Problem, The ( Great Britain ) , 6 4 - 6 5
N e w York Stock Exchange , New York Times ,
Nicaragua ,
2 9 ( tab le ) , 1 0 1 , 4 3 9 M i l i tary purcha se s , 1 3 , 4 5 , 8 2 , Mineral s ,
and Economi c Studies
New International Economic Order , 50
2 0 , 46 , 1 3 7 , 145 ,
3 1 6 , 446 , 448 va lue-added tax ,
194
Natural disa sters , 88 , Natura l gas , 4 2 , 4 4 5 Netto , Delfim, 4 4 4
terms o f trade , 3 0 1 trade surplus , 8 5 , 3 2 0
urban , 1 5 4 and U . S . , 1 9 ,
Re search ,
National Institute o f Statistics
255 ,
7 4 ( tab le ) ,
1 7 5- 1 7 6 ( tab l e ) ,
22
260 , 443
7 6 ( table ) ,
4 2 7 , 4 29 , 4 3 0 ,
4 3 1 ( tab l e ) , 4 3 2 , 4 3 3- 4 3 4 , 4 3 5 , 4 3 6 { tabl e ) , 4 5 2
NICs . See Newly indus tria l i z ing countries
Nigeria , 8 ( tab l e ) , 1 8 , 2 7 - 2 8 ( tab l e s ) , 3 0 ( tabl e ) , 9 7 , 1 0 2 - 1 0 3 ( tabl e ) , 1 4 9 , 1 5 0 ( tab le ) , 3 3 2 , 4 4 3 Nonal igned countri es , 5 1 , 5 5 North-South relationship , 5 0 , 5 1 , 5 2 , 58 OECD . See Organi zation for Economic Cooperation and Deve lopment
O f f i c e for the Sys tem of
D i f f erential Exchange Rates ( RECAD I )
339 , 347
( Vene zue la ) ,
Oil
benchmark pric e , prices ,
12,
5 3 , 66 , 67 ,
107 ,
14 ,
173
15,
333 ,
37-3 8 ,
50,
84 , 1 0 1 , 1 04 , 1 0 5 ,
149 , 1 7 0 ,
172 ,
173 ,
203 ,
274 , 3 3 5 , 337 , 405 shocks ( 1 9 7 3 - 1 9 7 4 , 1 9 7 9 - 1 9 8 0 ) , 3 7 - 3 8 , 1 0 5 , 1 0 8 ( tabl e ) , 1 1 1 , 112 , 1 7 2 , 278 , 301 , 396
S e e a l s o under individual
countries OPEC . See Organi zation o f Petroleum Expo rting Countri e s
477 Open economies , 4 0 , 1 1 0 , 2 3 2 , 2 4 1 - 24 2 , 3 7 4 Organization for Economic Cooperation and Devel opment ( OECD ) , 1 4 , 2 2 , 4 7 , 64 , 161 , 441 , 450 economie s , 8 2 , 1 2 2 , 4 4 2 GOP , 5 0 , 7 8 imports , 1 1 4 rece s s ion , 8 3 , 4 0 8 Organization o f Petroleum Exporting Countries ( OPEC ) , 8 , 14 , 1 5 , 5 5 , 59 , I l l , 3 3 5 , 3 3 7 , 4 3 9 , 448 current account surplus , 1 0 0 debt-service ratio , 2 9 ( tab l e ) financial surplus , 6 6 , 1 7 3 , 2 7 4 o i l surplus , 1 0 7 production quota s , 3 2 6 , 3 3 0 , 332, 335 Output value , 9 OVerborrowing , 2 0 3 OVerl ending , 2 0 3 , 2 0 6 OVervaluation , 4 0 . S e e a l s o under individual countries Pak i stan , 7 , 8 ( tabl e ) , 2 7 - 2 8 ( tabl e s ) , 3 0 ( tab le ) , 6 5 , 1 7 5 - 1 7 6 ( table ) " Pampa , " 2 3 5 Panama , 7 4 ( tab l e ) Paraguay , 74 ( table ) , 76 ( tabl e ) Para l l e l agreement , 3 3 9 Paris Club , 2 8 7 , 4 0 3 , 406 , 4 1 0 , 434 PEMEX . See Petroleos Mex icanos Peru a d j u s tment , 4 0 3 -4 0 5 , 4 0 7 -4 08 , 409 agricul ture , 3 8 8 arms purc hases , 4 0 5 , 4 0 8 bal ance o f payments , 384 , 3 8 5 , 3 8 7 , 3 96 , 4 0 5 , 4 06 , 4 0 7 , 412 balance o f trade , 3 8 6 bank s , 3 8 3 , 3 8 4 , 3 8 5 , 3 8 6 , 3 8 8 , 389 , 393 , 398 , 402 , 403 , 412 budget , 3 84 capital inflow , 3 8 3 ,
3 99 ( tab l e )
c on sumption , 3 9 5 ( table ) , 3 9 7 ( tabl e ) , 4 1 7 current account , 3 9 5 ( tabl e ) , 3 9 6 , 3 9 8 , 4 05 , 4 0 8 , 4 1 7
debt payments , 1 5 2 , 1 5 5 , 3 9 8 ( table ) , 4 0 2 , 4 1 0 , 4 1 2 debt proportion of export s , 3 2 5 , 3 9 0 ( tabl e ) deb t proportion o f GOP , 3 9 0 ( table ) , 3 9 6 debt proportion of GNP , 8 , 2 8 ( tab le ) , 3 8 6 debt renegotiation s , 1 7 5- 1 7 6 ( tabl e ) , 4 0 0 , 4 0 3 , 4 04 ( tabl e ) , 406 , 410- 4 1 2 , 4 1 8- 4 2 1 debt-service ratio , 3 0 - 3 1 ( tabl e s ) devaluation , 3 9 8 , 4 0 8 devel opment , 3 8 5 , 3 8 8 droughts , 4 1 2 economy , 3 8 3 , 3 8 6 , 3 8 8 , 3 9 4 , 3 9 5 ( table ) , 3 9 6 , 3 9 7 ( tabl e ) , 3 9 8 ( table ) , 4 0 5 , 4 0 6 , 4 0 7 , 412 , 417 exports , 3 8 5 , 3 8 6 , 3 8 8 , 3 9 4 , 3 9 5 ( tabl e ) , 3 9 6 , 3 9 7 ( table ) , 3 9 8 ( tab le ) , 405 , 406 , 4 0 7 , 412 , 417 external debt , 8 ( table ) , 2 7 ( tab le ) , 7 4 ( table ) , 7 6 ( table ) , 1 2 9 , 1 4 8 , 3 2 6 , 3 8 4 ( tab le ) , 3 8 5 , 3 8 6 , 3 8 8- 3 8 9 , 3 9 0 ( tab l e ) , 4 4 5 flood s , 4 1 2 fore ign investment in , 3 8 5 , 3 9 4 and fore ign l oan s , 3 8 5 , 3 8 6 , 3 8 7 , 388 , 38 9 , 391-393 , 394 , 396 , 3 9 8 , 400-40 2 , 4 0 3 , 406-407 GDP , 3 8 6 , 3 9 5 ( tabl e ) , 3 9 7 ( tabl e ) , 400 ( table ) , 4 0 6 , 4 0 8 , 409-41 2 , 4 1 3 , 4 1 6-4 1 7 , 446 gold , 4 0 3 government , 3 8 6 , 3 8 7 , 3 89 , 3 9 3 , 398 , 400 , 403 , 406 and IMP , 1 9 6 , 3 8 7 , 3 8 8 , 3 9 8 , 4 0 2 , 4 0 3 , 408 , 409 , 4 1 2 , 445-446 imports , 84 , 3 9 3 , 3 94 , 3 95 ( tabl e ) , 3 9 6 , 3 9 7 ( tabl e ) , 405 , 406 , 4 1 7 income per capi ta , 4 1 2 industrial iz ation , 3 8 8 , 4 0 6 inf l ation , 3 8 6 , 4 08 , 4 1 7 , 4 4 6 interest rate s , 3 8 3 international reserve s , 3 9 6 , 398 , 403 investmen t , 1 6 5 - 1 6 6 , 3 8 3 , 3 8 5 , 3 8 8 , 3 9 3 , 3 9 5 ( tabl e ) , 3 9 7 ( tabl e ) , 3 9 8 , 4 0 0 ( tabl e ) , 4 0 5 , 4 0 6 , 4 0 8
478
Peru ( continue d ) mining , 4 0 5
Private sector . S e e under
Mining Code , 3 9 4 and oil , 38, 107 , 385 , 389 , 393 , 394 , 398 , 405 overvaluation , 3 8 6 pr ivate sector , 3 8 3 , 3 8 4 ( tabl e ) , 3 8 5 , 393 pub l i c expenditure , 1 5 4 , 3 8 4 , 3 8 5 , 3 8 6 , 3 9 3 , 3 9 5 ( tabl e ) pub l i c sector , 3 8 9 , 4 0 6 , 408 , 417 , 446 savings , 3 8 3 - 3 8 4 , 3 8 8 , 3 9 8 , 4 0 0 ( tabl e ) , 4 0 6 , 4 0 7 a n d Soviet Union , 4 0 5 stab i l i zation program , 3 8 8 , 3 8 9 , 398 , 400 , 402 , 445 taxation , 3 8 4 , 3 8 6 , 3 8 7 , 3 9 3 , 417 terms of trade , 3 9 7 ( tab l e ) , 4 0 7 trade surplus , 8 5 , 4 1 2 and U . S . , 3 9 1 and U . s . TNCs , 3 8 7 , 3 8 8 , 3 9 4 and Venezue l a , 4 0 3 wage s , 4 0 5 Peso . S e e Argentina , devaluation ; Chi l deva l uation ; Mex ico ,
�
devaluation ; Mexi co ;
290 , 4 4 2
" Po l i cy Re spon s es to External Shocks in Deve loping Countrie s " Population ,
(Be1a s sa ) , 3 0 1 59 . See also
Latin America , birthrate Portuga l , 7 , 8 , 2 7 - 2 8 ( tab1 e s ) , 3 0 ( tab1 e ) , 64 , 4 4 3 Postindustrial society ,
Program for Joint Studies on Latin American International Relations ( RIAL ) , 2 Property , 44 Protectioni sm, 3 6 , 4 2 , 69, 9 0 , 9 5 , 1 2 1 , 1 5 9 , 1 7 2 , 1 8 3 , 184 , 1 8 5 , 1 8 9 , 1 9 6 , 1 9 8 , 2 3 6- 2 3 7 , 241 Pub l i c expenditure , 4 4 - 4 8 , 49 , 6 0 , 6 7 , 8 3 , 89 , 1 2 3 , 1 2 5 , 1 5 3 . See a l s o under ind ividual countries Pub l i c sector , 40, 4 3 , I l l , 1 2 3 , 1 2 5 , 1 5 3 , 1 8 1 , 1 8 5 . See a l s o under individua l countries Qui to economi c conference ( 1 9 84 ) , 2 , 95 , 453 Reaganomi c s , 1 0 9 , 4 4 1 RECADI .
overva luation Petrodo l lars , 9 9 , 100 , 3 1 5 , 3 1 6 Petr6leos d e Venezue la , 3 3 1 Petr6 1 eos Mex icanos ( PEMEX ) , 1 3 2 , 3 0 8 , 3 1 0 , 3 1 1 ( tab 1e ) , 3 1 3 Ph i l ippine s , 8 ( tab1 e ) , 1 7 , 1 8 , 2 7 - 2 8 ( tab1 e s ) , 3 0 ( tabl e ) , 6 5 , 1 2 8- 1 2 9 , 1 4 9 , 1 5 0 ( tab 1 e ) , 4 4 3 Pol and , 1 3 , 5 5 , 6 5 , 1 7 5 - 1 7 6 ( tab l e ) , 2 8 0 ,
individual countries Production , 1 1 , 1 2 , 1 3 , 2 4 , 44 , 60 , 6 1 , 78 , 8 7 , 1 0 5 , 1 24 , 1 2 5 , 1 2 6 , 1 8 0 , 1 8 1 , 206 , 2 3 7 , 3 4 9 Produc t markets , 7 Profit mot ive , 2 1 6
59
( Buenos Aires ) , 2 5 9 Pr imary sector s , 2 3 5 , 2 3 7 , 4 2 8 Prensa , La
Priva te bank s , 2 , 1 3 , 2 3 , 6 6 , 6 8 , 6 9 , 7 4 , 8 7 , 99 , 1 0 4 , 171 , 1 7 3 , 178 , 180, 186 , 189 , 2 1 0 , 386-3 8 7 , 3 9 6 , 401 , 4 0 3 , 4 0 8 , 4 1 3 , 4 1 8 , 4 4 4 , 44 5 , 448 , 4 5 0 , 4 5 2 , 454
S e e O f f i c e for the Sys tem
of Dif ferential Exchange Ra te s Rece s s ion , 1 , 1 4 , 1 7 , 66 , 6 7 , 7 7 - 79 , 8 3 , 89 , 96 , 1 0 1 , 1 0 7 , 1 08 ( tab 1 e ) , 1 4 8 , 1 4 9 , 1 5 2 , 1 5 3 , 1 7 2 , 193 , 205 , 214 , 2 2 3 , 251 , 274 , 297 , 398 , 429 Recycl ing o f funds , 1 7 8 , 1 8 6 , 1 9 0 , 200 , 2 4 9 , 3 1 5 , 4 3 9 Regan , Dona l d , 68 , 9 8 " Rescue s cheme s , " 1 6- 1 7 , 8 7 , 1 9 0 ( n3 ) , 4 1 0 , 4 5 1 Res earch , 4 3 , 4 7 , 4 4 2 Res e rve currency countrie s , 215
26 ,
Res ource a l l ocation , 1 3 . See a l s o Transfer prob l em RIAL . See Program for Joint Studies on Latin Amer i can International Re la tions 184
Ri sk capi ta l ,
Roman i a ,
13 ,
65 ,
1 7 5 - 1 7 6 ( tabl e )
Santiago de Chi l e , 1 5 4 Sao Paulo (Bra z i l ) , 46 , 1 5 4 Saving s , 1 2 , 8 2 , 9 0 , 1 0 5- 1 06 , 1 0 9 , 1 5 6 , 1 8 0 , 1 8 8 . See a l so under individua l countries
479 SBM . � supernational bank money Schmidt , Helmut , 69 SDRs . See Spec ial Drawing Rights Segmented labor markets , 40 SELA. See Latin American Economic System Senega l , 1 3 , l 7 5- l 7 6 ( tabl e ) SEPAFIN . See Min i s try of Nationa�roperties and
Industrial Devel opment Short- term deposits , 1 7 1 Sierra Leone , 1 7 5- 1 7 6 ( tabl e )
Sigaut , Lorenzo , 2 3 1 , 2 5 1 , 2 5 3 S i lva-Herzog , Jesu s , 3 1 6 Singapore , 6 4 , 1 0 1 Soc ial i s t economi e s , 5 2 , 5 5 , 442 , 448 Sociocultural trans formations , 60-61 , 62 Sol . S e e Peru , deva luation ; per overvaluation Solar energy , 46 Solvency , 1 1 2- 1 1 3 , 1 8 3 South Africa , 9 Southern Cone , 7 7 , 1 0 2 - 1 0 3 ( tab l e ) , 3 7 6 , 3 8 5 Southern P e ru Copper Corporation , 394 South Korea , 149 consumption , 1 06 ( tabl e ) debt per capita , 7 , 2 7 ( table ) debt proportion of GNP , 8 , 1 0 5 debt- service ratio , 3 0 ( tabl e ) exports , l 1 6 ( tabl e ) , 1 3 9 ( tab l e ) external debt , 7 , 8 ( tabl e ) , 2 7 - 2 8 ( tabl e s ) , 1 0 2 - 1 0 3 ( table ) , 1 29 , 1 5 0 ( tab l e ) , 4 4 3 indu s try , 1 7 inflation , 1 4 0 ( tabl e )
U;-
as NIC , 64 , 1 0 0 terms of trad e , l 1 6 ( tabl e ) , 1 4 0 ( tabl e ) Soviet bloc , 54 , 5 5 Soviet Union , 3 9 , 54 - 5 5 , 4 0 5 . See al so under United States Spain , 6 5 , 4 1 0 , 444 Special Drawing Rights ( SDRs ) , 2 5- 2 6 , 2 1 1 - 2 1 3 , 2 2 2 , 2 8 1 , 4 5 3 Specul ation , 8 2 , 1 2 5 Stabi l i zation pol i c i e s , 78 , 79 , 8 8 , 1 2 5 , 1 2 7 , 1 2 8 , 1 29 - 1 3 0 ,
1 3 3 , 146 , 149 , 154-1 5 5 , 214 , 2 1 5 , 4 3 8 , 4 4 8 , 4 5 2 . See a l s o � Argentina ; Mex i c o ; Venezuela Stag flation , 56 , 4 3 8 , 4 5 2 Sta te enterprises , 1 5 3 , 1 6 7 , 2 6 0 Suarez-Lamont Agreement ( 1 9 4 2 ) , 294 Subcontra cting , 4 3 Subsidies , 4 2 -4 3 , 9 4 , 1 2 3 , 1 2 5 , 127 Sudan , 1 3 , 1 7 5 - 1 7 6 ( table ) , 4 4 3 Sugar , 84 , 4 2 8 SUpernational bank money ( SBM) , 220 Supply conditions , 1 2 4 - 1 2 5 syndicated loan s , 6 6 Taiwan , 3 0 ( tabl e ) , 64 , 1 0 1 Tari f f s , 3 6 , 50 , 2 3 6- 2 3 7 Taxation , 40 , 4 5 , 6 7 , 1 2 3 , 1 2 5 , 127 Technocracy , 1 2 8 Technology , 1 1 , 3 7 , 4 2 , 4 3 , 46 , 4 7 , 59 , 6 0 , 1 9 9 Tepoztlan Centre ( Mexico ) , 2 - 3 Terms o f trade , 6 , 3 7 , 6 9 , 7 8 , 79 , 84- 8 5 , 8 6 , 8 8 , 89 , 90 , 9 1 , 1 0 7 , 1 08 ( tabl e ) , I l l , 1 14 , 1 1 6 ( tabl e ) , 1 1 7 , 1 1 8 , 1 1 9 , 1 20 , 1 2 1 , 1 4 8 , 1 7 2 , 1 9 5 ( tabl e ) Texti l e s , 6 4 Thai land , 3 0 ( tabl e ) , 6 5 Thi rd World . S e e Developing countries ; Less developed countrie s ; under Latin America Thorp , Rosemary , 3 9 4 Time maga zine , I I I TNCs . See Transnational corpora tions Togo , 1 7 5- 1 7 6 ( tabl e ) Tranche s , 1 7 9 , 2 5 9 , 2 6 3 ( tab l e ) , 28 0 , 2 8 5 , 4 0 2 , 4 5 3 Trans-Andean o i l pipel ine , 3 9 4 Trans fer problem , 6 , 7 , 1 8 , 8 6 , 9 1 , 94 , 1 1 3 , 1 2 9 , 1 3 5 , 1 8 3 , 209 ,
223 , 450 .
See a l s o Bra z i l ,
tran s fer of resources Transnational corporation s 4 2 , 4 3 , 5 8 , 1 00 ,
(TNCs ) ,
24 2 , 3 8 7 , 3 8 8
Transnationa li zation , 5 3 , 5 7 - 5 8 , 60-61 Trea sury Certi ficates ( CETES ) (Mex ico ) , 304
480
Treatise on Money , A ( Keynes ) , 219
2 18 ,
Trilateral sys tem, 54 , 5 5 Trinidad a n d Tobago , 3 8 , 1 4 9 Turkey , 8 ( tab 1e ) , 1 7 , 2 7 - 2 8 ( tab1 e s ) , 3 0 ( tab 1 e ) , 64 , 1 7 5 - 1 7 6 ( tab l e ) Uganda , 1 7 5 - 1 7 6 ( tab l e ) UNCTAD . S e e United Nations Conference on Trade and Deve l opment Undernouri shment , 4 7 Unemployment , 6 , 1 3 , 1 7 , 5 0 , 8 8 , 109 , 1 2 1 , 1 2 7 , 147 , 154 , 1 7 2 , 198 , 340 , 341 , 4 4 2 UNESCO . See United Nat ion s Educationa l , Sc ienti f i c , and Cul tura l Organi zation United Nations Con ference on the Human Environment , 4 6 United Nations Conferenc e o n Trade a n d Devel opment ( UNCTAD ) , 51 Group of Governmenta l Experts on Debt Prob l ems of Devel oping Countries , 4 3 9 Uni ted Nations Economic Commi s s ion for Latin America ( ECLA ) , 2 , 4 1 , 452 uni ted Nations Educationa l , Sc ient i fi c , and CUl tura l Organ i zation ( UNESCO ) , 4 7 Un ited States banks , 1 3 , 1 9- 2 2 , 69 , 1 3 1 - 1 3 2 , 1 3 3 , 1 5 7 , 2 7 7 , 387 , 388 , 389 , 3 91 , 3 9 3 , 4 0 0 , 4 0 7 , 4 0 9 , 4 4 4 , 448 c apital inflows , 2 0 7 , 4 4 2 a n d Central America , 4 6 , 1 6 7 deficits , 1 2 1 , 1 9 8 , 2 0 7 , 4 5 4 economy , 89 , 9 0 , 9 7 , 1 3 7 , 1 4 5 , 1 9 4 , 1 9 9 , 2 0 7 , 2 08 , 223 , 441 , 442
215 ,
exports , 1 9 , 2 0 0 GNP , 4 4 1 a n d IMF , 9 8 , 1 5 8 , 1 6 0 , 1 6 1 , 447 imports , 1 5 , 1 9 6 , 1 9 9 , 2 0 7 industriali zation , 2 3 6 intere s t rates , 2 0 0 , 4 4 5 monetary po l icy , 1 7 2 , 1 9 5 ( tabl e ) , 1 9 6 , 1 9 7 , 2 0 0 , 202-203 , 214 , 2 2 0 , 223 , 451 , 455
and o i l , 1 5 power , 5 4 prime rate , 1 5 5 , 1 5 6 , 1 6 2 private sector , 1 9 8 as res erve currency country , 2 6 security , 58 and Soviet Union , 3 9 , 54 Treasury , 2 0 , 2 8 0 , 2 8 4 , 3 1 6 See a l s o Group of Ten ; under Argentina ; B ra z i l ; Lat�
America ; Mexico ; Peru Urquidi , Vic tor L . , 4 5 1 Uruguay , 3 1 ( tabl e ) , 7 4 ( tab l e ) , 76 ( table ) , 84 , 8 5 , 1 2 8 , 1 4 8 , 1 5 2 , 1 5 5 , 4 1 1 ( tab l e ) , 4 5 2 Vel a s c o Alvarado , Juan , 3 8 7 , 3 98 Venezuela and Argentina , 3 3 0 balance o f payments , 3 4 0 bank s , 3 2 7 , 3 3 1 , 3 3 3 capital out f l ow , 1 3 , 1 1 1 , 1 6 6 , 327 , 331 , 332 consumption , 1 06 ( tab l e ) current a ccount , 4 0 , 1 2 2 , 3 3 1 debt payments , 7 7 , 1 5 2 , 2 9 0 , 3 3 2 , 446 debt per capita , 7 , 2 7 ( tab l e ) debt proportion o f exports , 3 2 5 debt renegotiations , 3 2 5 , 3 2 6 , 3 2 7 , 3 29 - 3 4 0 , 4 4 6 , 4 5 4 debt-seIvice ratio , 3 0 ( tab l e ) devaluation , 1 5 3 , 3 2 7- 3 2 8 , 3 3 4 , 34 1 , 3 4 2 , 3 4 4 dome stic market , 1 6 6 economy , 3 8 , 4 0 , 3 2 7 , 3 28 - 3 29 , 331 , 33 2 , 340-344 , 346 exports , 3 2 5 , 3 2 6 , 3 3 7 , 3 4 0 , 3 4 2 , 446 external debt ,
7,
8 ( tab 1 e ) ,
28 ( tabl e ) , 4 8 , 4 9 , 7 3 , 7 4 ( tab1e ) , 9 7 , 1 0 2 - 1 0 3 ( tab1 e ) , 1 4 8 , 1 5 0 ( tab1e ) , 3 2 5- 3 2 6 , 3 4 4 , 345-347 and Federal Republ ic o f Germany , 19 and fore ign loans , 1 3 , 3 3 0 , and Germany , 345 GNP , 343 gol d , 3 2 6 - 3 2 7
346
government , 4 4 6 and Great Brita in ,
19 ,
and IMF , 1 3 2 , 3 29 , 341 , 342 , 344
33 5 ,
330,
345
336-34 0 ,
481
Venezue l a ( c on t inued ) imports , 1 9 , 84 , 3 2 8 , 3 3 4 - 3 3 5 , 340 , 343 , 346 import sub s t i tution , 3 6 , 3 4 1 i n f l at ion , 4 0 , 3 2 8 interest rates , 3 2 7 , 3 29 in ternationa l reserve s , 3 2 6 , 3 3 2 , 335 inve s tment , 1 8 , 3 2 9 , 3 4 1 I nve s tment Fund , 3 2 6 , 3 4 5 l abor market , 4 5 nationa l i za tion , 3 4 6 oil , 38, 3 2 6 , 3 2 7 , 3 2 9 , 330 , 3 3 2 , 3 3 7 , 3 3 8 , 3 4 0 , 3 4 6 , 446 . See a l s o Petroleos d e Venezuela overva l ua tion , 3 2 8 , 3 4 1 , 3 4 3 pol itics , 3 2 8 , 3 4 5 price sys tem , 3 3 3 private sector , 3 2 6 , 3 2 9 , 3 3 3 , 342 Pub l i c Credit Law , 3 3 0 pub l i c expenditure , 3 2 8 , 3 3 8 pub l i c s ector , 3 29 , 3 3 3 rec e s s ion , 3 4 0 Re financ ing Law ( 1 9 8 1 ) , 3 29-330 Sixth Na tional Plan , 3 2 9 stab i l i zation pol icie s , 340-344 Stock Exchange , 3 3 3 , 3 3 4 taxation , 3 3 8 , 3 4 2 trade surplus , 8 5 trade union s , 3 4 1 unemployment , 3 4 0 , 3 4 1 wages , 3 3 8 , 3 4 3 See a l so under Peru
Videla , Roberto , Vietnam, 1 3
231
Viner , Jacob , 2 1 5 Viola , Rob erto , 2 3 1 , Vol cker', Pau l , 1 3 1
253
Wage s , 8 8 , 1 2 7 , 1 3 0 . See a l so under individua l countries Wal l Street Journa l , 2 1 , 9 9 , 255 , 443 Wehbe , Jorge , 2 5 7 , 2 5 8 , 2 6 3 We l l s Fargo ( U . S . bank ) , 3 89 , 3 9 1 , 4 0 0 , 4 0 7 , 409 Wharton World Economi c Outl ook , 120 Whea t , 2 3 6 , 2 4 8 Wi l l iamson , J . , World Bank , 1 0 ,
216 12, 14 ,
23 , 63 ,
64 , 6 8 , 9 3 , 94 , 1 1 2 , 1 1 3 , 1 3 4 , 1 3 7 , 1 5 6 , 1 6 1 , 1 6 2 , 18 5 , 1 8 7 , 1 9 0 , 2 2 5- 2 2 6 ( n9 ) , 2 5 6 , 4 4 4 , 446 , 450 , 453 Con sultative Group , 407 World F inancial Markets , 1 3 0 Wor ld trade , 9 , 1 2 , 1 6 , 6 5 , 68 , 8 3 , 84 , 9 5 , 9 6 , 1 4 5 , 171 , 1 7 2 , 181 , 189 , 199 , 438, 441 Yugos lavia ,
8,
13 , 18 , 19 ,
2 7 - 2 8 ( tab1 e s ) , 3 0 ( tab1 e ) , 64 , 1 4 9 , 1 7 5 - 1 7 6 ( tab1e ) , 4 4 2 Zaire , 1 3 , 1 7 5 - 1 7 6 ( tab 1 e ) , 4 4 3 Zamb ia , 1 7 5 - 1 7 6 ( tabl e ) Zero- coupon bond s , 2 3
.
About the Book and Editor S ince 1 9 8 1 Latin America has been in the mids t of a protracted
external debt c r i s i s due , among other reasons , to emergency borrowing at record-high real inter e s t rates and the dec l ine in the region ' s export proceeds .
Until now , mo s t l i terature on the sub j ec t originated
in industrial lender countr i e s , whos e primary c oncern is the impact of the debt c r i s i s on their own pro f i ts and on the world f inanc ial sys tem .
Th i s volume , written by Latin Ameri can experts , pre s ents the Latin American debt experienc e and d i f f i culties from the viewpo int of bor rowers .
The first part o f the book analy zes l i nks between the inter
national financ ial c r i s i s and the present external debt d i f f i culties
The second part contains case s tud i e s o f Argentina , in the regi o n . Bra z i l , Mexi co , Venezue la , Ch i l e , P eru , and Central America .
Dr . Migue l S . Wionczek is a senior fel low and the head of the He i s co long- term energy res earch program at El Colegio de Mexico . edi tor o f Energy in the Transi tion � Rura Z Subsis tence (with Gerald Fo ley and Ar iane van Buren 1 We s tview , 19 8 2 ) and Mexico ' s Energy Re sources : Toward a Po Zicy of Diversification (with Ragaei El Mal lakh ; We stview , 1 98 5 ) . Dr . Luci ano Toma s s i n i i s director o f the Program for Jo int S tudies on Lati n American International Re lations ( RIAL ) in Santiago , Ch il e .
482