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The U.S. and Latin America: A Lost Decade?

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The 1980s have been difficult years for the countries of Latin America. They have seemed to take one step forward and two steps back on many fronts. The return of democracy to the region has been heartening, but governance has proved difficult. Economically, many call this the lost decade for Latin America. U.S. policy has been helpful in some respects, but notably frustrated, and frustrating, in others. The next few years will be particularly challenging if Latin Americans are to change the pattern of the past.

Fortune looked favorably on Latin America in the 1960s and 1970s, then turned her back in this decade. Economic growth rates averaged six percent for the region in the 1970s but have been minimal in the 1980s, while populations have continued to increase. In 1988 Latin America's gross product grew by less than one percent, and per capita income, down one-and-a-half percent, has shrunk to 1970s levels. Investment is down as well, from 25 percent of regional product a decade ago to only 16 percent in 1987. Inflation is out of control in economies as varied as Brazil, Peru and Nicaragua. Foreign debt stands at $420 billion, compared with less than $100 billion in 1980, and debt service requires $33 billion per year-nearly one-third of the region's export earnings.

As for politics, nearly all Latin American countries replaced military governments with elected civilian governments in this decade. Chile, Haiti, Panama and Paraguay remain the exceptions, and the outlook for democracy in some is uncertain. Even those countries which returned to civilian rule are beset by problems. Balancing social and political aspirations against severely constrained economic realities has proved frustrating. The task of forging streamlined, more efficient and competitive states out of complacent bureaucracies has been daunting. The hoped-for results of unpopular policies seem further off than ever in many countries.

In 1988, the final year of the Reagan Administration, the United States continued with policies of past years. There were few new initiatives because this was an election year in the United States as well as several Latin American countries. The record of U.S. policy accomplishments was mixed, with some successes and several clear demonstrations of the limits of U.S. power and influence.

Four issues dominated U.S.-Latin American headlines in 1988: Nicaragua and the U.S. support for the contras, Panama and the effort to oust General Manuel Antonio Noriega, drug trafficking in the region, and the persistent debt problem. Beyond these headlines, the struggle to institutionalize democracy and modernize economies continued.

II

The broad Central America agenda for 1988 was dictated in August 1987 when the five Central American presidents signed an agreement committing themselves to peace. The agreement earned its author, President Oscar Arias Sánchez of Costa Rica, the Nobel Peace Prize but, inexorably, peace seemed to escape the signatory parties.

The 1987 accord established a series of guidelines for measuring progress in the difficult process of reconciling differences between political foes. Little progress had been made by January 1988 when the Central American presidents met to hear an international advisory team's assessment of each nation's efforts to comply with the peace plan's terms. The five leaders began their talks amid charges of bad faith and "strongly different interpretations of the treaty." The meeting, nevertheless, proved tantalizingly successful. For the first time the Sandinistas agreed to suspend their three-year-old state of siege and to begin direct talks with the contra resistance, including its armed elements.

This significant breakthrough breathed new life into hopes for a final resolution of the conflict, though administration skeptics argued that the move was a cynical effort to stall a February 3 congressional vote on continuing military assistance to the contras. That vote was another in a long series of tests of the policy of military pressure on the Sandinistas. The administration's program had seemed doomed in December 1986 when the Iran-contra scandal was revealed. But Sandinista intransigence in responding to regional peace efforts prior to January 1988 had encouraged proponents of contra aid, and the contras had done well militarily during the year, penetrating deep into the country and inflicting injury to the economy.

On February 3, 1988, the House of Representatives voted 219-211-a wide margin for a contra aid vote-against the administration's request of $36 million, including a small amount of lethal aid. A mostly symbolic favorable vote in the Senate could not change the clear message: military aid to the contras was at an end. President Reagan did not ask for contra aid again.

The Congress continued to feel an obligation to provide the rebels with humanitarian assistance. At the end of February House Speaker Jim Wright (D-Tex.) proposed a $25-million package for four months of food, clothing and medical assistance. Republicans countered with a plan for $36.3 million over two months, an approach designed to shorten the interval before the president could come to Congress again with his own request. On March 3, however, in a surprise outcome, the House of Representatives voted 216-208 against the Democrats' package. The vote left the contras with no new money at all and a pipeline rapidly drying up.

Although Congress ultimately appropriated a total of $74 million in humanitarian funds for the contras for fiscal years 1988 and 1989, the March 3 vote marked the effective end to the administration's contra policy. The demoralized contra leadership read the writing on the wall: there would be no bipartisan support for their program; they had best explore accommodation with the Sandinistas. Contra troops began to move back from field positions in Nicaragua to base camps in Honduras. On March 16 Sandinista forces crossed the border, pursuing contra units to their base camps. The United States dispatched some 3,000 airborne troops to deter further advances, and the Sandinistas withdrew. The event prompted another brief round of debate on military aid for the contras but no further action.

On March 21 Sandinista and contra negotiating teams met at Sapoá, Nicaragua, and after three days of talks signed a 60-day cease-fire agreement permitting the rebels to remain armed and inside Nicaragua. On April 16 the government and contra representatives met in Managua to discuss their substantial differences. The Sandinistas wanted to discuss the immediate laying down of arms; the contras sought agreement first on a lengthy agenda of fundamental political changes. The parties held talks again April 28-30 but made no progress. Venting his frustration, and reflecting tensions within his own directorate, President Daniel Ortega threatened the contras that the Sandinista army would "crush them if they did not accept his peace offer." Sandinistas began cracking down on dissidents, who had been enjoying a sort of "Prague Spring" after the lifting of the long state of siege.

After a prolonged dispute over the site of the third meeting, the contra leaders, including for the first time military field commander Enrique Bermúdez, agreed to travel to Managua to meet with the Sandinistas in May. They continued to press for political reforms as a condition for laying down arms. On June 7, amid great expectations for a definitive breakthrough, the rebel leaders returned to Managua for a fourth round of talks, which ended in bitter accusations from both sides. While the Sandinistas seemed willing to tolerate greater political participation by their opponents, they were not willing to undertake the reforms that the contras argued would be necessary to preserve political freedoms. In spite of their differences, both sides agreed to continue the cease-fire.

Secretary of State George Shultz, correctly concerned that the peace process was stagnating and the contra forces were losing their ability to mobilize in force again, made a four-nation swing through Central America in June to urge the Central American presidents to demand more "flexibility" from Nicaragua in coming negotiations.

Following the breakdown of talks in June the Sandinistas became increasingly harsh in their crackdowns on dissidents and protestors. On July 10 Sandinista police used tear gas and clubs to break up a large antigovernment demonstration in Nandaime, a small town near Managua. Human rights groups charged that the government police had attacked the demonstrators. The Nicaraguan government accused U.S. Ambassador Richard Melton, who was in Nandaime to observe the demonstration, of being a provocateur and expelled him. The antigovernment Radio Católica and La Prensa were shut down in a further reaction to the mounting wave of protest against the government and its policies. The United States countered by expelling the Nicaraguan ambassador in Washington.

In mid-September representatives of the contras and Sandinistas were unable to agree on location and terms for another meeting to continue talks. It was apparent that neither side was ready to make concessions yet. Then, in the face of continuing opposition activity, the Nicaraguan National Assembly approved another state of siege decree, which Ortega imposed in the aftermath of Hurricane Joan on October 22.

Finally, on November 30, Central American ministers gathering in Mexico City for the inauguration of President Carlos Salinas de Gortari agreed on a meeting of Central American heads of state in early 1989 to renew the stagnated process of regional negotiations. After a year the Central American peace process had hardly advanced.

Besides in Nicaragua, circumstances elsewhere in Central America were also discouraging. Costa Rica and Guatemala were making economic gains, but President Vinicio Cerezo of Guatemala was unable to implement radical reforms. Two coup attempts forced him to make concessions to the military, and insurgents continued to operate in the countryside. In El Salvador the right-wing ARENA party won massively in the March elections, gaining a majority in the legislative assembly. President José Napoleón Duarte miraculously continued to survive despite massive stomach cancer, but his Christian Democratic Party, rent by factionalism, seemed spent after five years in office. Though leftist elements have decided to run in the March 1989 presidential elections, during 1988 the nine-year-old insurgency gained new energy and provoked an increase in right-wing violence.

In Honduras, from 10,000 to 15,000 Salvadoran and Nicaraguan refugees continued to weigh heavily on that country's resources. In the last half of the year some 2,000 Nicaraguans per month were migrating illegally to the United States, the ultimate sign that they had given up on their own country. The United States continued to maintain "temporary" bases in Honduras, but anti-Americanism was mounting after the long period of intense U.S. involvement in the area had brought no solution into sight. In all the region the sense of fatigue with the old policy was profound. The Bush Administration will need to develop a new libretto for Central America.

III

U.S. concerns with both drugs and democracy contributed to the star-crossed and ultimately unsuccessful effort to topple Panamanian military leader Manuel Antonio Noriega. Panama's increasingly apparent role as a haven for laundering drug money made the country conspicuous as the U.S. crackdown on drugs intensified. In addition, as one country after another turned to democracy, the Panamanian military's powerful influence over the nominally civilian Panamanian government stood out as aberrant. Moreover, successful U.S. efforts to aid the coming of democratic government in the Philippines and the departure of Jean-Claude Duvalier in Haiti, and clear U.S. support for a political opening in Chile, encouraged a certain hubris about the prospects for success elsewhere. Panama's long-standing and close relationship with the United States made it seem a logical next target for building democracy.

Panama was already in turmoil as 1988 began. The National Civic Crusade, a loose coalition of parties and interest groups, began organizing demonstrations against Noriega's influence in the Panamanian government in mid-1987. The United States encouraged their activity, and increasingly elements began to call for an early transition to genuine civilian government.

Pressure for Noriega's departure escalated following a series of charges that he was involved in drug trafficking, arms smuggling and even in the murder of a colleague's son. Finally, on February 4, the U.S. Justice Department obtained two indictments against Noriega for involvement in drug trafficking, money laundering and other activities.

Panamanian President Eric Arturo Delvalle dismissed Noriega as head of the Panamanian Defense Forces on February 25, but his choice of successor to Noriega rejected the appointment and, with other officers, declared his loyalty to the general. The following day Delvalle himself was removed by the National Assembly and forced into hiding. In an effort to bolster democratic forces the U.S. government placed its full support behind Delvalle. Latin American governments also deplored the dismissal of a civilian president, and the Group of Eight-heir to the Contadora process-excluded Panama from its membership because of its unrepresentative government.

From hiding, and encouraged by a small group of Panamanian supporters, Delvalle sought to freeze Panama's assets in the United States and asked governments and companies to refuse to pay fees owed to the Panamanian government. The United States backed the effort by first ordering banks not to disburse any Panamanian government funds and by later prohibiting U.S. companies from making payments to Panama. But the United States continued to make payments to Panama Canal employees and U.S. military personnel living in Panama, a total of some $57 million every two weeks-enough to keep the economy afloat, though GDP has declined 25 percent.

In May the United States stepped up efforts to force Noriega's hand. Deputy Assistant Secretary of State Michael Kozak, a career lawyer with the State Department who had been involved in the Panama Canal treaty negotiations, made a number of trips to Panama to negotiate with Noriega. To the dismay and anger of the U.S. public and campaigning presidential aspirants, he appeared to hold out the offer that the United States might drop the drug charges if Noriega left Panama. The general made several counteroffers, none satisfactory, and the effort broke down by the end of the month.

By late summer Panama was barely a memory in U.S. headlines, though the Noriega relationship became something of an issue in the fall presidential campaign. The economic sanctions had wreaked havoc with the Panamanian economy. U.S. corporations were barely surviving; banks were leaving or had left, and recovery seemed impossibly far off. Panamanians were no closer to a solution to military dominance of their government; many would argue they were farther away. Indeed, one casualty of the 1988 process was the National Crusade coalition, which was weakened by the United States assuming the role of principal interlocutor. In August Arnulfo Arias, the octogenarian populist politician long of concern to the United States, died. Arias was probably the only civilian who could win an election in his own right. Indeed he had done so as many as four times, always to be denied the office. His passing further weakened the civilian alternative and challenged the remaining parties and factions to fill the void.

The Panama affair was a clear example of the limits of U.S. influence over its small neighbors. Heavy economic and diplomatic pressure had been brought to bear with no results. The United States read the situation incorrectly and undercut local political forces' efforts by sending its own officials to negotiate with the Panamanian general. The United States also failed to perceive the level of military support for Noriega and incorrectly gambled that officers would turn against him. Finally, the United States did not take advantage of Latin American efforts to isolate Noriega and discreetly pressure him into leaving.

IV

Latin America is the major source of illegal drugs supplied to the United States. Mexico, Colombia, Jamaica and Belize are the principal suppliers of marijuana to the U.S. market. Peru, Bolivia and Colombia cultivate nearly all of the cocaine that the Colombian drug mafia ships into the United States. Mexico produces about 40 percent of the heroin brought into the United States. The retail market for illicit drugs in the United States is estimated to be on the order of $130 billion-about two-and-a-half times Colombia's official gross domestic product.

Until recently the drug war has been one-sided, with the United States complaining about supply and providing assistance to Latin America for crop eradication and other anti-drug activities. Latin American governments regarded the drug problem as America's. The U.S. Congress focused on supply and over the decade urged increasingly severe sanctions against governments not actively combating production in their countries. Latin Americans resented being asked to do more about drugs than the United States seemed willing to do at home.

As the power of the drug mafia increased, however, Latin American governments began to recognize the need to deal with their own growing drug abuse problems, to control drug-related crime and corruption, and to reverse their growing inability to carry out the law because of bribes to and threats against the judiciary. The 1984 assassination of Colombia's justice minister, the 1985 guerrilla attack on that nation's Supreme Court and the revelation of Mexican police involvement in the cover-up of the murder of U.S. Drug Enforcement Agent Enrique Camarena all raised awareness of the perversity of organized drug crimes in the region. As efforts to fight drugs increased in Colombia, Peru and Bolivia, the drug cartels' production and transit activities spilled into countries such as Venezuela, Argentina and Brazil, which did not previously have serious drug problems.

Contrary to common perception, cooperation between the United States and Latin American countries in narcotics control has been good, even though the results have been disappointing. Stepped-up cooperation between U.S. and Latin American authorities permitted interdiction and eradication of record quantities of drugs in 1988. The United States and Mexico have made a serious joint effort to eradicate marijuana and heroin in Mexico; Peru and the United States, despite difficult relations on other issues, continue to collaborate on cocaine eradication efforts in the Upper Huallaga Valley. The Bolivian government permitted U.S. troops to participate in Operation Blast Furnace in 1986, an effort to eradicate coca crops in that country.

In an important action Bolivian police seized Roberto Suárez Gómez, one of the top cocaine traffickers in South America; this was the first time Bolivian authorities had taken action against a drug kingpin. Jamaica reduced marijuana production from 1,755 metric tons in 1986 to 455 in 1987. Also, in September 1987, the Organization of American States created the Inter-American Drug Abuse Control Commission to coordinate activities targeting consumption and production of illicit drugs in the region, and in the fall of 1988 the OAS General Assembly recognized drugs as one of Latin America's greatest problems.

U.S. courts turned out a record number of indictments in 1988. More than 170 U.S. and Latin American citizens were indicted by a U.S. grand jury for drug trafficking and money laundering linked to General Noriega. Colombian drug boss Pablo Escobar Gaviria was indicted with five others on charges of trying to set up a cocaine distribution network in Colorado. Senior Honduran army officers were accused of setting up drug operations in that country, and the Honduran ambassador to Panama pleaded guilty to charges of trying to smuggle 26 pounds of cocaine into the United States. A top Haitian military commander, Colonel Jean-Claude Paul, who later died, was accused of providing a secure airstrip to cocaine smugglers.

In contrast, the record of convictions of organized criminal elements operating the trafficking is mixed. Prosecution has often been frustrated by legal and bureaucratic impediments. In December 1987 Colombian authorities released from prison the dean of the Medellín drug cartel, Jorge Luis Ochoa, although in February 1987 the same authorities extradited drug kingpin Carlos Lehder Rivas to the United States, where in July 1988 he received a sentence of life without parole plus 135 years. After Colombian Attorney General Carlos Hoyos Jiménez was kidnapped and killed in January 1988, the Colombian Supreme Court nullified legislation implementing a 1979 extradition treaty with the United States. In April Honduras turned over alleged trafficker Juan Ramón Matta Ballesteros to U.S. authorities, an act that provoked an attack on the U.S. embassy by Hondurans charging that the action was unconstitutional because there was no extradition agreement between the countries.

Congress reacted to the drug epidemic and the wave of related violence with its second anti-drug legislation in two years. The 1988 Omnibus Anti-Drug Law recognized for the first time that the problem had a powerful domestic demand component. It mandated the death penalty for major drug traffickers. In spite of this legislative effort, experts agree that solutions to the drug epidemic are more complex: they require reduction of demand and close cooperation among authorities as well as stiff penalties. State and local governments that have started anti-drug programs will depend on the Bush Administration and Congress to maintain funding for their efforts.

In Latin America the police and the judiciary are often too weak to cope with powerful organized drug crime. They need the full support of U.S. and international authorities to bolster their meager forces. The OAS involvement in the drug issue is encouraging, but it will have to be much more active to have a measurable impact on the problem. One area in which the OAS might take the initiative is in developing region-wide protocols for handling accused criminals and extradition requests.

V

In 1982 the vast majority of Latin American countries were headed by the military. The transition to democratic government in the region has been one of the bright spots in an otherwise bleak decade. By the end of 1988 only Chile, Paraguay, Panama and Haiti had military heads of state, and even Chile's enduring President Augusto Pinochet seemed to be preparing to transfer political power.

The most heartening step in 1988 was Chile's plebiscite. On October 5 seven million voters went to the polls and said "no," by a margin of 54.7 to 43 percent, to General Pinochet's remaining in office for another eight years. After 17 years of authoritarian rule, the government hesitated only momentarily before committing itself to respect voters' wishes.

Chile's 1980 constitution requires presidential elections in December 1989. In the intervening months the 16 political parties that united in the "Command for the No" face a serious task of reorganization and coalition-building in order to mount an effective campaign to elect a civilian president with a mandate to govern. The prospects for a successful transition seem bright because political leaders across the spectrum agree that the current economic policies should be continued, though many seek a greater emphasis on the distribution of wealth. The Pinochet government's policies have made Chile an economic star in Latin America by reducing its budget deficit, halving its debt burden and stimulating almost six-percent growth, led by nontraditional exports.

The United States backed the campaign for a return to democracy in Chile with a policy of steady public pressure and support. The policy was consistent through most of the Reagan Administration, but beginning in 1986 signals were made crystal clear by Ambassador Harry G. Barnes, who sacrificed access to the Chilean government for an outspoken position supporting the return to democracy.

The transition to democracy failed in Haiti after a brief flirtation with political opening. The United States pressured Jean-Claude (Baby Doc) Duvalier to leave Haiti in 1986. Initial elections in November 1987 were canceled after bloody massacres during the voting. The army, acting as caretaker during the transition period, conducted elections again in January 1988, but many opposition candidates boycotted them. Nevertheless, civilian Leslie Manigat was inaugurated as president on February 8. Almost immediately violence by rival political and military factions constrained his political space. By June he had been ousted by the same general, Henri Namphy, who had presided over his accession to power. In September Namphy was himself ousted, in a reaction by noncommissioned officers to government inaction in the face of growing violence, and replaced by General Prosper Avril. Hopes for an early return to democracy remained faint at year's end.

The process of political opening and modernization was apparent in Mexico, where the venerable Institutional Revolutionary Party, PRI, has ruled unchallenged since the 1920s. When Carlos Salinas, director of the Office of Program and Budget and protégé of outgoing President Miguel de la Madrid, was named the PRI presidential candidate in October 1987, the announcement seemed to promise continuity in economic policies that would sustain confidence in Mexico during the country's tumultuous presidential campaign season. Equally important, Salinas, 39, represented a new generation of Mexican leaders, heirs to the revolution to be sure, but intent on modernizing and invigorating the old political apparatus.

The campaign itself marked the first serious contest for the presidency in modern Mexican history. Not only did the conservative National Action Party field a candidate, Manuel Clothier, but a PRI faction split off and allied itself with a number of left-wing and populist parties under the rubric National Democratic Front to back the candidacy of Cuauhtémoc Cárdenas, the son of a former president.

Early returns seemed to suggest that the ruling party might be losing the election, but the final figures announced by the Federal Elections Commission gave Salinas a bare majority-50.36 percent of the votes-with Cárdenas receiving 31.12 and Clothier 17.07 percent. Both losing candidates charged that the Salinas victory was fraudulent. The opposition parties did make major gains in the Mexican congress, thus guaranteeing more careful scrutiny and vocal criticism of the new president's program. Salinas said he welcomed the new political reality but also recognized that his leadership task would be infinitely more difficult, given the country's need for continuing economic adjustment.

VI

The persistent debt problem plagued Latin America throughout the Reagan Administration. When the debt crisis was precipitated by Mexico's August 1982 announcement that it was unable to meet payments on its $80-billion debt, emergency financing was promptly cobbled together by bankers and the U.S. government, but voluntary commercial bank lending to Latin America ceased. Throughout the debt crisis three interrelated goals have prevailed: (1) to sustain growth or, as it stagnated, to renew it, (2) to assure new capital inflows essential to growth, and (3) to bring about necessary structural reforms to make Latin American countries more attractive to capital and better able to sustain development.

From 1982 to 1984 a combination of International Monetary Fund standby arrangements, U.S. government bridge loans and commercial bank refinancings seemed to provide a remedy to the debt problem. The relief was temporary, however, and by mid-1985 storm clouds were again gathering. Secretary of Treasury James A. Baker acknowledged the impasse confronting debtors and creditors alike when he spoke to the IMF and World Bank Boards of Governors in Seoul in October 1985. His "Baker initiative" speech noted the goals mentioned above and called on debtor countries to speed up domestic reforms and on commercial banks to lend aggressively to indebted countries so they could grow out of the crisis. In his plan sharply increased lending by the World Bank to the 15 most indebted countries would bolster continued commercial bank lending to provide the capital necessary to restart growth.

Quick calculations demonstrated that the amount of capital needed to revive growth in Latin America far surpassed World Bank capabilities and private lenders' willingness to continue exposure in the region. Since 1985 both indebtedness and demands for global solutions, including some kind of debt or interest rate relief, have increased. Proposals have ranged from New Jersey Senator Bill Bradley's "three-percent solution" for reducing interest rates and payments to funding independent "debt facilities" to buy discounted debts. A variety of market-oriented mechanisms including debt-equity swaps and exit bonds have been employed, but overall debt reduction has been modest compared to the continuing overhang.

By 1988 debt "fatigue" was growing, not only in debtor countries, but also among commercial banks and creditor-country governments. Many banks had increased reserves against Latin American debt in 1987; several large banks wrote down portions of debt, and many smaller regional banks wrote off their Third World debt entirely. In the final week of 1987 the U.S. and Mexican governments and Morgan Guaranty Bank launched a unique debt buy-back scheme, backed by U.S. government bonds. While less successful than its authors had hoped, the plan signaled a new degree of U.S. government involvement in the debt question. That involvement deepened over the year as the United States supported a major new package for Mexico at mid-year and a $1.5-billion World Bank structural adjustment loan for Argentina with a $550 million U.S. bridge loan (the fifth to that country in four years).

In February 1988, following months of negotiations, Brazil ended a year-long moratorium on debt payments and concluded a 20-year rescheduling agreement with creditors that included exit bond facilities and $5.2 billion in new bank money to cover interest payments. Installments would be tied initially to World Bank rather than IMF targets, a major break with past practice.

Market options were also tested more aggressively in 1988. Bolivia and Costa Rica concluded interesting "debt for nature" swaps, to provide funding for creation of wildlife reserves. Brazil's debt-for-equity auction scheme, launched in April, resulted in a conversion of $1.1 billion into investments after eight monthly auctions. Argentina undertook a more limited debt-for-equity plan. Neither was as broad as the Chilean program, which reduced that country's commercial bank debt by one-third between 1985 and 1988, but each contributed to easing indebtedness.

In February 1988 American Express President James Robinson proposed the formation of an International Institute for Debt and Development that would buy Third World debt at a discount and pass the savings along to the debtor country. Others proposed that debtor countries pay interest in local currency which creditors could invest as they see fit, and still others suggested that special development accounts be created to capture debt payments.

Secretary Baker briefly raised expectations of greater official U.S. involvement in a debt solution in June when he announced at the annual meeting of the African Development Bank that the United States would support concessional interest rate reschedulings for the poorest countries in the Paris Club. The measure was intended for African nations, but some speculated that it could be extended to the poorest Latin American debtors as well. At the Toronto summit on June 21 Japanese Prime Minister Noboru Takeshita aired a debt reduction plan to be monitored by the IMF.

The IMF-World Bank annual meetings in Berlin in September 1988 offered another opportunity for airing proposals and evaluations of the debt situation. A United Nations Conference on Trade and Development report urged commercial banks to forgive up to 30 percent of the debt of the 15 most indebted nations, arguing that this is the only way to get them growing again. A distinguished group of New York bankers called for a new plan to revive Third World economies, saying $16 billion a year in new capital is needed. A new governor of the Federal Reserve Board called for an "unorthodox new approach to the debt," observing that "we've got to think of a different approach from what we've been doing." Nevertheless, the new U.S. secretary of treasury, Nicholas Brady, held firmly to the Baker policy formula in his maiden speech on the debt before the IMF and World Bank governors in September.

Both World Bank President Barber Conable and IMF Managing Director Michel Camdessus expressed their frustration with the commercial banking sector. Conable charged that the international strategy for resolving the debt crisis was being jeopardized both by private banks' reluctance to cooperate and by lower-than-expected economic growth in industrialized countries. Camdessus urged commercial banks to do more to aid highly indebted countries by mixing more new money with debt reduction facilities.

But the commercial banks felt that they could not do much more. In September Horst Schulmann, the managing director of the Institute of International Finance, an organ created to monitor commercial bank exposure in the Third World, wrote the chairmen of the World Bank's Interim and Development Committees that "the demand for new bank financing from developing countries exceeds the capacity and willingness of banks to supply it." Schulmann cited several reasons why they find international lending unattractive: the depreciation of the dollar, reduced cohesion in the banking community, the absence of recyclable funds once available from oil-producing countries, the withdrawal of smaller banks from consortia and the large number of arrearages (totaling $4.4 billion in 1987).

To permit the World Bank to make the large-scale program loans envisioned in the Baker plan, the administration requested $70.1 million in March to support a $75-billion general capital increase for the bank. But the request bogged down in Congress, leaving the United States, the largest single shareholder, as the only bank member not to have subscribed to the increase. Liberal Democrats concerned about the debt sought to use the legislation as a means to force the administration to develop a more flexible policy for dealing with Third World debt. Their efforts fell short, but the occasion offered ample opportunity to vent frustration over the debt problem and to test support for solutions requiring taxpayers to shoulder some costs. Finally on September 30 Congress approved $50 million for the World Bank, the first part of a planned $420.6 million commitment over six years.

The debate in 1988 made clear that more aggressive programs for reducing debt and stimulating new capital flows would be necessary in a new administration. All parties need relief: U.S. exporters, Latin American leaders and banks caught in a vicious circle of debt. At his December 1 inauguration, Mexican President Salinas announced pointedly that growth, not debt service, would have to be his priority. Five days later the newly elected Venezuelan president, Carlos Andrés Pérez, repeated that theme.

Prospects for a global solution are dim. As Federal Reserve Chairman Alan Greenspan remarked, "There are no clever financing schemes or fiscal gimmicks that can substitute for sound policy. Debtor countries will be restored to full access in the international financial system because of their policies, not those of their creditors." Nevertheless, there were signs that the new U.S. administration was working on a Brady corollary to the Baker plan. In December the president-elect seemed to agree, saying that his administration "should take a whole new look at [the Baker plan]" and acknowledging that there are "enormous problems-particularly in . . . our own hemisphere on Third World debt."

VII

The major challenge Latin America has faced over the past decade has been economic adjustment. Development came easily to the region in the 1960s and 1970s. Private investment and bilateral, multilateral and private bank lending were readily available. Economies were buoyant and world demand was high. Conditions were tolerant of mismanagement, inefficiency and protectionism. This is no longer the case. Latin American producers now compete for capital and markets with Southeast Asia, with the Mediterranean countries of Europe and with aggressively exporting industrialized countries. Latin American leaders are confronted with the task of implementing policies that will determine whether the region becomes more like Africa or more like Asia in the coming decades.

The debt crisis has forced profound adjustment on the region, and it has responded impressively. Since mid-1982 total Latin American exports have risen 30 percent in volume, led by manufacturing exports. Most countries have begun fiscal reforms and are privatizing state-owned companies or imposing more rigorous performance standards on them. Under pressure to reduce fiscal deficits, governments are cutting subsidies to remove distortions in the market. Agriculture, long neglected by Latin American policymakers interested in imitating the industrial north, is thriving.

Mexico has set the standard for trade liberalization. Between 1985 and 1988 Mexican President Miguel de la Madrid removed import licensing requirements on over 2,000 categories in Mexico's tariff schedule (about 37 percent of the total value of Mexican imports), and joined the General Agreement on Tariffs and Trade. In December 1987 Mexico lowered its maximum tariff to 20 percent, reduced other tariffs and removed the general import tax. Thus Mexico began 1988 with a weighted average tariff about equal to Canada's. Also, Mexico passed an amended patent and trademark law in 1986 reflecting new perspectives on intellectual property. In 1987 the United States and Mexico initialed a bilateral framework agreement for trade and investment that gave additional flexibility to their relationship.

There is a rapidly growing consensus in the region about a new model of Latin American development, but it has not yet been fully incorporated into the region's political culture. Political inexperience-the result of long years of circumscribed political debate-hinders the evolution of ideas. Political parties often still see their role in the context of opposition to intransigent authoritarian government. Once in office they have difficulty shifting their focus to the national interest and administering power, as the cases of Brazil and Peru demonstrated over the past year. Equally important, parties have not been well organized to translate constituent interests into policy alternatives, and government bureaucracies are not always responsive to leaders' directions.

Latin American leaders will have to make further adjustments to integrate into the international economy; they must do so if they are to compete on an equal footing with the tigers of Southeast Asia and Mediterranean Europe, and to take advantage of the European market after 1992. There is little the United States, other countries or the multilateral lending institutions can do to accelerate that process. Latin Americans must do it for themselves and out of conviction that it is right for their countries. Relief from debt burden will not accomplish this sea change. Were that the case, countries that did not pay in the past-Peru since 1985 or Brazil in 1987-should be better, not worse, off today than before. Rather, the evidence suggests that those countries which have accepted the long-term challenge of macroeconomic adjustment have fared the best-Mexico, Colombia, Uruguay, Chile, even the Dominican Republic. But even these countries have not yet tackled the challenges that confront them in the social area, where deregulation and reforms in health, education and welfare are especially important.

VIII

The United States has been at the margin of Latin American developments in this decade. Notwithstanding positive initiatives such as the Caribbean Basin Initiative, the Central American Economic Recovery Act, cooperation in the drug war and encouragement for the transition to democracy, political changes have come about through Latin American efforts. In spite of massive efforts and millions of dollars in assistance, the political crisis in Central America has not been solved and economic recovery is far off. Despite reforms, the debt is more burdensome than ever.

George Bush called for a "kinder, gentler nation" in his speech accepting the Republican presidential nomination in August. A kinder, gentler quality is also needed in U.S.-Latin American relations. The tensions of the past decade-the Central American wars, the debt crisis, trade disputes and the anti-drug campaign-have polarized relations between the United States and its neighbors in the hemisphere. Even the struggle for democracy and the still unmet expectations of the Caribbean Basin Initiative and the Central American Economic Recovery Act have created frictions and disappointments.

Latin Americanists are quick to point out that the region is as diverse as it is huge, and that no single policy can be effective in guiding relations throughout the region. Different policy tools are needed for clusters of issues that characterize the hemisphere's different regions. Moreover, the problems are tremendous and the policy instruments for treating them are few. All parties will have to work together to achieve satisfactory outcomes.

Of necessity, the United States' primary focus will continue to be on its nearest neighbors, Mexico and the Caribbean basin countries. Yet the United States should not fail to recognize its long-term interest in the domestic political and economic successes of South America. Nations there are potentially important economic partners in an era of increased competition and emphasis on export trade growth. Only since 1982 has the U.S. trade balance with Latin America been negative, and this will inevitably be reversed once strong growth returns to the region.

The coming years will be hard for Latin America, and relations with its northern neighbor will be complicated. Eight new presidents will be elected in 1989, all determined to reverse the economic stagnation and capital outflows that have plagued the region in the 1980s. Latin leaders will need political space within which to work out a new domestic political consensus. It will be tempting to blame the United States for setbacks, but the United States should not overreact. Nevertheless, many of today's leaders have indicated their desire to engage the Bush Administration early on and constructively.

The United States has a profound national interest in improving its relations with the countries of Latin America in the years ahead. The problems that characterize this decade-debt fatigue, the fragility of emerging democratic institutions, the struggle for consensus on the region's economic model, the profound economic difficulties and the growing drug menace-have also created a window of opportunity for strengthening the U.S.-Latin American relationship. Differences with the United States will persist on many fronts, but they should not be exaggerated. If mutual respect and candor can be maintained in a wide-ranging dialogue, the prospects for enhanced relations are good. If the United States and Latin America can build on the difficult lessons of the 1980s, this decade will not have been lost.

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