The debt crisis, as Albert Fishlow states in his address “Revisiting the Great Debt Crisis of 1982” in this collection of lectures presented at Notre Dame, is Latin American. Mexico brought the threat of default to front-page headlines. Latin America bears the highest debt burden relative to export earnings, and initiated 90 percent of the early rescheduling of bank debt. Fishlow fears the conventional wisdom—that growth of the industrial economies, depreciation of the dollar, and lower interest rates will contain the crisis—may prove unfounded. The upsurge of Latin American exports during the decades before 1980 will not resume if the industrial countries turn to protectionism.
Betting the free trade era could continue, Mexico joined the General Agreement on Trade and Tariffs in the summer of 1986. Judging from co-editor Kwan Kim’s “Industrial Development in Mexico: Problems, Policy Issues, and Perspectives,” joining GATT continued the opening to trade that Mexico began in the 1970s. Reducing barriers to trade, Kim suggests, caused a near-tripling of Mexico’s imports between 1977 and 1981. He gives less weight to the burst of spending that followed the discovery of oil.
Mexico’s swelling of imports also derived from a real appreciation of the peso, which, in “Wages and Employment in International Recessions: Recent Latin American Experience,” Victor Tokman shows followed the oil finds. Tokman argues that, in Mexico and other large Latin American countries, growth of real wages during periods of payments difficulties does not raise unemployment. (Incidentally, many of the regressions Tokman reports on page 91 err seriously, and should be redone before being cited to support hypotheses.)
In contrast to some of the larger countries, small open economies in Latin America were unable to avoid wage compression during world recessions, according to Tokman’s data, as the terms of trade turned against their commodity exports. By one measure, during the years 1980-82 the world price of manufactures fell 7 percent compared to a 45 percent plunge in the price of commodities. At the same time, real interest rates in small, primary-product countries soared. Larry Sjaastad, in “Exchange Rates and the Real Estate of Interest,” documents the rise in real interest rates for Uruguay and Chile, and links it to the change in relative prices, as follows: the rise of the dollar against European currencies in the early 1980s depressed prices of traded goods relative to the CPI in the United States. Since Chile’s economy is open, prices in Chile also fell relative to the CPI here. Inflation in Chile fell below ours. Arbitrage, however, kept nominal interest rates (adjusted for any expectations of depreciation of the peso) in Chile equal to those in the U. S., plus a risk premium. Consequently, Chile’s real rate of interest, which is the nominal rate minus the rate of inflation, jumped above even the high levels in New York. Sjaastad’s hypothesis, that real appreciation of a major currency against others boosts real interest rates in small open economies, warrants testing. It might prove even more fruitful for before the late nineteenth century, when gold appreciated against silver and London set nominal interest rates for Latin America.
Remarks about other papers must be brief. Alain de Janvry surveys policies in Brazil, Argentina, and Chile to argue that successful development requires articulation between wage goods and production. Ricardo Ffrench-Davis analyzes Latin America’s debt and wants further import-substituting industrialization. A short introduction by the editors and an address by Raúl Prebisch on “Power Relations and Market Laws” open the book.
These are good lectures, with stimulating ideas. Normally, however, lectures are not used for subjecting ideas to careful tests, tests that might persuade skeptics; these are no exception.
