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Debt and Transfiguration? Prospects for Latin America's Economic Revival.

Edited by David Felix. Armonk, N.Y.: M.E. Sharpe, Inc., 1990. Pp. xxiii, 302. $45.00.

This book grew out of a conference entitled "Financing Latin American Growth in the 1990s" which took place in October, 1988. Although there is a plethora of books that study the Latin American debt crisis, what distinguishes this volume is its high quality and balanced presentation: all viewpoints--those of academics (economists as well as political scientists), politicians and bankers--are presented. However, as with most other books on this topic, this book was somewhat dated even as it went to press. Since the Brady Plan was instituted after the conference took place (March 1989), it is not dealt with very thoroughly. Although many of the papers can be used to evaluate the costs and benefits of the Brady Plan, this collection lacks in-depth analysis of the Plan itself and its potential effects.

The key themes echoed by politicians, political scientists and economists alike are the importance of economic growth and the incompatibility of growth and full debt servicing. Major debt relief is needed for any growth and stabilization program to succeed. All participants feel that the debt strategies tried up to October, 1988 failed to accomplish the basic objective of restoring growth in Latin American countries. Consequently, this book can be viewed as strong support for the debt reductions contained in the Brady Plan.

Various authors claim that the desirability and indeed inevitability of debt-service is due to changes affecting the debtors (as Lessard says "debt burdens, whether or not economically repayable, are politically intolerable"), creditor governments and international agencies. According to Feinberg, it is in the interest of the industrial countries to restore growth to Latin America, to reopen export markets and to help stabilize the region's democratic institutions. Padoan emphasizes the need for a stable international environment.

There was also consensus on the need for new sources of external funding for heavily indebted countries. For example, Dornbusch and Rotberg agree that new money is necessary for growth, regardless of the risk that it may be used unwisely and unproductively. There was also wide-spread agreement that international loans should be made on a country-by-country basis and should be conditioned upon the design and implementation of necessary stabilization and strong structural adjustment programs.

There is some disagreement on the desirability of market-oriented policies. Dornbusch is strongly opposed to a free market-based solution citing the case of Mexico which was faced with a capital flight problem even though it had solved its budget deficit problem. Angermueller, on the other hand, feels that "countries cannot shrink their way out of the debt problem. Countries must grow their way out, and to grow, countries must adopt market-oriented economic policies".

This book is divided into five parts. Part I consists of two papers which use simulation modeling to estimate external financial needs for improved growth prospects in the 1990s. Both papers and comments conclude that since the goal of full debt servicing with economic growth is probably unattainable, "debt reduction is in the air" (Felix and Caskey). Comments like this foreshadowed the Brady Plan's slashing of Mexico's and Venezuela's debt burdens and indicate the quality of economic analysis since this prediction was realised. Gallardo and Duran analyze proposals to writedown the principal and/or interest on the Latin American debt. This analysis is extremely useful since this is what is occurring under the Brady Plan which cuts the debt burden outright. Unfortunately, this section lacks an up-to-date analysis of how the policies enacted under the Brady Plan should affect future growth prospects.

Part II contains two papers which examine political aspects of the debt crisis. Remmer claims that there has been a record of progress towards democracy in the years of the debt crisis. Remmer's paper presents the political case for the need for the debt reductions contained in the Brady Plan. Stallings argues that one of the reasons debtors continued to pay rather than repudiate their debt (as in earlier crises) was the united front consisting of the industrial country governments, multilateral agencies and private banks. If debtors rebelled, they would be cut off from all source of international finance. This observation needs to be modified since the Brady Plan has features that reduce the cohesiveness of banks as a negotiating group. Stallings predicted (correctly) that "an increased role for Japan could come about within a close alliance with the United States, but the preferences of that alliance could change in favour of the debtors". Stallings also predicted (correctly) that Mexico would be the test case for the new program.

Part III consist of country studies of Brazil, Argentina, Chile and Mexico. Cardoso, who analyzes debt cycle in Brazil and Argentina, sees a solution to the debt crisis based on interest recycling. French-Davis analysis Chile's use of debt-debt swaps and debt-equity swaps. Ruiz, in his essay on Mexico, views the debt issue as a domestic transfer problem. He suggests that debt repayment was possible because Mexico was an authoritarian regime.

Part IV examiners trends in the sources of international finance for Latin America. Padoan's game theory analysis leads him to predict (correctly) that Japan would participate in the solution to the debt crisis. Feinberg criticizes both the IMF for not making better use of its existing resources, and the World Bank for not giving more substantial external assistance to countries engaged in strong adjustment programs. His criticisms are no longer valid. For example, the IMF, the World Bank (and Japan) came up with $3.9 billion of new money to help guarantee the new loans made to Mexico in July 1989 under the Brady Plan. Lessard's paper provides a fairly exhaustive list of the alternative modes of foreign financing available to the debtor countries.

Part V presents some views on the debt crisis from Washington, Wall Street and London. Angermueller (Vice-Chairman of Citicorp) and Dornbusch feel that comprehensive, compulsory debt forgiveness is not the solution to the debt crisis. Angermueller feels that the best course for the debtors is to continue to work with their creditors along the principles of cases-by-case negotiation. Dornbusch supports a growth-oriented IMF Agreement as well as some mechanism by which banks can be made to put a major part of a new money package. Baron Lever feel that government must get involved in order for the debt crisis to be resolved.

Although debt-debt and debt-equity swaps were discussed in several papers, there was no mention of debt-for-nature swaps in which debtor nations that are rich in biological resources are allowed to reduce debt in return for preventing wilderness areas. Debt that otherwise might simply be written down by banks as a loss can be put to productive use through this type of debt swap. Debt-for-nature swaps are becoming more common and have great potential for Latin American countries. Indeed, in 1991, both Mexico and Brazil entered into debt-for-nature swaps.

The Brady Plan hoped to encourage market-based debt reduction on terms agreeable to debtors and creditors alike. However, market solutions are unlikely to provide debtors with much real help. Coordinated debt relief (as in the case of Mexico) may offer a more solid basis for renewed growth. Unfortunately, the Brady Plan led banks to increase their reserves against developing country loans. This signalled that banks were withdrawing from the business of developing-country lending. Observers have noted that in this way the Brady Plan endangers third world prospects as well as the global financial system. It may also adversely affect the capital flight problem. Consequently, it seems unlikely that banks will spontaneously lend the required amounts so that Latin American countries can return to their pre-1982 growth rates. A lack of a thorough analysis of this potential danger of debt relief was a shortcoming of this book.

Under the Brady Plan, the eligibility of the debtor for debt relief is conditioned on its implementing market-based restructuring of its economy. Some conference participants felt that market-based restructuring may reinforce the economic and political instability of the region. Other participants seemed to feel that with adequate debt relief, this approach was the appropriate strategy. Obviously the Brady Plan was not explicitly studied, and given the uncertainties about the effects of the market-based approach, more analysis is needed.

The Brady Plan is still evolving and its consequences are unclear. It still remains to be seen whether agreements like Mexico's and Venezuela's can work for other debtors. This book provides an excellent understanding of his history and economics behind the Brady Plan and why it was so badly needed. Unfortunately, one is left with a concern that the Brady Plan may not be enough to help countries recover from the debt crisis without damaging their development prospects and without provoking political instability. Judith A. McDonald Lehigh University
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Author:McDonald, Judith A.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Apr 1, 1992
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