THE LATIN AMERICAN DEBT

Also by Antonio Jorge and Jorge Salazar-Carrillo

EXTERNAL DEBT AND DEVELOPMENT STRATEGY IN LATIN AMERICA

FOREIGN DEBT AND LA TIN AMERICAN ECONOMIC DEVELOPMENT

TRADE, DEBT AND GROWTH IN LATIN AMERICA FOREIGN INVESTMENT, DEBT AND ECONOMIC GROWTH IN

LA TIN AMERICA

The Latin American Debt

Edited by Antonio Jorge Professor of Economics Florida International University

and

Jorge Salazar-Carrillo Professor of Economics Florida International University

Palgrave Macmillan

ISBN 978-1-349-12053-6 ISBN 978-1-349-12051-2 (eBook) DOI 10.1007/978-1-349-12051-2

© Antonio Jorge and Jorge Sa1azar-Carrillo, 1992

Softcover reprint of the hardcover 1 st edition 1992

All rights reserved. For information, write: Seho1arly and Referenee Division, St. Martin's Press, Ine., 175 Fifth Avenue, New York, N.Y. 10010

First published in the United States of Ameriea in 1992

ISBN 978-0-312-06797-7

Library of Congress Cata1oging-in-Pub1ieation Data The Latin Ameriean debtjedited by Antonio Jorge and Jorge Sa1azar-Carrillo p. em. Includes index. ISBN 978-0-312-06797-7 I. Debts, Externa1-Latin Ameriea. 2. Debt re1ief-Latin Ameriea. I. Jorge, Antonio, 1931- 11. Sa1azar-Carrillo, Jorge. HJ8514.5.L388 1992 336.3'435'098-de20 91-22391

CIP

To our children

Contents

Preface

Acknowledgements

Notes on the Contributors

List of Abbreviations

Introductory Overview Antonio Jorge, Jorge Salazar-Carrillo and Bernadette West

PART I GENERAL ISSUES OF LATIN AMERICA: DEBT, FOREIGN INVESTMENT AND ECONOMIC DEVELOPMENT

The External Debt and the Economic Development of

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XIV

Latin America 15 Antonio Jorge and Jorge Salazar-Carrillo

2 New Direction of Foreign Investment in Developing Countries 25 Felipe Pazos

3 Reflections on the Macro-Economy of Latin American Development 40 Gustav Ranis

4 Latin America: The Revival of Growth and the W orld Bank 57 Carlos Quijano

PART 11 ISSUES OF LATIN AMERICAN DEBT RELIEF: PROPOSALS AND CONTROVERSIES

5 Real Alternatives for Handling the Latin American Debt Problem 67 Pedro Palma

6 Latin American Debt-Equity Swaps AU Parhizgari

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Vlll Contents

7 Credit Securitization and Developing Countries' Debt 100 Wilbert Bascom

8 How to Assess the Market Value of Developing Country Loans: The Case of Latin America 115 M anuel Lasaga

9 External Debt, Unilateral Transfers and Kleptocracy in Latin America 146 Markos Mamalakis

PART 111 ISSUES OF CENTRAL AMERICA AND TUE DOMINICAN REPUBLIC: DEBT, ECONOMIC POLICY AND TUE NEW POLITICAL ORDER

10 Recent Developments in the Central American Debt Crisis 155 Raul Moncarz

II Economic Poliey in the Dominican Republic sinee 1966 170 DeLisie Worrell

12 New Perspectives for Modernization in Central America 179 George Im'in

Index 201

Preface

The vicissitudes of the Latin American external debt seem endless. Despite the various policy approaches tried over the years, the essential problem remains unabated: namely, the burden of financing the debts effectively impairs the developmental efforts of the region. Numerous plans have succeeded one another, underlining this or that trait: debt­for-equity swaps (DESs); stable and/or fixed interest rates; repurchas­ing the debt at secondary markets' prevailing prices; partial remission of capital obligations; conversion of principal into different kinds of variously secured long-term loans; putting a ceiling on interest payments as a percentage of export proceeds; not to speak of the many ad hoc negotiations on rescheduling and new bridge loans, and so on.

The point to be noted is the gradual change in emphasis in all of these schemes, from a piecemeal analysis of the problem and a narrow focus on honouring payments, to an open recognition of the tremen­dous impact of the debt on the economic development and well-being of the area. The concern is not now exclusively centred on maintaining the integrity of the international financial system and restoring the soundness of worried banking institutions. Counter-balancing forces have come into play, readjusting our perception and modifying the participants' perspective of that many-sided phenomenon which is the regional debt of Latin America. The Brady plan has been partIy instrumental in helping to bring about a fresh view of the issue. At long last, it seems that a growing realization ofthe rock-bottom truth­that without sustained economic development there cannot be any real, long-term solution to the thorny problem of debt repayment - is slowly emerging. The editors would like to point out, obiter dictum, that they took a lonely stance in favour of this position as far back as February 1982, at an international conference on the subject which took place at Florida International University.

Finally, it is worthwhile to remark that the global macro-social weltanschauung (world view) on the debt now in vogue is not wertlos (without value). Neo-classicism, as economic philosophy, now defini­tely enjoys the upper-hand in the policy schemes elaborated by technicians in international institutions in collaboration with debtor and creditor nations. Perhaps Latin America was in need of adjusting

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x Preface

its position on the economic ideology spectrum, shifting somewhat towards the pole of market-driven mechanisms and behaviour. However, it would be a cosdy mi stake to ignore the weighty influence of culture, values and established institutions. The corporatist tradi­tions of the Southern Hemisphere are very much alive in the ethos of Latin nations and definitely operative in their political realm. The public sentiment cannot be simply ignored in matters such as these in societies which are struggling for stability and sustained progress.

The wide consensus among top-ranking Latin economic functionar­ies in the recent meeting of SELA (Sistemas Economicos Latino Americanos: Latin American Economic Systems) regarding the social and developmental priorities of their countries, as they relate to the handling of the debt problem, reveals their abiding concern with the fundamental question of the proper strategy for the socio-economic development of Latin America. In this context, it would be weIl to remind ourselves that the treatment of the extern al debt of the area is definitely not reducible to a mere matter of financial technique. The debt is a symptom and a symbol of the whole Latin American problem. Any attempt at visualizing it otherwise is ultimately doomed to fai!. Superficial treatments will only buy us the illusion of a eure. At best, a little time will be bought while the wound festers. There is no substitute for a truly autochthonous and comprehensive solution to the area's problems. In order for such a solution to be feasible, Latin societies must count on the active help of the international economic community. Only with the vigorous support of world trade, finance and investment can local programmes succeed. Let us hope that such an outcome will come to pass.

ANTONIO JORGE

JORGE SALAZAR-CARRILLO

Acknowledgements

The contributors of this la test volume on the Latin American debt have emphasized topics that are currently at the centre of debate. These are the market solutions of the debt crisis; in particular, the DESs and the secondary markets for debt instruments and the publicly-managed debt reduction plans arising out of the Brady initiative. At the same time this volume differs from others of its kind in the treatment of the problems specific to Latin America and the Caribbean. Finally, some of the chapters deal with overall development problems that afflict the region, determine its peculiar policy focus, and suggest how to most appropriately deal with its debt overhang.

The authors represent a rainbow of specializations and approaches. Academic viewpoints have been interspersed with those of practitio­ners, covering developed and developing orientations, while spanning a spectrum of perspectives arising from private agencies, public bodies and higher learning institutions. Consequently this book can claim a solid balance in its treatment of the timely topic of the Latin American debt.

We are grateful to the authors of the timely articles contained in this volume who have made possible, with their contributions, an up-to­date treatment of the Latin American debt from an ample variety of perspectives.

We also wish gratefully to acknowledge the invaluable cooperation of Ms Bernadette West without whose indispensable participation the task at hand would have been impossible to accomplish.

A. J. J. S.-c.

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Notes on the Contributors

Wilbert Bascom heads the Bureau of International Banking, Florida State Comptroller's Office. He is also an adjunct professor at Florida State University.

George Irvin is Chairman of the Department of Economics at the Institute of Social Studies at The Hague (Holland). He is the co-editor of Central America: The Future 0/ Economic Intergration (1988).

Antonio Jorge is Professor of Political Economy at Florida Interna­tional University and Senior Research fellow at the University of Miami. He co-edited Foreign Investment, Debt, and Economic Growth in Latin America (1988).

Manuel Lasaga is Vice-President and Senior Economist at Southeast Bank. He was formerly an economist at Citibank and a research associate at Econometrics.

Markos Mamalakis is Professor of Economics at the University of Wisconsin. He is the originator of the theory of 'sectoral clashes' and publishes extensivelyon economic policy in Chile.

Raul Moncarz is Professor and Chairman of the Department of Economics at Florida International University. He is the author of Moneda Y Banca (1985).

Pedro Palma is Professor of Economics at the Institute for Advanced Business Studies in Caracus, Venezuela, and the head of Metroecono­mica, an econometric consulting firm.

Ali Parhizgari is Professor of Finance at Florida International University.

Felipe Pazos is Director at the Central Bank of Venezuela, and economic adviser to its president. He was a member of the 'Commit­tee of Wise Men' which supervised the 'Alliance for Progress'.

Carlos Quijano is assistant to the Vice-President of the Latin America and the Caribbean Division of the World Bank.

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Notes on the Contributors xiii

Gustav Ranis is Director of the Center for Economic Growth and Frank Altscuhl Professor of Economics at Yale University. He is co­originator of the 'Ranis-Fei Model' of economic development.

Jorge Salazar-Carrillo is Director of the Center of Economic Research, Professor of Economics at Florida International University, and a non-resident staff member of Brookings Institution. He co-edited Real Product and Price Comparisons in Latin American (1990).

Bernadette West is a PhD candidate and research assistant at Florida International University.

Delisie Worrell is Visiting Fellow at the Institute of International Economics in Washington, DC, and Director of Economic Research at the Central Bank of Barbados.

List of Abbreviations

CAR CBI CACM CABEI CADESCA

CD CEDLA

CEPAL DC DES DFI ECLA ECLAC

ELG EP ERT FINOV FRN GATT GDP GNP ICAITI

lOB IMF IRT ISI ITBI LAD LDC LIBOR MIGA MNE

Central Al11erican Report Caribbean Basin Initiative Central American Common Market Central American Bank for Economic Integration COl11ite de Accion para el Desarrollo Economico y Social de Centro Al11erica Certificate of deposit Centro de Estudior y Docul11entacion Latin Americanos Comision Economica pore Anuirica Latina Developing country Debt-for-equity swap Direct foreign investment Economic Commission for Latin America Economic Commission for Latin America and the Caribbean Export led growth Export promotion Extraregional Trade Financial Overseas Holdings Floating rate note General Agreement on Tariffs and Trade Grass domestic product Gross national praduct Instituto Centro Al11ericana para la Investigacion de la Tecnologia Industrial Interamerican Development Bank International Monetary Fund Intraregional trade Import-substitution industrialization Impuesto a las transferencias de bienes industriales Latin American debt Lesser developed country London Interbank Offered Rate Multilateral Investment Guarantee Agency Multinational enterprises

xiv

NBTT NIC NIF NTX OECD

ODA OPEC PEC

PES PIS PLAD PR PRD RER RLID SAL SEC SES SIS SPV TX UNO

List of Abbrel'iations

Net barter terms of trade Newly industrialized country Note issuance facility Non-traditional exports Organization for Economic Co operation and DeveJopment Official Development Assistance

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Organization of Petroleum Exporting Countries Programa Especial para Centroamerica (Special Programme for Centroamerica sponsored by the UN) Primary export substitution Primary import substitution Price level adjusted debt Partido Reformista Partido Revolutionario Dominicana Real exchange rate Rate level indexed debt Structural Adjustment Loan Securities Exchange Commission Secondary export substitution Secondary import substitution Special Purchase Vehicle Traditional exports Union National Opposition