Democracy and debt were a macabre pas de deux in South America during 1983. As military regimes withdrew in disgrace (Argentina), further liberalized (Brazil), or tried to cope with vigorous popular pressures to restore democracy (Uruguay and Chile), that welcome news was haunted by the growing social and political implications of the continent's economic difficulties. The growing foreign debt burden has become the most visible manifestation of the current economic crisis, the worst in more than 50 years.

The quality of life has deteriorated dramatically in most of the countries of South America, largely as a result of stabilization programs and austerity measures implemented in 1983. Outbursts of rioting and growing street demonstrations indicate a decreasing tolerance for belt-tightening among the poor and middle sectors of the populations. Many ask if it is possible for fragile democratic institutions to meet the demands of the International Monetary Fund and the international private commercial banks, and simultaneously to respond to the expectations and needs of their citizens.

U.S. policy in the Western Hemisphere in 1983 continued to emphasize what the Reagan Administration has taken to be America's "backyard" in Central America and the Caribbean. Indeed, the early twentieth-century reality of the "big stick" and "gunboat diplomacy" returned for many observers as American troops landed in Grenada, the number of U.S. advisers increased in Central America, U.S. covert aid for guerrillas became overt, and American warships steamed off the coast of Central America. These actions were a warning to unfriendly governments that the Reagan Administration was committed to a reassertion of what it perceived as U.S. vital interests in the region. Headlines trumpeted the meandering of the Contadora Group (a regional peace initiative by Colombia, Mexico, Panama and Venezuela) as well as the deliberations of the Kissinger Commission for Central America.

At the end of the year, the Administration faced multiple problems in this backyard-disengaging and helping to establish viable self-government in Grenada, working toward new elections in El Salvador while seeking to bring right-wing death squads under control, and above all addressing the policy issue of whether it would accept a continued Marxist regime in Nicaragua even under some negotiated structure of restraints on its external behavior. But there could be no doubt that the Administration-and Congress-were fully engaged in these problems.

That was not true for the continent, unfortunately. Preoccupied with at best a stalemate and possibly a rapidly deteriorating situation in Central America, the U.S. government nodded vaguely from time to time in South America's direction, primarily when the financial crisis threatened to boil over. Contadora received only polite lip service. Little else about South America appears to have stirred Washington's emotions in 1983.

Yet, in relation to the potential political dangers to the major nations of South America posed by the economic crisis, a low profile or the absentminded neglect of the continent is surely shortsighted; it is also dangerous. In their mid-term and long-term importance, the countries of South America and Mexico loom far larger than those of Central America and the Caribbean, whether one looks at political, economic and commercial, or financial considerations. The United States has important national interests throughout the hemisphere, not only in the backyard. If we assume that support of democratic regimes is a legitimate goal of U.S. foreign policy in Latin America, there is a grave danger in failing to understand the threat that the current economic crisis, and the foreign debt specifically, pose to the social and political stability of a majority of the states in South America.1

There is a risk that these democratic governments will collapse, of course-possibly to be replaced by others prepared to take radical steps such as repudiation of their debts. But an even more basic threat is that the promising trend to greater democracy in the area-an intricate and delicate process of political institutionalization now under way-may be aborted, with the crushing of social expectations that were generated during the 1970s, as South America moved toward middle-class status in the international system. These dangers are, or should be, of the highest importance to U.S. foreign policy in the hemisphere in the 1980s.

II

The high profile of Latin America in the current debt crisis has been carefully reviewed elsewhere.2 About one-half of the total Third World debt is owed by Latin American states. Two-thirds of the Latin debt has been loaned by private commercial banks. The banks have lent to Latin America at prevailing commercial interest rates, which have fallen from the all-time highs reached in 1980-1981 but remain very onerous; the average term of the loans is also relatively short. Fees and spreads add to the cost of borrowing. To generate the foreign exchange required to service the interest on the private bank debt alone, Latin America has had to mortgage a higher and higher percentage of its export earnings-35 percent in 1983. In 1982, total debt service, both interest and principal, equalled 66 percent of the region's exports. This is at a time when the world recession has cut the demand for the region's exports; merchandise exports in 1983 were estimated at about $87 billion, compared to $97 billion in 1981. The recession has cut into Latin America's traditional export markets in Western Europe as well as newfound openings within Latin America itself and in the Third World. The 1983 payments on the debt-for interest alone-were about $40 billion.3

Private commercial banks have reduced the net flow of capital to Latin America at a time when greater flows are needed. New publicly announced syndicated loans (maturities of one year or over) to Latin America fell off sharply from 1981 to 1983. The banks loaned Latin America $30.2 billion in 1981. That figure dropped to $26.7 billion in 1982 and, at the end of 1983, had fallen to half the 1981 number, or $15.3 billion. The trend is similar for other areas of the Third World.

Trade is a crucial link in the chain of repayment. But the trends both for Latin America and for the United States are disturbing. Given the increasing percentage of exports required to finance interest payments on the debt, little is left for buying goods from the industrial countries. The year-end estimate was that U.S. exports to Latin America fell about 40 percent in 1983 from 1981 levels, and it is worth noting that the decline in U.S. exports to Latin America cost nearly 400,000 domestic jobs in 1982 and 1983. While exports to Latin America accounted for only 17 percent of total U.S. exports in 1981, between 1978 and 1981 they had grown more than 50 percent faster than exports to the rest of the world. Thus, the decline since 1981 represents a particularly sharp reversal of past trends.

Meanwhile, the Latin Americans find that the North American market is even more important-with recovery still lagging in Europe and with the Third World barely emerging from deep global recession. According to the Department of Commerce, the United States had an $8-billion trade deficit with Latin America in 1983, compared with negative $3.8 billion in 1982. This trend, especially the resulting loss of employment, has spurred protectionist pressures in the United States against Latin products. Such pressures probably strengthen the hand of those who oppose increased support for the International Monetary Fund, which is seen as "bailing out" the Third World; during 1983 it took many months to persuade the Congress to approve, in November, an IMF quota increase that may still fall short of the need. And any undertaking to support the private commercial banks may be viewed in similar terms. The Fund and the banks are key actors in both the short-term and long-term resolution of the crisis. Efforts to limit their role or effectiveness will further complicate the debt morass.

Latin America is caught. World markets are inhospitable to the exports which it needs to earn foreign exchange to meet payments on the debt. The U.S. market, absorptive in the present recovery, is under increasing pressure to limit access. Increased lending is vital to maintain a modicum of economic order, but the amounts remain inadequate and are subject to stringent policy conditions of retrenchment that tend to hit particularly hard at the working classes.

III

There is a wide range of opinion about the implications for the private commercial banks and the international financial system of the current debt crisis. Reasonable men disagree. One school of thought argues that a moratorium by one or more nations is possible, indeed likely, if the general economic picture in 1984 remains as gloomy as it was in 1983. Others argue that the debt is manageable, that the problem is liquidity rather than fundamental solvency, and that the capacity to meet debt payments can be adequate-if an overall recovery in the industrial countries becomes a solid reality in 1984 and beyond. The debate about the financial aspects of the debt burden and the timing and magnitude of recovery will continue. It is an important debate, and it is natural that it should be addressed by the IMF, government economic officials and the banks primarily in terms of figures and economic indicators.

But it may be even more important to understand the social costs for Latin America, and especially South America, of the current economic downturn there-and the probable future social price for the people of the continent. If these social costs should lead to political changes that bring in radical governments unwilling to continue the regressive policies required by the IMF and the banks, then and then only might there be not only moratorium but outright debt repudiation-first in one country and then perhaps in others. And even if such repudiation were avoided, so that debt payments continued on an agreed schedule, financial "victory" could be at the price of eventual political defeat.

The economic impact of the debt burden and the belt-tightening measures that accompany IMF lending can be quickly summarized in aggregate terms. The year-end estimate was that, for Latin America as a whole, gross national product (GNP) declined by 3.8 percent in 1983, adjusted for inflation. Per capita income fell for the third straight year in 1983, to a level eight percent below its peak in 1980. On present prospects, even if growth picks up after 1983, per capita income will not return to the 1980 level before the end of the decade.

On their face, these declines may not seem significantly more serious than those experienced in the post-1980 deep global recession by many countries, including the United States itself. Why, then, is the situation in Latin America more threatening and more politically explosive?

The first answer is that continent-wide figures do not reflect significant differences from one country to another. While the Latin American oil-exporting countries, notably Venezuela and Mexico, have had their own steep decline in the standard of living of their citizens, those standards are considerably higher than elsewhere in the hemisphere. More important, even the present price and market for oil are sufficient to give these countries a significant cushion and means of recovery. Mexico in 1983 exceeded expectations in getting on top of its debt problem and now looks a good bet to dig itself out without major internal political disruption.

On the other hand, the much larger number of countries that have no such oil capacity are almost uniformly in bad shape. All of the states of South America have experienced high rates of inflation, escalating unemployment, diminishing fiscal resources for social support programs, and increasing poverty. But this precipitate decline in social and economic wellbeing has been particularly acute in selected cases, of which Peru and Brazil are the most dramatic examples. And it happens that these are the two countries where there were marked outbreaks of social unrest during 1983.

In Peru, the drop in GNP was about 12 percent in 1983. Less than half of the workforce of six million is fully employed. Real wages are only three-fifths of their 1973 levels and inflation doubled to 130 percent in 1983.

Moreover, Peru experienced a series of natural disasters during the year. El Niño reappeared at Christmas 1982-a warm water current that drives away schools of anchovies who thrive on the cold waters of the Humboldt current-and has decimated the world's fourth largest fishing industry. Fish processing, once Peru's major economic activity, fell by two thirds in the first half of 1983, compared with 1982. The climatic changes that accompanied El Niño caused severe floods in the north of Peru and drought in the south.

For Brazil, 1983 was the third year of recession. More than a quarter of the work force of 49 million was out of work, or underemployed; employment levels in São Paulo, the industrial heartland of Brazil and of Latin America, have fallen back to where they were in the early 1970s; over the year food prices rose by 227 percent, with the cost of some staples, such as beans and potatoes, multiplying four-fold.

In short, averages do not by any means tell the whole story. The situation is far graver in several key countries.

Second, the process through which Latin America is passing is particularly hard on working classes and the poor. The need to drastically cut imports has led to a dramatic decrease in production and therefore in job creation. The economic crisis has occurred at the same time that the children born in the 1960s, when birth rates were far higher than now, are entering the job market. The sudden "bulge" in the labor force further aggravates the situation of the working poor. Devaluations have spurred inflation and increased the real cost of living for all, but especially for the poor, who are a majority in each of the countries of the continent. In these circumstances, social assistance programs or public work projects to create employment opportunities are financially unfeasible.

In their rush to expand in the 1970s, what were apparently the most successful Latin American countries neglected their safety nets-in Brazil, for example, there is no social security system, nor is there unemployment insurance or a widespread network of social support institutions. In other countries with more comprehensive systems, coverage often extends only to industrial workers. There is little social support for those employed in agriculture, where significant percentages of the economically active population remain: more than 35 percent in Brazil, Colombia, Ecuador, Peru, Bolivia and Paraguay. Only Argentina and Uruguay have less than 20 percent employed in the countryside.

It is possible to overdramatize the social situation in South America. It is also true that poverty and social marginality have been facts of life for decades in the region. But a third factor making the current economic crisis ominous in social and political terms is that it has come so drastically and suddenly, after years of relatively good economic growth in the 1960s and 1970s. During those years many of the key South American countries and Mexico-most notably Brazil-made great economic strides, so that they came to be classified as newly industrialized countries; growth was uneven, and by no means equally distributed throughout the society, but there was a palpable sense of momentum and forward movement. As de Tocqueville pointed out long ago in connection with the French Revolution, and as contemporary history has demonstrated time and again, political danger may be greatest not when an economy remains stagnant, but when it has turned upward and then become disappointing.

These are the factors that lay behind the riots and looting that came abruptly to the world's attention in São Paulo in April, and in Rio de Janeiro during the autumn. Soup kitchens in Lima and Santiago are common occurrences today, as they are in other major cities of the continent. The dramatic victory in the race for the mayoralty of Lima, Peru, in November 1983 indicated the relationship of hunger and deprivation to politics-for the first time, a Marxist candidate won the position. He had promised to provide free milk for children. To the poorer segments of Lima society, his ideology appeared less important than his social message.

The issue is not that one Marxist candidate, of a relatively mild stripe, won an open and competitive election in Lima. It is the generalized stress under which the political systems of South America now labor. And this brings us to the fourth factor, namely that the crisis comes at a time when most Latin American nations have become progressively disillusioned with the performance of authoritarian and military regimes and are in the process of inaugurating or moving toward democratic systems. The very process of democratization runs the risk of being short-circuited if social and economic expectations cannot be met by democratically chosen governments. The slow and tortured consolidation of open and competitive politics, not necessarily a replica of the U.S. system, but representative of the realities and the desires of Latin Americans, may be in jeopardy.

It is this interaction between economic crisis (enormously accentuated by the debt problem) and a political crossroads that is at the core of the situation in South America today. We shall return to a country-by-country examination of the interaction in Sections V and VI-putting Peru and Brazil alongside others in this wider context. For 1983 was a year of paradox-on the one hand, a year of unprecedented economic strains, and on the other hand a time when the possibility of a return to democracy on the continent gained strong momentum.

But first let us take a short look at the historical background against which this important political trend has emerged. This background is also relevant to our discussion because it highlights the dangers for the United States in facilely accepting, in the future, the argument that "weak" democratic regimes are susceptible to subversion and that "strong" military governments will be both efficient and ideologically more amenable to "Western" values.

IV

After a decade or two of populist politics in South America in the 1950s and 1960s, badly managed development (in the face of enormous inherent difficulties, it must be said) led to societal polarization and eventual political breakdown. A wave of military regimes replaced democratic governments-Brazil in 1964, Argentina in 1966 and 1976, Peru in 1968, Ecuador in 1972, Chile and Uruguay in 1973. All of the new regimes, with the exception of Ecuador and Peru, were right-wing authoritarian; those in Ecuador and Peru were military populist experiments. In general, these new regimes rested their right to rule on their efficiency, their capacity to induce economic growth, and their newfound ability to govern without the political stalemate and social class tensions that populist democratic regimes allegedly generated.

From the perspective of many in the United States and the industrial North, those promises appeared to bear fruit. The Brazilian "miracle" of the 1970s led to spectacular rates of growth. The post-1973 Chilean "Chicago School" of economists and bankers modernized the economy and opened it to the winds of world competition. Argentina's classical solutions to traditional problems made economic ministers like José Martinez de Hoz heroes among international bankers and corporate leaders.

The armed forces, in some cases, also justified their overthrow of the democratically elected governments on the grounds that the latter were either willing to tolerate, or unable to control, subversive forces. Radical leftist (and anti-democratic) elements were indeed present in Brazil in 1964, in Chile in 1973, and in Argentina in 1976. In each of those countries, and in others, the military undertook a vigorous campaign to suppress and eliminate such activities. But extra-legal action, such as the cancellation of political rights or exile, soon slid into ominous witchhunts against all who allegedly supported the old government or were in some way thought undesirable by the new one. In Chile, a Santiago soccer stadium and Dawson Island became symbols of how far the armed forces would go to protect that country from the threat of Marxism. The olivegreen Ford Falcon sedans that were used to abduct those allegedly guilty of subversion, and the Naval Mechanics School, the location of some of the most savage torture, testified to the efficiency and commitment of the security forces in defending their perverse view of "social peace." By the end of the decade, as human rights violations continued, public protest grew stronger.

After a few years of economic sleight-of-hand, and following the first oil price shock of 1973-74, the economic invincibility of the technocrats in South American societies became questionable. Bloated state bureaucracies borrowed and spent large amounts of money, often without clear guidelines or central government control. Pharoanic projects became the norm in some countries. In many, corruption became endemic. Capital flight and speculation were acceptable business activities. By the late 1970s it was clear that the military regimes had no magic wand with which to modernize their economies. It was also clear that their disdain for political participation and social needs, even in Peru where the military regime claimed to have created a humane revolution, had become intolerable to the average citizen.

The United States also discovered, often to its surprise, that authoritarian regimes had contrary views on international issues. Argentina and Brazil refused to sign the Non-Proliferation Treaty. When President Carter asked them to join the United States in organizing the grain embargo against the Soviets to protest the invasion of Afghanistan, they declined. As regimes diversified their economic and political relations, they turned to other arms suppliers: Soviet weapons suddenly appeared in Peru, for example. Increasingly, military regimes espoused the language of the Third World and entered into the fray of the North-South dialogue-on the side of the South.

Moreover, apart from the tensions created by their human rights violations, the recent authoritarian regimes in Latin America have shown a strong tendency to reopen old scores, initiate or risk armed conflict, and meddle in the internal affairs of other sovereign states in the hemisphere. In earlier periods, the United States had been able to exercise some influence in preventing such activities, and particularly outbreaks of hostilities. But the United States had lost the leverage that went with its earlier role as the sole source of military equipment, first under grant aid and then by sales. Sources of arms are now varied and diverse; indeed, Brazil had become an important Third World arms producer, in part to be independent of the United States and the industrial arms suppliers. Other instruments of policy normally available for purposes of influence and persuasion, such as foreign aid, had diminished or disappeared.

Thus, for the first time in decades, war talk was cheap talk in South America in the 1970s and early 1980s, and the settling of old scores became fashionable, as newly armed military regimes rediscovered old border disputes and territorial claims. Chile and Argentina came perilously close to war over possession of the Beagle Channel islands in 1978. Two military regimes, identifying their prestige with a long-festering claim to sovereignty, spent hundreds of millions of dollars in preparation for a war that neither country could afford and neither people really wanted. In Peru, even after President Fernando Belaunde Terry returned to power in democratic elections in 1980, an autonomous military establishment skirmished with Ecuador in 1981.

And the most devastating example, of course, was the 1982 war in the South Atlantic, initiated by the military regime in Argentina through the forceful seizure from Britain of the Falklands, or Malvinas, Islands.

In none of these conflicts was there parliamentary or political party consultation. Public opinion was shamelessly manipulated. Arms purchases were given highest priority, without regard for the social and economic needs of the domestic population. And the United States appeared powerless to prevent the outbreak of hostilities. Indeed, in the case of the South Atlantic conflict, U.S. mediation was interpreted as duplicitous by many countries in Latin America and momentarily exacerbated diplomatic ties between Washington and the major capitals of the continent.

In short, the record in South America over this period-and indeed in past history-shows that authoritarian regimes have a strong tendency to military aggressiveness and to the forceful assertion of territorial claims. The theme will not go away. The claims are many and diverse.4 For military regimes war is an obvious and simple response to a simple problem. The difficulty is that people die and causes are lost, as the South Atlantic war clearly demonstrated.

V

It is also true that authoritarian regimes in advanced states of decay can badly misjudge aroused public opinion, especially after a military defeat. The origins of the successful return to democracy in Argentina, capped by the election on October 30, 1983 of Raul Alfonsín as constitutional president, lay in a massive public repudiation of the military government following the revelation, first by events and then by progressive disclosures, of its mendacity and fecklessness in conducting the war. The defeat in the Falklands/Malvinas was the straw that broke the Argentine military's back. The conflict had been preceded by widespread economic chaos and increasing public repudiation of "el proceso"-the dirty war that resulted in the disappearance of thousands of Argentine citizens allegedly implicated in subversive action against the state. If the mothers of the Plaza de Mayo, who marched each day in front of the presidential palace demanding information on their missing children, symbolized the personal agony of a nation, the outcome in the Falklands/Malvinas symbolized the incompetence of the armed forces and shattered any remaining claim they had to govern Argentina.

Argentina responded late in 1982 by suddenly joining the countries of the continent moving toward democracy. The promise of free elections, so often confounded in the past, this time became reality. By 1983, the age-old division between the Radical Party and the Peronists, organized in the Justicialista Party, was again the key element in electoral politics. Alfonsín, for many years the leader of a minority faction in the former, captured the nomination by offering an image of competence and energy. After a period of suspense over whether Mrs. Isabel Perón would return from exile in Spain to either lead the Peronists or become their candidate, they selected Italo Luder.

In the country's first campaign season since Perón himself ran and won in 1973, I encountered many who said that while they themselves preferred Alfonsín, Luder would win. However, playing on the need for a change, Alfonsín artfully identified the conservative Peronist labor elite with the military. Images of the violent side of Peronism emerged in the campaign meetings. In a historic shift in direction, the Argentinians gave Alfonsín an extraordinary majority of 52 percent of the popular vote.

Alfonsín's election victory has meaning far beyond Argentina. With close ties to the social democratic parties of Latin America and Western Europe, the Radical Party's victory is viewed as an opportunity to offer a dramatic alternative to the military regimes that remain in power in the Southern Cone. Moreover, it represents a moment in which civil-military relations in Argentina, and by extension in other states, can be redefined to help preclude future coups d'état. Finally, with his popular mandate, there is widespread hope in and out of Argentina that the president will be able to heal the nation and restore the vitality of the state.

The agenda he faces is overwhelming, but not impossible. The military are demoralized and publicly rejected. The Peronists are divided. Alfonsín has widespread support throughout Argentine civil society, even among those who voted for other candidates. What he needs is political space to deal simultaneously with multiple problems. The foreign debt is one of the most immediate.

About $10 billion of the total $40 billion debt comes due in 1984. The Alfonsín government has asked for a six-month grace period and then renegotiation of the debt. The attitude of the private commercial banks, the Central Banks, the IMF, and the U.S. government will be critical in determining whether the space is made available. While the social cost in Argentina has not been as great as in other countries in South America, a 1983 inflation rate of 433.7 percent, the highest in the world, daily price changes, rising unemployment, and widespread uncertainty have created a tense situation. It is simply not realistic to expect Alfonsín and the Radicals in 1984 to successfully restructure the armed forces, to reorganize the unions, and to deal with the punishment of those guilty of the dirty war and the death of at least 6,000 "disappeared" Argentinians-while at the same time imposing further economic hardship on the Argentine nation.

From the point of view of U.S. foreign policy, the first priority should be the consolidation of the democratic process in Argentina. Internal social and institutional questions are of highest priority and must be dealt with successfully to demonstrate that the government is effective. Building legitimacy-over time-can be turned into valuable currency to nurture the democratic system.

Washington must frankly face up to the likelihood that this overriding priority may for the time being mean that a number of issues now dividing Argentina and the United States will have to be put to one side or treated in low key. Argentina's nuclear program, the most advanced in Latin America, appears to be at the point where a nuclear weapon could theoretically be made; this is rightly a cause for growing concern-and not only in Washington-but it cannot be undone, and it is unlikely that Alfonsín will soon change his country's negative posture toward the Non-Proliferation Treaty. The real question is whether Argentina will develop a serious nuclear capability. The Alfonsín government has assigned a low priority to nuclear research and that decision, to hold, requires the continuation of civilian democratic rule.

Likewise, Argentina's strong commercial ties and increasing technological links with the Soviet Union have been an irritant in U.S. foreign policy circles. The new regime may be disposed to dilute these ties but it cannot move rapidly, and again the long-term picture depends on economic recovery and political stability. And the same is true of Argentina's Third World orientation in foreign policy; for the time being this is a "given"-the long-term question is whether it will be pushed in an adversary and abrasive manner.

In short, if an escalation of misunderstanding is to be avoided, the one issue on which there is the possibility of immediate and salutary action is the debt. It behooves policymakers to understand the debt as political and as an opportunity to contribute to the consolidation of democracy in Argentina. Such a determination would strengthen the U.S. position with our social democratic allies in Western Europe, including parties now in opposition.5 Above all, it would be seen throughout Latin America as a signal that the United States is able to redefine its foreign policy to meet new and highly relevant circumstances in the hemisphere.6

A similar attitude may be needed in the near future in the case of Brazil, whose economic situation was outlined earlier. That country's more than $90-billion foreign debt has become increasingly burdensome in both financial and political terms.

Following the remarkably successful national elections of November 1982, 1983 was to be the year of democratic consolidation in Brazil. A new congress, new state governors (the latter directly elected for the first time since 1965) and new municipal officials indicated the vitality of Brazil's political system, now unfettered and looking to indirect presidential elections in 1985 with a real possibility of a civilian candidate at that time.

Simultaneously, 1983 was to be a year of implementing a four-phase program that represented the best thinking of the Brazilian government, the private commercial banks, and the Fund. Apparently successful negotiations surrounding the foreign debt were concluded in December 1982 and agreement reached with the IMF.

Things did not work out so neatly. The December 1982 package contained a number of tough social and economic measures, including the deindexing of wages from inflation, a drastic reduction in inflation, a decrease in government spending in all areas, and the elimination of agricultural subsidies for farmers. Very shortly it became clear that the Brazilian government was having difficulty in meeting the targets established in December. The continuing decline in economic activity and rising unemployment caused an explosion in São Paulo in April 1983 with days of rioting and looting. The call for a debt moratorium grew among the opposition parties and eventually spread to members of the government party.

The commercial banks and the Fund announced in May that further payments were suspended until the government complied with the agreements. June and July were months of labor agitation, strikes, and demonstrations against both the austerity package, which focused primarily on wage cuts, and against the private banks and the IMF. Supermarket invasions and looting erupted in Rio de Janeiro in the autumn.

Meanwhile, the government attempted to ramrod a series of decrees through congress to meet the guidelines of the austerity package. Only after a painful period of months, in which the congress voted down a number of wage bills, did the executive branch open negotiations with the legislature. A compromise was reached that pleased no one, but it did comply with a new letter of intent negotiated between Brazil and the IMF in late August, which the private banks accepted.

The tension generated by the crisis surrounding the debt renegotiation intertwined with a deteriorating political situation in 1983. President João Figueiredo developed health problems and had to take a leave of absence in July. Confidence in the country's economic team dropped precipitately as new decisions were abruptly announced and as the austerity measures took their full toll on industry, the middle class, and the poor. The presidential succession became increasingly complicated in late 1983 as the opposition pressed for direct elections in 1985 and the government appeared uncertain of its course of action. Indeed, the music had stopped in Brazil. Gone were hopes of rapid economic modernization and social mobility for millions. The toll on the renewed democratic institutions was not quantifiable, but the fear that extremist political groups would attempt a comeback lurked beneath the surface of conversation in Brazil.

There are few who believe that a threat from the left is imminent. The most likely danger, if one emerges, will be from the right. Unlike the past, a rightist challenge may well be nationalist and populist in tone and in policy, disposed to either nationalize or severely restrict the role of the private banks and direct foreign investment. "If 1984 is as traumatic as 1983," one high-ranking government official in Brasília commented to me in late fall, "all bets are off." The severe economic crisis of 1983 made a dramatic turn of events, barely conceivable a year before, at least plausible to some observers. Others are even more pessimistic. They believe that a breakdown in the present political structure will lead to disintegration of the political system and the emergence of a highly unstable stop-go series of temporary governments, none of whom will be able to restore order or establish coherent policies.

Many Brazilians ask: Is it worth the domestic political risks to go on trying to work with the IMF and the banks? It may of course be possible to formally negotiate a new debt package if the existing one doesn't work. New goals are easily established, but they will be increasingly hard to meet when unemployment is rising rapidly; rioting, looting and bank robberies are escalating; industrial output has dropped precipitously; the shrinkage of the industrial park is a cause of real concern to the business community; and tens of thousands of Brazilians are demanding political action to relieve social and economic distress that is affecting millions of citizens. No one wants or predicts a collapse. But the potential is high.

It is in the U.S. interest to do all in its power to prevent a further deterioration of the social situation in Brazil and thereby provide a strong show of support for the fledgling democratic system. There are many who see a scenario in which Brazil will need to open negotiations again early in 1984. Letters of intent between the government and the Fund will be rewritten. New money will be pledged. But the revised guidelines will not be met because of the social cost and rising political opposition. And another breakdown will result.

It is that kind of scenario that calls for a definition of the debt as political and for quick and salutary efforts to reorganize the debt, public and private, on very different terms than those now employed. We shall return in Section VII to how this might be done, recognizing that Brazil is the toughest case and-perhaps even more than Argentina-the bellwether one.

VI

Debt and politics in 1983 were deeply interwoven elsewhere in South America. One of the most vigorous of the continent's democracies, Venezuela, had already undergone four years of stress. During the tenure of outgoing president Luís Herrera Campíns, the foreign debt doubled to $34 billion. Overspending and falling oil income led to a precipitate decline in economic activity. Although notoriously unreliable in Latin America, existing data indicated that unemployment was nearing the 20-percent mark.

The December 1983 national elections gave Democratic Action Party candidate Jaime Lusinchi a resounding victory at the polls and a mandate for a new economic policy.7 The first priority is the renegotiation of the foreign debt. Whatever the outcome, Venezuelans confront years of austerity. Having grown accustomed to a comfortable middle class life-style, (the per capita income is $4,700 a year), many will find that the future will little resemble the past. It is at that point that serious strains may appear.

Again, it is in the interest of the United States to do whatever is feasible to provide Lusinchi and his colleagues, who take office in February 1984, as much political space as is possible in the debt renegotiations. Everyone admits that there was bureaucratic inertia and incompetence in the outgoing government, as well as mindless spending and apparent disregard for economic reality. But holding the new government to account for the mistakes of the old will not serve any purpose and might contribute to a weakening of viable political institutions in a key South American nation-state.

In Peru, the democratic political system, restored in 1980 with the election of Fernando Belaunde Terry as president, was buffeted by economic and social adversity in 1983-with highlights noted earlier. It is estimated that servicing the foreign debt in 1983 will absorb 47 percent of export earnings. The government has drastically reduced imports, starving industry of essential supplies. Government spending has been cut, taxes will be raised, and the currency devalued. Inflation is running at an annual rate of 130 percent. A key element in Peru's current difficulty is that military expenditures absorb about one-quarter of Peru's annual budget, with the government contending this is essential for the struggle against the Sendero Luminoso (Shining Path) guerrilla movement.

The Belaunde government is trapped by rising social and political discontent, illustrated by the resounding defeat that Lima residents gave to the president's party in November 1983 in electing a Marxist mayor of the capital city. The guerrilla threat, which has moved from the mountains into the cities, has led the government to declare a state of emergency for long periods of time. Black-outs and bombings are frequent, as are labor strikes and protests.

Peru, like others, needs time to initiate a modest economic recovery. The renegotiation of the debt is a prime element in any overall strategy, given current world economic realities. The next presidential elections are scheduled for 1985. There is increasing skepticism in Peru that the elections will take place as scheduled if the government is unable to demonstrate a higher level of political competence and response to popular pressures. The Belaunde government is under siege as much from without as from within. The Peruvian debt is small, only $12 billion, but it looms large in any overall strategy of satisfying both security demands (mostly legitimate, though some of the saber-rattling variety toward Ecuador) and the social needs of the hard-pressed people of Peru.

In both Chile and Uruguay, the political motif is different. There rigid authoritarian regimes are under mounting pressure to restore democracy. In both countries economic adversity has played an important part in robbing the military of their claim to be efficient modern administrators. But the principal pressure appears to stem from a growing revulsion against repression, torture, and human rights violations. 1983 was an important year for the democratic cause in both countries.

Increasing protest in Uruguay clearly communicated to the armed forces their growing unpopularity. Opposition party leaders were invited to Buenos Aires for the Alfonsín inauguration to emphasize the new Argentine government's interest in change in Uruguay. Public demonstrations continued in Montevideo with thousands of citizens defying the government to march under the slogan of "freedom, work and democracy." The generals have now promised elections in November 1984 and a return to democracy in 1985. The question is whether these elections will be genuinely free-and what parties will contest them.

Chile is more turbulent, with no change yet envisioned. The regime of General Augusto Pinochet confronted in 1983 the most sustained opposition since it came to power a decade ago following the overthrow of Salvador Allende. Buffeted by bank and business failures, rising unemployment, high levels of inflation, and an unmanageable foreign debt, the Chilean middle class appeared ready to support a restoration of democracy. In a series of violent protests that began in May 1983, dozens of people were killed and thousands arrested. The demonstrations were motivated both by economic deprivation and political discontent. In an effort to defuse the tense situation, Pinochet allowed several thousand political exiles to return and lifted a state of emergency, in effect since 1978. A series of cabinet changes gave Pinochet an opportunity to appoint Sergio Onofre Jarpa as Interior Minister. Jarpa set out to construct a package of reforms that would grant greater political freedom in Chile, without opening the issue of whether Pinochet would continue in power until the scheduled end of his term in 1989.

The opposition, organized in a Democratic Alliance composed of the Christian Democrats, an important part of the socialists and the Christian Left, and smaller parties of the center, attempted to negotiate with the government, but talks collapsed in late September and were not renewed. Opposition forces were themselves divided on strategy. There remained great concern among average Chileans about a return to the disorder of the pre-1973 years, in which the Communist and Socialist Parties were key actors. 1984 will be an important year in determining the relative strength of the various opposition groups and the tolerance of the Pinochet regime for continued public protest.

At the Alfonsín inauguration in Buenos Aires in November, Vice President George Bush said: "We would like to see a greater adherence to democratic principles in Chile. If there were, you would see vastly improved relations between the United States and Chile." It was a welcome statement of U.S. policy for supporters of democracy in South America who had seen the Reagan Administration evolve from its early acquiescent and friendly posture toward authoritarian military regimes to the general backing for democracy expressed by President Reagan in his short Latin American trip of late 1982-but who had noted the Administration's failure to apply its position to specific countries, particularly Chile.

The United States in 1984 will have ample opportunity to endorse the process of restoring democracy in both Uruguay and Chile, and of strengthening democratic forces in small countries such as Paraguay and Bolivia. The former remains the longest standing dictatorship on the continent. While no one expects General Alfredo Stroessner to liberalize his regime in the short term, the movement to democracy in Argentina and elsewhere in the Southern Cone will stimulate opposition to him. Diplomatically, the United States should support those efforts. In Bolivia, where the embattled democratic government of President Hernan Siles Zuazo faces threats from both political opponents and from the armed forces, strong support will be needed to avert a military coup d'état. Economic assistance may also be a key issue for Bolivia's government, as it confronts depressed world markets for its principal mining exports and as it wrestles with the debt incurred under previous military regimes.

In two other countries on the continent, Colombia and Ecuador, democratic institutions have demonstrated resiliency in dealing with social and economic pressures. Belisario Betancur, the Conservative Party leader elected Colombian president in 1982, has demonstrated a capacity for strong leadership and artful dealings with his opposition. Colombia has withstood the devastating impact of the world crisis better than many of its neighbors; Betancur deserves high marks for continuing the democratic tradition and using it in a responsive and responsible manner.

President Osvaldo Hurtado of Ecuador, elected vice president in 1979, succeeded to the presidency in 1981 with the sudden death of President Jaime Roldós. In conformity with an IMF austerity program, Hurtado took a series of highly unpopular economic measures in 1983 that have produced strong protest. But the democratic institutions of Ecuador withstood the pressures, and prospects are good that the presidential elections scheduled for 1984 will take place and further consolidate that country's commitment to democratic politics. Both countries demonstrate that democratic institutions do function and that they are able to cope with stress, but that reality should not be taken for granted.

VII

In the final analysis, the ability of the United States to come to grips with the big problems in South America is a question of foreign policy management. Our affairs in the hemisphere, at this moment, are dominated by the immediacy of the crisis in Central America. The United States appears unable to manage both the day-to-day activities of defining and protecting our vital interests in Central America and the Caribbean and the elaboration of a strategy, with important variations for individual countries, for the continent of South America.

The United States cannot play either the role of policeman or that of savior in South America. The circumstances call for a much more nuanced management strategy. One major element must be a high diplomatic and political profile that clearly identifies the United States with the return to democracy. No occasion should be lost to reiterate, in specific terms and with reference to specific countries, the posture exemplified by Vice President Bush's statement in Buenos Aires concerning Chile.

But the biggest challenge to U.S. policy at the beginning of 1984 is to devise mechanisms to limit the social and economic damage caused by current world economic conditions; in most countries the key problem is external debt. Democratic political institutions in South America are neither strong nor experienced, in most instances, and the continent is undergoing a rapid process of returning to democracy after years of military government. What is needed is time for new governments to consolidate decision-making procedures and programs that will build confidence in democratic politics and reduce the possibility that the armed forces or extreme elements of either the left or the right will bid for power.

It should be clearly understood that support for democracy is not a ruse to allow directly elected governments to walk away from their countries' outstanding financial obligations. Responsible governments in South America need to recognize previously incurred debt as a binding obligation. Just as the private banks should not be "blamed" for the current crisis, the countries of South America should clearly reject the evolving mentality that argues for a unilateral default on the debt or selective responsibility for only part of the debt. And it is precisely to avoid those possibilities that effective political leadership by the United States is required now.

This necessitates a willingness by the Reagan Administration to look beyond the narrow financial aspects of the current economic crisis and take the lead in defining the foreign debt of South America as a foreign policy priority of potential political volatility. Only U.S. government action will bring together the key players to devise short-term and medium-term strategies for defusing the debt issue. Those players include the IMF, the debtor countries, the Federal Reserve System, and the private commercial banks of the United States, Western Europe and Japan.

Increasing concern has been shown by some of these players. It is reported that the Federal Reserve Board supports improved terms for bank lending to countries such as Mexico that have been able to implement austerity programs with success, although at high social cost. The Managing Director of the IMF, in December 1983, stated that credits by the private banks "should be provided on reasonable terms in order not to compound unduly the balance of payments and indebtedness problems of debtor countries." Mr. de Larosière also stated that large and small commercial bank creditors will have to participate in future restructuring efforts; that large countries must not preempt the flow of funds to smaller nations; and that the composition of capital flows must change in order to foster a more viable debt structure. He urged that private bank lending be supplemented by "more basic development oriented financing" such as foreign direct investment and expanded official flows, with new official aid for the poorer countries taking the form of larger concessional assistance.

In the November 1983 legislation approving the new U.S. contribution to the IMF, the U.S. Congress also stated its concern. "Sustaining economic growth" was named ad a high priority by the Congress, and the President and others were instructed to encourage countries to formulate economic adjustment programs which:

. . .should be designed to safeguard, to the maximum extent feasible, international economic growth, world trade, employment, and the long term solvency of the banks, and to minimize the likelihood of civil disturbances in countries needing economic adjustment programs.

The legislation directed the U.S. executive director of the IMF to recommend and work for changes in Fund policy to "convert short-term bank debt which was made at high interest rates into long-term debt at lower rates of interest" and to "assure that the annual external debt service, which shall include principal, interest, points, fees and other changes required of the country involved, is a manageable and prudent percentage of the projected annual export earnings of such country." In other language, designed to preclude "bailouts" of the banks, the U.S. executive director should "work to insure that the Fund encourage borrowing countries and banking institutions to negotiate, where appropriate, a rescheduling of debt which is consistent with safe and sound banking practices and the country's ability to pay."

Slowly, and reluctantly, the private commercial banks have begun to modify their lending policies. In negotiating a $3.8-billion loan in late 1983, the banks recognized the Mexican government's extraordinary success in imposing an austerity program in the past 18 months. The new loan was for ten years, with repayment scheduled to begin in 1989, compared with more stringent terms earlier in 1983. The banks also stipulated lowered interest rates and fees. Some bankers privately, and editorial opinion publicly, regretted that the loan agreement did not provide even easier terms in recognition of Mexico's performance and as an incentive for other debtor countries attempting to cope with austerity measures. But at least the banks have recognized Mexico's efforts and may be persuaded to negotiate similar or easier agreements with Venezuela and Argentina in 1984 to avoid no-win confrontations with the Alfonsín and Lusinchi governments. Brazil, whose latest $6.5-billion loan ran into bank reluctance until the very last moment, may require even greater private bank understanding if any semblance of an orderly repayment schedule is to be maintained.

All of these actions are welcome, but they are relatively isolated. What is required is a U.S.-led initiative to devise an orderly procedure for evaluating the structure of each country's debt, its ability to repay, and its future borrowing needs. Only leadership by the U.S. government will succeed in devising and implementing such a mission. The Federal Reserve System is not charged with the formulation of U.S. foreign policy. There are limitations on what the IMF alone can do without raising criticism once again that its actions are little more than an effort to save the private commercial banks and their profits. It is essential that the banks not be made the scapegoat in the debt crisis. Their role in the future is too important to allow ourselves the luxury of seeking victims.

The one player not yet heard from is the U.S. government. Compared to the positive initiatives of 1982-bridging loans, special packages, etc.-1983 saw a return to an attitude of business-as-usual. More ominous were signs that, at the top level of the Reagan Administration, the growing expressions of concern by the IMF, the Federal Reserve, and the U.S. Congress were either misunderstood or, in its preoccupation with the escalating power game in Central America and the Caribbean, ignored.

For example, the Administration announced in December 1983 that the U.S. contribution to the World Bank's International Development Association (IDA), a vehicle for loans to very poor countries, will be $750 million a year over the next three years. The United States had been urged by the Bank and by the members of the Organization for Economic Cooperation and Development to commit a billion dollars a year. And at the end of 1983, the OECD issued a report which indicated that the United States, in 1981 and 1982, allocated proportionately less of its wealth to poor countries than almost any major non-communist state. The report indicated that in a seven-year period beginning in 1976, U.S. assistance as a percentage of GNP declined by a greater factor than in any Western industrial society. While little of this aid is earmarked for South America, the policy does form part of the Administration's attitude toward the developing world.

If the U.S. record on official aid for the poor countries has been stingy, its attitude in 1983 on trade issues appeared to harden and to become more protectionist. The United States, for example, also took the lead in pressing for an agreement among industrialized countries to eliminate subsidies for steel mills built in the Third World. Given world overcapacity, the United States and its industrial allies are moving to bar steel from developing countries to protect domestic producers. In both steel and other products, such as footwear, leather goods and cement, South American countries could find themselves frozen out of U.S. markets at a time when they must export to service their debt and to pay for crucial imports from the United States and the industrial countries.

The Reagan Administration also failed to act on the U.S. budget deficits which are a major cause of the high rates of interest charged by the commercial banks for loans to South America. As South America's need to borrow continues, high interest rates further compound the debt burden and make prompt or manageable repayment more problematical.

In 1983, the United States was thus found wanting in a range of policy areas that would lessen the social cost and possibly avoid political repercussions in South America. What should the U.S. government do?

A strong U.S. position in defense of free trade and against protectionist pressures is critical to South America's recovery. Many believe that an increase in world trade is the only way in which the debt crisis will be stabilized. The United States will need to take the political heat, always difficult in an election year, of carrying the flag for an expansion of world trade. One imaginative proposal calls for the creation of an "Export Development Fund." The new entity, closely allied to the World Bank, "would mobilize support from the export sectors of the industrial countries through joint financing by the national export credit organizations, private commercial banks, and the World Bank."8

The Reagan Administration should seriously consider a joint effort by the United States and its West European and Japanese allies to actively encourage exports from South America as the best means of earning the foreign exchange required to meet interest payments on the debt. Such trade, as we have seen, would also generate jobs in the industrial countries, as South America used new foreign exchange earnings to buy their products.

A second U.S. initiative with great merit would emphasize greater lending facilities for the World Bank, the Inter-American Development Bank, and other multilateral agencies, in which the South American states generally have a high degree of confidence. It has been suggested that the leverage of the World Bank be increased, for example. Currently, the Bank borrows and lends an amount roughly equal to its paid-in and callable capital. Various proposals have called for increased facilities for the Bank. U.S. public support for exploring variations on this theme would be welcome and indicate U.S. confidence in an expanded role for the multilateral organizations.

A third area in which the United States should take the lead is in strongly and publicly encouraging the private commercial banks, in the United States and abroad, to reduce the terms of their loans to South America as the governments of the region demonstrate a willingness and ability to take appropriate internal decisions with regard to exchange rate policy, public spending, and other adjustment-related programs. U.S. government action in this regard would support the efforts of the Federal Reserve and others who argue for greater flexibility in lending terms. The Reagan Administration could make a very useful contribution to the present efforts to restructure existing debt obligations by indicating its concern that the smaller banks, in the United States and abroad, remain firmly committed to a renewal of credit for South America and available for new loans, as appropriate, in the future.9

Finally, the United States needs to continue providing federal government support through emergency credits and financing as needed. Humanitarian and emergency assistance, in the form of food and medicine primarily, should be given serious consideration for countries like Bolivia, Brazil and Peru.

None of these suggestions is earth-shaking; all have been made before. What is lacking is coordination at the highest political level and a capacity to anticipate new pressures and needs rather than waiting to respond after the fact.

The Reagan Administration has a historic opportunity to seize the debt issue, to define it as political and of immediate concern to U.S. interests in the hemisphere. No one predicts that such an initiative will be either easy or fully successful. But it must be done. Prudent management of the nation's foreign affairs requires prior action, before the next and probably inevitable wave of public protest and demonstration, and while responsible governments remain in power. Once a particular political situation starts to go to pieces, the possibilities of action can only become less, and there will be a progressive danger of new and radical regimes, with drastic implications for the ultimate repayment of debt, the spread of democracy, and the security situation in the hemisphere-not to mention sharp and growing anti-U.S. sentiment.

In the last analysis, the consequences of failure to handle the debt issue will be not merely economic, or even confined to the domestic politics of individual Latin American countries and of the continent as a whole: behind both of these lies a crucial security dimension. It would hardly serve U.S. interests to save Central America from a communist threat while allowing major South American countries to become radical, alienated from the United States, and active against it. In a recent study on the debt crisis in Latin America, Ambassador Thomas O. Enders, former Assistant Secretary of State for Inter-American Affairs, put the point well:10

. . .When the crisis in some countries drags on with per capita incomes below 1980 levels-as they may be for much of this decade-and without credible promise of relief, it is easy to imagine resentment and frustration exploding in Latin America, turning against governments when they fail to persuade the United States and other industrial countries of the need for more generous terms. Not only would the current broad but weak trend towards democracy falter, but public order and national security could also be at risk.

Whatever the action taken, the Administration must see U.S. relations with the countries of South America in the broadest context. Not to do so is to neglect the potential impact on the international financial system, the U.S. banking system, and the economic and political relations between the United States and the continent, of a possible debt crisis. It is also to overlook the human cost in South America of the current austerity measures. And, ultimately, it fails to understand that U.S. interests in the hemisphere are best served by whatever steps are taken to strengthen democratic institutions and procedures.

Early in 1983, President Osvaldo Hurtado wrote to the executive secretaries of the United Nations Economic Commission for Latin America (ECLA) and of the Latin American Economic System (SELA). Hurtado asked their help in devising a Latin American response to the economic crisis confronting the hemisphere. The deliberations continue, but Hurtado captured the essence of the problem confronting us when he wrote that:

What is at stake, then, as never before, is the social peace of the nations and the stability of the democratic system-in brief, the fate of vast human communities which are seeing their unresolved social problems grow worse day by day, are fearfully becoming aware of the possibility of total disaster.

The president of Ecuador is a wise man. He is also a democratic political leader. On both counts, his message requires a thoughtful hearing by the Reagan Administration.

1 The political implications of the debt crisis are as real elsewhere in the Third World as they are in Latin America, of course. The recent coup d'état in Nigeria clearly demonstrated the fragility of democratic systems in Africa in the present economic situation. As The New York Times commented, "the oil glut, high interest rates and recession are squeezing virtually every economy in the third world. That is not an environment in which democracy can flourish, no matter how well laid the plan. If America cares about democracy in the rest of Africa, Asia and Latin America, it will have to lend more than its political structure." (January 4, 1984, p. 20.)

3 In fact, Latin America has become a capital exporter. The amount of money it pays each year for servicing the debt is larger than the amount of new money that flows into the region.

4 The Chilean-Argentine dispute over the islands in the Beagle Channel is not irrelevant in broader geopolitical terms. The thirty-year freeze on new territorial claims in Antarctica is beginning to wind down and both countries have substantial interest in pursuing competing claims on the Antarctic continent. Possession of the channel islands will determine the outcome of those claims. In early 1984, it was reported that both countries have accepted the 1980 proposals of Pope John Paul II to resolve the dispute which award the islands to Chile.

5 The impressive array of West European and Latin American social democratic leaders that attended the Alfonsín inauguration in December 1983 indicated the extraordinary level of interest in the success of the new democratic government in Argentina. As a leading member of the Alfonsín team said to me in late November in Buenos Aires, "Argentina identifies with the West, but we do not necessarily equate the West with the U.S. alone."

Clearly the Reagan Administration needs to understand the great significance for social democracy, worldwide, of the Alfonsín victory. If that implies a further deepening of Argentina's ties within Latin America, and with Western Europe, it should be welcomed by the United States as another source of support for democracy in the southern cone.

6 In the case of Argentina, the legacy of past U.S. policy is clearly an impediment. Many Argentinians, including members of the Alfonsín government, believe the Reagan Administration "tilted" toward the military authorities between 1981 and 1983. The United States appeared overly anxious to establish cordial relations with General Leopoldo Galtieri particularly. His government's actions in Central America, in support of the Reagan Administration's policy, were viewed by many as an important factor in Argentina's decision to risk war with England over the Falkland Islands. Galtieri believed that because of this tie the United States would not side with Britain against Argentina. After Galtieri's overthrow, the United States pressed the issue of certifying Argentina for a renewal of military aid and arms sales, even though Alfonsín made clear it was a very low priority for his government. Finally, Alfonsín's strong defense of human rights compares unfavorably with the Reagan Administration's "low profile" on human rights.

7 The Democratic Action Party is closely allied with the social democratic movement in Latin America and Western Europe. The election in 1983 of governments in Argentina and Venezuela with social democratic affinities may prove to be useful in South American efforts to devise complementary strategies for dealing with global issues.

8 William H. Bolin and Jorge Del Canto, "LDC Debt: Beyond Crisis Management," Foreign Affairs, Summer 1983, p. 1099.

9 There have been a number of more dramatic suggestions made with regard to debt refinancing. Some call for converting existing debt into old-fashioned development bonds with a grace period for both interest and principal and a guaranteed real rate of interest. Others urge the creation of a new international institution which would issue long-term bonds to banks in exchange for accepting Third World debts. A new round of SDRs has been suggested as one way of introducing greater liquidity into the international financial system. None of these ideas has been tested, nor does it appear that the political climate at this moment will support high levels of innovation and creativity in dealing with the debt. More practical suggestions, of late, emphasize subsidization when lending occurs at unduly high interest rates. The private banks oppose this suggestion because of the impact on their earnings. Another proposal would permit debtors to pay half their interest in dollars and the remaining half in local currency. Latin American governments are increasingly interested in schemes to limit interest payments to 20 to 30 percent of export earnings.

10 Thomas O. Enders and Richard P. Mattione, "Latin America: The Crisis of Debt and Growth", Brookings Discussion Papers in International Economics, No. 9, December 1983, Washington: The Brookings Institution, p. 79.

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  • Riordan Roett is Professor and Director of the Latin American Studies Program, and Director of the Center of Brazilian Studies, at The Johns Hopkins School of Advanced International Studies in Washington D.C. He is the co-editor (with Wolf Grabendorff) and a contributor to a forthcoming book on the triangular relations of Latin America with Western Europe and the United States. The third edition of his book, Brazil: Politics in a Patrimonial Society, will appear in 1984. He traveled extensively in Latin America during 1983 conducting interviews and collecting material for this article. Dr. Roett was President of the Latin American Studies Association in 1978 and a consultant to the second Linowitz commission.
  • More By Riordan Roett