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Billions in U.S. : Private Cash Drains From Latin World

Second of two articles.

August 18, 1986|JOHN M. BRODER | Times Staff Writer

CALEXICO, Calif. — Latin Americans employ all manner of schemes to convert their savings into dollars and spirit them away to havens abroad. They fake export invoices, smuggle gems, create phony Caribbean corporations and take kickbacks on foreign business deals.

Jose Silva, a 34-year-old pharmacist's assistant in Mexicali, Mexico, on the California-Mexico border, simply hops in his beat-up Datsun and drives two miles across the border to the Calexico branch of First Interstate Bank, where he puts $50 a month in a passbook savings account. He keeps no money in Mexico.

"It's because of the safety of the dollar," Silva explained recently.

When bankers and economists speak of capital flight from the Third World, most people think of corrupt government officials and crooked businessmen stashing millions of looted dollars in numbered accounts in Zurich and private banking departments in Miami and New York. They envision presidents-in-exile living in splendor in Hawaii or the south of France, of luxury condominium complexes in Florida and Texas and California filled with wealthy Latins.

But throughout Latin America, the urge to hoard dollars extends to the shop worker, farmhand and domestic servant, who, if they cannot get their $10 bills into a U.S. bank, will keep them in shoe boxes at home. And while politicians decry capital flight as unpatriotic, it is utterly rational in light of steady devaluations and rampant inflation that quickly dissipate the value of savings held in local currencies.

The equivalent of $1,000 in Mexican pesos deposited in a Mexican bank in 1980 is worth about $125 now. The same sum in Argentine pesos banked domestically six years ago is virtually worthless today.

Savings Disappear

But $1,000 placed in a U.S. money market fund at the same time would have nearly doubled in value.

"It's very simple. When you face inflation, you buy dollars," said Adalbert Krieger Vasena, former Argentine finance minister and World Bank executive vice president for Latin America. "You can't blame people who have seen their savings disappear. On the contrary, you can blame a man, the head of a family, for not protecting his money.

"In Argentina, it goes to the lowest level. A fellow who works for me on the estancia (ranch) asked me, 'Senor, can you sell me dollars?' A maid in the house said, 'Please, sir, invest for me in some dollars.'

"That money will not come back. You can't fool them with speeches or appeals to patriotism," Krieger Vasena said.

Capital flight is both a cause and a result of Latin America's debt crisis. Frightened and cynical citizens drain needed capital from floundering economies, exacerbating the region's difficulties in repaying its collective debt of $370 billion to foreign banks and governments. The effect is to deepen a region-wide recession and discourage foreign lenders from committing new money.

New Policies Sought

U.S. Treasury Secretary James A. Baker III has said that the crisis will persist until Latin governments adopt policies to staunch the cash outflow.

"As a practical matter, it is unrealistic to call upon the support of voluntary lending from abroad when domestic funds are moving in the other direction," the Treasury secretary said last fall in announcing a series of steps aimed at resolving the debt problem. "Capital flight must be reversed if there is to be any real prospect of additional funding."

It is impossible to gauge precisely the extent of capital flight, because it is often illegal and usually practiced clandestinely. But by all available evidence, the exodus of cash from major Latin debtor nations and a number of other developing countries over the past decade has been massive.

According to a recent study by New York's Morgan Guaranty Trust, $123 billion left 10 Latin countries between 1976 and 1985 as flight capital. During the same period, those nations' foreign debt increased by $270 billion.

Billions Were Lost

In other words, an amount equal to nearly half of all the money that flowed into the region slipped right back out, like water through a leaky bucket. Morgan suggested, in its usual understated way, that the lost billions might have helped to repay debt and rebuild troubled economies.

The phenomenon is not limited to Latin America. The bank study also identified India, South Korea, Malaysia, Nigeria, the Philippines and South Africa as having capital flight problems.

But in Argentina, Mexico and Venezuela, the practice has been elevated to art. According to Morgan, without the unchecked cash migration from these countries, there would be no debt crisis.

The bank said that if the billions had been invested domestically and not in foreign banks and real estate, Argentina's foreign debt today would be $1 billion, not $50 billion; Mexico's debt would be $12 billion, not $97 billion, and Venezuela would actually have a capital surplus of $12 billion instead of a debt of $31 billion.

Foreign Banks Reap Profits

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