What happened in the Latin American countries after the so-called Mexican Debt Crisis? Explain the reasons for the debt crisis of the eighties. Comment on the transfer problem. Comment on the many policies adopted to solve the debt crisis. Were they efficient?
A debt crisis developed in the 1980s that engulfed many of the so-called developing countries. Banks in North America and Western Europe kept pushing surplus funds at high rates of interest to governments that primarily were pursuing economic populist policies. Within a few years, it became impossible for the debtor countries to make even the interest payments on the huge debt loads.
In August 1982, Mexico declared that it could no longer service its external debt. MexicoÆs admission marked the official beginning of the ôThird World Debt Crisisö and Latin AmericaÆs so-called ôlost decadeö. Chile, which had implemented so-called free market reforms in the 1970s, was not spared the misery that hit the Latin American countries (such as Brazil and Argentina) that had retained statist policies.
Transfers became a major headache. Much of the external debt loads afflicting the debtor countries was owed by private companies. In many Latin American countries, the private debt was transferred to the government, which, in effect, meant it was transferred to the ordinary citizens who would pay the cost (either through taxation or through devalued savings). Hyperinflation also resulted in a transfer of wealth those people who had savings in domestic currencies to those who held dollars. The transfer problem also fueled inflation, as firms attempt to stem their losses through higher prices.
Different countries tried different policies to deal with the problems. Mexico resorted to deficit financing to fund expansion through investment. A low-interest monetary policy accompanied this fiscal policy with the result that capital fled the country. The outflow of capi...