CEPAL Review - Volume 1987, Issue 32, 1987

The topics of internal debt, external debt and the process of adjustment and economic transform ation have special features which distinguish them from each other. But they also have important interrelationships, often obscure, which must be studied with care. This issue of the CEPAL Review takes up these three topics, with emphasis on their interrelationships.

Closely linked to the external financing difficulties of Latin America is the problem of domestic financing and debt, a problem less studied and understood but no less important. In many countries of the region this problem has helped to delay economic recovery and discourage the accumulation of capital, and sometimes the steps taken to solve it can work against the programmes and policies designed to cope with the problem of the region’s foreign debt.

In the first half of the 1980s one of the clearest developments in Colombia’s financial sector as in that of several other Latin American economies, was the increasing indebtedness of private and public enterprises. A large part of the increased lending was of domestic origin and this led to an unprecedented growth in the financial assets held by the public and the interm ediation systems. At the same time the form erly buoyant stock market went in to its death throes; the great majority of shares came into the hands of a few large investors, for the small investor put his savings into the financial instruments issued by the intermediaries who were lending to business.

The crisis of the 1980s was preceded in Peru by five years of economic stagnation which accentuated its effects. Gross investment fell sharply, as did industrial and farm production and construction. However, this fall was due mainly to activities connected with domestic demand, for activities responding to the international market did not have the same results.

There is a growing consensus in the region that the Latin American econom ies should become more efficient, more internationally competitive and less insulated from m arket forces, even if this restructuring is achieved through more pragm atic and selective instruments than those usually proposed by the Centre.

Conversion of foreign debt is an econom ic policy instrument of both positive and negative potential for the regional economy. The positive potential includes reduction of the cumulative value of the debt and of the interest payments, improvement of the financial situation of enterprises, repatriation of fugitive capital, and direct foreign investment in priority sectors. The negative potential includes a net adverse effect on the balance of payments, increased inflation resulting from increased issue of money, denationalization of the economy using subsidized capital, and crowding out in the use of foreign exchange. The final mix resulting from conversion is determined mainly by the modalities with which this tool is used.

The countries of Central America did not manage to escape the effects of the crisis of the 1980s, despite having pursued a relatively conservative external financing policy. Although their external debt was mainly public or backed by the government, the increase in interest rates and deterioration in the terms of trade created considerable external imbalances which forced them to apply stringent adjustment policies. Economic activity weakened and the countries had to choose between finding new sources of financing or transferring the whole impact of the crisis to the domestic economy.

In 1982 the flow of external resources to Latin America suddenly stopped, and the countries of the region were obliged to devise economic policies consistent with the shortage of foreign exchange. This article makes a critical analysis of these policies and reviews a number of options.

The problem of adjustment to external imbalances has become a focus of the attention of economists in Latin America. Various analytical approaches to this problem have been proposed. The current account approach places the emphasis on international trade; the capital account approach places it on financial flows, w hile the monetarist approach of the balance of payments is based on the global balance of international payments. Each of these approaches gives rise to a set of economic policy measures.