Debt Trap


MEXICO, and the rest of Latin America as well, has become the land of opportunity for the western industrialized nations and the international lending institutions they control. A combination of bad luck and poor economic planning has contributed to creating a state of economic chaos in Mexico. In August, the country's Ministry of Finance found itself unable to repay foreign banks approximately $20 billion in loans that came due this year. The lenders extended the repayment period but also made the most of Mexico's desperate position by attaching a number of conditions to the debt extension. As a result, a significant share of the Mexican government's economic policies will come courtesy of the U.S. Department of Treasury, the Federal Reserve, the International Monetary Fund (IMF) and the World Bank.

The crisis arose under outgoing Mexican President Lopez Portillo whose term ended last month. Portillo had attempted an ambitious program of quick economic growth based on revenue from oil exports, and it brought Mexico a brief period of prosperity. But last year, the worldwide price of oil fell drastically, sending Mexico's economy reeling. The value of the peso plunged, and nervous Mexican businessmen began investing their money abroad. Finally, in late August of this year, Mexico was scheduled to erase about one fourth of its $81 billion debt--the largest in the world--and Portillo had to announce that his country could not pay.

America first seized the opportunities offered by Mexico's cry for help. The Treasury and Federal Reserve came up with $3.7 billion in new loans and assistance and extended the repayment time for $18 billion in old loans. The U.S. also entered into talks with the largest lending institutions, the IMF and World Bank, to decide how the Mexican economy should be stabilized. The result was a new three-year IMF loan of $4.5 billion, backed by the credit of the U.S.

Although the Wall Street Journal described the payback rescheduling as "a major international rescue operation," the move actually had little to do with benevolence. For its role in the "rescue," the U.S. got an agreement from Mexico to quadruple exports to America by next summer. Mexico has also agreed to disregard future oil price guidelines drafted by the Organization of Petroleum Exporting Countries (OPEC). The U.S. will buy Mexican oil for between $25 and $28 a barrel, which undercuts the OPEC price of $34 a barrel.

The conditions imposed on Mexico will not help the country recover. In fact, quadrupling exports to America in 12 months and lowering petroleum prices will further dissolve Mexico's crucial oil income. And the huge debt has not been reduced, just drawn out over a longer period.


Other Latin American countries will soon find themselves repeating Mexico's experience. Brazil's debt now stands at $75 billion, and its economy experienced a 4 percent decline in gross national product last year. In 1980, Bolivia and Panama each owed amounts exceeding their gross national products. Peru recently diverted $2 billion from development funds to service its debt. Altogether, Latin America's foreign debt amounts to $240 billion.

This predicament has not escaped the notice of the developing world. In Havana last spring, at the annual meeting of the Association of Third World Economists, representatives of developing countries praised a proposal for the formation of a "debtors' cartel" to negotiate more favorable credit terms from Western lenders and put an end to the IMF's "financial colonialism."

While a showdown seems unlikely in the near future, developing countries should form the debtors' cartel anyway to dramatize their need to break out of the vicious circle of indebtedness that hands control of entire countries over to outsiders.