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Debt Fever Erupts : Democratic Latin America Can’t Sustain Lenders’ Terms

<i> Jorge G. Castaneda is a professor of political science at the National Autonomous University of Mexico and co-author (with Robert A. Pastor) of "Limits to Friendship, the United States and Mexico" (Knopf, 1988)</i>

It is not a cliche to say that the riots in Venezuela last week, which left several hundred dead, thousands wounded and millions of dollars in property losses, are a warning sign that must be heeded. Something along this line, with or without the exact succession of events and causality as unfolded in Venezuela, has been foretold in many parts of debt-burdened Latin America.

The rioting in Caracas followed the government’s announcement of price increases in gas, public transportation and other consumer items. They had been decreed as part of an agreement with the International Monetary Fund to obtain new credits for Venezuela’s $33-billion debt.

The 1980s have been repeatedly called the “lost decade” for Latin America. With a few exceptions, the continent’s economies did not grow, living standards plummeted, and a substantial portion of each country’s national effort and wealth--60% of the federal budget in Mexico, 70% in Venezuela--was devoted to servicing its debts. The fact that every Latin American country (with the possible exception of Colombia) is over-indebted shows that causes unique to each are insufficient as explanations. There was a common thread to the process of indebtedness, as there have been common features in the so-called solutions.

Most of the Latin American governments of the 1970s and early 1980s borrowed too much because they had no choice. Without strong inflows of capital from abroad, they could not promote the growth and provide the services that they felt were necessary to prevent violent eruptions of popular discontent and the rise of criminal sub-societies. (While class riots have been rare, a subculture of crime has become a characteristic of Lima, Rio de Janeiro and Mexico City, among others.) For historical, political, cultural and even demographic reasons, domestic savings were simply not enough to fuel high levels of domestic investment. Exports of raw materials or goods from newly developed industries, tourism or foreign business investment did not suffice; the amount of money required was far greater than that.

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With the money obtained from foreign loans, a peculiarly Latin form of the European welfare state was created: Through services and spending on education and health, on highways and dams--and through corruption, cronyism, patronage and inefficiency--the enormous inequalities and the intolerable injustices of nearly every Latin American society were kept manageable.

When it became impossible for these nations to go on borrowing, or even to keep servicing the debts they had incurred, they were hit by a double whammy. There were no new sources of outside money, and they had to cut back on the public spending and “development policies” that were the original reason for going into debt. In exchange for enough new lending to cover their interest payments, the continent’s nations committed themselves to “new” economics--Reaganomics with a Latin flavor. The impossibility of continuing with previous policies was the strongest argument in favor of new ones. Their intrinsic merits, applicability or prospects were rarely analyzed.

Currencies were devalued, public spending was slashed, subsidies were cut and consumption was sharply reduced; the state-owned sectors were sold off or shut down and protectionist barriers were dismantled. At some point the question of which came first, the chicken (pressures from abroad to implement these policies) or the egg (a sincere conversion to this philosophy) became irrelevant. Virtually every nation in the hemisphere was putting these policies in practice to one extent or another. Many were hailed for their “courage” and boldness. Little heed was paid to the fact that the original goal--resumption of growth--was steadily receding; it seems as distant today, after nearly a decade of austerity, as before.

Similarly, scant attention was paid to the social and economic consequences of the adjustments and the ensuing structural reforms. But those consequences, devastating for these nations’ futures, were emerging. Some have come into public view in Mexico, thanks to traditional election-year openness and scrutiny. Between 1982 and 1988, public expenditures (excluding interest payments on debt) fell from 27% of gross domestic product to 22%. Spending on education fell from more than 5% of GDP to less than 3%, this in a country where roughly half the population is under 15. Spending on health also fell, from about 2.5% of GDP to 1.5%. In other words, more than half of the adjustment downward came out of health and education. How one can achieve a competitive, exporting economy by halving spending on education in a country with nearly 25 million children in school is anybody’s guess. How long a situation like this can last anywhere in Latin America is also.

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The problem with implementing Reaganomics in societies like those of most of Latin America lies in the different meanings of what the French call two-track countries. In Europe--be it in Spain or England, or even in France--recent economic policies have created a dual society: 70% to 80% of the population live well, in a thriving, open economy, while the remaining 20% to 30% become a permanent, more-or-less-government-assisted underclass. The situation in the United States is not dissimilar. It is not an ideal or even acceptable situation, but it is a manageable one, made easier by the fact that the prosperous three-quarters tends to be ethnically homogeneous, the excluded one-quarter often “different"--black, Latino, Arab, Basque, Welsh.

But in the south of this hemisphere, the proportions are upside down. Ideally, these policies can work for one-fourth or -fifth of the population, the middle classes and certain regional sectors. The rest of society--70% to 80%--is, at least for the foreseeable future, excluded from the benefits of export booms, stable government finances, privatization and subsidy cuts.

These excluded majorities could be seen in the Venezuelan hordes who took their revenge on affluent neighborhoods when their rage boiled over. They are cousins to the Mexican (and Brazilian and Argentine) hordes of Ciudad Nezahualcoyotl, a slum of more than 1 million inhabitants outside Mexico City, who so far have only voted against the other Mexico, the prosperous few.

The letter of intent that the Mexican government is scheduled to sign soon with the IMF will not trigger riots in the capital, nor will upcoming new austerity measures by Argentina’s government bring the descamisados back into the streets of Buenos Aires. But the “right policies” so popular in Washington and New York will have to begin producing results soon, or they and the governments that espouse them will not last.

A reduction in debt and a resumption of growth have become the basic necessities for stability, democracy and nearly everything else in Latin America. Increasingly, obtaining them seems worth any price.


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