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Latin America on $10 billion a day.


Latin America's heavy borrowing looks likea blunder today, but it looked sensible in the 1970s. The big international bankers were awash in petrodollars, and were eager to unload them. Inflation kept real interest rates low so debtors could service their debts with dollars that would be worth only slightly more, or in some cases less, than those they had borrowed. High prices for Latin America's raw materials seemed to guarantee income with which to pay off the debt. At least in theory, borrowing looked like a quick--and perfectly responsible--way for Latin American nations to augment their own internal savings, increase investment, and raise their standard of living. But the 1981-82 recession snapped inflation. Raw material prices tumbled. Real interest rates soared. Growth stopped. Mexico barely avoided default. Development on the cheap was exposed as a pipe dream. The nightmare of ever more onerous debt payment began.

There is no question that the internationalbanks deserve a good deal of the blame for this outcome. Bankers were incredibly cavalier about disbursing their cash. They assumed sovereign countries would never default, blithely ignored early signs of trouble, and when the recession came, they turned usurious, insisting on ever greater interest payments in order to protect their profit statements. Meanwhile, many banks were also profiting from helping wealthy Latins spirit capital flight dollars overseas into American bank accounts. Latin citizens now hold more than $100 billion in assets outside the region.

But Latin countries themselves have a lot toanswer for, too. The success of their borrow-abroad strategy hinged on investing loans efficiently in new productive capacity or in expanding existing capacity to produce more exports. The foreign exchange earnings would pay off the debt and there would be enough capital left over to invest and grow. Sometimes, as in the case of Mexican oil, investment went into production of a raw material, whose price later dropped unexpectedly. Yet too often Latin governments simply wasted the money on grandiose public works, government deficits, subsidies, and military hardware. They adopted exchange rate policies that clobbered their own exports, subsidized imports, and systematically encouraged capital flight.

Peru, with a current foreign debt of $14.3billion, may be the debtor most victimized by forces beyond its control. A freak shift in Pacific Ocean currents in 1982 destroyed its fishing industry and caused ruinous floods and droughts. Peru was heavily dependent on copper, whose price took a wild roller-coaster ride on the way to dropping roughly 25 percent between 1974 and 1984. Meanwhile the banks were charging higher interest rates on new credit: Peru's interest burden doubled between 1975 and 1985. The International Monetary Fund (IMF) was particularly inflexible in imposing austerity formulas. Today, Peruvian living standards are at 1964 levels. For all these reasons, President Alan Garcia, who was elected in 1985, claims a right to shun the IMF and to restrict debt service to 10 percent of export earnings.

Even this star-crossed nation, however, deservesmuch of the blame for its own plight. The government invested just one-third of what it borrowed between 1970 and 1985. Much of the rest went to finance government budget deficits that were caused not only by the recession, but also by bureaucratic bloat and subsidies on gasoline and imported food. In 1976, at the very moment the then-military government was promising its bankers austerity, the Peruvian Air Force bought $250 million worth of Sukhoi aircraft from the Soviet Union. In the middle of the 1982 recession, the Air Force contracted to buy 26 French Mirage 2000 planes for $728 million. (Garcia recently cut the Mirage purchase in half, but the bill is still $364 million.) Of the money that Peru did invest, most went into middle-class housing, highways, or boondoggles like the giant Majes irrigation scheme. Started in 1972 and still not complete, Majes was originally supposed to cost $600 million--$10,000 for every hectare watered. Cost overruns and inflation have approximately doubled the project's price over the last 14 years. According to Richard Webb Duarte, a former president of Peru's central bank, Peru devoted less than 10 percent of the loans it got between 1970 and 1985 to investment in export or industrial activities.

Chile's debt of $21.5 billion is the highest percapita of any major debtor in Latin America. Dictator Augusto Pinochet used foreign borrowings to buy political popularity. After taking power in a bloody 1973 coup, Pinochet needed to shore up his middle-class support. So he flooded the country with cheap imported cars, stereos, and TV sets and paid for them with borrowed money from private banks--$3.3 billion in 1981 alone. When the 1982 recession hit, new capital ceased to flow Chile's way, imports had to be drastically cut to save foreign exchange for debt service, and the consumer fiesta came to an abrupt end. Now Chile's per capita consumption has fallen to mid-1960 levels. Its annual interest bill of $2 billion is half of its export earnings.

Argentina's military dictators outdid Pinochet.Economist Rudy Dornbusch of MIT estimates that, before giving way to a democratically elected government in 1983, they wasted $30 billion on an overvalued currency, corruption, subsidies to cover the deficits of military-owned industrial companies, capital flight, and, most foolish of all, the Falklands War. Virtually nothing was invested productively.

Only two major Latin American debtors appearto be on sound financial footing today. Colombia, with a current foreign debt of $13.4 billion, pursued a relatively conservative borrowing policy in the seventies and benefited from a huge inflow of dollars from its illegal cocaine industry. While most other countries were exporting capital back to their lenders, the Colombian government was actually able to increase investment by 30 percent between 1980 and 1985. Brazil, with a current foreign debt of $104.7 billion, also had a penchant for grandiose investments. But many of its investments turned out to be productive, and it has stepped up manufactured exports so that its trade surplus is now more than enough to pay the interest it owes. In 1986, the economy will grow by 8 percent for the second year in a row.

The question of culpability for the debt crisisis far from academic. Still, those who blame the banks and those who find fault with the countries themselves, do agree on one thing: no solution to the debt crisis can work unless the debtor nations themselves take steps to restructure their economies toward greater efficiency, sensible exchange rates, and production for export.
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Title Annotation:foreign loans
Author:Lane, Charles
Publication:Washington Monthly
Date:Dec 1, 1986
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