Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Tequila Hangover: Latin America's Debt Crisis JEREMY ADELMAN ntroduction The year, 1994, was supposed to crown a process of successful economic restructuring in Latin America and usher in a new era for the region. Scarcely a decade ago, debt, inflation and social malaise engulfed the region. In recent years, gutted public sectors and rapidly opening national markets have reshaped the face of Latin American capitalism, thereby creating models of transformation for the rest of the post-Cold War Third World. Mexico turned on its national-popular heritage more significantly than did any other country in the region. By deregulating local markets, privatising state firms, and joining the North American Free Trade Agreement, Mexico became the darling "emerging market."! In the rest of Latin America, as the forces of transnationalism swept across the continent enciphered in the rhetoric of neoliberalismo, the 1990s were also supposed to conclude the long populist experiment that had been inaugurated in the 1930s and 1940s. However, Latin America's annus mirabilis turned out to be a long nightmare. A peasant uprising in Southern Mexico, the assassination of Mexico's leading presidential candidate, and the plunge of the peso in December 1994, ensured that the happy script went completely awry. Just as Mexico had unleashed the first Latin American debt crisis in 1982, it once again sucked the rest of the region into its vortex of trouble in 1994. At present, Mexican banks are still hovering on the brink of insolvency, slave-labour is on the rise in Brazil, and Argentina's official unemployment hovers around 20 per cent. The general rule in Latin America is slow or no growth. There is also widespread fear of powerful and I Studies in Political Economy 55, Spring 1998 5 Studies in Political Economy vindictive investors and the spectre of capital flight always lurks in shadows. Not even Chile, the rediscovered darling of the neoliberals, is unscathed by Latin America's renewed agony.I In examining what went wrong with those felicitous expectations, this article presents two interrelated arguments. First, many of the current Latin American economic ailments can be attributed to the way the 1980s debt crisis was managed. For all the panegyrics about solving Latin America's financial woes in the late 1980s, many of the policies adopted at that time displaced rather than resolved, the source of those problems. Second, the nature of external indebtedness has changed dramatically. In particular, new financial relations between Latin America and world money centres have sharply reduced the power of the banks, while exposing debtors to much more volatile capital flows. Combined, these two developments have crippled Latin American governments' ability to manage external shocks, resulting in a frequent exaggeration of their severity. Furthermore, the fall-out from the external shocks has called for delicate public interventions requiring tools that Latin American states no longer possess. Indeed, any efforts to soften the resulting blows from or ease the adjustment to these external shocks tend to be seen as reversions to old anti-market habits and thus liable to aggravate capital flight. In effect, public management of this latest round of the debt crisis will be reduced to desperate efforts to prevent further drainage of finance capital. Thus apostolic neoliberalismo has reshaped the face of financial dependence, while dismantling the machinery normally used to deal with the resulting cyclical ravages. The Debt Crisis in Retrospect One way to explain the events of 1994 is to depict them as accidental blips; as examples of bad political management of temporary problems. Some would say that Latin American governments made bad choices in the past by postponing devaluations for electoral reasons, smothering domestic savings to cater to consumers, and not embracing neoliberal recipes with quite enough enthusiasm. Now these governments can get back on track with the assistance of the money market's generosity. However, 6 Adelman/Debt Crisis this view, shared by the International Monetary Fund, the region's major lenders, and which is consistently broadcast in the pages of The Economist, does not explain why so many Latin American governments made these choices. In fact, this view does not offer a plausible account in the world of "rational agents" as it portrays investors as entering into their ventures blind. In short, this view does not consider the larger structural problems of Latin American capitalism. Reducing the trouble to Mexico's idiosyncracies misses the regional nature of the crisis.I The current problems can be traced back to the debt crisis of 1982, whose origins, in tum, date back to domestic and international changes starting in the 1960s. On the demand side, the crisis of national populism, and the yawning balance of payments problems have reshaped Latin American dependence on world money markets. By the 1960s, importsubstitution industrialisation (lSI) was running up against stubborn obstacles. Industries became more capital-intensive, requiring imports of expensive technology and machinery, and traditional exports could not always assure a steady source of foreign exchange. External financing helped cover the shortfall. Much of this financing came in the form of multinational investment, prompting Peter Evans to speak of the much trumpeted "Triple Alliance", a fusion of local private, state and foreign capital. By 1974, one third of external financing took the form of foreign direct investment.f Fiscal politics sharpened this shift to external funds. Industrial malaise was compounded by rising public sector spending which paid scant attention to overhaulling the tax machinery largely because rulers did not want to tamper with regressive subsidies to high income earners. Growing public spending, coupled with rising inefficiency and escalating indebtedness of state-owned firms, led to massive net increases in public expenditures. Again, external funds met the shortfall for a time. By 1974, 42% of lending to Latin America came in the form of official credits, mostly earmarked for the public sector. Financing current spending in this way meant monetising the deficit, so that the supply of money rose, fueling inflation. Rising prices, coupled with fixed or crawling exchange rates led to overvalued exchange 7 Studies in Political Economy rates (especially in Argentina, Mexico and Venezuela) which triggered more imports, and thus aggravated trade deficits.> One last factor contributed to the 1980s debt crisis. It affected the Southern Cone countries of Argentina, Chile and Uruguay in particular. By1976, all three countries were in the grip of military regimes which aimed to bury the remnants of state dirigisme and populism, and which had brought the Southern Cone republics to the brink revolution and civil war. A cornerstone of their policies was to alleviate what neoliberal economists call (without irony) "financial repression." In other words they sought to free domestic capital markets from government distortions and reduce public borrowing from, and public ownership of, financial agencies. By easing restrictions on capital movements and relaxing bankers' standards of operation, deregulated banking systems intensified foreign borrowing. Overblown and cluttered financial systems soon collapsed, which lead to massive bankruptcy, debt, and paradoxically unprecedented government intervention in Southern Cone banks.f While the implosion of this national-popular model intensified the demand for external finance, emerging world financial networks created an enormous supply of flexible and mobile money. The cornerstone of the shifting personality of finance capital was the commercial bank. Until the late 1950s, commercial banks had played a residual role in dispensing global capital. With the collapse of the Bretton Woods system, financial deregulation, and the emergence of the Eurodollar market in the wake of the OPEC oil price hikes of the early 1970s, banks emerged as major controllers of world liquidity. In fact, the nucleus of the resulting wave of international borrowing and lending was formed by a small group of very large banks with extensive overseas operations." In the midst of these institutional changes, the oil crisis plunged the world economy into its deepest recession since the 1930s. Output in industrialised countries slumped and unemployment soared. All the while, the oil exporting countries of the Middle East, who were unable to absorb the massive amounts of capital suddenly produced, deposited their windfalls in offshore accounts. Thus, just as unused industrial capacity in the OECD rose, the global stock of 8 Adelman/Debt Crisis investible funds increased sharply, leading to a sharp downturn in returns to capital. In response, a new brand of borrower entered the scene helping to avert catastrophe: clients in the Third World. By the mid-I970s, the glut of capital had been redirected to fund-starved industrialisers in the semi-periphery.f This confluence of demand and supply-side developments enabled and induced unprecedented flows of capital from the North Atlantic to the semi-periphery, and to four large Latin American countries in particular, Brazil, Mexico, Argentina and Venezuela. In Brazil and Argentina military juntas sought the means to rebuild capitalism from the ruins of populism. Mexico and Venezuela, large oil exporters, embarked on massive public sector spending programs and used overvalued currencies to keep the loyalty of their citizenry, as electoral politics reinforced the grip of traditional party rulers. In the cases of Argentina, Mexico and Venezuela, these policies, combined with political instability, eventually provoked massive capital flight. Between 1975 and 1985, the cumulative capital flight from Latin America exceeded $100 billion, roughly $265 per capita. During the peak exodus from 1979 to 1982, Argentina lost $22.4 billion, Mexico $22.3 billion, and Venezuela $20.7 billion. Brazil began large-scale capital exports only once the debt crisis broke in 1982. The result was an utterly perverse circulation of funds from banks to Latin American borrowers, and then back to offshore private accounts. This process helped to create the debt crisis and to shore up returns to global finance capital.? This was, however, an unsustainable situation. The problems of post-1973 adjustment were due to this combination of freeflow bank lending and domestic policies which encouraged debt without ensuring the growth of future exports. On the whole, massive commercial bank inflows did not create better conditions for loan repayment or contribute to the necessary longterm restructuring of Latin American capitalism. However, as long as yields on loans to Latin America exceeded those available to investors within the world's money centres, and as long as real interest rates for Latin American borrowers were negative, the pattern of financial flows to the semi-periphery 9 Studies in Political Economy were logical from the point of view of lender and borrower alike.!" In this respect, the difference between Latin America and East Asian "Tigers" is clear. The latter group, South Korea and Taiwan for instance, also turned to banks for external funds but used the money to promote vigorous export diversification and growth without widespread market "liberalisation." As well, the Asian "Tigers" did not relax the strictures on local banking institutions in the name of alleviating financial repression. I I Latin America's misfortune was that it turned to international bank lending while at the same time throwing open its financial systems (thereby facilitating capital flight) and funding consumer imports (therefore enlarging current account deficits). Although this broad comparison needs qualification, it does suggest that the source of Latin America's problem was not financial dependency per se, but rather the political and economic framework for those capital flows. Accordingly, while the semi-periphery absorbed a rising share of the world's billowing trans-border capital flows, the big Latin American debtors were increasingly ill-prepared for any sudden change in those flows, or in the terms of their obligations. The Climacteric of the Early 1980s The neo-conservative demarche began by dismantling the welfare state and removing remnants of national market industrialism in the North Atlantic, but it soon inflicted devastating, if unintended effects on Latin America. Permissive credit flows to the semiperiphery soon began to choke. The elections of Margaret Thatcher and Ronald Reagan, both of whom embarked on determined anti-inflationary campaigns and tight money policies, sealed the fate of fiscal and monetary expansion and flows of hot money to semi-peripheral borrowers. In the United States, monetarism coupled with massive public sector spending increases and faltering revenues, created a yawning public debt. European and North American policies suddenly sent the cost of borrowing capital soaring. Although London Inter-Bank Offer Rates (interest charged on loans between offshore banks) were negative through the 1970s, by 1981 they had reached 7.5%, and 11% by 1982. 10 AdelmanlDebt Crisis Since most debts carried variable interest rates, these sharply rising increases, meant that much of the massive lending to Latin America after 1979 (once Paul Volcker took over as Chairman of the Federal Reserve) was needed to service the escalating interest charges on previous debts.l? Moreover, with the 1979 wave of oil price rises, the OECD economies slumped again by even more than they had in 1974, forcing them to reduce their imports and provoking a sharp decline in the terms of trade for Third World exports. More lending covered the worsening balance of payments. With rising interest rates and declining returns on their exports, from 1972 to 1982, developing countries in general faced a tenfold increase in debtservice ratios (the interest and service charges on debts in proportion to total export earnings). By 1982, debt payments siphoned off 59% of Latin American export eamings.U The crisis finally broke in the summer of 1982. On the eve of the IMF-World Bank meetings in Toronto, Mexico's Finance Minister Jesus Silva Herzog announced that Mexico could no longer afford to keep up payments on its debt. His declaration sent riptides through the world's financial system. One by one, other big debtors followed the Mexican lead, and it seemed as if the biggest spontaneous collective default in history was imminent.H In the first few years of the debt crisis, world finance teetered on the verge of collapse. Calculations of Latin America's trade and financial future have fueled contemporary gloom and doom. Indeed, many observers, convinced of the rigidity of the world financial system, and underestimating the Third World's ability to absorb large declines in living standards, urged big debtors to default in order to avert a full-scale financial collapse, which would have been an even worse economic and political catastrophe.l> Such a catastrophe would have compelled creditors to bear some ofthe brunt of the resulting adjustment. Instead, the burden shifted entirely on to the shoulders of the debtors. However, effecting this shift required some fancy financial footwork among lenders who carefully moderated the bargaining with big debtors. First, a powerful actor was brought onto the world's financial stage: the IME Its command over crucial dollar reserves and its immense discretionary 11 Studies in Political Economy powers, enabled the Fund to provide conditional short-term loans to debtors to get them over immediate cash shortfalls. These stand-by loans were often arranged as countries neared the brink of insolvency, not as their performance improved. The main intention of these conditions was to prevent (or as Fund officials liked to say, "rescue") debtors from reneging on their obligations, rather than to reward them for their travails. Moreover, these loans came with stringent conditions. However, the selective negotiation and disbursement of these conditions ensured that no Latin American country declared wholesale default, though many countries were allowed to let payments slip into arrears. Furthermore, banks, by renegotiating credits, rolling over debts and deferring payments, averted default. Latin American debtors invested enormous energy and paid substantial fees to stay in good standing with commercial banks - hoping that circumstances would soon return to the permissive conditions of the 1970s. When the industrial economies eventually recovered from the Reagan-Thatcher recession, Latin American exports began rising. Although oil exporters such as Mexico and Venezuela did not fare well, the rest of the region registered a recovery in export values and volumes. Meanwhile, economic austerity had slashed Latin American imports. The resulting foreign exchange surpluses allowed earnings to be directed to meet debt payment obligations. It is important to underscore the uniqueness of the 1980s. The institutional personality of finance capital in the 1970s made commercial banks not just the intermediaries between global savings regions and world borrowers, but the final holders of most of the semi-periphery's debt, a situation with few precedents. In the nineteenth-century, and in the inter-war years, banks had served as conduits, and not as holders of debt instruments. Moreover, the banks' syndicated lending practices allowed them to maintain a common front in contrast to the atomised and disorganised position of bondholders in earlier financial cycles. In previous similar conjunctures (the 1820s, 1890s, and 1930s) borrowers more easily defaulted, or forced lenders to reschedule debts, since investors did not have the institutional clout of today's money-centre banks which are backed by the IMF. Historically speaking, banks had seldom 12 Adelman/Debt Crisis wielded the power they had by the late 1970s. These combined institutional changes dramatically shifted the bargaining power from the borrower to the lender.Iv This power enabled the banks to divert substantial resources from the periphery to the core. Chart I shows how Latin America's largest debtors sustained net outflows of resources (debtservice charges over new earnings of foreign exchange) throughout the 1980s. The aim of this early mix of policies was to protect the stability of the world financial system, not to assist borrowers. However, the first phase of adjustment soon ran into trouble. By 1987, the big debtors had suffered five years of financial compression and clearly displayed signs of debtfatigue: rising social tension, careening inflation and widening budget deficits. The latter two problems were actually aggravated, not ameliorated by IMF stabilisation.!? Moreover, the commercial banks remained cautious and parsimonious. The hopes of debtors (and of IMF officials) rested largely on renewed commercial lending to the periphery. However, this money was not forthcoming. As a result, Latin American debt-service ratios rose dramatically peaking in 1986, the year in which Argentina sent nearly 80% of its export earning to service its debts (see Chart II). Economic recovery receded below the horizon; Presidents Alfonsin in Argentina and Garcia in Peru pleaded for relief and warned of drastic measures to come. Once again, defaults loomed. Into this spectre of implosion entered the United States Treasury Department. First under James Baker, and later Nicholas Brady, it proposed alternative policies to alleviate these onerous resource transfers. These proposals were two pronged. First, measures had to be taken to reduce the weight of outstanding debt. International institutions and US Treasury bonds were used to support debt buy-backs, allowing Central Banks to purchase debt from creditors at a discount, and bank-debt was to be converted to longer-term portfolio debt (so-called Brady Bonds). Second, a much vaunted "adjustment with growth" proposal was launched in an effort to encourage new bank lending. In the end, the U.S. Treasury Department administration failed to recruit the full support of bankers, but it did succeed 13 .... .•.. Chart I: Annual Net Transfer of Resources, 1983-1994 Argentina, Brazil, Mexico, Venezuela (billions US dollars) 25,-------------------------, 20 15 10 5 of------=......a.-;:----;7L2-:r-4=""'=d -5;k~~~~ -10 ""'--*----'ll[ -15 -20L------.J_--'-_--'-_----L_---"-_-L-_-L-_...L--_-'--_'----' 198319841985198619871988198919901991 199219931994 --- Argentina + Brazil "* Mexico .• Venezuela UNECLA, Economic Survey of Latin America and the Caribbean, 1992 Statistical Yearbook for Latin America and the Caribbean, various years. Adelman/Debt Crisis in encouraging hobbled Latin American democracies to restructure large portions of their external debts. Beginning in 1987 with Chile (still far from an electoral turn), and then later in 1989 under the umbrella of "the Brady Plan," Chile, Mexico, Venezuela, Costa Rica, Uruguay and Argentina offered various debt and debt-service reduction options. By 1993, some $116 billion had been transformed from short-term into longer-term debt instruments, or from foreign to domestic obligations, through buy-back provisions (in which Latin American treasuries assumed the obligations from banks in return for some compensation). 18 This transformation helped to reduce substantially the stream of repayments and debt-service ratios (see Chart II.) This second phase of debt-adjustment had its domestic corollary. In countries with chronically high inflation, such as Argentina and Brazil, governments tackled inflation with dramatic austerity measures. For example, President Menem clamped down on Argentina's porous fiscal machinery and slashed monetary expansion. In Brazil, three separate stabilisation plans were enacted in five years, the most sweeping of which was President Collor de Melo's heterodox restriction of foreign exchange speculation and the freezing of financial assets. The political crisis surrounding Collor's impeachment undermined the effectiveness of his government's anti- inflationary measures, however former Finance Minister Cardoso's preelection stabilization plan, and post-election promise to deepen structural adjustment, have dramatically curbed Brazilian inflation. In moderately inflationary countries like Mexico, stabilization was easier. However, even in Mexico stabilisation came on the heels of a domestic political pacta, designed by the out-going Miguel de la Madrid government in 1988, which froze wages and prices, and had an official quid pro quo that public prices and the exchange rate would remain fixed.l? Across the region, for a time, local currencies served as anchors to combat inflation, however, they were soon overvalued once again. Meanwhile, the massive privatisation of state firms further redefined Latin America's relationships with external creditors. There is a crucial link between reducing debt-loads and selling public assets, which should not be obscured by 15 ------------------ .. - - ~ Chart II: Debt-service-to-export ratios, 1985-1994 Argentina, Brazil, Mexico, Venezuela debt servicepayments/exports 100,----------------------, 80 OL---'----'----'-----'---'------'---'-----'--~ 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Year ~ Argentina + Brazil -* Mexico ---Venezuela World Bank,World Debt Tables,1996 (Washington,1996) AdelmanlDebt Crisis Chart III: Proceeds from Privatization in Argentina, Brazil and Mexico, 1988-1994 lmllllon. of us dollars) Thousands 12,------------------, 10 8 -Brazil + Argentina 6 "Mexico 4 1988 1989 1990 1991 1992 1993 1994 World Bank, World Debt Tables, 1996(Washington, 1996) the official rhetoric of raising the efficiency of hitherto publicly managed enterprises. By the time the big debtors began lining up prospective domestic and international buyers, they had two aims. First, was to line Treasury coffers, thereby closing the fiscal gap. Second, they aimed to restock Central Bank reserves, thereby giving governments desperately needed foreign exchange with which to combat downward pressure on local currencies.s'' In Mexico alone, of the 1,155 firms in state hands in 1982, only 269 remained so in 1991. Argentina has managed to privatize almost all of its public firms, even including the Buenos Aires municipal zoo. Brazil remains the laggard having sold only 33 companies (worth some $6 billion) in the past two years. However, many expect a reelected Fernando Henrique Cardoso will embark on a wholesale transfer of state assets during his second term. Chart III illustrates the sudden surge and subsequent waning of the sell-off by the three biggest vendors. All told, these policies coincided with more propitious conditions for Latin America's exports. The region's nadir in terms of net resource transfers was 1988 (see Chart 1). The outflow began to abate thereafter, and by 1991, money began flowing back into the region. By the end of the decade, 17 Studies in Political Economy it seemed to many that Latin America's malaise was over. However, the solution had entailed a dramatic domestic redistribution of wealth: curbing the income base of the region's poorest citizenry, and strapping public policy more tightly to the Procrustean bed of global finance capital's interests. Not surprisingly, the world's attention now shifted away from the external constraints on Latin America's fortunes, and focussed on the prospects of lucrative returns available from investing in their so-called "emerging markets" (a term invented by a World Bank official in 1981 to encourage new investment). The Fund Fetish While international bankers and Latin American creditors were locked in protracted negotiations through the 1980s, the general background rules of world financial operations changed rapidly. The late 1960s and early 1970s had altered the channels through which capital flowed from core lenders to peripheral borrowers. The late 1980s were to prove equally trans formative. First, US and British governments substantially liberalised their financial markets, dropping entry barriers to new investors and money managers. As a result, the old world of commercial bank authority over financial hubs was exposed to intense competition and it began to collapse.U As capital has been flowing back to the semi-periphery through new institutional channels after 1989, in order to understand world finance, we have to focus on non-bank money managers and creditors. Changing background rules, especially deregulation, has led to the emergence of a host of new financial intermediaries (mutual, trust and pension funds, insurance companies, internationally-linked stock market brokers), and the resurrection of firms interested in investing directly in large Latin American economies.V These developments have spawned, in the words of the IMF, "financial conglomerates" which have increased the range and flexibility of financial instruments, and have permitted Latin American borrowers to broaden the range of institutions that can be used as sources of capital. At the same time, these conglomerates have generated a new host of 18 AdelmanlDebt Crisis problems concerning financial supervision and regulation, a point to which I will return below. Although commercial banks dominated external finance to Latin America in 1982, a decade later their business has shrunk drastically. On the other hand, foreign direct investment (FDI, offshore ownership of assets within Latin America) has risen. However, the most remarkable increase was that of the coterie of new private intermediaries active in portfolio equity and bond markets.23 As a result of the above changes, patterns of borrowing have shifted. Much of the lending in the 1970s and early 1980s was to sovereign states. However, by 1992 60% of lending was to Latin America went to private agents. Given the catastrophic state of Latin America's treasuries private creditors interested in public sector investments are scarce. However, it should be noted that this new profile of lending and borrowing closely resembles earlier patterns of capital flows to Latin America. Prior to the global economic malaise of the 1970s, Latin America's private sector had been the largest recipient of such funds, and capital had flowed through an array of non-bank channels. Therefore, it might be tempting to conclude that the long-run effects of this particular "resolution" of the debt-crisis has been to restore the pre-1973 institutional fabric of global financial relations. While it may be true that the sidelining of the banks has eliminated a source of turbulence,24 recent events suggest that such a conclusion would be premature and excessively optimistic. For example, the scale of the new lending has changed significantly. By 1992, total lending to Latin America was significantly higher than in 1982 on the eve of the first crisis (see Chart IV.) And since then, the lending has soared in spite of Mexico's blow-out in 1994.25 From 1990 to 1993, private capital flows to the developing world rose by 250%, most of which was concentrated in middle-income countries. In 1993 alone, the total debt stock of developing countries rose by $90 billion. Some of this increase did reflect the reconversion of old debts. The capitalisation of interest - the folding of accumulated interest arrears into the principal of the loan while rescheduling its 19 ------------------------- Chart IV: Total Disbursed External Debt, 1987 & 1994 (billions US dollars) Argentina, Brazil. Mexico. Venezuela Brazil $ 149.5 Brazil $ 121.2 Venezuela $ 34.8 Argentina $ 58.3 Mexico $ 102.4 Mexico $ 135.5 1987 UN ECLA, Statistical Yearbook 1994 for Latin America and the Caribbean, 1995 (New York, 1996) AdelmanlDebt Crisis maturity and setting new interest rates - alone raised Third World debt stocks by $15 billion in 1993. It is estimated that another $10 billion in interest arrears remain out standing.26 If the scale of these new capital flows poses hazards which are no less dangerous than those of the early 1980s, so do the terms under which these new debts are being incurred. Just as capital flowed to Latin American borrowers during the OECD slump ofthe 1970s and flowed out with the North Atlantic recovery of the mid-to late 1980s, this new deluge was once again contingent upon conditions in the OECD. Beginning in 1989, as interest rates in the OECD declined, investors flooded to booming "emerging markets" in pursuit of higher returns. Semi-peripheral borrowers therefore continue to live in an inverse relationship with core borrowers. With the recent economic "recovery," especially in North America, finance capital has been returning to core investment. Indeed, the current turmoil in Asia and the whiplash inflicted on other emerging markets in Latin America may reinforce this flight to more secure, core assets. What has changed most, and which continues to pose an indeterminate risk, is the institutional personality of finance capital. Non-bank capital flows are as responsive, ifnot more so, to shifting relative returns (e.g., as gauged in interest rates) between core markets and emerging markets, and between lending and borrowing regions. Thus, in early 1994, when the Federal Reserve raised interest rates to curb fears of domestic inflation and to cleanse the market of overheated financial speculation, Latin American interest rates had to move in step. Latin America had to raise rates above their already very high levels in order to keep investors from divesting their more risky Latin American assets in favour of assets yielding rising returns at home.I? In this way, central banking policies (especially in the U.S.) continue to calibrate the money flow, both out-bound and in-bound, between core and periphery. The new generation of investors and fund managers watch every twitch of Alan Greenspan's face (the Federal Reserve Board Chair). Their changing sentiments can lead to stampedes on the computer screens of central bankers in Latin America, who must watch, powerlessly, as 21 ~~----- -------------------- Studies in Political Economy their reserves drain from their coffers and their currencies plunge. Moreover, foreign direct investments will eventually lead to remittances of substantial profits and dividends. Indeed, the World Bank has recently calculated that due to sharply rising interest and profit remissions, these outflows reached $80 billion in 1992, and $92 billion in 1993.28 This prospect of rising reverse capital flows is reminiscent of the events which led to earlier disillusionment with FDI and multinationals in the late 1960s and 1970s, leading to the shift to commercial bank lending. In summary, the institutional fabric of international capital markets has thus not eliminated the semi-periphery's vulnerability to the fickleness of investors. If anything, the herdlike behaviour and short-term horizons of the new non-equity portfolio managers may actually aggravate the degree of volatility in the markets. As the handling of Mexico's plight has shown, the custodians of hot money are often free-riders and efforts to quiet their collective panic have proven largely ineffective except for the massive intervention of the United States Treasury in February 1995. But to understand the full dimensions of the current crisis, we need to return to the demand side of world money markets. Mexico and the Demand Side It would be a mistake to ascribe the causes of Latin America's plight to factors at work only in the core countries. Efforts to control ravaging inflation and to contain distributional social conflicts did little to curb government reliance on new money from abroad. With only meagre reserves to protect local currencies, states had to find alternative means to tame unruly, and inflationary, exchange rates. One option they had was to raise reserves by selling off local public property. Latin American governments have used the proceeds from privatisation for short-term stabilization rather than for long-term fixed capital formation, especially in Argentina, Venezuela and Mexico.I? The argument in favour of the passive use of such revenues is that resulting stability generates confidence, that will result, in turn, in rising investment rates. However, private domestic rates of saving and investment 22 Adelman/Debt Crisis continue to lag; this is a growing source of concern throughout the region. To make matters worse, local financial institutions remained weak. Consequently, local firms have to rely on in-house sources of finance or expensive bank lending, and are unable, for instance, to raise funds through the public flotation of stocks. Capital inflows, therefore, merely perpetuated weak local capital markets. It was only after the massive inflow of capital, from 1989 to 1993, ended that authorities (with the belated benediction of the IMF) have turned to financial reform. At this point Mexico, which had a relatively closed financial system, threw its doors open, allowing foreign banks to establish branches within its borders. Eighteen permits were issued in October 1993, and in the wake of the debacle of December 1994, the doors have all but been removed. However, local banking remains divided between a clutch of highly concentrated big banks surrounded by tottering overexposed smaller banks. Meanwhile the Argentine and Brazilian financial systems retain their lucrative commitment to short-term speculative investment backed by threadbare capital reserves. Only recently has the Menem administration turned to banking reform; the Cardoso government is expected to do the same. On the whole, Latin American banks are notoriously inefficient, uncompetitive and resistant to the very free market forces that they like to see prevail in other realms.J" In short, sclerotic local money markets only perpetuated financial dependency. Savers and small borrowers, as the IMF and World Bank have now come to realize, could intensify their activity, reducing reliance on external money, if local money markets were less dominated by rentier blocs. This change, however, would require tackling the very same institutions that bankroll hobbled Latin American treasuries and that mediate the capital flows that keep local currencies from collapsing, a political proposition that the Bretton Woods agencies recoil from embracing. However, perhaps the most evident and worrying upshot of the region's recent resurgent indebtedness is its effect on the balance of payments. The massive surpluses in Latin America's capital accounts are mirrored by deficits in its 23 Studies in Political Economy current accounts. Mexico's deficit in 1994 was by far the Third World's largest at close to $30 billion, followed by China and Argentina. This trade imbalance stems less from any essential nature of finance capital than from domestic policies. As large volumes of capital began flowing back into Latin America, most countries had embarked on tough counter-inflationary policies involving, with various degrees of stringency, fixed exchange rates. By fixing local currencies to the US dollar (Argentina went so far as to enshrine this practice into law in April 1991), Central Banks relinquished monetary independence in return for a degree of stability. However, in many cases, local currencies eventually became overvalued. To make matters worse, with the blessing of foreign powers and international financiers protectionist barriers were being torn down. The result was that foreign funds flowed in, rejuvenating local short-term consumer credit, and high exchange rates slashed the costs of imports while crippling exports. Dismantling old populist and nationalist supports and protection for local industries opened the floodgates for cheap consumer imports.U Once again, it helps to compare Latin America to other semi-peripheral countries, especially the East Asia "Tigers," where external funds have gone more directly into productive capacity, into manufactured goods for export in particular. The institutional girding of capital markets in East Asian industrialising countries has been much more successful at translating large-scale borrowing into capital formation. Recent evidence suggests that much of the difference between the two regions can be ascribed to the fabric and efficiency of local financial systems, in spite of the recent upheaval there.32 In East Asia, regulation made the difference. Authorities prevented capital from entering local money supplies in the form of consumer credit and, instead of subsituting for it, foreign capital bolstered public savings. In contrast, evidence from Latin America suggests that severe stabilization limited the discretionary power of monetary officials, and weakening the flexibility of their responses to volatile capital flows. The paradoxical, and perilous, result of combining the use of hot money to bolster anti-inflation drives, by perpetuating ossified 24 Adelman/Debt Crisis local capital markets and encouraging cheap imports, is that those foreign funds have contributed to falling domestic savings in much of Latin America.V If, of late, East Asian "Tigers" are starting to look more Latin American, it is because the very controls that they used in the 1980s and early 1990s to regulate "hot money" flows have been dismantled. By the end of 1994, close observers outside the myopic community of money managers, were throwing up warning signals.H Mexico, the darling borrower, turned out to be the system's Achilles Heel, combining all the potential pathologies of economic restructuring on unsound foundations. The now-vilified Carlos Salinas de Gortari overvalued the peso while liberalising trade. Furthermore, the government relaxed transaction rules in financial markets in a fashion which spurred consumer credit over investment which, in turn, only aggravated the country's historically low savings rates. This decision, it is worth saying, was designed to assuage middle and upper class Mexicans after the debacle of the 1988 election. Meanwhile, the public sector divested itself of most of its prime assets while public spending was pared down to a minimum. On the surface, this yielded a better fiscal balance, but it also deprived the government of policy instruments that it might need to cope with future crises, such as the one sparked by the Federal Reserve Board, north of the Rio Grande, when it began to raise interest rates. Political contingencies soon overwhelmed the triumphalism of NAFTA's ratification and President Salinas' proclamation that Mexico had joined the First World. With the Chiapas uprising and the assassination of Luis Donaldo Colosio the fuse was lit. In the first 40 days of 1994, Mexican Central Bank officials recorded a financial exodus of $11 billion; in March alone the Mexican stock exchange lost $5.9 billion in foreign investment.l> Alarmed at the prospect of a massive flight of capital, Salinas and his successor Emesto Zedillo struggled to pacify foreign investors by protecting them against the threat of a future devaluation. Interest rates began to rise, but, more importantly, Mexico's treasury allowed bondholders to convert their maturing peso-denominated securities (cetes) into dollar-denominated instruments (tesobonos). This 25 Studies in Political Economy latter move was crucial since it meant that investors could keep their money in Mexico without being harmed by a devaluation (which many were predicting). In the argot of the money markets, this conversion of government debt shored up "investor confidence." Over the course of 1994, $29 billion worth of tesobonos were issued on local stock markets. By December 1994, on the eve of the peso's collapse, tesobonos accounted for 87% of Mexico's newly issued public debt, up from 6% a year earlier. As it turned out, this short-term change in public indebtedness merely elongated the fuse packing the system with even more dynamite. First of all, much of this dollar-denominated debt was short-term and would come due in the early months of 1995. Second, authorities could not rely on the traditional cornerstone response to balance of payments problems, devaluating currency to slash imports and bolster exports, because this would expose the treasury to massive increases in debt overnight. In sum, the level of Central Bank reserves to meet a sudden run on the currency (the obsession of bankers and IMF officials alike) is only a poor, and ultimately misleading, indicator of a government's ability to cope with potential external account problems. However, as this package began to disintegrate, the recirculation of funds created the illusion that the Central Bank had the power to defend the exchange rate.36 More serious tremors began in late November 1994. As interest rates climbed to protect the exchange rate, the number of failing domestic consumer loans rose in step. As many observers began to fret about the solvency of the domestic financial system, the peasants in the south increased the decibel level of their frustration, prompting rumours of a second uprising. In mid-December 1994, news-agencies began reporting guerrilla movements in Chiapas, provoking investors to pull $2 billion from Mexico two days prior to the peso's December 20th plummet. Over the following days, the Central Bank spent between $5 billion and $7 billion in reserves to protect the exchange rate. Foreigners, but more especially Mexicans withdrew their funds in droves, intensifying the pressure on the Central Bank's dwindling reserves. Having squandered the opportunity to introduce the devaluation 26 Adelman/Debt Crisis gradually, the new Zedillo administration was forced to abandon any semblance of macroeconomic order. Only when it was clear that foreign and Mexican investors could no longer be protected did Finance Minister Jaime Serra Puche let the peso drop. It fell precipitously.J? What started as a foreign exchange crisis soon billowed into the threat of insolvency. Just as the peso tumbled, the accumulated tesobonos began to mature. By early February, all efforts to reassure investors (domestic and foreign alike) had failed. It seemed that few would keep their money in Mexican public securities, and that a full-scale default was imminent. As rumours of a collapse spread, investors accused the Mexican government of betrayal.P Capital flight was inevitable, and there was little the Mexican authorities could do but brace themselves for the fall-out. The speed and scale of the crisis exceeded the capacities of the normal channels of financial supervision. This was no ordinary exchange shortage, the stock-in-trade business of IMF stand-by loans. Mexico was threatened by a wholesale liquidity crisis; on a scale which threatened to engulf much of Latin America. Investors began to subject local markets in Argentina and Venezuela to the same panicked capital flight. By early February, the only saviour of the teetering system to appear was the US government. Yet even here, the initial talk of a "rescue plan" became bogged down in Congress, as isolationist Republicans and Democrats embittered over their loss in the NAFTA vote, conspired to hold New York financiers for ransom.J? With US banks holding $41 billion in Latin American debt ($15.9 billion in Mexico alone), US mutual funds carrying $17 billion in the region, and three major securities firms deeply embroiled in Latin America (J.P.Morgan, Salomon Brothers, and Goldman Sachs together earned over $300 million from Latin American trading in 1994), the paralysis in Washington briefly threatened to destabilize the pillars of global finance. Goldman Sachs, as it turned out, was the largest single underwriter of Mexican securities ($5.17 billion between 1992 and 1994), and its former co-chairman, Robert Rubin, was now President Clinton's alarmed Treasury Secretary.40 Rubin, in a panic, warned the President that Mexico could 27 Studies in Political Economy default, and that his efforts to calm New York money managers were failing now that Mexican authorities had lost all credibility. He successfully argued that Washington had to step in directly to make the largest international financial bail-out in world history. The Treasury posted $20 billion and a reluctant IMF $17 billion, effectively operating as a lender oflast resort to a volatile and herd-like private market. As the rescue funds mopped up the bonds that had been eulogised by domestic and foreign agents as a sound and highly lucrative bet just a year before, Mexico avoided collapse. Since 1995, the Mexican economy has stumbled along, with only occasional moments of recovery and only very localized prosperity. Mexican economic growth is not enough to absorb the vegetative expansion of the work force (about 3.5% yearly), never mind absorbing dislocated workers from plant closures and agrarian enclosures. The toll of urban squalor and petty crime rates is also becoming a major source of alarm. Mexican austerity was the price paid to accumulate foreign exchange to payoff the republic's "rescue" package. In the long-term Mexico is left fully exposed to international financial whims. The intervention of the US authorities was not just another emergency measure, it epitomised how crippled Latin American states have become in the face transnationalism. The rest of the region has only barely avoided Mexico's complete ignominy. The flight of funds from Mexico also sucked money out of other so-called "miracles" and "emerging markets," in particular Argentina. Thus, despite the lofty promises of the neoliberal reformers, resources once again flowed out of Latin America to world money centres. Over the past two years, some capital has been crawling back, supporting assertions that Rubin's efforts were successful. What has not changed, however, is the extreme vulnerability of capital flows to factors beyond the control of Latin American states, as shown by the hammer-blows delivered to Latin American markets in the wake of East Asian turmoil. Conclusion Although the most recent Mexican crisis once again spread austerity, high interest rates and lay-offs across 28 AdelmanlDebt Crisis Latin America, it differed from its 1982 predecessor. Finance capital is now more widely spread in a variety of institutional forms, each having distinctive interests in host economies. Whereas, much of the 1970s debt was held by large collaborating commercial banks, recent flows have been more diversified. For some, these changes are reassuring. Portfolio investment (especially in bonds derived from reconverted old bank debt), and foreign direct investment, represent longer-term obligations. Moreover, the more atomised and varied nature of today's investments inhibits the formation of creditor-blocs like those that emerged in the wake of 1982. Accordingly, Latin American debtors are thought to be in a stronger position since they no longer face a tightly organized circle of lenders. This is the silver lining, however, of a very large, dark cloud. Creditor heterogeneity and atomisation may weaken their collective bargaining strength, but such a structure also creates undeniable problems of coordination. Capital flows, though more polymorphous, are now potentially far more volatile and less susceptible to scrutiny and control.U Indeed, the fall-out from Mexico's debacle has illustrated the difficulty of bringing panicky portfolio investors to heel when the temptation to free-ride is so great. In order to deal with Mexico's near-default in 1982 by deferring payments and emergency loans from the IMF, there had to be a united front and close collaboration between the money-centre banks. But the change in the personality of finance capital between 1982 and 1994 meant that the Mexican authorities were unable to cope with capital flight in this way, and explains why the IMF was singularly unprepared to step in as a lender of last-resort in early 1995. On this occasion, only massive and direct intervention by the US Treasury slowed the stampede out of Latin America. Thus, for all the institutional plasticity of recent global capital flows, panic is the spectre that still haunts all financial authorities south of the Rio Grande. Indeed, the IMF may no longer be necessary as a disciplinary agent since the mere threat of capital-flight now forces regimes to impose austerity to deal with trade imbalances or government "overspending. " 29 Studies in Political Economy Domestic factors also make the post-1994 crisis different from the post-1982 one. Much of the restructuring during the 1980s and early 1990s was financed by forced domestic savings (meagre though these were) and the massive wholesale transfer of assets from the public to the private sector. The full effects of Latin American privatisation and the removal of the last remnants of national populism have not yet been seen, but the scale of the transformation has been monumental. Such a sweeping re-mapping of property rights carries with it the possibility of large associated speculative gains, which can serve as giant magnets for new investment. The beneficiaries of these changes have been both domestic and foreign conglomerates, creating the new corporate sinews of the more internationalised markets of the region. But now that this orgy of redistribution is almost over, except in Cardoso's Brazil, there is little left to seduce new investors.42 The latest era of "hot money" in Latin America may therefore be effectively over, not so much because the Mexican malaise has chastened investors, but because there is simply nothing left to entice speculators. The only other major enticement would be to attend to potentially rapidly growing domestic markets. However, given the need to preserve a patina of "frugality" and "responsibility," Latin American governments have to keep a tight lid on domestic consumption. The historical situation which most closely resembles the landscape that faces much of Latin America today is the need for adjustment to financial cycles before the Second World War. Now, as then, stripped-down states have relinquished much of their ability to monitor, or to oversee local markets. Bereft of any direct stake in production and distribution, deprived of fiscal discretion, and left with imperfect tools wielded by "independent" central bank authorities (some of whom have completely abjured themselves as lenders of last resort), Latin American states now operate under terms reminiscent of the old gold standard of the nineteenthcentury.O In summary, Latin American governments are being called upon to alleviate the market's blows, to deepen the process of economic restructuring, and to legitimate redefined property relations, at a time when their capacities to 30 Adelman/Debt Crisis do so are increasingly constrained. For much of Latin America, the primary variable of adjustment to world money and commodity market cycles is now the level of local incomes. It remains to be seen how societies entering the next century will address the on-going saga of dealing with the debt crisis with policy tools fit for the last century. After a decade of neoliberalismo, it is not only the state coffers which are empty. Notes I. 2. 3. 4. Pedro Aspe and Jose Angel Gurria, "The State and Economic Development: A Mexican perspective," in Proceedings of the World Bank Annual Conference on Development Economics, i992, (Washington: World Bank, 1993), pp. 9-14. Oscar Altimir, "Income Distribution and Poverty through Crisis and Adjustment," in Graham Bird & Ann Helwege (eds.), Latin America 50 Economic Future, (New York: Academic Press, 1994), pp. 265-302; Ann Helwege, "Poverty in Latin America: back to the Abyss?" Journal of inter-American Studies and World Affairs, 37/3 (1995), pp.99124; John Sheahan, "Effects of Liberalization Programs on Poverty and Inequality: Chile, Mexico and Peru," Latin American Research Review, 32/3 (1997), pp. 7-37. Refusal to deal with these embedded causes can produce some idiosyncratic results and wildly inconsistent appraisals. For a taste, see The Economist's feature article on Mexico in the August 26-September I, 1995 issue. For the IMF's in-house account, see IMF, "Evolution of the Mexican Peso Crisis," international Captial Markets: Developments, Prospects and Policy issues, (Washington DC: IMF, 1995), pp. 53-66. Peter Evans, Dependent Development: The Alliance of Multinational, State, and Local Capital in Brazil, (Princeton: Princeton University Press, 1979); Inter-American Development Bank, External Debt and Economic Development in Latin America: Background and Prospects, 5. 6. 7. (Washington: IADB, 1984), p.7. IADB, External Debt and Economic Development, p.7. Carlos F. Diaz-Alejandro, "Good-bye Financial Repression, Hello Financial Crash," in Andres Velasco (ed.), Trade, Development and the World Economy: Selected Essays of Carlos F Diaz-Alejandro, (Oxford: Basil Blackwell, 1988), pp. 364-386; Vittorio Corbo, Jaime de Melo, James Tybout, "What Went Wrong with Recent Reforms in the Southern Cone?" Economic Development and Cultural Change, 34/3 (1986), pp. 607-640. The best study of this change is Robert Devlin, Debt Crisis in Latin America: The Supply Side of the Story, (Princeton: Princeton University Press, 1989). See also, Carlos F. Diaz-Alejandro, "The Post 1971 International Financial System and the Less Developed Coun31 Studies in Political Economy 8. 9. 10. II. 12. 13. 14. 15. 16. 17. 18. 32 tries," in G. Helleiner (ed.), A World Divided: The Less Developed Countries in the International Economy, (Cambridge: Cambridge University Press, 1976), pp. 177-205. Philip Armstrong & Andrew Glyn & John Harrison, Capitalism Since World War ll, (London: Fontana, 1984); William Darity & Bobbie Horn, The Loan Pushers: The Role of Commercial Banks in the International Debt Crisis, (Cambridge, Mass.: Ballinger, 1988). Rudiger Dornbusch, "Capital Flight: Theory, Measurement and Policy Issues," IADB Occasional Papers 2 (1990); Robert Cumby & Richard Levich, "Definitions and Magnitudes: On the definition and Magnitude of Recent Capital Flight," in Donald Lessard & John Williamson (eds.), Capital Flight and Third World Debt, (Washington: Institute for International Economics, 1987), pp. 27-67. Albert Fishlow, "Lessons from the Past: Capital Markets during the Nineteenth-Century and the Interwar Period," International Organization, 39/3 (1985), pp.383-439. This, of course, has been a thorny model for international financiers and their institutional girders. For an insight into the battle over financial paradigms, see Robert Wade, "Japan, the World Bank and the Art of Paradigm Maintenance," New Left Review, 217 (1996), pp. 3-36. For a more general reflection on alternative financial systems see, Robert Pollin, "Financial Structures and Egalitarian Economic Policy," New Left Review, 214 (1995), pp. 26-61. Cline, International Debt, Systemic Risk and Policy Response, p. II. IADB, External Debt and Economic Development, pp. 7-10; Chris Carvounis, The Debt Dilemma of Developing Nations (London: Aldwych, 1984), p. 25. For a good account of the political circumstances within Latin America at the time, and their connection to debt-management, see Jeffrey Frieden, Development and Democracy: Modern Political Economy and Latin America. 1965-1985, (Princeton: Princeton University Press, 1991), especially chps. I & 2. See for instance, Harold Lever & Christopher Huhne, Debt and Danger: The World Financial Crisis, (Harmondsworth: Penguin, 1985); Anatole Kaletsky, The Costs of Default, (New York: Priority Press, 1985). Even Carlos F. Diaz-Alejandro urged some approximation to 1930s-style default. See "Latin American Debt: I Don't Think We Are in Kansas Anymore," Brookings Papers on Economic Activity, 2 (1984), pp. 335-389. Christian Suter & Hanster Stamm, "Coping with Global Debt Crises: Debt Settlements, 1820 to 1986," Comparative Studies in Society and History, 24/4 (1992), pp. 645-678; Barbara Stallings, Banker to the Third World: US Portfolio Investment Latin America. 1900-1986, (Berkeley: University of California Press, 1987). Nouriel Roubini & Xavier Sala-i-Martin, "Financial Repression and Economic Growth," Journal of Development Economics, 39 (1992) pp. 5-30. International Monetary Fund, World Economic Outlook. October 1993, (Washington: IMF, 1993), p. 72. Brazil began negotiations to reconvert $44 billion in commercial bank debt plus $3 billion in interest arrears, but the prolonged political crisis associated with President Collor's demise postponed any final settlement. New York AdelmanlDebt Crisis 19. 20. 21. 22. 23. 24. Times, 10 July, 1992. In April 1994, a "Brady" deal was finally struck with 750 creditors worth $60 billion to foreign banks and $6.9 billion to domestic banks. The Economist, (26 Nov., 1994), p. 40. Nora Lustig, Mexico: the Remaking of an Economy, (Washington: Brookings Institute, 1992), pp. 50-54; Julio Nogues & Sunil Gulati, "Economic Policies and Performance under Alternative Trade Regimes: Latin America during the 1980s," The World Economy, 17/4 (1994), pp. 467-496. Werner Baer, "Privatisation in Latin America," The World Economy, 17/4 (1994), pp. 509-528. It is worth observing that not until a decade after Latin America began its arduous adjustment to bankers' demands did the IMF begin to insist that there be stronger supervision and the creation of a sound regulatory framework for banks. See IMF, Annual Report. 1994 (Washington: IMF, 1994), p. 25. Banks themselves responded by expanding the range of their activities as intermediaries. They dipped into a wide array of new business activities. But now that Third World debtors were ruled out by virtue of their crippled economies their loans were concentrated in a new set of single-risk classes, their greatest preference being for domestic urban real estate. They also made a booming business in over-the-counter derivative markets. In itself, the evolution of bank operations had little immediate impact on the periphery, but it did make them less prominent players in revamped Latin American markets. This conclusion does not mean that banks are irrelevant, simply that they are no longer important conduits of capital. In many ways, foreign banks' role within Latin America has increased enormously as they have financed much of the privatisation of state assets, making themselves important holders of assets in sectors throughout the economy. In the US, 1990 saw approval of two important measures, "Regulation S" and "Rule 144A". The former clarified the definition of sale and offer of developing country securities in the US (prior to 1990, the Securities Act imposed stringent terms on security buyers and levied heavy fines on public offerings which failed to meet legislative requirements). This enabled foreign issuers to duck registration requirements (of between $500,000 and $700,000). Rule 144A relaxed stipulations that securities buyers hold their investment for at least two years, thereby increasing the liquidity of their holdings. In Japan, authorities lowered minimum credit rating standards for public bond issues on the Samurai market (from A to triple B) in June 1991. In Switzerland, minimum credit rating standards were abolished altogether for foreign bond issues (they had been at triple B). Mohammed A. El-Erian, "Restoration of Access to Voluntary Capital Market Financing," IMF Staff Papers, 39/1 (1992), pp. 175-194; IMF, International Capital Markets: Developments and Prospects (May, 1991), pp. 1-9. UN, Economic Commission for Latin America and the Caribbean, Economic Survey of Latin America and the Caribbean. 1992, V.I (Santiago: UNECLA, 1994), pp. 165-166. Robert Devlin has charted the grim record of pro-cyclical behaviour of banks, of exaggerating booms and aggravating recessions in Debt and Crisis in Latin America, especially pp. 235-245. 33 Studies in Political Economy 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 34 Published figures may well underestimate the degree of bank claims on developing countries due to American reporting habits to the Securities Exchange Commission. See "Bank Lending: Hidden Horrors," The Economist, (22 Oct., 1994). World Bank, World Debt Tables, 1993-1994 (Washington: lBRD, 1993), p. 3. There are also institutional reasons for the convergence in yields. See "The Intermediary's Lot," The Economist, (5 Nov., 1994); Kenneth Gilpin, "The New Third World Fear: Investors Could Walk Away," New York Times, 24 April, 1994; World Financial Markets, (II Nov., 1994). Recent signs point to disenchantment with Mexico and Buenos Aires, and new-found euphoria for Brazil. See Kathryn Jones, "Steamy Brazil Helps Emerging Markets," New York Times, (3 Oct., 1994). World Bank, World Debt Tables, 1993-94 V.I, p. 9. World Financial Markets, (14 August, 1992). See the useful "Banking in Latin America," Latin American Special Report, (Dec., 1993); John H. Welch, "The New face of Latin America: Financial Flows, Markets and Institutions in the I 990s, " Journal of Latin American Studies, 25/1 (1993), pp. 1-24. The exception here is Brazil, which has heretofore not been a major new borrower and has sustained high export and stable import levels. Cardoso's pre-election decision to peg the new real to the US dollar, however, suggests he might send Brazil down the Mexican and Argentine path. "Cardoso takes the plunge," The Economist, 2 Apr., 1994. Susan Schadler, Maria Carkovic, Adam Bennett, and Robert Kahn, "Recent Experiences with Surges in Capital Flows," IMF Occasional Paper 108 (Dec., 1993); "Coping with capital," The Economist, (29 Oct., 1994). Schadler et al, "Recent Experiences with Surges in Capital Inflows," pp.II-28; Guillermo Calvo, Leonardo Liederman, Carmen M. Reinhart, "Capital Inflows and Real Exchange Rate Appreciation in Latin America," 1MF Staff Papers, 40/1 (1993), pp. 108-151. Thailand, for instance, administered a quick and large fiscal adjustment, enjoyed historically low inflation rates and hosted a banking system with much greater capital absorptive capacity. For a clear warning, see IMF, World Economic Outlook, October 1993, pp. 79-81 & Annual Report 1994, pp. 26-28; Latin American Weekly Report, 7 Apr., 1994; and The Economist, (26 Nov., 1994), especially p. 43. Craig Torres & Thomas Vogel, "Some Mutual Funds Yield Growing Clout in Developing Nations," Wall Street Journal, (14 June, 1994); Latin American Weekly Report, (21 April, 1994). On estimates of capital flight, see the report on Bancomer studies in Latin American Weekly Report, (5 May, 1994). "Factors Behind the Financial Crisis in Mexico," IMF, World Economic Outlook, May 1995, (Washington: IMF, 1995), pp. 90-97; Nora Lustig, "Mexico y la crisis del peso: 10 previsible y la sorpresa," Revista de Comercio Exterior (forthcoming). AdelmanlDebt Crisis 37. 38. 39. 40. 41. 42. 43. "Mexican President Outlines Rescue Plan," New York Times, (30 December, 1994); "Mexico Puts Economic Steps on Hold," Wall Street Journal, (27 December, 1994). One foreign bond trader decried "this is just a complete shift in credit fundamentals. They've got to line up international financial institutions and maintain credibility with the creditor community, which has been shredded here." Craig Torres & paul Carroll, "Mexico Puts Economic Steps on Hold," Wall Street Journal, (27 Dec., 1994). "Putting Mexico together again," The Economist, (4 Feb., 1995); Craig Torres, "Mexico's Debt-Restructuring Plans Stall," Wall Street Journal, (15 Feb., 1995). Tim Carrington, "Rubin's Link to Goldman is Scrutinized," Wall Street Journal, (27 Feb., 1995); David Sanger, "The Education of Robert Rubin," New York Times, (5 Feb., 1995). IMF, World Economic Outlook, October 1994, (Washington: IMF, 1994), p. 6 & International Capital markets, Developments, Prospects and Policy Issues, (Washington: IMF, 1995), pp. 165-17 I. For some recent reflections on Brazil, see Reinaldo Goncalves, "Globalizacao financiera e insercao internacional do Brasil," Revista Brasileira de Politica Internacional, 39/1 (1996), pp. 72-88; on Mexico, Juan Carlos Moreno and Jaime Ros, "Market reform and the Changing Role of the State in Mexico," in Amitava Dutt, et al (eds.), The State, Markets and Development, (Aldershot: Wheatsheaf, 1994), pp. 107-143; on Argentina, Jeremy Adelman, "Post-Populist Argentina," New Left Review, 203 (1994), pp. 66-91. This, of course, is seen by some as a virtue, especially for open economies unused to responsible fiscal and monetary management. See for instance, Harold James, International Monetary Cooperation Since Bretton Woods, (Washington: IMF/Oxford University Press, 1996). 35