Latin America on $10 billion a day.

• Author: Lane, Charles
• Position: Foreign loans

LATIN AMERICA ON $10 BILLION A DAY

Latin America's heavy borrowing looks likea blunder today, but it looked sensible in the 1970s. The big international bankers were awash in petrodollars, and were eager to unload them. Inflation kept real interest rates low so debtors could service their debts with dollars that would be worth only slightly more, or in some cases less, than those they had borrowed. High prices for Latin America's raw materials seemed to guarantee income with which to pay off the debt. At least in theory, borrowing looked like a quick--and perfectly responsible--way for Latin American nations to augment their own internal savings, increase investment, and raise their standard of living. But the 1981-82 recession snapped inflation. Raw material prices tumbled. Real interest rates soared. Growth stopped. Mexico barely avoided default. Development on the cheap was exposed as a pipe dream. The nightmare of ever more onerous debt payment began.

There is no question that the internationalbanks deserve a good deal of the blame for this outcome. Bankers were incredibly cavalier about disbursing their cash. They assumed sovereign countries would never default, blithely ignored early signs of trouble, and when the recession came, they turned usurious, insisting on ever greater interest payments in order to protect their profit statements. Meanwhile, many banks were also profiting from helping wealthy Latins spirit capital flight dollars overseas into American bank accounts. Latin citizens now hold more than $100 billion in assets outside the region.

But Latin countries themselves have a lot toanswer for, too. The success of their borrow-abroad strategy hinged on investing loans efficiently in new productive capacity or in expanding existing capacity to produce more exports. The foreign exchange earnings would pay off the debt and there would be enough capital left over to invest and grow. Sometimes, as in the case of Mexican oil, investment went into production of a raw material, whose price later dropped unexpectedly. Yet too often Latin governments simply wasted the money on grandiose public works, government deficits, subsidies, and military hardware. They adopted exchange rate policies that clobbered their own exports, subsidized imports, and systematically encouraged capital flight.

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