With the 10th anniversary of the Latin American debt crisis just past, some journalists and academicians are suggesting that "crisis" is too strong a word to describe the series of events that began in the summer of 1982.
They support that argument with two main points. First, they say that, in hindsight and despite dire predictions, the crisis didn't bring about the collapse of the international banking system. Second, they cite the profound economic and political transformation under way in a number of countries in the region.
Given my background as an amateur historian and career banker, I'm not terribly surprised by these views.
The historian in me accepts that revisionism is a natural stage in the evolution of how we view the past. In the United States, we see it regularly in a peculiar rite by which, after a certain number of years, popular former presidents are demeaned and the unpopular are applauded for their newly discovered competence and statesmanship.
Real Enough at the Time
But as a banker who has spent practically all of the last 10 years renegotiating the commercial bank debt of the nations of Latin America, I assure you that any cursory glance at the newspaper headlines in the summer and fall of 1982 would underscore the alarm the crisis provoked.
In response to that alarm, a group of public officials and private bankers set to work to prevent that debt bomb from exploding.
At the core of their actions was the belief that the crisis not only could be managed but had to be managed, given the enormous stakes. Loans to troubled debtor countries by New York money-center banks, for example, exceeded those banks' capital.
In addition, the possibility of a major bank encountering funding problems in the markets could have started a chain reaction that would have severely shaken the international financial system. The U.S. Federal Reserved and other central banks were among those deeply concerned.
Evidence of Leadership
The facts that the international banking system didn't break down and that many Latin American countries are today at the forefront of economic reform testify to the leadership of those involved, both in the early years of the crisis and now.
If greed often drives people apart, fear often draws them together.
At the beginning, a sort of partnership emerged among representatives of the creditor governments, notably Paul Volcker at the Fed; many of the borrower countries; the international financial institutions, in particular Jacques de Larosiere at the International Monetary Fund; and commercial-bank creditors.
The resulting cooperation ultimately overcame widespread fear that the international system would collapse.
Historic Toronto Meeting
Those anxieties were especially pronounced at the September 1982 IMF/World Bank annual meetings in Toronto. I can still recall people using the old phrase "rearranging the deck chairs on the Titanic" to describe the discussions in Toronto on what to do about the spreading crisis.
The sense of cooperation among the various parties was perhaps best exemplified by the leaders of Mexico's economic team, Jesus Silva Herzog and his chief debt negotiator, Angel Gurria, both of whom believed that the best interests of all could be achieved by working together.
As the crisis wore on, Latin America's political leadership rose to the occasion, as evidenced by the reform programs enacted by successive governments in Chile, as well as in Mexico under the administrations of Miguel de la Madrid and Carlos Salinas. Today in Argentina, the leadership of President Carlos Menem and Finance Minister Domingo Cavallo has contained once-rampant inflation, attracted foreign investment, and restored growth.
The experience of several Latin in American nations has demonstrated that certain key criteria exist for carrying out a successful economic reform.
Recipe for Success
In short, such a formula entails a strong head of state, a viable economic plan, an economic team that works together, a belief in the plan by all senior officials involved, and most importantly, a method to convince all levels of society of reform's benefits. Continuity in carrying out a reform program from one administration to the next is also essential.
During the last decade in Latin America, we have also seen how economic reform failed in those countries that restricted their efforts to short-term stabilization programs. Economic reforms that lead to sustained growth must also focus on adopting structural economic changes such as trade and tariff liberalization, privatization, deregulation, and tax reform.
The successful economic transformation of those Latin American countries that have installed such structural reforms now serves as an example for other developing countries. Those in Central and Eastern Europe come immediately to mind.
Only time will tell whether the trend toward economic reform is permanent. While I'm confident that reform will endure in many of these countries, we should always be aware of its fragility and never underestimate the cost of economic adjustment.
At the same time, we should never forget the strong need to educate all levels of society about the long-term benefits of a reform program.
As I look back on the last 10 years, I take satisfaction in the results we have achieved:
The international banking system remains intact; banks have been able to increase capital substantially and bolster reserves; and some countries that had once been in bad economic shape are now being held out as models of what reform can accomplish.