Abstract

The explanation for the worse performance of Latin America in the 1980s vs. the 1930s must be found, not in the magnitude of the trade and capital account shocks, which were in fact worse during the Great Depression, but in the international response to the crisis. During the 1930s, external debt default opened the space for counter-cyclical macroeconomic policies. In contrast, during the 1980s, Latin America faced strong pressures to avoid prolonged defaults and was forced to adopt contractionary macroeconomic policies. Averting default helped the U.S. avoid a banking crisis, but at the cost of a lost decade of development in Latin America. The Brady Plan came very late, but helped create a market for Latin American bonds. Two basic implications are that there is a need to create an international debt workout mechanism and that international financial institutions should never be used to support the interests of creditor countries.

Read the full paper at Initiative for Policy Dialogue.