Tropic of Chaos_ Climate Change and the New Geography of Violence - Christian Parenti [93]
The Mexican economy was now like a waiter rushing forward with a tray full of dishes: keep moving and you are okay. But, as the bankers say, “It’s not speed that kills; it’s the sudden stop.”
Crash
The sudden stop took the form of that disciplinary recession unleashed in 1979 when the US Federal Reserve, under Paul Volcker, jacked up rates. This triggered (but did not cause) the Latin American debt crisis. As the crisis worsened, the International Monetary Fund (IMF) and World Bank stepped in. As chapter 13 on Brazil explains, assistance from the Bretton Woods institutions came with strings attached: emergency loans were given only if austerity was imposed and exports increased. But increased exports meant an oversupply of primary commodities and therefore declining prices. Thus, the debt crisis begat the commodity crisis, a prolonged period of low prices for primary commodities such as timber; metal ores like iron, bauxite, and tin; grains and foods like sugar, coca, coffee; and, to some extent, oil. By one estimate, commodity prices declined 35 percent during the 1980s.58 As a result, many economies in the Global South—the ones now feeling the first effects of climate change—suffered relative stagnation for nearly two decades. Only the overflow of the long Chinese boom and the early impact of climate change finally broke the torpor beginning around 2004 and accelerated to the food crises of 2008 and 2010.59
The commodity crisis essentially had three causes: (1) the economic slowdown in the developed countries; (2) the rise of synthetic subsidies in part as a result of the oil-price hikes of the 1970s, which raised incentives for new industrial engineering techniques; and (3) the structural-adjustment policies of the IMF and World Bank that forced debtor nations to increase exports and devalue their currencies.60
In the summer of 1981, as the effect of Volcker’s monetarist squeeze went international, oil prices began to slide, and Mexico faced badly diminished revenues and the world’s largest foreign debt: $70 billion. Mexican economists had projected the country would have oil revenues of $20 billion in 1981 and $27 billion in 1982. Both borrowing and domestic spending were based on those figures. In 1981, however, oil brought in a mere $14 billion, and the next year was also below target.61 The cost of debt servicing now consumed most of Mexico’s projected petroleum sales, thus most of its foreign earnings.62 By the summer of 1982, Mexico owed almost $81 billion to foreign banks, and that sum was growing. To avoid default, the peso was devalued, and the government imposed limited capital controls. It was the second devaluation of the year.63 Rich individuals and private firms began to panic and shift their wealth out of the country.
On August 12, 1982, Mexico announced that it could not pay its bills and took the first steps toward default, declaring a ninety-day moratorium on repayment. The peso was devalued 30 percent and before year’s end would drop another 53 percent.64 As the New York Times explained, “A default by Mexico could have serious effects on the American banking system and on banks throughout the world. According to one American banker, some United States banks have as much as 90 percent of their capital on loan to Mexico. Even at banks with relatively small exposure, the Mexican loans represent 30 percent of their capital.”65 In early September, President José Lopez Portillo nationalized the country’s private banking system, freezing negotiations with the IMF.66
Bailout ’82
The eventual compromise involved the US Federal Reserve, the IMF, and most of the 800 banks to which Mexico owed money.67 In exchange for $12 billion in credit, Mexico began economic liberalization and imposed austerity. Out went Keynes; in came Hayek.