Don’t Blame It on Debt : Economic Reforms That Aren’t Made Cripple Latin America

Swapping Latin America’s bad debts for shares in productive investments like banks, telephone companies, hotels and airlines, or even for nature conservation projects, has spawned the idea that debt also can be traded in for advances in democracy and social justice in debtor countries.

However well-intentioned, the “debt for democracy” swap, in its simplistic form of bailing out politically “deserving” debtors, is a concept with serious flaws. It assumes that Latin America’s current democracies, allegedly crushed by foreign debt, depend on relief of that debt for their survival against radical opponents of the revolutionary left or the authoritarian right.

This is a serious misreading. As important as the region’s $400-billion foreign debt may seem, it is not the central problem facing these countries. The U.N. Economic Commission for Latin America’s annual survey for 1988 has shown that debt interest payments as a percentage of export earnings have been declining since 1982 and represent about 5% of gross national product, not a crushing burden. The problem lies in the net outflow of capital because new investment, including possible conversion of debt to risk ventures, has been feeble in most debtor countries. Finance Minister Mailson Nobrega of Brazil acknowledged after a visit to Washington last month that the key problem Brazil faces is the breakdown of public finances as tax revenues have fallen behind government spending. Huge budget deficits have pushed Brazil, Peru and Argentina to the verge of hyperinflation. No debt swap can solve that.

The supposed link between foreign debt and democracy has been given immediacy by a succession of presidential and congressional elections in Ecuador, Mexico, Jamaica, Venezuela, Bolivia, Paraguay, Argentina, Panama, Brazil, Chile, Uruguay and Peru that are taking place over a span of about 18 months. The social issue has acquired apparent urgency in the wake of violent protests over consumer price increases, low wages and runaway inflation in Argentina, Venezuela and Brazil.

The consolidation of democratic systems in Latin America depends on internal economic reforms that include fiscal and monetary discipline, removal of self-inflicted obstacles to growth, release of creative energies that are now thwarted by misplaced state controls, and recovery of national savings, reducing dependence on foreign borrowing. Democratically constituted governments in Peru, Argentina, Brazil and Venezuela have shown themselves to be extraordinarily incompetent in managing their national economies. Soaring inflation, reduced economic growth, lower real wages, losses of domestic capital and deepening of social problems have generated enormous discontent. Given an opportunity, the voters protest and the incumbents are turned out.

The only democratic remedy for these symptoms of profound disorder in Latin American societies is more democracy. The convincing victory of the Peronist opposition candidate for president, Carlos Saul Menem, in Argentina was not a defeat for democracy. It was a rejection of the economic errors of President Raul Alfonsin’s Radical Party government. It will be up to Menem to show if he can do better.

Riots in Venezuelan cities in January against higher transport fares and lower food subsidies, in which 300 people were killed, were the tragic legacy of former President Jaime Lusinchi’s failure to take timely economic measures. His successor, Carlos Andres Perez, had to impose the unpopular measures to forestall a financial emergency. Despite a national strike last week, Perez said there was no turning back from austerity.

Is there a democratic alternative in Latin America to constant political upheavalsand violent protest? Yes. In Bolivia, President Victor Paz Estenssoro reduced an inflation running at 10,000% a year when he took office to less than 10% this year. The three top candidates to succeed him, who finished in a virtual tie in the popular vote, agreed to continue Paz’s stabilization measures. Congress will choose the winner in August. In Chile, where economic growth of 7% last year was the best in Latin America, the political debate over the democratic election in December for a successor to President Augusto Pinochet shows substantial agreement between the center and the right on maintaining a market-oriented economy, open to foreign investment. The issue is how the benefits of growth should be distributed, not the private-initiative system itself.

To consolidate these examples of economic reform, the Bush Administration needs to be more active on the Latin debt than was the case under President Reagan. The Brady plan, named for Bush’s treasury secretary, while short on specifics and necessary new money, seeks to reduce Third World debt principal and thereby alleviate service costs that drain $25 billion to $30 billion a year from the region. This plan will work better than the previous Baker plan only if it moves quickly to support actions by Latin American governments that truly address domestic reforms. Mexico and Venezuela have taken major steps, including debt conversion, to balance their budgets, free their markets and attract investment. The U.S. commercial banks, which hold most of Latin Americas’s debt, and the multilateral financial agencies, spurred by the U.S. government, have to move quickly to reward this progress. If not, they risk losing the initiative to the proponents of a debt moratorium advocated by the financial counselor in Havana, Fidel Castro.