The Lost Decade: The 1980’s Debt Crisis in Latin America

The Latin American debt crisis was a financial crisis that began in the 1980’s when Latin American countries were unable to pay back their foreign debt. This foreign debt amounted from the 1960’s and 1970’s, when many countries such as Mexico and Argentina took out loans to support industrialisation, such as for infrastructure programmes. In 1975, the region’s external debt was $75 billion, but it more than quadrupled to $315 billion in 1983.

During the 1970’s and 1980’s, much of the Western world went into recession and there were two oil crises, one in 1973 and the second in 1979. The 1973 oil crisis began when the Organisation of Arab Petroleum Exporting Countries declared an oil embargo, which by the end of, the price of oil had risen by nearly 300%. Meanwhile, the 1979 oil crisis was caused by a drop in oil production in the aftermath of the Iranian evolution. As a result, oil prices skyrocketed. Oil exporting countries in fact benefitted from this price increase and invested capital from this with international banks, which used it to provide loans to Latin American countries. The oil crises also meant that the banks and countries who lent out money asked for payments to be made in a shorter time span, since they too were struggling to pay for oil. It increased interest rates in Europe and the USA, which meant that debt payments increased, making it harder for borrowing countries to pay back their debts. Commercial banks were also reducing the repayment periods, making the debt burden unsustainable.

As the foreign debt accumulated over the years, it became clear that Latin America would not be able to pay it back. On the other hand, the potential risk of growing involvement with Latin America for US banks did not go unnoticed. For example, in 1977, Arthur Burns who at the time was the chairman of the Fed, criticised American commercial banks for their lending.

In August 1982, Mexico’s Finance Minister, Jesús Silva-Herzog declared that Mexico would no longer be able to meet its payment due-dates and requested a renegotiation of the payment schedule. In light of this, most commercial banks then significantly reduced or stopped any new lending to Latin America. As loans ceased, many industrialisation projects became useless. This contributed to infrastructure problems in the affected countries, as they were not finished.

As a result of the crisis, the International Monetary Fund (IMF) intervened to restructure the payments and economies of debtor countries. The debt crisis of the 1980’s was the most serious debt crisis in Latin America’s history. Incomes and imports dropped, economic growth stagnated, and unemployment increased. Between 1970 to 1980, Latin America’s debt levels also increased by more than 100%. From 1980 to 1990, decreases in real wages in urban areas ranged from 20-40%. Capital that could have once been used to invest in public sectors and crucial social issues such as poverty was now being used to pay back debt.

The IMF provided Latin American countries with loans and capital to service the unpaid debts and forced them to impose free-market, capitalist and neoliberal reforms as conditions of these loans. These reforms were part of Structural Adjustment Programmes and exacerbated inequality and poverty. The IMF also forced governments to impose austerity, which lowered total government spending, deteriorating living standards. These neoliberal reforms favoured foreign private firms profit rather than encouraging domestic investment.

The debt crisis had already increased poverty and worsened many problems such as crime, terrorism and homicides, which propelled intense anger towards the IMF’s power and role in Latin America, as they were making it worse. In the 1980’s, Brazilian officials decided to never again sign agreements with the IMF. These neoliberal reforms further embedded Latin American countries within the global economy and increased their dependence on developed world capital flows, increasing exposure to international volatility.

As part of the Structural Adjustment Programmes, most countries were obliged to adopt an export-oriented industrialisation strategy, abandoning their prior import substitution industrialisation strategy. This is at the exception of Chile and Costa Rica, which adopted reformist strategies. With an export-oriented strategy, international trade and exports make up a large percentage of the economy. To contrast, with import substitution, domestic production is advocated over foreign imports. This meant that domestic sectors did not receive any investment, leaving the domestic industry vulnerable.

As an organisation, the IMF had a poor strategy in managing the crisis as it recognised too late that debt relief was needed, although it was granted to Bolivia and Mexico. The resolution of the debt crisis was also delayed by poor co-ordination between the World Bank and the IMF, as during the first stages of the crisis, the Bank did not play an active role. It made substantial loans to Brazil, but not so much to Argentina and Mexico. Although by 1985, the Bank’s net flows to the region became larger than the IMF’s.

Moreover, the IMF treated the problem as a liquidity rather than a solvency crisis. With a liquidity crisis, a country would have enough resources to generate the foreign exchange needed to service its debt but has a temporary inability to do so. However, with a solvency crisis, it does not have enough resources to do so. Although, none of the heavily indebted Latin American countries faced a true solvency crisis, as Mexico for example had 72 billion barrels of petroleum and natural gas. It was the fact that they could not mobilise these resources in a feasible manner.

To conclude, the Latin American debt crisis led to many consequences of social and economic suffering, which was exacerbated by IMF imposed reforms on their economies.

This article was written by: Tasneem Rahman, currently a student at the London School of Economics, pursuing BA Geography

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