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Tough Talk

September 29, 1985

This past week's opening of the 40th General Assembly of the United Nations brought with it much-needed reminders that the Latin American debt crisis is still far from resolved.

In their speeches before the General Assembly, major Latin American leaders emphasized that the region's $370-billion foreign debt is the most severe problem that they face. And they warned that the economic methods being used to deal with their indebtedness--budget-cutting and other forms of austerity prescribed by the International Monetary Fund--are not working well, and may have to be scrapped in favor of new approaches.

In the strongest and most controversial speech, Peruvian President Alan Garcia Perez told the delegates, "We are faced with a dramatic choice: It is either debt or democracy." He then threatened to pull his country out of the IMF if the fund's managers do not agree to change their policies to make it easier for Peru to pay the $14 billion that it owes to foreign creditors. In private meetings afterward, other world leaders at the United Nations took Garcia to task for his threat. They pointed out, quite correctly, that leaving the IMF could have serious repercussions for Peru, and is not an option to be tossed about lightly.

But, in fairness to Garcia, his threat is not the most drastic that has emerged from Latin America during the last three years of economic crisis there. Cuban President Fidel Castro has called on the Latin nations to simply repudiate their debts. Characteristically, the Cuban leader took this macho stance only after he had quietly renegotiated Cuba's debts. Garcia has tried to stake out an alternative position to Castro's--urging other Latin American nations to pay their bills, but also to follow Peru's lead by demanding concessions from the IMF, other lending agencies and the world's major banks. His most noteworthy proposal is to limit Peru's debt payments during the coming year to only 10% of its export earnings--a reasonable plan when compared to Castro's cynical suggestion.

Brazilian President Jose Sarney followed Garcia to the U.N. podium, and, while his words sounded moderate in comparison to the young Peruvian leader's, they were no less dramatic. He told the delegates that Brazil will be able to pay its $103-billion debt only with economic growth, "not with unemployment, nor with hunger." As Brazil's first civilian president in more than 20 years, Sarney also warned that severe austerity could endanger the still-fragile democracy of his nation and other Latin Americans countries with new civilian governments.

In a speech for Mexico, Foreign Minister Bernardo Sepulveda warned the delegates that the massive earthquake in his nation will only exacerbate the country's economic woes and make the repayment of Mexico's $96-billion debt all the more difficult.

In light of these warnings it is encouraging to note that the Reagan Administration has finally begun to accept the fact that the Latin debt is a political as well as a financial problem. It was reported last week that U.S. officials had begun drafting proposals, to be presented at next month's meeting of the IMF and the World Bank, that could lighten the debt burden on the Latin Americans. In general terms the United States will urge that the World Bank and regional development banks provide more loan guarantees to Latin American debtors in order to spur more foreign investment and long-term development projects there.

But, while that is a step in the right direction, it will probably not be enough to deal with a crisis of this magnitude. It is disappointing to note that the Administration has still not given serious consideration to the Latin American Marshall Plan proposed by former Secretary of State Henry A. Kissinger. That provocative proposal is based on a better understanding of how concerned Latin Americans are about the debt crisis' long-range implications. Leaders like Garcia and Argentine President Raul Alfonsin genuinely fear that massive debts will leave their countries in a state of economic underdevelopment well into the next century. And they worry that the hunger and the poverty that result from this backwardness will lead to political unrest and violence, undermining their democratic and largely capitalist systems. If that happens, future leaders of Latin America could, as Castro urges, refuse to pay their debts, undermining the international financial system.

Kissinger understands the serious security implications of widespread financial chaos or Latin American instability for the industrialized West, which is why he proposed his Latin American Marshall Plan. Now the Administration must take the problem as seriously, and must understand that tough talk--even threats--about the debt crisis by Latin America's leaders is not mere rhetoric. Unless the United States and other Western democracies respond with dramatic gestures of their own, the Latin American debt crisis may not be resolved peacefully.

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