El País (Spain): the burden of debt that drags on Latin America

Governments that spend a lot of money to mitigate the effects of the economic crisis at the end of the pandemic will have a huge debt. According to recent data from the world Bank, in 2018, the total external debt of Latin America and the Caribbean amounted to 1.87 trillion dollars. Even before covid-19 international monetary Fund (IMF) warned about the risks associated with the growing debt. But for many countries, borrowing is the only way to provide citizens with all necessary until the pandemic coronavirus they can’t go to work.

If someone thought that the international community and different agencies will help to ensure that rich countries saved most needy, those hopes were dashed. Each country is so focused on helping its population that has neither the time nor the desire to create a plan similar to the Marshall plan implemented in Europe after the Second world war. But critics argue that it wouldn’t work, because the current situation differs from the post-war.

As explained by senior Advisor research Department inter-American development Bank Alejandro Izquierdo (Alejandro Izquierdo), take loans must be considered as a buffer, or mechanism, which helps to soften the blow: “it is Highly justified to use a buffer in such critical moments. But then we need to demand from the government to reduce costs and make them more effective. Otherwise, pay for this will have youth.”

The fact that the Latin American countries in the past could not properly spend the money. According to a study by Izquierdo and colleagues, every year, inefficient use of funds by the governments of Latin America and the Caribbean leads to a loss of $ 220 billion, equivalent to 4.4% of GDP for the whole region. This means that in the context of the world crisis and the pandemic, increased costs do not necessarily help to restore the economy. Inter-American development Bank has identified three cost items which, although used with the best of intentions, governments tend to become a bottomless barrels: targeted cash transfers, lack of transparency in public procurement and high-paying jobs.

“Now it makes sense to increase debt, but, in my opinion, it is also necessary to require from governments a more responsible attitude. In the future, these additional costs are not turned into fixed costs. The government increased the efficiency of spending, which eventually will lead to fiscal surpluses and reduce debt. Citizens have the right to demand this, because otherwise the bills will always pay future generations,” — said Izquierdo.

In this regard, Mexico, ranked second in the region in terms of economic development, stands out for its desire not to increase debt in order to cope with the economic crisis caused by the pandemic. The country has enough available funds, and the budget deficit can be regulated, so if Mexico wants to, it can borrow even more.

What awaits Latin America

According to the UN Economic Commission for Latin America and the Caribbean (ECLAC), this year the region will undergo the worst economic downturn in history. GDP declined by 5.3%. According to the International labour organization (ILO) last month in the pandemic 14 million workers in the region have already lost their jobs. Increasingly, the current situation is compared with the post-war, so the leaders like the Prime Minister of Spain Pedro Sanchez and his Mexican colleague andrés Manuel lópez Obrador was asked to create for your own region, a new Marshall plan. Recall that the name of former Secretary of state Marshall tied the financial assistance the United States provided European countries since 1948. These funds were used exclusively for economic recovery.

Is there a historical precedent that will help the region cope with this crisis?

“I’m afraid not,” answers the expert in the field of economic history, writer and Professor at Columbia University in new York, Adam ACE (Adam Tooze). “Because we really haven’t had such experience.”

After the financial crisis of 2008 and 2009, the Chinese government has allocated a very large amount of money to stimulate the economy, and this helped countries that China buys raw materials such as Brazil, Argentina, Chile and others. But this time China is not going to take similar action and this is bad news for Latin American countries. According to Adam ACE, production for export is a vital engine of the global economy, and now there is an atmosphere of uncertainty.

“In the long term we have to wonder: is it possible to recover the driving force of economic growth? We have never been faced with such turmoil around the world. It’s scary. Defies comparison. I think we should be realistic about the scale of this shock,” he added.

As much of a choice no, Latinos should demand from the governments to make debt cost of interest that she will have to pay in the future. That is, that the expenditure was efficient, transparent and, above all, temporary as there is a risk that the state will get used to higher costs in the future to pay the debt by raising taxes will have the younger generations.

For help no one will come

The UN also called on rich countries to provide developing countries such as Latin America, the financial assistance program similar to the Marshall Plan. At meetings this spring, the international monetary Fund (IMF) and the world Bank was ready to start discussions on the project on creation of the global Fund assistance to the neediest countries, but the United States prevented. “I’m very critical of nostalgia for the Marshall Plan. People who are encouraged to create a model for the type of Marshall Plan, are not aware that the context in which it was applied was very different. The plan was implemented, in a world where, in principle, there was no private debt. Before the government took money to another, which ensured precise control of the balance of payments,” says Adam ACE.

“The world has changed,” says ACE, author of “the Collapse. As the decade the financial crisis changed the world” (Crashed: How a Decade of Financial Crises Changed the World). The government are borrowing not only from other governments or international organizations such as IMF or world Bank, but also issue bonds that are buying private banks, and international funds. The Argentine case shows how vulnerable private debts. Now, despite the fact that the country failed to reach an agreement with the IMF on debt, it is private lenders refuse to obtain small payments towards the debt, which is 66,238 billion dollars. The debt of Argentina, accounting for almost 90% of gross domestic product (GDP). The IMF said that the debt level is “unsustainable.” On Friday, may 22, the deadline for the redemption of bonds in 503 million dollars, and lenders already know that the money they receive.

As explained by Adam ACE, a risk of creating financial aid programs type of Marshall Plan is that the money will go on repayment of debts of state banks and private funds. They will not be used for the implementation of measures to restore the economy. That is, when a country that needs money to any Bank, will receive financial assistance, she can spend it on interest payments instead of having to develop the infrastructure and programs to restore the economy. Therefore, as noted by the UN, any financial support must be accompanied by measures to control capital, that he was not in the vaults of a private Bank on wall street. Former IMF chief economist and Professor of Economics and public policy at Harvard University Kenneth Rogoff (Kenneth Rogoff) agree and strongly in favour to suspend payments on account of repayment of debt by developing countries, including payments to private creditors.