In the early 1970s, following Richard Nixon’s removal of the U.S. dollar from its gold and silver backing and the “shock” caused by the steep rise in oil prices, the international economic order which had been in place since the end of World War II came to an exhausted end. The old order had been shaped by economic policies of social welfare, a global technology based on oil, and the central role of the Bretton Woods institutions—mainly the International Monetary Fund (IMF) and the World Bank—as stabilizers of a world economy configured by the dollar-gold relation and the stability of global exchange rates.
By the end of the 1970s, a new international economic order had arisen, though not the equitable one then advocated by the countries of the Third World. The new world order was instead anchored by market-oriented economic policies, a global technology based on information, and a new role for the old Bretton Woods institutions, now given the task of designing new economic policies and supervising international debt agreements.
As the oil shocks played themselves out through the 1970s, global financiers, in an effort to put accumulated petro-dollars “to work,” encouraged public and private economic actors in developing countries to take out loans. The less-than-democratic governments that ruled Latin America at the time were all too happy to oblige, leading to the doubling of Latin America’s foreign debt between 1970 and 1990. At the end of the 1970s, interest rates were dramatically raised in the United States in an attempt to capture global savings in order to finance the chronic U.S. trade deficit. These high interest rates, combined with falling prices of most Third-World exports, produced a situation in which many debtor nations threatened to default on their foreign loans, thus sparking the so-called debt crisis. In the wake of this crisis, between 1980 and 1990, economic growth stagnated throughout the region and net exports of capital came to $375 billion in the process of servicing the debt.
Meanwhile, a number of influential Washington-based bankers, economists and functionaries of both U.S. and multilateral institutions, worried that the region’s growing economic crisis might infect the rest of the world, converged around the idea that Latin American economies should be quickly liberalized and deregulated—a set of guidelines that informed a Washington-directed process called “structural adjustment,” and which eventually became known as the “Washington Consensus.”
In the mid-1980s structural-adjustment policies began to be imposed throughout the world, and the results have not been happy for the poor. As the per capita gross domestic product (GDP) doubled in the ten richest countries in the world between 1985 and 1995, it fell by 30% in the world’s ten poorest countries. The gap in income per capita between the richest and poorest countries grew from a multiple of 70 to a multiple of 430 during the same period. By the early 1990s, Latin American governments had largely accepted Washington’s new “neoliberal” policies. They had become “common sense.”
The liberalization and deregulation of Latin American economies had three medium-term objectives: to increase national savings in order to avoid the levels of foreign indebtedness that occurred in the 1970s; to revalue and stabilize exchange rates in order to create a more predictable environment for international trade; and to narrow the region’s trade deficit, which had been very high during the period of import-substitution policies.
The 1990s, however, did not herald the arrival of the hoped-for results. The new policies produced neither growth nor investment, nor a reduction of the trade deficit. Economic growth in the 1990s is greater than in the depressed 1980s but only half of what it was in the “normal” years, from 1950 to 1970. Nor did the rate of investment return to the levels of the 1970s. Internal savings have remained depressed, leaving the region to continue to rely upon foreign private savings. National savings have been only 18% of GDP throughout the 1990s, compared with 20% in the 1970s.
Indeed, the structural-adjustment policies that sought to close the trade deficit, increase domestic savings, stabilize exchange rates and promote economic growth have not succeeded on any of those fronts if one compares the figures with the experience of the three decades between 1950 and 1980. There is only an improvement if one compares the data with the economically depressed 1980s. But rather than comparing the data with a period marked by economic depression, the comparison should be made with the previous “normal” period.
Latin America’s economies are struggling to develop in the midst of a powerful systemic crisis that began to unfold throughout the world in mid-1997. It began in Asia and then spread to Russia and Brazil. The stock exchanges of the most developed industrial countries became highly unstable, giving rise to the possibility of an intensification of the crisis that began in the early 1970s. There was a sudden realization that short-term international debt was very high throughout the world and that levels of internal indebtedness were also quite high. This provoked alarm about financial volatility and the contagious nature of financial-investment decisions. The stock exchanges of the middle-income countries dropped between 30% and 66% over the two-year period, 1997-1998, though the larger exchanges, while not very stable, did somewhat better. The global economy seemed to have one foot over a cliff.
We are now seeing a substantial decline in global economic growth rates, a substantial fall in the prices of raw materials as well as of industrial products and evidence that the Japanese crisis has spread throughout Asia and is beginning to affect the rest of the world. Meanwhile the economies of Latin America have virtually stopped growing. In the Western Hemisphere, only the United States has steady growth rates. Since 1971, the U.S. currency has had no backing whatsoever save the faith of its holders. The dollar, in turn, has become the backing of the rest of the world’s currencies. This has permitted the most powerful country in the world to use its own faith-backed currency for operations of international commerce. U.S. foreign deficits can be maintained in a growing manner because to a certain degree they can be financed by printing money. This allows the United States to grow rapidly while the rest of the world hovers somewhere between recession and depression. The result is an overvalued stock market in New York while the rest of the world’s exchanges move uncertainly.
Within this systemic crisis, it is apparent that the Latin American—and African—foreign-debt problem is still very much with us. Resolving the ongoing debt problem is important, but the international system itself must be modified in order to make economic development possible and to ensure that the debt crisis does not repeat itself. In this context, a number of anti-debt movements—the most visible being Jubilee 2000, a broad, international coalition of primarily religious organizations—have emerged demanding debt forgiveness. From a technical point of view, the argument has to do with distribution. We cannot further impoverish the population of poor countries, forcing them to transfer to wealthy countries—in the form of debt service—what they do not have.
The debt is key because the Washington Consensus—structural adjustment accompanied by free-market policies—was introduced by way of the foreign debt. Specifically, it was introduced through a process called “cross conditionality,” an interlacing of the conditions imposed by the various lenders, making those conditions virtually irreversible. The failure to comply with the conditions of any single creditor automatically leads to the cancellation of the accords with the others. These interlacing conditions exist in agreements between governments and the Paris Club of creditors, Brady Plan guarantors, private banks, the IMF, the World Bank and the Inter-American Development Bank (IDB), as well as in antidrug agreements with the United States and membership in the World Trade Organization (WTO).
To negotiate one’s foreign debt, for example, it is necessary to have an agreement with the IMF which imposes the conditions to resolve the problems of exchange rates, domestic savings and the trade deficit. After signing an agreement with the IMF, it is necessary to have a structural-adjustment agreement with the World Bank that has the following policy elements: liberalizing and deregulating foreign and domestic trade; deregulating the labor market and creating labor “flexibility”; liberalizing and deregulating the financial system; and reducing the size of the state by eliminating subsidies, privatizing public firms, and reducing state personnel and functions.
After all that is agreed to, a country can negotiate—or renegotiate—its debt with the Paris Club and with private creditors. Negotiations can take place through the International Development Agency facility of the World Bank for low-income countries or through the Brady Plan for middle-income debtors. The accords with the IMF, World Bank, IDB, Paris Club and London Club are structured in such a way that failure to comply with one means failure to comply with all. Usually accords with the WTO, antidrug agreements with the United States, and, when they exist, environmental agreements are also linked to these.
Cross conditionality, in other words, seeks to impose a universal set of conditions on debtor countries. Debtor governments were virtually forced to sign on, having been assured that there was simply “no alternative.” The instrument was coercion, mostly through the renegotiation of the debt. Debtor countries were forced to apply adjustment policies before being allowed to renegotiate the debt with both public and private creditors. That is to say, either one followed the commands of the governments of the industrialized creditor countries by way of the World Bank and the IMF or there would be no dialogue.
Historically, debt-alleviation accords with Colombia in 1941, Peru in 1945 and Germany in 1953—in which that country’s war debt was restructured—were centered around a now-forgotten principle: A country cannot satisfactorily get out of debt by simply borrowing money to pay what it owes. This is common sense. The evidence shows that the foreign deficits of the 1990s are greater than those of all previous decades and have been financed by short-term credits, making the economies of the debtor countries all the more volatile. It is like a giant pyramid scheme. I owe more because you lend me more to pay you what I already owe you. It has also been forgotten that international credit should be a mechanism by which one obtains a good or service that generates economic returns that can cover that debt.
Through the IMF’s Heavily Indebted Poor Countries Initiative (HIPC), the international creditors are now prepared to alleviate the debt of the world’s 42 poorest countries. The debt-forgiveness movement seeks to expand that list to the severely indebted middle-income countries. There is no question that those governments that incurred debt in the 1970s bear some responsibility for the current situation, but if debt was contracted at 2% and rates have risen to over 20%, no investment project will be profitable. Beyond that, interest liabilities have generated further interest liabilities which have greatly swollen the debts, making them all the more unpayable. Between 1980 and 1990, Latin America’s foreign debt doubled solely because of the capitalization of interest.
Latin America’s situation on the eve of the millennium is simple. Old debts have been reprogrammed through the Brady Plan and the Paris Club. New debts are directed toward the private sector, and those directed to the public sector are channeled through the multilateral agencies. Apart from Mexico, Brazil, Argentina and Venezuela, which have issued public offerings on the European bond market (known as Eurobonds), Latin American countries are wallowing in costly multilateral loans. Plagued by conditions in which the debtor countries assume all interest and exchange-rate risks, these multilateral loans are yet another burden as debt service grows while exports stagnate. It has therefore become imperative—for the world system itself—that the rules of the game be modified to allow Latin American and African countries to comply with at least a portion of their debt-service obligations so that the “debt crisis” of the 1980s is not revisited.
ABOUT THE AUTHOR
Oscar Ugarteche teaches economics at the Catholic University in Lima, Peru. He is author of several books, including El Falso Dilema: América Latina en la globalización (Nueva Sociedad, 1997), La Historia de la deuda externa peruana (Sur, 1999), and The New International Agenda Viewed from the South (ZED Books, forthcoming). Translated from the Spanish by NACLA.
