Current Legal Issues Affecting Central Banks, Volume III.


Robert Effros
Published Date:
August 1995
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An important aspect of the debt problem was how that problem was perceived by the debtor countries and how they lived through it.

Role of Private Investment

An important political influence in a majority of the debtor countries was the loss of prestige associated with private investment in the decades previous to the debt crisis. In Latin America, during the 1920s and 1930s, the public image of foreign investment, with the exception of the attitude of the elite, was discredited. The elite, the intelligentsia, and other groups associated with business were acutely aware of the advantages of foreign investment. The great masses, however, failed to see the advantages; both foreign and national investments had a negative connotation for them. National private investment was associated with privilege, inequality, and an oligarchy of landowners who did not seek the modern goal of a truly competitive market economy. Furthermore, foreign investors were viewed negatively because, even when they brought technical and economic advantages, social and political aspects of development were neglected. So prevalent was this image that it was reflected in Latin American literature, where great novelists such as Nobel Prize-winner Miguel Angel Asturias and poets such as Nobel Prize-winner Pablo Neruda presented the evil character as a foreign investor or national entrepreneur.

From a purely technical point of view, the economic approach advocated by certain experts shared a negative image of private investment as a way of solving the economic problems of Latin America. As a result of this public perception, in the 1960s, there arose a new approach to foreign investment, represented by Decision Number 24 of the Commission of the Andean Pact and by the Cartagena Agreement, creating the Andean Common Market.1 This climate coincided with a great flow of capital deriving from petrodollars and Eurodollars.

Debt Problem

With this change of perception, some people thought that the solution to Latin American economic problems was to become indebted. Direct foreign private investment was not the solution. Foreign investors some-times were accused of interfering with the political life of the countries and with trying to influence their policy. If investments were not the answer, perhaps borrowing was. It is easy to incur debt. A country can receive a lot of money quickly. At that time, creditors were not particular about how they lent money; bankers were looking for borrowers to whom they could lend the excess funds resulting from the increase in oil prices. Moreover, creditors seek only to be paid interest on their loans, and, if the debt service is right, they do not interfere with the political life of the country. Thus, external borrowing, which would have been difficult in other circumstances because of the different controls in the countries or because of political opposition, was now easy. Furthermore, borrowing from abroad had the support of an overwhelming majority of the population. That is how countries got into debt so easily.

Then, the day of reckoning arrived. Countries that had borrowed began to realize that they had to pay the bills and that they did not have the resources to do so. Following the realization came a second stage when the countries said, “Well, the rate of interest is not our fault. It is the industrial countries that really control and determine the rate of interest.” Creditors began to shy away from lending new money to these countries. Investors had been badly treated in the past in many of these countries and were unready to resume their activities. In addition, some of the main industrial countries began to adopt protectionist measures against imports. As a result, the debtor countries said, “If we cannot export to the main markets; if the rate of interest is raised for us without our participation; and if we do not receive new investments and new loans; then where on earth are we going to get the money?” This led to an assertion by the debtor countries that the debt crisis was a shared responsibility. If not openly recognized, the notion of shared responsibility was at least tacitly accepted in policies that were later adopted, such as the Baker and Brady Plans.2 In a way, it was recognized that the debt crisis had to be resolved with the cooperation of the creditor countries, as well as with the debtor countries.

The third stage reflects the tremendous efforts undertaken by the debtor countries to modernize their economies by way of complementing the measures suggested by Secretaries Baker and Brady. In Latin America, there has been a strong current toward a free market, which has been associated with the encouragement of private investment to a degree never seen before. In many Latin American countries, there had never been a true market economy. There was only a form of what economists call mercantilism, according to which many forces were employed in order to protect the market against both foreign and national competition. The result was that businesses did not grow in a healthy, strong climate but in a fragile, glass-like economy protected by import restrictions and other restrictions on foreign capital. In fact, the dominant policy during the 1960s and 1970s was import substitution.

Effects of Liberalizing the Economy

Something extraordinary has happened in Latin America since the late 1980s. Even populist politicians with no background in liberal economics have adopted these initiatives. They have realized that the pragmatic way of solving the crisis is to liberalize the economy and help it become more competitive. Peru, for example, completely opened up trade for imports, reduced trade tariffs, liberalized interest rates, and decided that the interest rates should be determined by the banks and the market, not by the central bank.3 Each country within the Andean Pact (Bolivia, Chile, Colombia, Ecuador, Peru, and Venezuela) reformed its regime for foreign investment and lifted restrictions for authorizations and for profits, dividends, and capital remittance.4 They also lifted all restrictions on access to credit in the Andean market. Finally, these individual policies were reflected in a decision of the Commission of the Andean Pact to change completely the approach to foreign imports, as well as to foreign capital and private investment (both national and foreign).5

The country that has kept to a constant policy for more than 15 years is Chile.6 The rest of the countries had to change directions. Many Latin American countries have signed treaties with the Multilateral Investment Guarantee Agency, the International Centre for Investment Disputes, and the Overseas Private Investment Corporation. This represents a milestone in the legal tradition of Latin America.7 After all, Latin America had been governed by the nineteenth-century doctrine of the Argentine jurist Carlos Calvo.8 The Calvo doctrine established that every investor coming to Latin America should submit to the jurisdiction and the laws of the country in which he or she was doing business. What began as a purely legal, conventional principle gradually acquired a powerful mystique. A lot of emotion characterized the nationalistic regimes of the 1960s and 1970s in Latin America. Then, in the 1980s, people became more pragmatic and circumstances forced them to realize that countries must compete for foreign investment, in part to facilitate the solution of the debt problem.

In some countries of Latin America, for instance in Peru, trade tariffs have been reduced from an average of 65 percent to an average of 17 percent.9 Many countries have lifted all restrictions on foreign investment. Within the countries, policies are aimed at creating and encouraging market economies. After the experience of the debt problem and socialization programs, they have come to realize the failure of state economies and their incompetence in solving certain problems. The dramatic changes in the world political climate have contributed to this realization.


For the first time, countries in Latin America have set about pursuing a market economy and liberalizing trade or foreign investment, with the support of public opinion. Therefore, it is not only an elite, an intelligentsia, or a group of interested businessmen who advocate these policies but the entire population of the country. It is this point that characterizes the tremendous efforts that have been undertaken by debtor countries. It is hoped that the debtor countries’ efforts will continue to be recognized by the creditor countries.

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