Debt and Democracy: an Uneasy Balance in Latin America

Only the most optimistic observers could imagine five years ago that South America would enter the second half of the 1980s with 94% of its population living under civilian and constitutional regimes, or that the countries of Central America would be holding internationally monitored elections, a first, if not comprehensive, step toward democracy.

In South America, the return to democracy has been the main political issue of the last five years. Despite drastic economic reverses and declining living standards, there has been much less social upheaval and political radicalism than might have been expected. This has been so in large part because elite groups of different persuasions have come to understand the worth of democratic politics, and because military officers have come to appreciate the cost of political involvement to their institution’s coherence and morale. Also, popular frustrations have been constructively invested in the mechanics of the transition to civilian rule.

The central question for the remainder of the decade will be whether this commitment to democracy, and its consolidation, can continue as the region struggles with its profound economic problems. If international constraints remain tight and the new democracies cannot soon generate hope that growth will resume, popular pressure will accelerate the potential for chaos. Populist demagogues may press for radical nationalist policies that would undermine political stability. Parties that have refrained from fratricidal competition during the delicate process of transition may succumb to the urge to polarize. Terrorist and insurgent movements that have had relatively limited appeal--M-19 in Colombia and Sendero Luminoso in Peru are the main examples--may broaden their popular bases if economic and social conditions deteriorate still further. Drug traffickers may take advantage of weakened governments to expand their control of enclaves within Latin America. Counterinsurgency and anti-narcotics operations, in turn, could lead to renewed repression in some countries and rekindle the dynamics of instability. The potential of these threats makes Latin America’s economic problems all the more disturbing.

The statistics on Latin America’s economic distress are stark. Per-capita income for the region has fallen about 9% since 1980, back to the levels of 1977--in some countries, to 1960s levels. Unemployment and underemployment exceed 50% in some countries. Inflation is rampant, almost 150% for the region as a whole.

External debt is a staggering $370 billion; The debt-to-export ratio, a standard measurement of debt-service capacity, worsened for every major Latin American country in 1985. Ten nations are substantially behind in their interest payments, with Bolivia, Guyana and Nicaragua effectively in default. Loans to Peru have been classified by U.S. bank regulators as “value-impaired” because the country’s arrears are so high. At least six countries, including Brazil and Mexico, are out of compliance with International Monetary Fund targets for adjustment.

Close to 40% of Latin America’s export earnings are now devoted to interest payments. In 1985, for the fourth year in a row, the net total of investments and loans to Latin America was substantially less than that of net remittances for interest and foreign companies’ profits. During those four years, Latin America has transferred $106 billion to the industrialized countries--a burden more than twice the relative size of the German war reparations of the 1920s. About one-quarter of Latin America’s savings are being drained to keep up interest payments, sharply reducing investment capital.

Latin America’s economies are caught in a vicious circle. Because they are devoting so much of their savings to debt service, they are undercutting their ability to invest, to grow and to generate additional earnings to improve their credit-worthiness.

This situation is intolerable, economically and politically.

The exhilaration engendered by the revival of democracy is beginning to give way to dissatisfaction. In several countries, the new governments are being pressed by labor union resistance, public demonstrations and opposition victories in by-elections. A scrawl on a wall in Lima summed up the growing popular sentiment: “We’ve had enough crisis. We want promises.”