US Should Heed the Call from Latin America for Debt Relief

By Samuelson, Robert J. | American Banker, March 26, 1986 | Go to article overview

US Should Heed the Call from Latin America for Debt Relief


Samuelson, Robert J., American Banker


US Should Heed The Call from Latin America For Debt Relief

THE CONTROVERSY OVER Nicaragua may turn out to be a sideshow. The country that really matters on America's southern border is Mexico, and Mexico--shaken by collapsing oil prices and an earth-quake --is in deep trouble. President Miguel de la Madrid wants relief on the country's $97 billion overseas debt. It is a reasonable demand that the United States should try to accommodate. Mexico is a reminder of how much our relations with Latin America hinge on defusing the region's massive debt crisis.

Our porous borders and trade make Latin American prosperity and political stability vital U.S. interests. A sickly Mexican economy is already increasing illegal immigration into the United States. Since 1980, U.S. exports to Latin America have declined 31%; our annual trade deficit with the region has risen $18 billion. And the debt crisis may shape Latin America's politics for decades. In Brazil and Argentina, the survival of new, democratic governments depends critically on their ability to overcome debt problems and raise living standards.

Actually, debt crisis is a misnomer: The real crisis is one of economic growth. In the 1970s, cheap foreign loans and inflationary government spending kept Latin economies growing. Government budgets became bloated with subsidies and inefficient state-owned companies. Rising inflation destroyed confidence.

The foreign loans (mostly in dollars) were intended to finance productive new investments. In practice, they often propped up high exchange rates, which promoted imports and discouraged exports. Without a new growth formula, Latin American economies will continue to stagnate.

At best, modest debt relief can play a secondary role in reviving Latin economies. Only Latin governments can make the basic changes needed to restore confidence. Argentina and Brazil have already issued new currencies in an effort to crush runaway inflation, which in Argentina's case had surpassed an annual rate of 1,000%. The three major debtors (Argentina, Brazil, Mexico) are moving to sell or close some state-owned companies. These steps aim at replacing government with private investment as the main engine of economic growth.

A test of success will be whether debtor countries can reattract some of the overseas funds of their own citizens. Latin American businesses and families have often voted no confidence in their countries' economic policies by buying dollars and investing overseas.

This capital flight was one absurd consequence of the huge loans to Latin governments. In effect, Latin governments sold dollars to their citizens at unrealistic exchange rates. John Cuddington, a World Bank economist, estimates Mexican capital flight at nearly $33 billion between 1974 and 1982, about 40% of Mexico's loans. (See table on page 4).

But excessive foreign debt now threatens reform. To service their loans, debtor countries have slowed their economies, cut imports, and run massive trade surpluses (mostly in dollars). In 1985, Argentina's surplus was 7. …

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