The Latin American countries are right when they say that austerity alone can't lighten their burdens of debt. The bankers are also right when they say that, in the absence of any other remedy, new loans can only add to those burdens. Secretary of the Treasury James Baker, in his address in Seoul, now proposes to go quite a lot further. But that brings him to a sensitive subject, the internal structure of the Latin economies.
To carry their debts comfortably, he suggests, these countries are going to have to undertake substantial reforms. If they do it, he said, they are entitled to much greater financial support from both the commercial banks and the rich countries' governments through the World Bank.
Mr. Baker is doing a genuine service here. Discussion of the Latin debts had been stuck at the same point for a couple of years, and while previous policies had prevented defaults and disasters, they clearly were not leading toward any adequate improvement of economic conditions in the debtor countries. Mr. Baker has now pushed the discussions toward more promising remedies.
When Mr. Baker says that the Latins have to give more latitude to their private sectors and rein in their public enterprises, it ought not be dismissed as Reaganite sloganeering. He is touching delicately on a crucial part of any real solution. Brazil, for example, has some public enterprises that run efficiently. It has many more that are not -- utterly unproductive state-owned enterprises that have greatly contributed to Brazil's huge debts by borrowing abroad and getting fat on those loans. Trimming them down won't be easy since, in Brazil and in most Latin countries, the people running the political system have come to depend on the state enterprises for patronage without which the process of governing would be much more difficult.
Most of the Latin countries, to one degree or another, give heavy protection to their manufacturing industries -- a sure formula for inefficiency -- and simultaneously resist foreign investment. Both traditions are brakes on economic growth. These countries turned enthusiastically to bank loans in the 1970s because they seemed a marvelously attractive alternative to the direct investment by foreigners that nationalists attacked as a threat to independence. It was only after interest rates soared in the early 1980s that the borrowers fully understood that bank loans carry their own dangers.
Now the Latins are agreed that they must achieve faster economic growth. They are entitled to greater support from the world's financial system, as it is represented at the meetings in Seoul. But they have responsibilities to change their own entrenched political practices that are enemies to growth and rising standards of living. That is the subject toward which Secretary Baker is trying to lead both the lenders and the borrowers.