Latin American Debt Crisis Brings a Decade of Troubles and Progress : Economy: On 10th anniversary, Third World countries are still trying to dig their way out from under. But there are some signs of hope.

When former Mexican Finance Minister Jesus Silva Herzog shocked 200 international bankers in 1982 with the news that his country could not make its next payment on an $86-billion debt, he did not expect to start an economic revolution.

But a decade later, it is clear that the Aug. 20 announcement was the shot heard round the world--or at least around Latin America--the undeniable signal that the policies which had brought the region decades of growth no longer worked.

The Third World debt crisis began that day, discrediting Latin America’s paternalistic, state-run economies that protected inefficient industries in the name of national development. It put Latin American countries on an entirely new economic path of slashing federal spending, selling off state-owned companies and opening borders to foreign goods.

It is a path that has led Mexico to negotiate a free trade agreement with the United States--a step toward economic integration unthinkable a decade ago--and sent Chile clamoring to be next in line.

Third World loan losses were also the first indication that all was not well in the international financial system--that respected banks such as Citicorp, Chase Manhattan and Bank of America were lending money to less-than-reliable borrowers.

While shareholders of those companies have suffered from the debt crisis as well as questionable domestic lending practices, the heaviest burden has undeniably fallen on the debtor countries. Brazil’s public hospital system is in a state of semi-collapse for lack of funds. Large expanses of Costa Rican jungle have been turned over to grazing land for cattle that will be turned into fast-food hamburgers in the United States, a source of hard currency for debt payments.

The economic reforms undertaken to manage the debt have stifled economic growth, closed thousands of businesses, cost hundreds of thousands of jobs. They have whittled away the quality of all basic public services.

“There are still enormous social deficits as a result of the debt crisis,” said Abraham Lowenthal, an expert on regional policy issues. “People are uneducated. People are unhealthy. Latin America will be paying for this for a long time.”

Yet, on the 10th anniversary of the debt crisis, those who have watched it unfold are increasingly reluctant to write this off as a lost decade.

“This has been a decade of preparation and learning that has given Latin America a new foundation for economic growth,” said Jaime Pellicer, debt expert at the Center for Latin American Economic and Monetary Studies, an organization of central banks based in Mexico City.

What governments have learned is how to govern without running the whole economy: how to set priorities, how to delegate to private enterprise, how to make more effective use of less money.

Latin American officials insist that the new foundation of growth through exports with production dominated by private initiative is a stronger one and is beginning to show results. Manufactured goods now account for more than half of Mexico’s exports, against only about one-fifth in 1983.

And there are finally some signs that the workers in those export-oriented industries are beginning to benefit, although they are far from recovering the buying power that was slashed in half over the past decade. In Mexico, for example, although the minimum wage still lags behind inflation, contracts for unionized workers have begun to improve over the past three years.

“The wages of 1981 were paid with foreign debt and could not be sustained,” President Carlos Salinas de Gortari told reporters last week. “Today’s wages are being paid with domestic savings and they can be sustained.”

But that’s not to say that the problem is solved.

Latin America still owes about $420 billion. It is manageable at today’s interest rates and under today’s agreements with international bankers, but it is still a staggering sum.

“The debt remains a serious problem, an obstacle to development in many countries,” said Silva Herzog, now Mexico’s ambassador to Spain. “For Mexico, Chile and Costa Rica, it is a manageable problem. But that is not true for everyone.”

Debt payments absorb more than one-third of the funds most Latin American countries earn from exports--money those nations urgently need to buy new imported equipment to modernize antiquated factories.

Latin American countries accumulated the debt at a time of low interest rates when Middle Eastern countries were pumping dollars into international banks as quickly as they pumped oil into tankers headed for Europe and the United States. The glut of savings from oil-producing countries forced banks to find a place to lend that money.

Latin nations used borrowed funds to finance a government-driven economic system that had brought them steady economic growth since World War II. Mexico got into trouble when oil prices plummeted in 1981, capital fled the country and interest rates skyrocketed. By early August, 1982, Mexico was borrowing on a day-to-day basis from international markets to cover its payments. Hoping to avoid a moratorium, Silva Herzog first met with then-U.S. Treasury Secretary Donald Regan to find alternatives.

A week later, he told international banks that there was no alternative. Debt payments due that day were more than the country’s capital reserves. Mexico could not pay.

“The debt crisis had officially begun,” recalled Silva Herzog. “We were completely aware that this was a far-reaching step. We thought the problem could be corrected in three or four years. There was no way we could have anticipated the depth of the resulting economic changes.”

After the experience with Mexico, banks began checking over their portfolios for loans to other Third World countries. Suddenly, no more money was available to Brazil--the developing world’s biggest borrower with a debt of $92 billion--or Argentina, Venezuela or other Latin American countries.

Without new borrowing, they could not make payments either.

The need for funds forced countries to look for a new economic structure. After decades of trying to build industry to serve their domestic markets, they now needed industries that could export. That meant forcing companies to be competitive by tearing down the trade barriers that had protected them and facing the fact that some factories would fold, taking with them thousands of jobs.

The transition toward that structure has been hard on people such as Victoria Sanchez, a 33-year-old worker at a northern Mexico City textile factory, one of the industries hardest hit by import competition. Sanchez and her co-workers have been on strike for a year because their financially strapped employer was holding back legally mandated cash benefits.

After a decade, workers are becoming increasingly restive as national economic figures improve and their wages lag behind. Seeing what international competition has done to their way of life so far, Mexicans worry what will result from even closer integration with the U.S. economy under the proposed North American Free Trade Agreement.

Joseph Ramos, of the Santiago-based United Nations Economic Commission for Latin America and the Caribbean, is especially concerned about how education has suffered, a concern that has hit home for Mexicans recently as they worry about the results of closer integration with the U.S. economy.

“Are our public schools preparing business leaders and executives? They are hardly preparing skilled workers. What will happen to future generations” under free trade? asked Ribilda Cornejo, a schoolteacher and mother of three.

Despite the urgency of those concerns, Mexico, like the rest of Latin America, still has debt payments to make. So the government must spend carefully on social programs, relying on economic reforms to gradually supply funds needed to return education to its previous level.

Conditions have never been ideal since she began teaching in 1965 in the northern state of Sonora, said Cornejo. “But today, the government gives us nothing except the textbooks. We have to ask to parents to donate buckets and mops to clean the classrooms.”

Younger teachers, such as Lourdes Flores in her second year as a grade-school teacher, work two jobs, teaching at a private school in the morning and at a public school in the afternoon, where she teaches 50 children.

The larger problems of the society are reflected in the classroom, she said: children who have not eaten breakfast or lunch before they come to afternoon sessions, whose parents are so busy working to support them that they cannot help with homework.

But with all the problems of the new, post-crisis development path, Latin America will probably continue to follow it because there is no other choice.

“The model of going back to the old ways of doing things just is not there,” said Purcell.

But getting debt under control is the key, said Mexican President Salinas, who earlier this month became the first Latin American leader to negotiate a free trade agreement with the United States. “It would have been difficult to begin negotiating an agreement on trade without having completed the one on debt.”

Times staff writer William Long in Buenos Aires contributed to this story.