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THE DEBT AS A LEVER FOR ECONOMIC POLICY CHANGE: A tale of two continents

Oscar Ugarteche

Discussion Papers from Research on Money and Finance

Abstract: Latin America has had repeated debt problems in the 1820’s, 1870’s, 1930’s and in the 1980’s. All of them have had an external origin that combines portfolio theory of interest rates with weak tax revenues. In the 1980’s it was a result of the sudden jump in US interest rates in 1979-81 to its highest historical record with a simultaneous depression of commodity prices that strangled the external sector. That external problem became internal as the need for fiscal resources and foreign currency for increased debt service led to reduced public sector wages and expenditures while foreign exchange policies attempted to foster more exports and put a brake on imports while generating inflation. By 1990 the entire Latin American economy had been transformed, the domestic market lost ground, the wage bill on GDP was reduced, welfare polices were substituted by anti poverty policies and social commonsense was won over by the IMF/WB argument that the economy required to be totally opened for international financial investment. The Hayekian view won over the Keynesian, or better over the Latin American structuralist. This meant the demise of the Economic Commission on Latin America and the Caribbean (ECLAC) and the surge of Washington based IFI’s as policy makers. In this article we wish to present some comparative elements between the Latin American and the current European debt crisis.

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