For Latin American debtors, 1986 promises to be a year of hard decisions. The problem seemed to be in remission for awhile in 1985. The governments demonstrated remarkable capacity to absorb adjustments by draconian import curbs, while political discontent was effectively diverted by the transition to democracy in many countries. All that has dramatically changed as we enter 1986. Trade is faltering and democracy is here, awaiting its testing.
Meeting in Montevideo in December, the Latin American economic ministers addressed Secretary James Baker's proposal for an increase in loans to the area. The ministers considered it important but hardly sufficient. Significantly, they affirmed that growth was a higher priority than repayment.
The Latin American dilemma stems from hard realities. First, there is no money. Most of the countries cannot pay even if they want to. Second, as new democracies, the political dimensions of the problem are life threatening. They cannot ask new voters to bear the burden of the necessary adjustments indefinitely and hope to survive. Third, adding more loans and increasing the debt load are not solutions for countries that are now remitting abroad in interest payments a greater proportion of their GNP than any nation in modern history. Without relief, the present opening to democracy in Latin America could easily abort, as it did in the 1960s.
The issue is not debt alone. Debt is a problem because of the nature of the world economy in which it must be carried. The reality is that the agony of Latin America is a result of specific economic policies that have acutely contracted the world economy.
Three issues are inseparable: First, the restrictive economic policies mandated by the Reagan administration in the early 1980s that have dramatically changed the patterns of world trade; second, the adjustments that have to be made in the Latin American economies as a result of inefficient, protected economies that acquired bad habits during the easy money years of the '70s, and third, the severe drain on world liquidity caused by the current deficit plagued U.S. economy.
The so-called debt problem can only be dealt with by addressing all three issues. Proposed solutions that address only the cash flow aspect, as does Secretary Baker's, are as nonresponsive as Fidel Castro's advocacy of default or moratoria. They may help us overcome today's crunch -- but will exacerbate tomorrow's crisis. Latin America's debt which stood at $220 billion in 1980 has increased to more than $360 billion in 1985, over 60 percent, from interest and higher energy costs alone, not from productive purposes. These interest costs will continue to drain their economies for the foreseeable future. Unless measures to attract new capital or reduce capital outflow are accompanied by increased earnings derived from trade, they will be futile.
For Latin America's leaders, there is no unilateral way out such as default. The adjustments will have to be made, for good and common sense. As President Raul Alfonsin of Argentina learned, when running a budget deficit you need to borrow. Cutting off your sources of credit makes things worse, not better. This is especially so in societies that have a traditonal anathema to taxes and a penchant for wholesale transfers of private capital abroad. Without credit the only alternative is to print money, not a helpful solution with near hyper-inflation already raking the Latin American economies.
The failure of Castro's recent discourses to generate a response are illustrative of these realities. Responsible Latin American leaders know full well the potential cost to them if international sources of finance are disrupted. They also know their own realities: the lack of capital accumulation, a private sector that borrowed instead of capitalizing, resulting in poor companies and rich entrepreneurs with plenty of capital to transfer abroad. They know that while the GNP of their countries is down, the total assets held by their citizens abroad leave many of them richer today than before.
The solution to Latin America's struggle to find effective ways to deal with their adjustments, reduce net transfers abroad and reattract their own capital can only be found in an expansive world economy. The principal way we can help is by adjusting our approach to global economic policy. Jacques de Larosiere of the IMF commented that the solution to our present predicament is to grow out of it. Numerous studies confirm that in a gradually expanding world economy, the Latin American debt payments would be manageable. Clearly no one wants to return to the inflation rates of the 1970s, but events such as the 1,000 percent energy price increase that fueled it are unlikely to recur.
Here the other element of the problem, the U.S. deficit, becomes worrisome. The U.S. economy is currently receiving one of the most massive economic stimuli in history, $200 billion a year, yet it is still limping. Its dependency on imported capital is absorbing world liquidity and choking the flows to the developing countries. This is not only the problem of the United States, it is the world's problem. Latin American leaders know that if the U.S. economy cannot find the right formula to get going again, the debt will be the least of their worries.
Thus, the commanding realities of interdependence are once again evident. The solutions for the United States and Latin America are intertwined. Closing the U.S. deficit, lowering interest rates, making the necessary adjustments in debtor nations and stimulating world-wide economic growth are indispensable to enable us to resolve today's seemingly insolvable dilemma.
On Latin America's part, it too has to begin to get its act together. While the debt effects each country differently, Latin America's common interests are clear. Statements such as those just issued by the economic ministers reflect a joint concern. But they have no joint policy. If they expect other nations and banks to assume part of the burden, such as in a program for World Bank guarantees, for example, why not talk first about a Latin American mechanism for mutual guarantees for new money? If they propose that foreign banks reinvest part of the interest payments in productive enterprise, Latin America should first commit itself to a joint development program of hemispheric scope to help each country through the essential internal adjustments.
We do not have forever to come up with a positive plan that will deal with the real issues. President Reagan is proud of the return to democracy in Latin America. Regardless of what his administration had to do with making it happen, it will certainly have a lot to do with whether it survives. Sound policy to nurture fledgling democracies today requires not temporary measures to postpone debt payments or increase cash flow but fostering sound economic growth and increasing trade throughout the world. It could be the cheapest mutual assistance program we ever undertook.