LECTURE 14: LATIN AMERICA SINCE the EARLY 1980S

LECTURE 14: LATIN AMERICA SINCE THE EARLY 1980s

Last time we took the story of Latin America into the 1970s. What we saw was a divergence between the large and small economies. The larger economies (Latin America’s Big 6) turned increasingly to inward centred patterns of development, becoming less dependent on export earnings and much more determined to develop domestic manufacturing capacity. In this effort, they tended to get the worst of all worlds. Their industries were relatively inefficient, and needed very substantial protection from international competition. In the efforts to build industrial capacity, the central state in most of these major economies became over-extended, resulting in high underlying core inflation, balance of payments weakness and economic frailty. In many cases, governments had begun to recognise the problems and had taken steps towards greater international competitiveness in the 1960s. In many cases, Brazil being the most notable example, these steps required a fundamental change of political regime and the re-appearance of military dictatorship. The smaller countries, on the other hand, had little real option but to continue to focus on the world market. They continued to develop their primary exports, and had much greater monetary stability (low inflation, stable exchange rates with the US dollar) that the larger countries. However, conditions in the world economy were not particularly favourable to primary producers until the late 1960s and early 1970s, when prices of primary products began to rise. By this time, the larger economies had anyway realised that they needed to develop greater export potential, and had begun to borrow from international organisations, particularly the World Bank, to rationalise and reorganise parts of both industrial and primary production to enhance international competitiveness.

The Problems to be Faced

This time I want to bring the story as far up-to-date as possible. There are three main these to pick up. The first is economic, and covers the reaction of Latin America to the various oil shocks of the 1970s and early 1980s, the debt crisis of the 1980s and the lost decade for much of Latin America, with zero growth a transfer of capital to the rich countries and increasing pressure for new policies, which came in the 1990s with a new export, outward orientation. The next theme is social, and tries to examine in broad terms the social consequences of these economic changes. Finally, there is the political dimension, the question of the political context in which these major socio-economic problems were experienced and the political foundations for the reversal of the policy of inward-oriented development that has been at the centre of Latin American thinking for half a century or more. These have been very turbulent decades for Latin America in every aspect of its political economy and therefore any judgements will inevitably be interim, there is just not sufficient distance from events to make clear and confident judgements.

Latin America and the Oil Crises of the 1970s

The best place to begin is in the first round of oil price rises in 1973. Latin America, as you probably know, has oil exporting countries as well as oil importers. The biggest oil exporter has been Venezuela, which had become an important supplier of oil to the USA before the Second World War, but it too had attempted inward-looking development from the late 1950s and had become heavily dependent on the revenues from oil to finance its ambitious industrialisation plans. The price rises implemented by OPEC in 1973 (when oil prices were doubled, and then doubled again) made it much more commercially viable to extract oil from Mexico. Rising oil prices stimulated the search for new sources of oil within the country, and its known reserves increased dramatically from 6.3 billion barrels at the end of 1976 to 40 billion barrels by the end of 1978. Mexico was not a member of OPEC, and it did not need to follow OPEC rules, with the result that its share of Latin America’s oil production rose dramatically from 9% to 44% between 1973 and 1982. As in Venezuela, Government in Mexico saw oil as the source of funds for a major development project. Oil has also been found in Ecuador and Peru, but in the latter especially these were in disappointing quantities.

In general terms, the LDCs as a whole managed to survive the first round of oil price rises much more successfully than the Developed Market Economies, in large part because their dependence on imported oil was so much less than that of the DMEs. Latin American oil-importing countries recorded very little adverse impact in their growth rates, but by the same token most of the oil exporters did not register much of an increase either. Those in OPEC were under instructions to cut back production after 1973-4 in order to make the price rises stick, so they tended to be on a roller-coaster ride as export receipts rose and then fell with the state of oil exports. The Latin American oil importers did, however, see major problems in their current balance of payments. Clearly the higher cost of oil (four times higher in 1974 than at the start of 1973) meant a massive rise in the cost of imports, and export proceeds could not cover the cost, not least because the DMEs went into recession in the mid-1970s and cut the growth of Latin American exports. This Latin American balance of payments problem continued to worsen, at a rapid rate.

The figures are quite frightening. Between 1973 and 1981, Latin America’s imports of goods more than doubled in real terms, from US$44 billion to US$93 billion, at constant 1980 prices. In the same period, the Latin American current account deficit quadrupled, from UD$10 billion to US$40 billion, again at 1980 prices. Clearly something quite strange was happening. In this phase of severe international economic turbulence, Brazil experienced what is commonly called its economic miracle in this period of severe international economic turbulence. Brazil managed to break into the world market for manufactures at this time. In fact, Brazil is perhaps the best case for the longrun success of the import substitution (ISI) policy. There is a very good chapter written by three leading Brazilian economic historians (Abreu, Bevilaqua, Pinho) in a recently published book (Cardenas, Ocampas and Thorp, eds. The Economic History of Latin America in the Twentieth Century, vol. 3:Industrialisation and the State – the Postwar Years) that argues that the export successes beginning in the 1970s rested upon earlier developments. The long, slow and often painful build-up of industrial capacity was important, but so too was the realisation from the military governments of the 1960s that Brazilian industry had to aim at international competitiveness. Military governments added new incentives for export and began a process of opening up to competition. Borrowing for export-led development was coupled with a tightening of market incentives and appeared to be successful.

Table 15.1: Latin America, share of the manufacturing sector in GDP, 1950-90.

Source, L. Bethell, ed. Latin America, Economy and Society since 1930, p. 187.

Brazil was not alone in shifting resources in substantial quantities into manufacturing. Table 15.1 suggests that this movement was very general and for a number of countries the process continued into the early 1980s. The Big 6, the followers of ISI, were the most successful at this, especially those which had followed the Brazilian example of reorienting towards the world market in the 1960s. What made fast growth and substantial structural change possible was a massive change in the availability of funds for investment. These were moreover funds from the developed western economies, so borrowing also helped to finance the balance of payments deficit.

Latin American countries had found it very difficult to borrow from abroad before the 1970s. There had been borrowing in the 1950s and 1960s, but most of this was undertaken through official channels, like the World Bank and the IMF. There was also investment into Latin America by multinationals based in the rich, Developed Market Economies, as we saw in the previous lecture, but with very mixed economic results. But in the mid-1960s the situation was transformed first by the growth of the Eurodollar market and secondly by the opening of branches of major US banks in Latin America. Citicorp led the way and developed new ways of arranging finance for developing countries, particularly those in Latin America. The technique involved arranging big consortia of banks to finance specific projects – otherwise known as syndicated lending – and the use of variable rates of interest tied to key rates in New York. Citicorp made major profits from this activity. Its lending to Brazil alone accounted for 13% of its total profits in 1976. The first oil crisis in 1973 swelled both the Eurodollar markets and encouraged more banks to become involved in syndicated loans to Latin America. Western banks were eager to supply loans to Latin America, and Latin American countries were very ready to borrow. They intensified their efforts in debt-led development. They would for example much rather borrow from a syndicate of western banks than from the IMF. The latter imposed substantial strings or conditions on its lending; western banks did not. The lending was focussed primarily on the bigger economies: Argentina, Brazil, Chile, Colombia, Mexico and Venezuela. The smaller countries received comparatively little.

One of the obvious consequences was the rise in Latin American indebtedness. Table 15.2 tries to capture some of the more important elements.

Table 15.2: External debt indicators for Latin America, 1960-82

A

B

C

D

1. Total public, private and short-term debt, in billions of US$ (current).
2. Banks’ share of public external debt (%).
3. Ratio of interest and amortisation payments on debt to export earnings.
4. Ratio of interest payments to export earnings.

Source: V. Bulmer-Thomas, The Economic History of Latin America, p. 363.

The first column shows the growth of debt, especially after 1973. The second shows that the growth of indebtedness was primarily the result of bank lending, and this is lending from western banks. The third column shows that it was becoming increasingly burdensome for the Latin American economies to service their loans. By and large, foreign lending was used to pay for the rising burden of imports of oil, which doubled in price again in 1979, and other imports of consumer goods, investment goods and military equipment, the last of which figured prominently in the needs of the many military dictatorships in the region. Foreign borrowing also helped the wealthy switch their money out of the region, in the form of capital flight, particularly from Argentina, Mexico and Venezuela where controls on the capital markets were weak. In most countries the loans were used to increase imports. Comparatively disappointing amounts of this capital import went to finance new export activities, which was vital to service this borrowing. Quite clearly, borrowing to invest in tanks will do comparatively little to produce the means to earn the foreign currency to pay the interest on the loans for the tanks (other than to make it more attractive for foreigners to invest still more). But sooner or later these debts had to be repaid. But there was something to be said for extensive borrowing. Interest rates were almost certainly only a little above world inflation rates, and so there was every incentive to borrow as heavily as possible. But this volume of lending would continue only for as long as the western banks had confidence that their money would be repaid.

I have already mentioned the significance of the big rise in US interest rates in October 1979 and the decision by Mexico to default on its debt interest repayments in August 1982. That Mexico should have defaulted first was something of a surprise. As we have seen Mexico had been a minor oil exporter in 1973 and had used its oil revenues to build up its oil industry so that it expanded rapidly in the later 1970s. Mexico produced oil for the export market, so it was to some extent following the rules of prudent borrowing by building up the capacity to service loans. However, Mexico and Venezuela, which was in a similar position had both borrowed heavily to support new productive investment and to sustain consumption of imports. So both countries were allowing their caution to be overtaken by the idea that they could borrow indefinitely on the strength of their oil reserves. The crisis that was unleashed by Mexico’s default was immense. New lending virtually stopped overnight. The big Latin American economies had transformed their economies in the implicit expectation that borrowing would continue more or less indefinitely now had to face the consequences. The financial institutions in the DMEs were terrified above all of the Latin American countries combining to dictate terms to western banks, so they insisted on dealing with the debtors on a case by case basis and mobilised the IMF to act in support of their goals. The US government co-ordinated these negotiations, in large part because the US financial system was gravely threatened by the exposure of some of its leading banks to Latin American debts. The debtors had to agree to cut back imports, expand exports, and governments had to stand as guarantors for the loans taken out by private companies operating within their territory. In essence, the LDCs, and Latin American countries as the most exposed LDCs, had to agree to transfer capital quickly from their economies to banks in the rich countries. The flow of capital had to be reversed quickly. For those countries willing to agree to the terms on offer, there was a carrot in the form of ‘re-scheduling’, or further loans to help with interest payments. However, re-scheduling did not begin until the ‘Baker Plan’ of 1987, and the debtors had to have demonstrated ‘good behaviour’ in the difficult five years from 1982 when the loan tap was turned off to 1987, when it was slowly turned back on again.

The change in policy was abrupt and immense. The IMF insisted on a n agenda of economic liberalisation. Tariffs were dismantled, quotas on imports were abolished, indiscriminate state subsidies were cut back, financial markets were deregulated, state enterprises were sold to the private sector. Latin American economies, which had refused to join the GATT because of their dissatisfaction with its domination by the rich countries, now applied for membership, agreed to play by the rules of free trade and began to lobby for a better deal for primary producing countries. But this very harsh and limited role for the state in the economy, sometimes known as the Washington consensus, that we encountered in the first semester, was not guaranteed to provide a strategy for all economies. Mexico and Bolivia started to liberalise their foreign trade policies in 1985, and most of the other countries followed suit in 1989-93. Thus began the Latin American “New Economic Model”. This looks like a humbling experience for the Latin American economies, but in one vitally important respect the DMEs offered a major lifeline to the indebted countries of the less developed world. They did not close their markets to imports from the poor countries as they had in the 1930s. The USA in particular ran a major balance of payments deficit in the interests in part of stabilising he international system.

There is some disagreement about both the economic and the social effects of this abrupt change of policy. If we begin with the economic effects, there are two levels at which to look. The first is the firm. In theory the “New Economic Model” should have forced inefficient firms out of business by denying them access to the state subsidies and protected markets on which they had depended. Labour, managerial talent and capital equipment should have been released to shift into the more efficient firms, where the competition from imports should have stimulated improvements to productivity and competitiveness. Unfortunately, there is precious little evidence for either of these routes to improved performance. In many cases, Latin American governments were not prepared to allow naked market forces to determine the shape of their economies. National governments continued to find ways of supporting some industries, and they tended to be those that absorbed labour made redundant by intensified competition in the less favoured sectors. As far as the efficiency of individual firms is concerned, there was an immediate and substantial improvement in both productivity and competitiveness as firms laid off many surplus workers to meet the new levels of demand following the introduction of the New Economic Model. Thereafter, firms found labour relatively cheap and investment funds difficult to obtain and chose to follow more labour intensive production methods. This may have been good for competitiveness, but did little for productivity. The other level at which to look is the economy as a whole. Here, the big change was for governments of even the big Latin American countries to make stable exchange rates the absolute goal of policy. If you remember to the last lecture, this was what the small, open economies of the region had been forced to control inflation and to keep their exports competitive. In this way, they hoped to earn sufficient foreign exchange from exports to pay for the imports that they needed. The bigger Latin American nations realised that they were essentially in the same boat.