Political leaders in Washington and in Latin America began 1985 with sharply different perspectives.

The Reagan Administration was ostentatiously pleased with the state of the western hemisphere. It was gratified by Latin America’s steady turn toward democracy, which it thought would foster more cordial inter-American relations. The U.S. government was confident that Latin America’s debt crisis was easing, at least for the major countries, and that the debt management strategy employed since 1982 had proved largely successful. Washington was heartened that most Latin American countries were beginning to implement economic policies that were endorsed by the International Monetary Fund (IMF), policies designed to cut public sector deficits and generate trade surpluses so the countries could service their debts.

And, as had been the case since 1981, the U.S. Administration began 1985 strongly focused on Central America. Washington was pleased that the government of President José Napoleón Duarte in El Salvador was getting stronger while the Sandinista government in Nicaragua was weakening. Fresh from its overwhelming electoral triumph, the Reagan Administration sought additional resources from Congress for pressing these perceived advantages, in order to defeat what it regarded as a communist threat in Central America.

Latin Americans, however, were apprehensive and frustrated. They feared that the modest economic recovery of 1984 could not be sustained, and that the hemisphere’s depression would deepen. Satisfaction about Latin America’s turn to democracy was tempered by fears that harsh economic problems could overwhelm the fragile new civilian regimes.

Forced to implement extraordinarily painful austerity programs, many Latin Americans resented the fact that Washington talked eloquently about promoting democracy but did little concretely to alleviate their debt burdens. On the contrary, they felt that the United States was preaching discipline to them while running up unprecedented budget deficits that contributed to high real interest rates, which in turn increased their debt service. And although many wanted to cut back bloated public sectors, Latin American leaders resisted what they saw as self-serving U.S. homilies on the virtues of the market and foreign investment.

Latin Americans who looked to the United States for cooperation in dealing with the hemisphere’s economic crisis were often disappointed in the early 1980s. Intermittent indications of U.S. concern, especially in 1982, dissipated rapidly. The U.S. government had provided emergency assistance to Mexico and then Brazil, but resisted efforts to expand the resources available to the World Bank and, initially, the IMF; it preferred not to be drawn into the deliberations of the private commercial banks on debt reschedulings; and it seemed more interested in discouraging intra-Latin American cooperation regarding the hemispheric financial crisis than in seeking a solution to the credit shortage.

Latin America’s leaders in the early 1980s had to deal with a U.S. administration they found disconcertingly ideological. Instead of obtaining the help of the U.S. government to face the hemisphere’s economic problems, these leaders perceived that—with rare exceptions—the few officials in Washington who concern themselves with Latin America at all were obsessed with Central America. The possibility that the United States would escalate the militarization of Central America particularly disturbed leaders of the Contadora nations rimming the isthmus: Mexico, Panama, Colombia and Venezuela. In South America, Washington’s priorities were questioned. As 1985 began, the Americas were undoubtedly at odds.

Two major trends in 1985 brought Latin America and the United States somewhat closer together, although they also laid the basis for likely inter-American conflict in the future. First, democratic renewal took hold in South America, and the region’s victorious civilian politicians turned from the quest for office to the task of governing. Second, Latin America’s economic and financial problems worsened, and the strategy pursued since 1982 to deal with this crisis was challenged by many as ineffective and even harmful. Latin America’s democratic leaders sought new approaches for coping with economic distress, prodded in part by signs that the latent political appeal of radical national populist alternatives was increasing.

Washington’s perceptions of these interacting tendencies led the U.S. government to begin revising its international economic policies. The "Baker plan," unveiled by Treasury Secretary James Baker in October, was seen in Latin America as a significant though still insufficient step toward agreement with the views prevailing in the region.

Meanwhile, mutually reinforcing stalemates in Central America, in the Contadora negotiating process, and in the Washington policymaking environment caused the Reagan Administration to soft-pedal its aim for a decisive victory in Central America, at least for a time. This allowed the Contadora nations, preoccupied with their own concerns, to back away from their disagreements with Washington. The United States thus settled last year into a long-term, low-intensity, indirect war against the Sandinista government in Nicaragua and the leftist insurgents in El Salvador. Washington did not so much change as clarify its goals and strategy in Central America, but it lowered its profile somewhat. Skepticism about the Sandinistas also increased in Latin America, particularly in the other countries of Central America. The overall effect was to reduce the level of controversy about Central America in hemispheric relations, while the underlying problems continued to fester.

As 1986 began, an opportunity to improve U.S.-Latin American relations appeared to exist, but it may well be a brief one. Political leaders in most Latin American nations are carrying out moderate, pragmatic policies that are compatible with the long-term interests of the United States, and they are prepared to cooperate with Washington. They may be forced, however, to alter their approaches if they cannot soon produce some relief from the excruciating economic and social problems the region faces. The United States can help Latin America’s democratic leaders cope with the hemisphere’s economic crisis, and in 1985 it took a potentially important move toward doing so by proposing the Baker plan. But Washington has not yet taken any decisive action to relieve Latin America’s debt burden.

It remains to be seen whether the Reagan Administration will do much in 1986 to implement its new concern with Latin America’s economic growth—or whether it will instead return to business as usual on economic issues and perhaps also revert to its preoccupation with Central America. If the current chance to forge a new hemispheric relationship is not seized, the dynamics of democracy and debt, and of war and peace in Central America, could push the United States and Latin America into sharp confrontation before the end of the decade.

II

South America’s democratic wave has been gaining momentum in the 1980s. The focus of politics in the region has shifted in the last five years from the problem of democratic transition to the consolidation of newly reestablished constitutional processes and the challenge of economic policy.

The most significant political event in Latin America in 1985 was the end of 21 years of military government in Brazil. This milestone occurred despite the tragic death of Tancredo Neves, a veteran political leader chosen in January to become the first civilian president in a generation. Neves’ singular qualities as a compromiser and coalition-builder produced his victory in an electoral college established but not controlled by the military regime. His mortal illness was discovered literally on the eve of his scheduled inauguration on March 15, and Neves died in April without ever serving as president. But his selection had galvanized the national consensus necessary to return Brazil’s military to the barracks. The undisputed constitutional succession of Vice President José Sarney continued the return to full democracy in the continent’s largest country. Municipal elections in November carried forward the process; gubernatorial elections next year are already scheduled, and direct presidential elections are likely by 1988.

The consolidation of democracy in Argentina was equally striking. The political mandate of Raúl Alfonsín, elected in 1983 in the aftermath of the military government’s Falklands-Malvinas fiasco, was strengthened by congressional mid-term elections in October, despite his implementation of tough economic austerity measures. Alfonsín carried out his promise to bring to trial the top military leaders charged with responsibility for human rights violations in the 1970s and early 1980s. Five former military rulers were sentenced, two of them to life in prison. That senior military officers could be sentenced to prison terms without a serious threat to the constitutional order was remarkable.

In Peru, the peaceful transfer of office from Fernando Belaúnde Terry to Alan García Pérez was another feat of democratic consolidation. Despite severe economic and political deterioration during his term that could have threatened the electoral process, Belaúnde became the first elected Peruvian president in 40 years to turn over power to an elected successor. The young and charismatic García captured his country’s imagination by promising to address each of the nation’s main problems. After one hundred days in office, García achieved an astounding 85-percent approval rating.

The democratic trend in South America is surprisingly broad. In Uruguay, after a bitterly repressive decade of military rule, the administration of Julio María Sanguinetti was inaugurated in 1985, and the country has returned to the civilized political discourse for which it used to be known. No one can be confident that a constitutional regime will last long in Bolivia, where coups have occurred about once a year, on the average, for decades. But in 1985, power was transferred from the beleaguered Hernán Siles Zuazo to the venerable Víctor Paz Estenssoro; this was Bolivia’s first transition from one elected civilian to another in 25 years.

Of all the major South American countries, only Paraguay and Chile remained apart from the turn to democracy, but opposition to both these authoritarian regimes increased palpably over the year. Indeed, what could become a major step toward democratization occurred in 1985 in Chile, where General Augusto Pinochet is now in his 13th year of personalist rule. The "National Accord for a Transition to Full Democracy," arranged in August through the Archbishop of Santiago, established agreement on political principles and procedures among a broad spectrum of 11 Chilean parties. The Pinochet regime is increasingly isolated, both within Chile and externally, although it remains firmly in control. Alfredo Stroessner, Paraguay’s leader since 1954, also faces increasing opposition from the church and other sectors, the democratizing influence of both Argentina and Brazil, and the beginnings of a visible effort by Washington to distance itself from his government.

Latin America’s turn toward democracy has not been universal. It has not reached Cuba, where Fidel Castro has been ruling since 1959. Nor has it touched Haiti, where Jean Claude "Baby Doc" Duvalier changed constitutional provisions in 1985 to prolong his rule in the face of rising opposition. There has been some retrogression in Ecuador, where the elected president, León Febres-Cordero, has tried to stack the supreme court and postpone congressional elections. The nominating convention of the Dominican Republic’s governing party was disrupted by violence that forced a suspension of the balloting to choose a presidential candidate. The elections in Guyana to pick a successor to the late Forbes Burnham took place in an atmosphere of intimidation and fraud. Panama, where President Nicolás Ardito Barletta was pushed aside by the military in favor of the vice president, is not the only country where the armed forces still exercise a strong political role. In Colombia, where civilian politics have been entrenched for a full generation, President Belisario Betancur’s efforts to negotiate an end to the M-19 insurgency collapsed in 1985; the country was rocked by the bloody denouement of the M-19’s seizure of the supreme court building and a number of hostages. Even in Venezuela, the most stable democracy in South America, falling standards of living have created sharp antagonisms among former allies and challenged public confidence in the country’s long-term political stability.

And although internal and external pressures combined to produce elections in 1985 in El Salvador, Guatemala and Honduras, questions must be asked in each case about the significance of the elections. Important segments of the population felt themselves excluded from the elections in El Salvador. Some basic issues still cannot be discussed in Guatemala. The Honduran electoral procedures were rigged to assure the outcome. In all three countries the army still holds the trump. In these nations, as in Nicaragua for somewhat different reasons, democracy is still far from complete.

Yet the historic process of Latin America’s redemocratization did gain important ground in 1985. Only the most optimistic observers imagined five years ago that South America would enter the second half of the 1980s with 94 percent of its population living under civilian and constitutional regimes, or that the countries of Central America would be holding internationally monitored elections, which were surely a step toward eventual full democracy even if not a definitive one.

Throughout the early 1980s, the return to democracy has been South America’s main political issue. Despite drastic economic reverses and declining living standards, there has been much less social upheaval and political radicalism than might have been expected. This has been so in large part because elite groups of different persuasions have come to understand the worth of democratic politics, because military officers have come to appreciate the cost of political involvement to their institution’s coherence and morale, and because popular frustrations have been constructively invested in the efforts first to end authoritarian military regimes and then to choose, install and support civilian successors.

The central question for the next period will be whether this commitment to democracy, and its consolidation, can continue as the region struggles with its profound economic problems. If international constraints remain tight and the new democracies cannot soon generate hope that growth will resume, populist demagogues may well press for radical nationalist policies that could undermine political stability. Parties that have refrained from fratricidal competition during the delicate process of transition may succumb to the urge to polarize. Terrorist and insurgent movements that up to now have had relatively limited appeal—M-19 in Colombia and Shining Path in Peru are the main examples—might broaden their popular bases if economic and social conditions deteriorate still further. Narcotics traffickers may take advantage of weakened national governments to expand their effective control of enclaves within Latin America. Counterinsurgency and anti-narcotics operations, in turn, could lead to renewed repression in some countries and rekindle the dynamics of instability. The potential of these threats made Latin America’s continuing economic problems in 1985 all the more disturbing.

III

Most of Latin America continued to suffer the worst depression since the 1930s. The regional upturn of 1984 could not be sustained. It had been achieved to a large extent by restricting imports so severely that Latin America could not make full use of its installed capacity. The short-lived upturn was also based on a temporary boom in exports to the United States, made possible by the high growth rate of the U.S. economy and the unusually strong dollar, both of which faltered in 1985.

Only four Latin American countries—Brazil, Mexico, Cuba and Paraguay—managed per capita economic growth in 1985. Mexico’s growth was due partly to inflationary deficit spending early in the year, and it fell sharply after anti-inflationary measures had to be introduced. Brazil grew at more than seven percent, but this robust expansion, accompanied by inflation of over 230 percent, was unlikely to continue at this pace in 1986. Excluding Brazil, the rest of Latin America suffered a 1.5 percent drop in per capita income for the year.

The statistics on Latin America’s economic distress are stark. Per capita income for the entire region has fallen about nine percent since 1980, back to the levels of 1977. In some countries per capita income has declined to the levels of the 1960s; two full decades of growth have been lost. Unemployment and underemployment are higher than ever, upwards of 50 percent in some areas. Inflation is rampant, almost 150 percent for the region as a whole.

Latin America’s external debt, some $368 billion in total, remains staggering. The debt-to-export ratio, a standard measure of debt service capacity, worsened for every major Latin American country in 1985. Ten nations are substantially behind in their interest payments, with Bolivia, Guyana and Nicaragua effectively in default. Loans to Peru have been classified by U.S. bank regulators as "value-impaired" because the country’s arrears are so high. At least six Latin American countries, including Brazil and Mexico, are out of compliance with IMF targets for adjustment.

Close to 40 percent of Latin America’s export earnings are now devoted to interest payments. For the fourth year in a row, the net total of loans and investments to Latin America was substantially less than that of net remittances for interest and foreign companies’ profits. During these four years, Latin America has in effect transferred $106 billion to the industrialized countries—a burden more than twice the relative size of the German war reparations of the 1920s. About one quarter of Latin America’s savings are being drained to keep up interest payments, thus sharply reducing domestic investment capital.

Latin America’s economies are caught in a vicious circle. Because they are devoting so much of their savings to debt service they are undercutting their ability to invest, to grow and to generate additional earnings to improve their creditworthiness. This situation is intolerable, economically and politically.

The social and political costs of prolonged recession are growing. Translated into human terms, Latin America’s economic crisis means hunger, infant deaths, homeless children, boat people and feet people, bread riots, mounting street crime, including the internal drug traffic—and increasing public impatience. The exhilarating revival of democracy assuaged popular discontent somewhat in the early 1980s, but now the new civilian regimes are beginning to feel widespread dissatisfaction. In Argentina, Brazil, Venezuela and elsewhere, labor union opposition is growing. The municipal elections in Brazil weakened the moderate social democratic governing party and benefited populists from both the left and the right. In Jamaica and the Dominican Republic, the elected governments are by now ruling with a minority of the public behind them.

Latin America’s democratic leaders cannot tell their followers to tighten their belts further without providing them some hope that relief is in sight. A phrase scrawled on a wall in Lima put it well: "We’ve had enough crisis: we want promises."

Latin American responses to this grim reality shifted significantly in 1985. This was in part because of mounting tensions as reflected in strikes, protests, street crime, insurgency, polls and several election outcomes. But it was also because the premises of the established debt management strategy came increasingly under challenge.

From the start of the crisis, the creditors had pressed Latin American and other developing-country debtors to deflate their economies, cut imports, reduce social and other services, and promote exports. The debtors were urged to count on an expansion of global commerce to trade their way out of debt. Latin American debts were rescheduled to defer the amortization of capital, but interest obligations were increased.

Desperate for immediate debt service relief and unwilling to risk confrontational tactics that might cut them off from future credit, the countries of Latin America accepted this adjustment strategy. Usually they formalized their adherence by signing a "letter of intent" to the IMF, promising to meet specific austerity targets in exchange for short-term financial relief. They tried to ameliorate the terms: to limit fees and commissions, reduce spreads and stretch out maturities. But they did not fundamentally question the basic strategy of adopting austerity programs, curtailing imports and relying on global economic recovery.

By 1985, however, it was increasingly perceived that this approach served the immediate interests of the commercial banks more than those of Latin America. The banks had been kept solvent and some had even increased their earnings, but Latin America’s depression continued.

The conventional approach counts on expanding demand for exports from the developing nations, fueled by the projected recovery in the industrial countries. It also relies on commodity prices rising as growth in the industrial countries expands; on decreasing interest rates as fiscal equilibrium is restored in the United States; on renewed voluntary lending by the commercial banks as Latin American countries restructure their economies; and on expanded foreign investment as the region’s growth prospects improve.

None of these expectations was realized in 1985, however. Exports from Latin America fell six percent in 1985, as demand fell in the United States and the OECD countries, and future export prospects were clouded by rising protectionist pressures. Of Latin America’s 18 leading export commodities, only copper increased in price in 1985 (after several years of drastic decline), while the prices of 15 others continued to fall; commodity prices are lower in real terms now than at any time since the 1930s. Latin America’s terms of trade have suffered a cumulative decline of over 16 percent since 1980.

Although nominal interest rates have been falling, real rates remain high. Voluntary private lending to Latin America has virtually dried up as the banks reduce their exposures. New foreign direct investment in Latin America, far from picking up the slack, has also declined despite earnest efforts by some countries to encourage it; multinational firms hesitate to expand their operations in the region’s still uncertain economic and political environment.

To many in Latin America, therefore, the orthodox approach to the region’s economic problems looks increasingly like a callejon sin salida, a blind alley. In the words of Brazil’s President Sarney, "Latin America can no longer accept abstract theories that condemn us to stagnation. . . . Brazil will not pay its foreign debt with recession, nor with unemployment, nor with hunger." The message from García was similar: "Peru’s first debt is to its own people." Latin American nations were no longer content to apply imported recipes; they developed their own proposals.

Of all the new approaches launched in 1985, probably the most important was Raúl Alfonsín’s Austral Plan, announced in June when Argentina’s annual rate of inflation had reached 1,000 percent. The plan was designed by Argentine economists who sold it first to Federal Reserve Board Chairman Paul Volcker (increasingly a central figure in U.S.-Latin American relations), and then to the IMF and the international financial community. It called for a shock treatment to reverse inflation through a combination of wage and price freezes (contrary to IMF orthodoxy), drastic reduction of government deficits, an immediate end to the practice of printing paper money, and a series of linked measures to mobilize domestic savings and investment.

Alfonsín’s "war economy" plan won immediate approval in Buenos Aires as a serious attempt to reverse what most Argentines now perceive as accelerating national decline—"national decadence" in Alfonsín’s own phrase. The plan immediately affected the psychological and psychopolitical aspects of Argentina’s problems—hyperinflation, low worker morale and productivity, and capital flight. The country’s consumer price index, after rising over 30 percent per month for the first half of 1985, increased by only three percent in August, the lowest monthly adjustment in 11 years. Other indicators, including productivity and balance-of-payment figures, also improved. By year’s end, it was clear that Argentina needed further infusions of external credit, but it seemed that with appropriate debt relief the Austral Plan just might work.

Peruvian President García took a more dramatic tack, announcing at his inauguration that Peru no longer wished to negotiate with the IMF, and that the country would henceforth limit its debt service payments to ten percent of exports (about one fourth of Peru’s obligation but more than the country was actually managing to pay during the final months of the Belaúnde presidency). Peru has tightened exchange controls and import restrictions, devalued its currency, frozen the prices of basic goods, and stated its intention to reduce sharply government expenditures (including military purchases) and to reorient national policy toward rural growth. Peru under García has also toughened its stance toward foreign investors, insisting that they provide more capital for their Peruvian operations.

It is not yet clear how much of García’s rhetoric can or will be implemented, nor how much latitude Peru will have if it insists on confrontational tactics. García’s emphasis on internal growth and redistribution has undoubted appeal, and not only in Peru, but it remains to be seen where the foreign exchange necessary for imports will come from.

Brazil, too, altered its economic approach in 1985. Its shift was less brusque, in part because José Sarney’s weak political base does not permit bold innovation and in part because Brazil’s complex interests and national style call for caution. But even in Brazil, a firm decision to orient economic policy toward national growth at an annual rate of at least five percent caused the ouster in August of the government’s finance minister and central bank president, who preferred a continued priority for external adjustment. The national plan released in November calls for a doubling of social spending (after inflation) and for tax increases to shrink the budget deficit—the opposite of Reaganomics. Aided by the drop in world oil prices and the increase in domestic energy production, Brazil managed a $12.4 billion trade surplus; together with its strong domestic growth, this performance reinforced Brazil’s bargaining stance as it prepared for further debt restructuring negotiations early in 1986.

None of the paths being tested in Latin America in 1985 has yet proved successful, and their individual significance should not be exaggerated. What is important is that "debt fatigue" has descended on Latin America. The region’s economic and political realities will not permit a return to the orthodox adjustment policies of the early 1980s. It is also probably significant that consultations among Latin America’s debtors have increased considerably—through the Cartagena group of finance and foreign ministers, the meeting of democratic presidents in Lima at García’s inauguration, and an unprecedented level of informal talks among several chief executives. Although nothing like a debtors’ cartel has emerged from these exchanges, the potential of enhanced cooperation among the region’s major nations was glimpsed in 1985.

IV

Over the past year the Reagan Administration finally came to think of Latin America’s debt as requiring a long-term response coordinated by the U.S. government. The Baker plan, presented by the secretary of the treasury at the IMF-World Bank annual meeting in Seoul in October, represented a major change in Washington’s policies. For the first time, the United States endorsed the Latin American views that sustained austerity without new investment would leave the region with an increasingly intolerable debt overhang and that growth should be the top priority.

What was most significant about the shift in Administration policy, besides its emphasis on growth, was its recognition that substantial further commercial bank lending is crucial, its acceptance of a considerably expanded activity by the World Bank and the Inter-American Development Bank in Latin America, and especially its commitment (albeit still vague) to an active role for the U.S. government.

Mr. Baker urged that commercial banks increase their loans to 15 heavily indebted countries (ten of them in Latin America) by a total of $20 billion in new money within three years. He called for the World Bank and the IADB to increase their disbursements by about 50 percent, for a total of $9 billion in additional financial flows during the same period. He endorsed expanded activity in developing countries by the World Bank, which was previously distasteful to the Reagan Administration because of its supposed statist proclivities. These proposals were linked to demands, reflecting Reagan Administration ideology, that debtors commit themselves to market-oriented policies, supply-side economics, privatization, trade liberalization and measures to attract foreign investment.

Latin Americans reacted to the Baker plan with limited enthusiasm. They recognized its conceptual advances and welcomed the prospect of additional financing. But they argued that the funding levels contemplated are inadequate (Mexico alone needs close to half of the new credit proposed for 15 nations) and that the conditionality requirements are too uniform and ideological. They contended that the proposals do not deal with key issues like commodity prices and protectionism and that they do not address the plight of the region’s most disadvantaged debtors. Latin Americans noted, too, that the Baker plan depends for its implementation on cooperation by the commercial banks, and also on additional public resources for the World Bank and the IADB that may not be available if U.S. deficit reduction actually occurs. But the plan was universally recognized as a positive basis for further negotiation. At year’s end, Latin American officials were still formulating their specific responses, as Washington was working on translating the general approach into more concrete terms.

A number of elements helped produce Washington’s increased responsiveness to Latin America’s plight. Insistent Latin American representations on a number of occasions, notably those made directly to Secretary Baker at García’s inauguration in July, undoubtedly made a difference. So did the limited but anxiety-producing success of Castro in building bridges to the rest of Latin America by calling attention to the shared regional interest in repudiating the "unpayable" debt, as well as the obvious potential appeal of García’s less extreme formulation. The cautious but unmistakable moves toward a growth-oriented strategy by Brazil, the region’s principal debtor, also contributed, as did the impressive early success of Alfonsín’s efforts in Argentina. The fear that national populist appeals might eventually push some country toward a more radical position played a role, as did the indications that Latin American governments may begin to cooperate more effectively among themselves on the debt. The U.S. Treasury understands that if major Latin American debtors were to impose a moratorium, a number of major U.S. banks would be in trouble.

But, above all, it was Mexico’s situation in 1985 that forced Washington (and New York) to focus on Latin America’s underlying economic problems, just as in 1982 it was Mexico’s inability to keep up its debt service that had signaled the hemisphere-wide financial crisis.

Until 1985 Mexico was seen as the model debtor, validating the orthodox adjustment strategy. After two years of drastic austerity in 1982 and 1983, Mexico seemed to be on the road to full recovery in 1984 when it posted a growth rate of over 3.5 percent and brought down inflation and the public deficit. The commercial banks arranged a multiyear rescheduling agreement that extended maturities to 14 years and made a number of other concessions, thus providing implicit incentives for other debtors to follow Mexico’s example.

Mexico’s progress could not be sustained in 1985, however. Growth fell back to little more than the rate of population increase, and was declining by the end of the year. Inflation, the reduction of which has been the Mexican government’s top priority under President Miguel de la Madrid, leveled off at about 60 percent, still very high by Mexico’s historical standards. Capital flight soared to at least $2.5 billion for the year. The Mexican peso plummeted to a rate of over 500 to the dollar in November, before recovering somewhat.

Mexico’s severe difficulties are due in part to four consecutive years of declining oil prices; 1985 petroleum earnings were some $2 billion below official projections. But the crisis involves much more than this costly reverse oil shock, for non-petroleum exports are also down. Equally important, Mexico’s imports rose for the second consecutive year in 1985; the draconian cuts of 1983 could not be continued. Thus, by October 1985 Mexico could not meet even its rescheduled debt service obligations, which amounted to over half of its export earnings in 1985—interest payments alone took almost 37 percent of export earnings. There was no relief in sight; on the contrary, the devastating September earthquakes further depressed tourism revenues and created major capital needs for reconstruction.

Mexico has faced serious problems before, most recently in the mid-1970s and in 1982, but on each previous occasion it has regained its forward momentum. Its momentum was sharply reversed in 1985, however, with little chance that Mexico can resume its dynamism without major external relief.

Mexico’s economic decline has exacerbated political deterioration. Disaffection with the remoteness of the ruling technocracy and the corruption of Mexican public life has grown, as has opposition to the ruling Institutional Revolutionary Party; the government has responded by becoming both more repressive and more blatantly manipulative. The government’s decision to increase spending to influence the mid-1985 congressional elections in turn further aggravated the country’s economic problems.

The economy’s downturn has also thrown into question the approach Mexico has been taking toward solving its economic problems. Mexico has been restructuring its economy and attempting to impose enough austerity to reduce inflation and the public-sector deficit without disrupting the political consensus on which the country’s stability is based. But in 1985, De la Madrid increasingly came under attack from domestic groups on both right and left who objected to his policies. Critics from the business community (supported by some in the United States) faulted the regime for leaving too much of the bloated public sector intact, for allowing the government deficit to climb again because of politically motivated spending, and for sending out mixed signals that discourage foreign investors from entering Mexico. From the other side, national populists, still a powerful segment of Mexico’s ruling coalition, assailed De la Madrid for obeisance to foreign investors, international banks and the IMF, and for what they saw as an obsessive concern with cutting inflation even at the expense of investment and social needs. Mexico’s labor movement became increasingly restive, moreover; it is unlikely to acquiesce in harsher austerity measures in the future and will probably oppose any choice for De la Madrid’s successor who is as internationally oriented as he has proved to be.

By the end of 1985 De la Madrid was caught in an excruciating bind, with little room to maneuver. He looked to the United States for help that would go beyond the Baker proposals. In a summit meeting during the first week of 1986 President Reagan promised U.S. support to Mexico, but it is unclear what form that support will take and whether it will be sufficient.

V

Compared with any of the previous four years, 1985 was a relatively quiet period in U.S. relations with Central America. It was less a year of movement than of stalemate, when the possibility of direct U.S. military involvement in the region seemed to diminish. It was hard to tell at year’s end, however, whether the U.S. preoccupation with Central America had actually receded, or whether the lull of 1985 presages a greater storm.

During 1984, an election year, the Reagan Administration’s policy toward Central America was either dual or duplicitous, or both. Washington belligerently opposed the Sandinistas but made a point of continuing to negotiate with them. It spoke approvingly of the Contadora negotiating process but quietly hampered its progress. The United States also kept up a verbal barrage against Castro’s Cuba, but at the end of 1984 it announced a major agreement with Havana: 1,700 "excludable" Cuban immigrants who had entered the United States in the 1980 Mariel exodus would return to Cuba and, in exchange, regular immigration of Cubans to the United States would resume. There were even some observers a year ago who predicted that the reelected Reagan Administration might negotiate an end to the escalating Central American conflicts, either directly with Cuba and Nicaragua or indirectly through the Contadora mediators.

No move toward peace in Central America occurred in 1985, however. On the contrary, Washington broke off bilateral discussions with Managua in January. At a press conference in February, President Reagan intimated that U.S. policy aims to make the Sandinistas "cry uncle." The Administration put forward a "peace proposal" in April that was virtually indistinguishable from the position of the "contras," the U.S.-supported insurgents fighting against Nicaragua from bases in Honduras and Costa Rica. In May the Administration imposed a trade embargo on Nicaragua by invoking the provisions of the International Emergency Economic Powers Act, legislation meant to be applied "in case of unusual and extraordinary threat to the national security, foreign policy, or economy of the United States." As for Cuba, Washington failed to respond to numerous indications from Havana that Castro was eager to negotiate. Instead it began the broadcasts of Radio Martí, a major new propaganda effort, and tightened its economic embargo against Cuba by barring from the U.S. market third-country products that use any Cuban material. Castro responded by suspending the new immigration agreement as well as previous arrangements to permit separated relatives to travel back and forth between Cuba and the United States. U.S.-Cuba relations reverted in 1985 to a mutually hostile impasse.

During the first half of 1985 the Reagan Administration was waging its Central American war as much with Congress as with the Sandinistas. From January until April, the Administration undertook a full-court press to secure congressional approval of assistance for the contras, which had been ended—legally, at least—in mid-1984. After intense debate and considerable maneuvering, the House rejected the Administration’s request on April 4. But the Administration then succeeded in defeating a Democratic-sponsored alternate plan to provide limited and strictly defined humanitarian assistance to Nicaraguan refugees in Honduras and to push the executive branch toward a negotiated solution under the auspices of Contadora. The vulnerability of members of Congress to the charge that they had thus prevented adoption of any effective policy toward Nicaragua was heightened almost immediately when Nicaragua’s President Daniel Ortega flew to Moscow to request more Soviet aid.

The result was a classic Washington compromise: Congress approved $27 million in "non-lethal" (but not carefully defined) "humanitarian assistance" directly to the contras, while the President assured the House that he aimed for a "political, not military," solution. The Administration had succeeded in aligning Congress and much of U.S. opinion against the Sandinistas, but it also was forced—at least for a time—to accept congressional limits on what the United States would do to Nicaragua.

Stalemate also prevailed on the ground in Nicaragua, where the Sandinistas seemed able to contain the contras but not to defeat them. Having obtained as much support for the contras as Congress would permit, the Administration settled in for a prolonged, low-intensity, indirect war of attrition that would bleed the Sandinistas and keep them on the defensive, at low tangible cost to the United States. The Sandinistas, for their part, also seemed in 1985 to be preparing for a long haul. They further restricted domestic opposition, intensified their close ties with Cuba and the Soviet Union, and improved the quality of imported weaponry, including helicopter gunships.

By the end of 1985, few were left—in Washington or in the region itself—who doubted that Nicaragua is governed by a revolutionary movement, many of whose leaders are Marxist-Leninist, or that the regime is increasingly aligned with adversaries of the United States. What remained unresolved was how the United States and the other countries of the hemisphere should respond. The Administration seemed to believe that the only options were to provide U.S. support to the anti-Sandinista military efforts indirectly or to do so directly. But critics of Washington’s policy argued that the Sandinistas could be contained by diplomatic measures, as well as by economic and political support to Nicaragua’s neighbors. Those who called for a diplomatic approach continued to support the Contadora negotiating process, which Washington still professed to back.

But neither the United States nor Nicaragua was prepared in 1985 to make the concessions the Contadora mediators were calling for, and this unprecedented Latin American effort to resolve the Central American crisis through negotiation therefore seemed at an impasse as well. The Contadora negotiators, working with the Central American countries, did produce in September a sophisticated set of detailed treaties that could prove valuable if and when Washington is prepared to accept a Sandinista regime in Managua and the Sandinistas are prepared to accept strict limits on their international behavior, but which are largely irrelevant until then. With their efforts frustrated and with their own internal difficulties mounting, the Contadora Four showed signs of "negotiation fatigue." When Nicaragua asked in December for a five-month suspension of negotiations—ostensibly because the elections in Costa Rica, Guatemala and Honduras would put into place new governments with altered positions on the issues—the Contadora nations were glad to back off.

The civil war in El Salvador, likewise, came no closer to resolution in 1985. On the contrary, it became more brutal as both sides escalated the level of violence and violated the rules of war. President Duarte was unable to convert his party’s electoral victory in March and strong U.S. and international backing into substantially increased leverage with either the insurgent left or his own armed forces. The guerrillas of the Revolutionary Democratic Front-Farabundo Martí National Liberation Front continue to control significant areas of the country and have escalated their war of attrition. On several occasions, most notably in kidnapping Duarte’s daughter and then exchanging her and a number of mayors for FDR-FMLN cadres detained by the government, the insurgents demonstrated considerable military and political skills. The armed forces of El Salvador are better trained and equipped, but toward the end of the year questions were being raised anew about whether Duarte effectively controls the army. The hope that peace talks might succeed in El Salvador, kindled when Duarte met guerrilla representatives at La Palma, faded away during 1985, and the civil war continued to take its heavy toll.

For much of 1985 the conflicts in Central America, however intractable, diminished in salience in U.S.-Latin American relations. The Reagan Administration seemed resigned to a prolonged struggle in Central America and ready to focus more attention on the economic problems facing Mexico and South America. Latin American nations, in turn, shied away from confrontation with Washington over policies that were undeniably interventionist but also sharply circumscribed. Almost all Latin American nations voted in international forums to condemn Washington’s economic embargo against Nicaragua, but none was willing to make U.S. policy in Central America a focal point of dispute in their bilateral relations with Washington.

This decreased tension might well prove temporary, however. At the end of 1985, the Administration seemed again to be escalating its campaign against the Sandinistas. Secretary of State George Shultz, once considered relatively less confrontational on Central America than other senior Administration officials, spoke grimly in December of Nicaragua as a "cancer," and claimed it was a "virtual Soviet base." He applauded the contras’ first use of SAM-7 missiles against the Sandinistas, and he and other officials renewed a bid for substantial military aid to the contras in 1986. The risk that escalation and counter-escalation could eventually produce U.S. military intervention in Central America began to rise again.

VI

Twenty-five years ago this spring, President John F. Kennedy launched the Alliance for Progress. Latin America in the 1950s had suffered severe economic problems, mounting social pressures and the growth of revolutionary movements. Castro’s triumph in Cuba served to warn of the appeal these groups could have. The Alliance was designed as a preemptive antidote. The United States would provide financial resources and technical advice, and promote democracy. It would also furnish military training and counterinsurgency assistance to ward off the nascent security threat.

Although it was unilaterally proclaimed, the Alliance for Progress drew very substantially on proposals that Latin American leaders had been advancing for years. Despite shortfalls in its implementation, many Latin Americans still look back to the Alliance as a significant and positive U.S. policy.

The mid-1980s, like the late 1950s, are a time of ferment in Latin America. Demographic growth, massive urbanization and rapid industrialization have transformed the region. Once entrenched authoritarian regimes have weakened and been replaced. After three decades of growth, prevailing economic models have been found wanting. The region’s past gains and future prospects are threatened by debt and its consequences. The stability and security of the whole hemisphere are challenged.

Although Washington was painfully slow to respond to Latin America’s current crisis, the economic problems of Mexico and South America finally took precedence in Washington’s calculations late in 1985. Even if fully adopted and implemented, however, the Baker proposals would not be adequate, either in concept or in magnitude, to resolve the hemisphere’s difficulties. But the possibility that the Baker initiative is only the first step in an as yet inchoate U.S. government response does encourage those Latin Americans who believe that the United States is still an ally.

Many of today’s democratic leaders in Latin America—Alfonsín, Betancur, Guatemala’s Vinicio Cerezo, De la Madrid, Duarte, García, Salvador Jorge Blanco of the Dominican Republic, Venezuela’s Jaime Lusinchi, Paz Estenssoro, Sanguinetti, Sarney and others—are, indeed, natural or at least potential allies of the United States. They are exactly the kind of interlocutors that were so hard to find at the time of the Alliance: humane, moderate, pragmatic, reformist and disposed to cooperate with the United States. They are the region’s centrists, trying to build political support against the appeals of ideologues and populists of the left and right.

They are modern politicians, by and large. Most are more knowledgeable and realistic about economic issues than either the traditional politicos or the new technocrats, civilian or military. They recognize that public enterprises need to be trimmed and that market mechanisms channel resources more efficiently than political decisions, although they also see an important role for the state.

These democratic leaders believe that the most overwhelming threats in the hemisphere are debt, poverty and unemployment—not guerrillas, Soviet influence, terrorists or drugs. They are urging the United States to follow up the Baker plan with proposals that address the hemisphere’s economic problems. They do not want unilaterally imposed or proclaimed U.S. initiatives. They ask Washington to work with them, in genuine partnership, to help resume and expand growth in the Americas. They know that structural reforms, continued austerity and financial responsibility will be expected of them, and they are ready to do their part. They are also more able and willing than their authoritarian predecessors to reduce unnecessary military expenditures, fight corruption and attack the narcotics traffickers. And they want to preempt radical approaches, both from the revolutionary left and from the national populist right.

What they seek from Washington—apart from attention, sympathy and respect—is international economic cooperation. They want the United States to help provide the breathing space they require to maintain public backing while tackling tough social and economic issues. More specifically, the countries of Latin America are urging the U.S. government to take the lead in mobilizing additional credit for the region’s development from the United States, Europe and Japan. They want Washington to work with the commercial banks and the international financial institutions to reduce or cap interest payments so that the burden of adjustment is more equitably shared by lenders and borrowers. They are appealing to the United States to put its own fiscal house in order through a responsible plan for deficit reduction, and to continue fighting to beat back protectionist pressures that would hurt developing-country exporters. They are calling, in short, for a U.S. commitment to refurbish the international economic order.

The United States should respond positively to these Latin American appeals with a policy as comprehensive as the Alliance for Progress. The United States is no longer able, as it was in the 1960s, to provide billions of dollars in foreign aid, but it can help reduce the outflow of funds from Latin America to the industrial countries. The United States is no longer a hegemonic power in the western hemisphere, but it is still by far the most important external actor in Latin America. Washington must take the initiative if the region’s crisis of the mid-1980s is to be turned to opportunity.

This is not the place to discuss in detail a new U.S. policy adequate for the late 1980s. In brief, such a policy should include provisions to stretch out Latin America’s debt for a generation, capitalize interest above an agreed rate, and allow a share of interest repayments to be reinvested in the region. It should also provide orderly write-downs of debt for those small countries that are hopelessly over-indebted, further increase the resources available for lending by the international financial institutions, and expand trade credits to facilitate Latin American imports in the context of resumed growth. Furthermore, the United States needs to adopt trade policies that will reverse protectionist pressures; an integral part of trade policy must be effective trade adjustment programs to assist displaced workers.

The United States should adopt such measures not out of charity but rather out of self-interest. A more prolonged Latin American recession could lead to delays, debt moratoria or even defaults, with serious consequences for several major U.S. banks and perhaps for the entire commercial banking system. U.S. investors and exporters would also be further hurt if Latin America’s depression continues. It is estimated that 800,000 jobs in the United States have already been lost because of diminished Latin American imports from this country. Latin America’s recovery would clearly help the United States, for this country has a strong comparative advantage in Latin America’s markets.

Helping Latin America resume a reasonable rate of economic growth is also important to the United States in other ways. If the region’s new democracies crumble, the United States will again be faced with a hemisphere in which our core values, including respect for fundamental human rights, are at risk. Sustained depression in Mexico, Central America and the Caribbean would intensify the already considerable pressures for migration from these regions to the United States, and an expanded flow could arouse restrictionist and even racist sentiments in this country. Unrelieved economic problems in the region would make it much harder to combat the corrosive narcotics trade.

Perhaps most important, prolonged stagnation in Latin America could push some countries in a national populist direction. As foreign banks and investors prosper while Latin America’s pain worsens, the populist demagogues will blame their countries’ plight on the banks, the IMF and, behind them, the United States. They may push for economic and political nationalism, for closed markets, for expropriation of U.S. assets and for generally anti-U.S. positions on a variety of issues, including narcotics control and nuclear proliferation. Our neighbors in the hemisphere could all too easily become antagonists.

The United States now has a significant opportunity to shore up relations with the democratic countries of Latin America. Doing so, however, will require keeping the focus on economic issues and providing substantial responses that go beyond rhetoric. A return by Washington to its neglect of economic issues, coupled with a reversion to single-minded concern with Central America, would surely drive inter-American relations toward conflict.

If the current opportunity to build inter-American economic cooperation is not seized, Latin America’s crisis will probably worsen. If unrest and terrorism increase, some Latin American countries could turn back to authoritarianism, this time perhaps with a national populist orientation. U.S. investors, exporters and banks might then clash with Latin American governments pursuing autarkic policies. If the United States also gets more embroiled in Central America, and especially if U.S. troops are used there, the cumulative impact on inter-American relations would be profound. An era of bitter conflict in the Americas would then be hard to avoid.

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  • ABRAHAM F. LOWENTHAL is a Professor of International Relations at the University of Southern California and Executive Director of the Inter-American Dialogue. He was the founding director of the Latin American Program at the Woodrow Wilson International Center for Scholars in Washington, D.C.
  • More By Abraham F. Lowenthal