[THE LATIN

AMERICAN 80S
STOCK OF DEBT]
Luis Montero Salazar - 20035

here are 3 reasons why Latin American countries stock high

levels of debt in the beginning of the 80s; the import
substitution model implemented after World War II, the
increase in the oil prices in the 70s and the reduction in the
interest rates from the international banking system. These
and other secondary situations were the initiators of the big
Latin America debt crisis that sparked The Lost Decade.

Latin America ECLAC Import Substitution Model

With the creation of ECLAC at the late 40s one of the most
important decision was the creation of a model that
substitutes the importation of manufacturing goods with
the promotion of the local industry. That model was
previously and successfully used by Western Europe and the
United States in the middle half of the nineteenth century.
The change from food and raw materials, highly plentiful
resources in the region, to more complex manufacturing
goods was a challenge that required big investment and
time to get the results of United States and Europe.
The instruments to implement this policy mainly were:
protective tariffs and exchange controls, preferential import
exchange rates for raw materials and construction by the
government of the infrastructure needed to the industrial
sector. This last element was the most expensive one,
because regions infrastructure wasnt prepared for this
abrupt change. In order to finance the requirements for this
measures, the Latin American countries incur in external
debt with govern development banks and private
commercial banks that trust in the promising results of the

regions soaring economies. The problem was that the

results for the Import Substitution Model are seen in the
long run and the countries had to keep the investment
creating a vicious cycle and accumulation of high levels of
debt. The largest countries like Brazil, Mexico and Argentina
got better results of the model than the smaller ones
because the size of their internal market was larger.
Additionally the unwillingness from United States and
Europe of buying Latin America manufactured goods
created barriers for the model.
The region was spending more than it produced.

Increase in the Oil Prices

The Oil crisis of 1973 increased the price of the barrel from $3
to $12. Oil was vital resource for most of the industrial
sector; this abrupt change increased the prices of the raw
materials and the production process, forcing the companies
to ask for debt in order to keep their competitiveness.
Most of the Latin American countries are 100% oil
dependant, these crises created a big trade deficit and
difficulties to find buyers of their products in other markets
due to the world situation at that moment.
As a cyclical process, the oil producing countries had an
enormous surplus of money to invest, they gave the money
to private banks in order to maximize the gains of the oil
crisis. The private banks had to borrow this money taking
advantage of the situation and they trusted that the
sovereign debt was a safe investment. From 1975 to 1982 the

Latin American debt to commercial banks increased at

a cumulative annual rate of 20%.
The excessive optimistic analysis from the private banks of
the national development projects and the prices of
commodities from the Latin American countries increased
the amount of loans and reduced the requirements and
interest rates, creating huge stock of debt.

Reduction of the Interest rates

The third reason why Latin America stock large amounts of
debt was that there was somebody willing to lend to the
region. After the World War II the banking industry in United
States underwent major structural changes, with a more
aggressive lending behavior.
The competition private banks of new borrowers led them
to search for developing countries. Latin America was a
natural market due to the political closeness to United
States and geographic location.
The excess of money supply from the oil countries and the
high competition of the American banks reduced the
interest rates and improved the repayment conditions. The
low interest rates motivated the region countries to borrow
money for unessential consumer goods, military
expenditures or finance volatile fiscal deficit.
There was a feeling that use debt was good for the economy
and accumulate it was secure and manageable for
Latin America.

In 1982 When the Mexican government said "sorry, we can't

service our debt anymore", the bubble exploited and the
crisis reached unimagined levels. The commercial banks
asked for their money back, by this time the debt had
reached $327 billion (FDIC 1997).

References

IMPORT SUBSTITUTION AND INDUSTRIALIZATION IN

LATIN
AMERICA:
EXPERIENCES
AND
INTERPRETATIONS, Werner Baer (1992)

THE GREAT LATIN AMERICA DEBT CRISIS: A DECADE

OF ASYMMETRIC ADJUSTMENT, Robert Devlin,
Ricardo French-Davies (1995)

THE LATIN AMERICAN DEBT CRISIS IN HISTORICAL

PERSPECTIVE, Jos Antonio Ocampo (2000)