Private Sector Solutions to the Latin American Debt Problem Open Access

This book suggests different ways the private sector has contributed—in the authors’ view—to solving the Latin American debt crisis. Written by scholars, bankers, and economic consultants close to the financial circles of the so-called Washington consensus, the book attempts to explain the antecedents of the crisis, including the history of the external debt problem in the region, and the response of the region’s governments and private sectors to the debt crisis of the 1980s.

Rich in information, graphs, and figures, the book documents the growth of Latin America’s foreign debt from $50 billion in 1973 to more than $400 billion by 1990 (p. 2). It is interesting that the pace of borrowing followed a distinct, inverted pattern in the 1970s and 1980s, respectively: after the oil crisis of the 1970s, a febrile pace of external borrowing reached an annual growth rate of 27 percent; in the 1980s it reached only 3.4 percent. “In fact,” observes the editor, “when debt service is subtracted from new credit expansion, total bank lending actually declined in every year between 1982 and 1990” (p. 4).

The book’s prevailing analytical approach is that of international finance rather than political economy. The crucial question of how the external debt originated, grew, and got out of hand is addressed mostly from supply-side and monetaristic positions. A key explanation seems to lie with the banks: in Robert Grosse s view, “it appears that the banks did not know the full extent of external indebtedness of the Latin American countries that would require servicing; they saw the price increases in raw materials started by the oil hikes as indicative of increases in the LDCs’ [less developed countries’] ability to repay foreign loans; and ultimately they failed to pay adequate attention to their own information that signaled the borrowers’ overextension’’ (p. 3). Is this an argument that solid financial institutions are guilty of miscalculation and technical inefficiency?

This view is apparently endorsed by a banker as prominent as Robert McCormack, chairman of the Sovereign Debt Restructuring Committee at Citibank. McCormack argues that Latin American governments increased their exposure through growing indebtedness because “if commodity prices were going up like that and the expectations were that oil was going to hit $50 or $60 a barrel, computing the cash flow would make you think you could get your money back very easily’’ (p. 178). In either case, it seems that the debt was the result of a perverse miscalculation by bankers and governments. Grosse, however, argues that no matter how the debt originated, “the main problem came from government-sector borrowing for projects and other uses that did not generate foreign exchange to help meet debt-servicing needs’’ (p. 3).

This is a curious explanation that may be suitable for some highly indebted countries but not for others. For example, it makes more sense in discussing the origins of the external debt for oil-producing countries such as Mexico and Venezuela than it does for oil-dependent countries such as Brazil or barely oil-sufficient ones such as Argentina. One may wonder what is meant by “other uses’’ that did not produce higher returns. Are we talking about corruption and collusion of interests among private lenders; private borrowers; international organizations; and domestic, government, and nongovernment elites (sometimes including the armed forces)? This would imply that these groups appropriated resources through increased borrowing, which ultimately has undermined their countries’ creditworthiness as well as financial and political autonomy.

While these explanations are not totally satisfactory from a political economy perspective, what is fascinating in this book are the competing visions of the future. Looking at strategies for reducing the debt burden, the contributors agree that privatization is essential. After all, state-owned enterprises (SOEs) were “responsible for creating the Latin American debt problem and, more importantly, … their privatization may help resolve the problem” (p. 153). The privatization process, however, is not exempt from conflicts and contradictions. Ravi Ramamurti persuasively argues, “it is by no means certain that substantial efficiency gains will be realized in the long run by privatizing large SOEs with high marked power” (p. 168). A second source of conflict involves regulation.

Worrisome words for committed neoliberal politicians in the region.

Ramamurti’s scenario is compatible with some of the criticisms of the late Raúl Prebisch, founder of the Economic Commission for Latin America—criticisms, however, that McCormack dismisses as shortsighted, given economies of scale. Not surprisingly, Prebisch’s views are wholly uncomfortable to bankers and scholars, who would argue, as McCormack does, that some countries are more capable from a political point of view than others: “Chile is a good example of that. A rather authoritarian government that understands what it has to do has a much easier time of it” (p. 179). Not a bad prescription for economists, bankers, and financial analysts who are, analytically, totally infatuated with their own econometric models, and who, in policy terms, put profits ahead of people. For them, Latin America does not have a debt problem but merely an investment problem (p. 179). McCormack’s words of wisdom reverberate in the Latin American landscape: “The smartest thing General Augusto Pinochet did in Chile was to make the central bank independent. It brought some sense of market discipline to an otherwise totally political process” (p. 181). Yet what is even more surprising from a political economy perspective is that many proponents of privatization actually advocate an anti-statist perspective in Latin America, one that only pays lip service to open competition in politics and markets.