Down the toilet; where did Venezuela's loan money go?

• Author: Bridges, Tyler

DOWN THE TOILET

If you want to understand how LatinAmerica spent $365 billion in foreign loans, go visit the restroom of any public building in Venezuela. During the borrowing boom of the 1970s, then-President Carlos Andres Perez used the money foreign banks loaned his country to finance a unique employment program. He decreed that every public bathroom have an attendant. Forget that the program does nothing for Venezuela's economy; think hygiene and public relations: hand-towels courtesy of Citicorp.

The amount of money Latin America hasthrown down the toilet in recent years is staggering. Equally amazing, few people--borrowers or lenders--seem to know where the billions went. The Reagan administration doesn't have a handle on the problem either, judging by its latest plan for easing the debt crisis. Treasury Secretary James Baker's much-heralded proposal calls for $29 billion in international lending to Latin American governments that reduce their public sectors through privatization. The truth is that the private sector is nearly as responsible for the debt problem as any government. In Venezuela, about half of the country's $33.5 billion in foreign debt was originally lent to the private sector. International bankers and businessmen are extremely reluctant to make more loans to Latin America. Those willing to do so want Third World governments to be involved in loans to private companies, so that the lenders will be protected if the loans go sour. Baker's approach will not solve Latin America's financial woes. Any hope of doing that begins with a look at where the money went.

$100 million park

At first glance it seems Venezuela should haveavoided going deeply into debt. It has been called a democracy since 1959, complete--on paper at least--with the checks and balances that might rein in excessive spending. It exports oil. And it did spend a portion of its foreign loans wisely. It built the Guri Dam, which will generate more hydroelectric power than almost any dam in the world, providing the country with a cheap energy source. Venezuela used foreign money to modernize the three state aluminum companies, which now operate at full capacity and are an important source of foreign exchange. Foreign loans also built the Caracas Metro, among the cleanest and most efficient in the world. Nevertheless, Venezuela has amassed the fourth largest unpaid debt in the region, behind Brazil, Mexico, and Argentina.

The groundwork for the debt crisis inVenezuela--and around the world--was laid in 1973, when world oil prices quadrupled. Initially, Venezuela was awash in cash; its oil revenues soared to $10.8 billion in 1974 from less than $5 billion the year before. The money gave Perez, who became president in February 1974, enough funds to meet his ambitious plans to finance roads, electric power plants, sewers, bridges, schools, hospitals, and scores of other projects. The government committed itself to bigger and bigger outlays. Especially important was the centerpiece of Perez's economic policy: a massive five-year Fifth National Plan. The plan, scheduled to begin in 1977, called for spending billions of dollars to exploit the nation's abundant natural resources and industrialize the economy. But by 1976, oil income had leveled off. Without the revenue to pay for the plan, Perez decided to finance his dream with foreign capital, a decision international bankers eagerly endorsed. At the time, bankers, many with no international lending experience, were swarming Venezuela with open checkbooks. In October 1976, a group of foreign banks lent $1 billion to the Venezuelan government. Soon they were back lending to a host of state agencies. From 1976 to 1978, Venezuela's public-sector foreign debt more than quadrupled to $7.2 billion. The Perez government began to sink the money into vast building projects, many of which had been planned by Centro Simon Bolivar (CSB), a...