Big Loans, Big Debts, Big Problems
Free market forces have always played an important role in Latin and South American boom and bust economics. During the last few years as democratic capitalism seemed to take hold, the debt crisis which has plagued the region for centuries persisted. These debt problems usually recur just before the economies slump towards another depression and another round of dictatorial rule emerges. Mexico was the first country to default on its multi-billion dollar IMF loan package. After that, loan defaults became the trend throughout the region. Inflation rose as the new democracies adopted new currencies or printed more money to monetize their debts. Such unsound fiscal policies should not serve as a model to any developing state.
During the 1980s the Baker Plan governed US financial policy towards Latin American markets. The Baker Plan was a firm, goal oriented strategy that held defaulting states to their obligations. The plan applied essentially the same rules to foreign states as to an individual who obtains a bank loan: When the loan is due, the borrower must pay it. This protected the interests of foreign banks and encouraged them to lend money to developing states. When the defaults came, the Baker Plan stipulated that these banks would not suffer too heavy a loss on their ventures. The IMF and World Bank then imposed their structural adjustment programs upon the defaulting states. In Paraguay, Brazil, and Argentina the IMF gave multi-billion dollar loans in exchange for promises to increase privatization in accordance with free market principles. But these multilateral institutions wanted "limited oversight" to ensure the funds were not mismanaged. National governments soon realized their control of fiscal policy was restricted without IMF permission.
The IMF permission they received solved no problems. By 1989 the IMF de facto ruled Latin America. Then the Brady Plan was introduced to fix the messy situation. The Brady Plan rescheduled the debt, protected Latin American economies, and made no provision to the private banks that they may or may not have to take the losses incurred by extending loans to defaulting parties. Although its language and regulations are fiscally irresponsible, the Brady Plan gave the defaulting states enough time to gain partial control of their inflation and interest rates. Investments increased, and Latin America remained a viable market for low cost labor and assembly of goods.
But Latin America has been trapped at this level of development for nearly three quarters of a century since the advent of ISA (import substitution assembly). In a rather convoluted way, ISA is traceable to the colonial era. The social infrastructure of ISA economies does not permit the existence of a middle class. Encouraging fiscal responsibility is one way to transform this trend. The IMF and other lenders should suspend future loans to these states until pending debts are paid. This policy may include some debt rescheduling to make the burden more manageable and to avoid more severe economic disasters. The terms of any agreement must depend on bilateral co-operation. National leaders must be engaged directly in the process, and part of this direct engagement requires them to comply with agreements they previously accepted. No banker would lend money to an individual or corporation with a negative credit rating. Why then should the IMF and World Bank and other international lenders give loans to countries who absolutely do not intend to pay the debt? If these borrowers kept their obligations, the value or time of the loan would be of negligible consequence. But if these borrowers default, payments should cease just as they would to a non-government borrower.
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