[THE LATIN AMERICAN 80S

STOCK OF DEBT]
Luis Montero Salazar - 20035

here are 3 reasons why Latin American countries stock high levels of debt in the beginning of the
80s; the import substitution model implemented after World War II, the increase in the oil prices in
the 70s and the reduction in the interest rates from the international banking system. These and
other secondary situations were the initiators of the big Latin America debt crisis that sparked The
Lost Decade.

Latin America ECLAC Import Substitution Model

With the creation of ECLAC at the late 40s one of the most important decision was the creation of a model
that substitutes the importation of manufacturing goods with the promotion of the local industry. That
model was previously and successfully used by Western Europe and the United States in the middle half of
the nineteenth century.
The change from food and raw materials, highly plentiful resources in the region, to more complex
manufacturing goods was a challenge that required big investment and time to get the results of United
States and Europe.
The instruments to implement this policy mainly were: protective tariffs and exchange controls, preferential
import exchange rates for raw materials and construction by the government of the infrastructure needed
to the industrial sector. This last element was the most expensive one, because regions infrastructure
wasnt prepared for this abrupt change. In order to finance the requirements for this measures, the Latin

American countries incur in external debt with govern development banks and
private commercial banks that trust in the promising results of the regions
soaring economies. The problem was that the results for the Import Substitution
Model are seen in the long run and the countries had to keep the investment
creating a vicious cycle and accumulation of high levels of debt. The largest
countries like Brazil, Mexico and Argentina got better results of the model than the
smaller ones because the size of their internal market was larger. Additionally the
unwillingness from United States and Europe of buying Latin America
manufactured goods created barriers for the model.
The region was spending more than it produced.

Increase in the Oil Prices

The Oil crisis of 1973 increased the price of the barrel from $3 to $12. Oil was vital
resource for most of the industrial sector; this abrupt change increased the prices
of the raw materials and the production process, forcing the companies to ask for
debt in order to keep their competitiveness.
Most of the Latin American countries are 100% oil dependant, these crises created
a big trade deficit and difficulties to find buyers of their products in other markets
due to the world situation at that moment.
As a cyclical process, the oil producing countries had an enormous surplus of
money to invest, they gave the money to private banks in order to maximize the
gains of the oil crisis. The private banks had to borrow this money taking
advantage of the situation and they trusted that the sovereign debt was a safe
investment. From 1975 to 1982 the Latin American debt to commercial banks
increased
at
a cumulative annual rate of 20%.
The excessive optimistic analysis from the private banks of the national
development projects and the prices of commodities from the Latin American
countries increased the amount of loans and reduced the requirements and
interest rates, creating huge stock of debt.

Reduction of the Interest rates

The third reason why Latin America stock large amounts of debt was that there
was somebody willing to lend to the region. After the World War II the banking
industry in United States underwent major structural changes, with a more
aggressive lending behavior.
The competition private banks of new borrowers led them to search for
developing countries. Latin America was a natural market due to the political
closeness to United States and geographic location.
The excess of money supply from the oil countries and the high competition of the
American banks reduced the interest rates and improved the repayment
conditions. The low interest rates motivated the region countries to borrow money
for unessential consumer goods, military expenditures or finance volatile fiscal
deficit.

There was a feeling that use debt was good for the economy and accumulate it
was
secure
and
manageable
for
Latin America.
In 1982 When the Mexican government said "sorry, we can't service our debt
anymore", the bubble exploited and the crisis reached unimagined levels. The
commercial banks asked for their money back, by this time the debt had reached
$327 billion (FDIC 1997).

References

IMPORT SUBSTITUTION AND INDUSTRIALIZATION IN LATIN

EXPERIENCES AND INTERPRETATIONS, Werner Baer (1992)

THE GREAT LATIN AMERICA DEBT CRISIS: A DECADE OF ASYMMETRIC

ADJUSTMENT, Robert Devlin, Ricardo French-Davies (1995)

THE LATIN AMERICAN DEBT CRISIS IN HISTORICAL PERSPECTIVE, Jos

Antonio Ocampo (2000)

AMERICA: