Latin American Debt Crisis of the 1980s: Economic Policies and the IMF
Summary
In 1979, creditor banks grew concerned as Latin American countries faced a debt crisis. Reckless lending had resulted in debt exceeding repayment ability. The situation worsened in the 1980s with rising interest rates. Banks pressured debtors, refusing new loans. Countries adopted economic policies to increase exports, decrease imports, and combat high inflation.
1979 also saw three external shocks impacting Latin America:
- Second Oil Shock: Tripling oil prices significantly increased import costs for most Latin American countries.
- Rising Interest Rates: Increased annual interest payments due to high external financing.
- US Recession: Reduced North American exports.
Common economic imbalances (inflation and external imbalances) were addressed with International Monetary Fund (IMF) recommendations, primarily:
- Reduced state expenditure and balanced state budgets.
- Reduced and controlled currency circulation.
- Liberalized prices.
- Liberalized interest rates (increasing due to reduced money supply).
- Liberalized (devalued) exchange rates.
- Eliminated subsidies.
- Reduced public and private sector salaries.
The salary reduction, unlike other liberalizations, reflects a wage squeeze policy. Reducing government spending, money supply, and increasing interest rates reduce aggregate demand, causing recession (higher unemployment and lower production). This reduces inflation (considered demand-driven). Decreased consumption increases exports; decreased investment lowers import demand. Increased exports and reduced imports improve the trade and balance of payments.
Cruzado and Bresser Plans
The failure of the Cruzado and Bresser Plans, and Sarney’s failing health, created a critical situation. The Summer Plan was an attempt to ensure the survival of the government and maintain the political and electoral calendar.
The Bresser Plan
Bresser Pereira, a key figure in economic debates, offered the Bresser Plan amidst uncertainty following Cruzado II. His plan combined economic analysis with policy suggestions, a rare instance of effective theory-to-practice application within the complex political-economic landscape.
Orthodox economic policies, addressing inflation and external imbalances, typically involved (as recommended by the International Monetary Fund (IMF)):
- Reducing state expenditure and balancing the state budget.
- Reducing and controlling the money supply.
- Liberalizing prices.
- Liberalizing interest rates.
- Liberalizing (devaluing) the exchange rate.
- Eliminating subsidies.
- Reducing public and private sector salaries.
Three external shocks severely impacted Latin American countries:
- The second oil shock tripled oil prices.
- Sharp increases in international interest rates significantly increased interest payments for debtor nations.
- The 1979-1982 US recession (the worst since the Great Depression) reduced Latin American exports to the US, their primary trading partner.
The 1980s Economy
Stagnation and high inflation characterized the 1980s Brazilian economy.