FINANCIAL CRISIS IN LATIN AMERICAN COUNTRIES IN 1980’S

Before looking at the financial side, firstly, we need to know which countries are Latin American. Basically major countries which fall in the South African continent like Brazil, Peru, Venezuela, Argentina, Colombia, Ghana and many more. There are a total of 26 Latin American countries. These countries influence the global financial scene majorly.

The onset of the financial crises was in 1980’s and it is often called the ‘lost decade’, when the Latin American countries reached a point when they could not pay their foreign debt as it was more than their earning power. This event was marked the second worst financial crises after ‘Great Depression’ in 1930.

The countries which were majorly involved in this fiasco were Brazil, Mexico and Argentina. At that time, these countries were developing and attracted a lot of finance from developed countries for purposes such as infrastructure etc. These countries were soaring economies so the creditors were happy to provide loans. Most of these loans were granted through the World Bank.

The external debt intensified from 75 billion $ to 315 billion dollars in 1983 which was almost 50% of the GDP. The debt service (which is the interest on the principal) grew faster from 12 billion $ in 1975 to 66 billion $ in 1985.

There were mainly two reasons which triggered these financial crises. Firstly, the oil prices sky-rocketed in 1973-74. These countries were major importers of oil at that time. The oil producing countries put this money in the World Bank which was later recycled to give loans to these developing countries. Since, the oil prices increased, Latin American Governments were seeking loans too. These borrowed funds weren’t used in investment but rather consumption. Consequently, they had no money to pay the loans. At this time, the world economy was also slow. The interest rates increased in America and Europe making debt payments even more difficult. The value of their currency started depreciating which meant that they had to pay more for their imports.

The debt-GDP ratio of these countries increased drastically from 1975 and 1985. Like in the case of Bolivia, it increased from 0.5 to 1.4.

Because of this, unemployment broke out in the country. There was widespread inflation and the middle class people had to take the thrust. A lot of people became the victims of poverty.

The major outbreak was because of the announcement made by the Finance Minister of Mexico in August 1982 that they would not be able to service their debt. Many of their debts were short term, which were immediately due.

The only way to curb the situation was to seek help from World Bank and International Monetary Fund (IMF). IMF suggested reducing public investment and consumption. Ecuador, Mexico, Venezuela cut public expenditure almost by 20% in the years 1982-1986. They had to slash spending on social sectors like health, schools etc and focus on privatization of sectors, export of crops, cutting wages of jobs and workers. IMF wanted the shift of the economy from import substitution to export oriented economy. While the adjustment program of World Bank was more long term, as it focused on removing the trade restrictions and turn the economy into a capitalist free economy as proffered by the wealthy nations.

Thus, slowly and steadily these Latin American countries recovered from this vicious whirlpool of debt.