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April 6, 1990
"Latin America Emerges from Horror Show"
San Jose Mercury News
By Timothy Taylor
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FOR Latin America, the 1980s were an economic horror show. Per capita GNP for the region fell by 10 percent during the decade. Many countries experienced triple-digit inflation per year -- sometimes per month. Social ills of poverty and unemployment festered.

It is often assumed, both by Latin American politicians looking for a scapegoat and by U.S. politicians looking for an issue, that the root cause of Latin America's economic ills were its attempts to repay the foreign debts contracted during the 1970s.

But timing argues against that explanation: The collapse of the Latin American economies started with the global recession of 1980-82, at a time when loans were still flowing into the region. Moreover, Latin America's debtors haven't just missed a payment or two. They've managed to lose hundreds of billions of dollars in economically unworkable investment, an amount that makes even the U.S. savings and loan disaster look reasonable.

Many Latin American countries contributed to their economic maladies by following destructive economic policies: hostility to foreign goods and investment, huge subsidies for many industries, enormous budget deficits financed by printing money, and rampant price controls. Not so long ago, asking for sensible economic policy from Latin America would have been like asking a professional football team to dance a ballet: they were unlikely to attempt it, and certain to do it poorly if they tried.

But the last few years have seen a wave of sensible and courageous economic reforms in Latin America. Many of these are reviewed by John Williamson of the Institute for International Economics in a recently published monograph called "The Progress of Policy Reform in Latin America."

Williamson starts with Bolivia. Back in 1985, government tax revenues were only 3 percent of expenditures. The deficit was financed by printing money, and inflation had just hit 24,000 percent. Per capita income had fallen by one-fourth in the previous few years.

But within three weeks of President Paz Estenssoro taking office in 1985, he announced a plan for eliminating all price controls and consumption subsidies, deregulating the banking system, privatizing the nationalized industries, cutting the deficit by three-quarters, and more. These policies strangled the hyperinflation and restored economic growth, albeit at a very slow rate.

When Brazil's new President Fernando Collor de Mello took office a few weeks ago, he announced a similar program of eliminating government subsidies, turning the budget from a huge deficit to a mild surplus, creating a new currency to hold down inflation, and encouraging foreign goods and investment. Despite the immediate pain that this plan will cause, it has 60 percent support in the polls right now. With inflation at 2,400 percent, Brazilians are willing to try something new.

Under President Carlos Salinas de Gortari, Mexico has been following a similar plan of cutting budget deficits and subsidies, deregulation, and now appears on the brink of negotiating a free-trade zone with the United States.

This sort of pragmatic economic reform represents a recognition throughout most of Latin America that having the government borrow hundreds of billions of dollars doesn't buy economic development. Instead, economic growth happens when an economy is designed to mobilize the abilities and resources of its own people.

Perhaps the most striking example of the potential for Latin American reform comes from the money that Latin Americans have invested abroad, sometimes called "flight capital." The investments of Argentina, Mexico, and Venezuela in foreign countries are actually larger than their outstanding public debts. If policy reform draws this flight capital home, it will provide an enormous surge in investment. But if the Latin Americans aren't willing to invest in their own countries, foreign investors and banks are not likely to pick up the slack.

The World Bank put it this way in its most recent World Development Report: "The most critical component of the debt strategy remains continued adjustment by the debtor countries. Without strong adjustment, no debt strategy can restore growth."

The United States has several ways to encourage these economic reforms and provide a cushion for the dislocation they will cause. America should be open to buying Latin American products and investing in Latin America. Moreover, the U.S. government has just signed an agreement to help Mexico tax flight capital, as a way of encouraging some of that money to stay at home.

In addition, the United States can push to reduce the debts of countries that persevere with serious policy reform. This trade-off was the essence of the debt reduction plan announced in March 1989 by Treasury Secretary Nicholas Brady. Not much has happened under the Brady plan so far, but if economic reform continues in Latin America, the plan may be able to have an impact.

These incremental steps may seem too narrow and limited. But economic growth and development is a matter of improving a few percent per year over a long period of time. After the economic disasters of the 1980s, slow and sustained growth would qualify as a spectacular success for Latin America.

Many debtor nations in Latin America have foreign assets that could offset much or all of their foreign debt. The amount of flight capital last year, measured in billions of dollars, is shown in the second column. The third column shows the flight capital as a percentage of the country's long-term foreign debt.

Country Flight capital

As a % of
public debt

Argentina $46 111%
Bolivia $ 2 178%
Brazil $31 46%
Colombia $ 7 103%
Ecuador $ 7 115%
Mexico $84 114%
Uruguay $ 4 159%
Venezuela $58 240%

Source: Source: Jeremy Bulow and Kenneth Rogoff, "Cleaning Up Third World Debt Without Getting Taken to the Cleaners," Journal of Economic Perspectives, Winter 1990.

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