Latin Debt Awaits the Clean Slate of New U.S. Administration : Old Grand Strategies Must Bow to Case-by-Case Realism

While debating an increased U.S. contribution to the World Bank’s capital, many congressional voices have been raised in favor of requiring the bank (in fact, requiring the next Administration) to produce an overall plan to deal with the debt of developing countries, primarily in Latin America. This is a poor approach. As serious as the debt problem of some Latin American countries is, it is not the core of Latin America’s economic problem or the key to a constructive response by the next Administration.

Latin America’s economic problems cover a wide spectrum, and the effects differ from country to country. In Argentina and Venezuela the people’s main concern is rapid erosion of wages by inflation. In Uruguay it is a rash of strikes and work stop-pages threatening to stall a small export boom. In Peru there is growing frustration with a suffocating bureaucracy and regulatory tangle driving most of the economy off the tax books of a government that is broke. Heavy foreign debt burdens affect these concerns, but their main source lies in the inefficiency of domestic economies.

Fortunately, under the twin stimuli of economic pressure and pragmatic new political leaders, most of Latin America is facing the challenge of internal economic reform with candor. This approach is dramatically different from that of the traditional Latin populists, who looked to foreign scapegoats for the internal failings that they had no intention of fixing.

On a trip to Latin America this summer, I had the pleasure of meeting with five elected heads of state. While all were deeply concerned with the burden of servicing their foreign debt, none gave me the old populists’ song that their troubles were foreign-made. None told me that democracy would fail without debt relief or that their economic problems were not solvable without debt forgiveness. All expressed the hope that the next U.S. Administration will take a new approach to the debt problem, but they are concentrating on their own economic problems rather than waiting for someone to bail them out. Progress is still frustratingly slow, not unknown in politics, but talented democrats like Raul Alfonsin in Argentina and Julio Maria Sanguinetti in Uruguay know where they have to go in reducing government controls and opening their economies to the stimulus of greater competition.

An effort in Congress to try to commit the new Administration to a general debt “solution” seems somehow out of sync with many Latin American countries’ efforts to deal with internal economic reform. Think what would happen psychologically and politically if our President-elect were to suggest that there should be a general solution to Latin America’s debt problems. The focus on the debt issue would shift rapidly to the questions of whether the U.S. government had gotten the commercial banks to deliver, and whether the relief eventually provided was “enough”--that is, equal to the expectations created. The next Administration faces a significant opportunity for more effective political and economic collaboration with Latin America’s new democrats, but not if it starts with such a handicap.

Debt is not the touchstone of U.S.-Latin American relations, and the political psychology on both sides is a compelling argument for the unglamorous, case-by-case approach to debt: Argentina’s (or whichever country’s) debt problem should best be addressed first in the context of Argentina’s own efforts to structure a more efficient economy and then on the basis of what Argentina specifically needs to revive growth (and thus, incidentally, improve its longer-term ability to pay).

There is also something petty about reducing the scope for a healthier U.S.-Latin American relationship to the debt problem. What Latin America’s new democrats most want from a new U.S. Administration is some real political attention, it the highest level, which they believe is warranted by their political achievement and their countries’ economic importance to the United States. They want to use that political attention to get the United States to look at their problem as it has been reflected in almost a decade of economic stagnation for most of Latin America.

Latin America’s leaders have several ideas of how U.S. leadership might help if it paid more political attention. The United States might take notice of how all the easier avenues to “import relief” in the trade bill would cut the exports that Latin America needs to grow (and pay its debt). The United States might speed an increase in the capital of the World Bank, vital to Latin America’s chances to get some new financing for growth. The United States might take some account of how its preference for loose fiscal and tight monetary policy has produced the high interest rates that Latin American governments and all the rest of us debtors now pay. The United States might look at how the two major institutions of hemispheric cooperation, the Organization of American States and the Inter-American Development Bank, have been reduced to a fraction of their potential contribution by years of neglect. And, yes, in this more constructive context of U.S.-Latin American dialogue it might be necessary to broker exceptional debt relief for some countries, because they have so much reform to accomplish before they reap its benefits. Re-ordering the priorities and the process so that they start with longstanding fundamental challenges promises a healthier result for all.