The Mexican peso crisis of December, 1994, pro- duced a series of rapid consultations between U.S. and International Monetary Fund (IMF) advisers and Mexican government officials. Guided by their First World advisers, these Mexican technocrats designed an austerity program to curtail public spend- ing, privatize state industries, ease price controls and cap wages. Hailed by the White House and the IMF, these belt-tightening moves were enough to convince international financial observers that the country-- despite its financial crisis-would be able to meet its domestic and foreign obligations. The fear that Mexico might soon be unable to service its foreign debts was dispelled, and the country qualified for a bailout from outside funders. 1 The foreign-consultant/foreign-debt connection has long helped to shape the economic restructuring and development of Latin America, and has determined the destinies of numerous other indebted countries. 2 In 1991, for example, four years prior to the Mexican bailout, U.S. President George Bush told Russian President Boris Yeltsin that Russia could not obtain massive new loans until it sought the guidance of the IMF At the same time, a U.S. economist from Harvard, Jeffrey D. Sachs, coun- Paul Drake is Professor of Inter-American Affairs and Dean of Social Sciences at the University of California at San Diego. This essay is adapted from his "Introduction: The Political Economy of Foreign Advisers and Lenders in Latin America," in his edited book, Money Doctors, Foreign Debts and Economic Reforms in Latin America from the 1890s to the Present (Scholarly Resources, 1994). BY PAUL DRAKE seled Yeltsin on how to acquire foreign loans and con- struct a capitalist system. Sachs had proved his mettle previously by designing sweeping reform programs for heavily indebted Poland and Bolivia. His activity paral- leled visits to Poland and Bolivia over sixty years ago by another U.S. academic economist, Dr. Edwin W. Kemmerer of Princeton University. Known as the "Money Doctor," Kemmerer restructured those coun- tries' economies and rewrote their economic legislation in order to placate foreign lenders. The phenomenon of "money doctoring" has a long his- tory in the so-called Third World due at least in part to the chronic economic and political instability that has characterized underdeveloped countries. Through the successive debt cycles of the past two centuries, money doctors have performed their operations in various ways, but always on borrowers, not lenders. By inspecting and restructuring indebted economies, they have served as intermediaries between debtor/borrowers and creditor/ lenders, sending reassuring signals to foreign investors. The seal of approval of these monetary medics has helped risky credit recipients attract loans in the first place, acquire subsequent loans to help repay the old ones and adjust or escape from some of those obligations during debt crises. The evolution of their practice has been deeply tied to the cycles of debt and repayment that have accompanied Third World economic development. In Latin America, the first of these cycles occurred during the wars of independence of the early 19th cen- tury, during which naive Europeans invested in the fledgling new republics. By the end of the 1820s most 32 NACIA REPORT ON THE AMERICAS 0 0 t, oi uREPORT ON THE DEBT The United States first elaborated its brand of money doctoring after the Spanish-American War in 1898, when it dispatched economists along with troops to install economic as well as political institutions in its new colonies and semicolonies. Harvard's Jeffrey D. Sachs, a contemporary Money Doctor of the new governments had defaulted. They were nei- ther able to revive their war-torn economies quickly nor fund the new state apparatus-let alone repay their external obligations. Some of these financial burdens continued to hang over the young republics until the 1920s, though other loan spurts occurred in the 1860s, 1880s and 1900s. The external economy was dominated by Great Britain throughout this period. he United States first elaborated its brand of money doctoring in the formal and informal empire it carved out of Spain's former posses- sions in the Caribbean and the Pacific. After the Spanish-American War in 1898, the U.S. government dispatched economists along with troops to install eco- nomic as well as political institutions in the colonies and semicolonies it acquired. From the 1890s to the 1920s, security and economic motivations led to U.S. interven- tions in putatively sovereign countries in the Caribbean and Central America. The justification for meddling in the Caribbean Basin was to impose order so that other imperial powers would have no excuse for intervening with force--especially the excuse of collecting overdue debts. That concern led to U.S. involvement in these nations' fiscal and financial affairs to guarantee that suf- ficient revenues were available for debt servicing. Intrusion in the management of foreign economies involved the installation of U.S. institutions and proce- dures. In extreme cases, U.S. officials were also appointed, for example, to collect customs receipts and regulate the money supply. Another outcome of intervention was that it became more convenient for the United States to have U.S. banks become the primary lenders to these republics, often arranging new loans to pay off dangling debts to Europeans. The United States encouraged loans because of their intrinsic profitability and because they underwrote the purchase of U.S. goods. Those loans were secured by a variety of safeguards, including treaties, contracts, legislation, soldiers and money doc- tors. The United States carried out the most thorough financial sanitation in countries that became protec- torates under treaties that conceded the U.S. the right to intervention. Such treaties were in effect at various times in Cuba, Panama, the Dominican Republic, Haiti and Nicaragua. 3 In the opening decades of the 20th century, the U.S. government found it increasingly efficacious to export expertise through private agents rather than government officials. By favoring independent missions hired volun- tarily by host countries, Washington avoided any appearance of complicity with advisers and lenders. This "hands-off" policy defused anti-interventionist crit- icism at home and abroad. The State Department knew that the same advice would be more acceptable from pri- vate economists than from official representatives of U.S. government or business. Thus, missions legally independent from Washington and Wall Street used per- suasion in South America to replicate much of what U.S. officials had achieved through force of arms in the Caribbean Basin: exchange stability, fiscal rectitude, modern banking, efficient customs administration, reli- 33 8 33 VOL XXXI, No 3 Nov/DEc 1997REPORT ON THE DEBT able debt servicing and an "open door" and equal treat- ment for foreign capitalists. 4 From the 1890s through the 1920s, every Latin American country except Argentina and Brazil con- tracted U.S. financial consultants. They did so mainly to reassure U.S. lenders that they were safe investments. The most successful economic ambassador was Princeton University's Edwin W. Kemmerer. From World War I to the Great Depression, Professor Kemmerer became a sort of one-man IME A champion of central banking and the gold standard, he reformed the monetary, banking, and fiscal systems of Mexico, Guatemala, Colombia, South Africa, Chile, Poland, Ecuador, Bolivia, China and Peru. In the wake of Kemmerer's reforms, private U.S. investors engaged in massive lending to Latin American governments. For U.S. private banks and financial inter- mediaries, the lending frenzy of the 1920s generated millions of dollars through bond issues on the New York Stock Exchange. Through these channels, Latin America received the greatest influx of U.S. private finance capital prior to the 1970s. Then the Great Depression laid waste to this "dance of millions" and to Kemmerer's free-market policy prescriptions. With the Depression, the costs of continued compli- ance with the rules of international finance came to out- weigh the benefits, leading the governments of many of the countries in the region to disobey the prescriptions of the hegemonic power. Yet they did not do away with the procedures and institutions imposed by money doc- tors in the preceding decades. As foreign loans and exchange evaporated, domestic pressures compelled governments to halt payments on their foreign debt. Rather than employing money doctors to attract outside loans, Latin Americans used them to provide excuses when, due to bankruptcy, they were forced to declare moratoria on foreign-debt payments. Most countries suspended payments for at least a decade until they could be resumed after negotiated reductions. 5 At the end of World War II, the victors institutional- ized money doctoring in the IMF The initial goal was to restore the free-flowing international economy that had prevailed prior to the Great Depression. In the ensuing decades, the IMF and other newly created agencies pro- vided economic advice and financial sanitation to Latin America nations. These institutional sources of techni- cal assistance included the Inter-American Development Bank (IDB), the Export-Import Bank, the World Bank, the United Nations (especially its Economic Commission on Latin America), the U.S. Agency for International Development (AID), the U.S. Federal Reserve and other multilateral and bilateral agencies. Like Kemmerer, the IMF normally helped design and implement policies favored by Latin American as well as North American elites. The Fund made its loans to clients conditional on their promise to carry out the prescribed poli- cies. Kemmerer and the IMF tendered sim- ilar recommendations: equilibrate exchange rates, control the mon- ey supply and dis- cipline government spending. In reward- ing those policies, the IMF had more direct influence than Kem- merer, since it could extend its own credits as well as certify Although disagreeing with the IMF at times, Sachs, like most money doctors, has generally echoed its positions in favor of monetary stabilization, government austerity and free trade. creditworthiness to private lenders. From the 1950s onward, Latin American governments began relying on national economists trained in univer- sities in developed countries and endowed with credit- worthy reputations in international financial circles. Educated at the University of Chicago, the civilian advisers to Chilean dictator Augusto Pinochet (1973-90) gained notoriety for dismantling the statist and protec- tionist policies that had accumulated in their country since the Great Depression. Under their tutelage, Chile was one of the most successful countries in attracting foreign loans in the 1970s and one of the most adept at managing the debt crisis of the 1980s. By the mid 1990s, the fame of the "Chicago Boys" attracted flocks of future economists from the rest of Latin America to study at Chilean universities on scholarships from inter- national organizations. 6 fter decades during which public funding replaced private lending, conditions in the 1970s came to resemble those in the 1920s. Private loans to Latin American governments mushroomed. Direct commercial bank credits-not bond issues in the stock market-became the main source of finance capi- tal. To acquire these loans or new ones to repay old notes, countries increasingly had to obtain a clean bill of health from the IME Just as the 1970s in Latin America echoed the 1920s, so the 1980s evoked comparisons with the 1930s. When the international recession hit in the early 1980s, exter- nal financing dried up and interest rates soared. The hemisphere suffered the worst depression since the Great Crash of 1929. As growth and employment plum- meted, the 1980s became known as "the lost decade." Desperately short of resources, Latin American govern- ments struggled to avoid default on their staggering for- eign debts. 7 In the 1920s-1930s cycle of debt infusion and hemorrhage, the U.S. government took essentially the same laissez-faire position it would take in the 1970s-1980s cycle of accumulation and collapse. In both eras, Washington officially argued that U.S. investors and Latin American debtors took their own risks in private transactions. The United States provided no legal guarantee of protection or assistance. During the 1980s and early 1990s, Latin American governments often used visits by the Chairman of the U.S. Federal Reserve Board, IMF officials and U.S. aca- demics to certify the rectitude of their spartan policies. They employed these wisemen to reassert their worthi- ness as recipients of new private and public loans, which have in turn allowed them to maintain at least token pay- ments on their external obligations. Governments have also capitalized on these experts to justify sacrifices to their citizens and to lobby for leniency from their bankers. They have claimed penury, and they have counted on money doctors to legitimize the reduction or suspension of their payments to foreign creditors. Notwithstanding, First World bankers, governments, and multilateral agencies as well as ruling groups in the indebted countries have all agreed that full-fledged default would be an unacceptable blow to the entire international financial system. Since the 1970s, many countries with debt or devel- opment problems have turned to new academic money doctors like Jeffrey Sachs for a variety of reasons. Some governments have preferred these independents to get a wider range of advice than that proffered by the IMF. In VOL XXXI, No 3 Nov/DEc 1997 other cases, governments have not used the IMF because they are effectively in default on their debt payments or because their cit- izens are too hostile toward the Fund. Noncapitalist countries that did not belong to the IMF also engaged the services of freelance money doctors. In many cases, the problems set before these advisers were broader and more severe than those usually dealt with by the IMF or the World Bank. Stanching hyperinflation or creating a mar- ket economy proved more challenging than stabilizing exchange rates. In addition to Bolivia and Poland, Sachs has worked for Ecuador, Venezuela, Peru, Yugoslavia and Russia. In contrast with the "Chicago Boys" in Chile, he has insisted on advising only "democratic" governments. Although disagreeing with the IMF at times, Sachs, like most money doctors, has -1 4ll . : : r 4Pr f gen caiy ec1UU oe ts poMss 111 avor o monetary stabilization, government austerity and free trade. In Bolivia, Sachs supported one of the most dra- matic interventions ever implemented to stop hyperin- flation. He departed from orthodoxy by also recom- mending the reduction of the country's foreign debt obligation. Yet much like his predecessors, Sachs deliv- ered technical expertise and international legitimation. 8 In a narrow sense, the most basic function of these financial and fiscal physicians has been to transfer tech- nology and institutions. Yet more than simply convey- ing new knowledge, foreign economic advisers have been a political device for a large number of actors in both lending and borrowing countries. Whatever their own motivations, these consultants have served three interrelated political purposes: 1) they have helped wealthier nations expand their influence over poorer regions; 2) they have served the aims of political and economic contenders within the host countries; and 3) they have been used to justify and fund governmental growth. Ever since the 1890s, for example, Washington has recognized that its economic and strategic interests could be furthered by U.S. advisers operating overseas. However indirectly, and whatever their motives, U.S. health experts can induce foreigners to purchase U.S. drugs and medical equipment, military trainers can inspire them to buy U.S. arms and doctrines, agronomists to prefer U.S. seeds and farm machinery, artists to con- sume U.S. entertainment, educators to assign U.S. text- books and intellectuals to imbibe U.S. ideas. No matter how scientific, professional or altruistic the agents, their presence has usually encouraged the adoption of the technologies, systems and products of the United States. The implementation of principles and prac- tices taken from U.S. blueprints has reduced uncertainties for inter- national traders and investors. Incorpora- ting translations of U.S. laws into the legal codes of recipient na- tions has compensated for the lack of easily enforceable interna- tional regulations for transactions. In addi- tion, U.S. leaders have hoped that technical missions would gener- ally improve relations with the Third World. experienced the most success when helping polish and legitimize proposals already fav- ored by the ruling elites. In these cases, the adviser's primary role is to deliver and authenticate the ortho- dox institutions and ideas of the era. Sometimes the foreign- ers' stature has elevated certain ideas, institu- tions and individuals to almost untouchable positions of power. Some of their disciples and converts in the host country have become They have also thought that buttressing economic even more zealous and rigid than the advisers them- growth and political stability in low-income countries selves-one case in point being the Chilean "Chicago would reduce the dangers of default, disorder or, worse, Boys." 1 0 revolution. 9 Money doctors can increase a government's prestige While experts have helped external powers penetrate not only abroad but also at home. Faith in technocratic and regulate less developed economies, their second solutions to national problems, especially when crafted function has been to serve the aims of political and eco- by foreigners from more developed countries, has been nomic interests within the host countries. Competing widespead in Latin America. Despite some nationalistic domestic groups-such as bankers and industrialists- resentments, many Latin Americans have viewed for- have capitalized on foreign missions to improve their eign technocrats as being above local partisan divisions. standing vis-a-vis each other and foreign competitors. Seen as more trustworthy and better trained than local They have also used those outsiders and their reputa- notables, these visitors have been able to discredit and tions to tap international sources of credit. override internal opposition to authority and reforms. Money doctors have had profound impacts on domes- New leaders have used the missions' reports to blame tic groups, power relations, governments and political their predecessors for mismanagement and have taken developments within recipient countries. In many cases, advantage of the advising teams' institutional reforms to these advisers have promoted the concentration, urban- recast and restaff bureaucracies. ization and institutionalization of Latin American Over the decades, the general content of the money economies along paths previously traveled by the doctors' recommendations has repeatedly endorsed eco- United States. As a result, the republics have become nomic orthodoxy. Whether in the 1920s or the 1990s, more deeply integrated into twentieth-century global foreign economic wizards have called for stable capitalism; their economies more articulated and differ- exchange rates, restricted emissions of currency and entiated as local elites respond to external opportunities, credit, corrections in the balance of payments, austerity In many countries, the availability of international credit in government to balance the budget and dampen infla- has given expanding urban sectors and governments tion and a general prescription of diet and discipline, gains over traditional landed elites, partly to husband resources in order to repay external Another function of foreign advisers has been to help debts. The very predictability of the pronouncements of host governments justify, rationalize, organize and fund most of these savants has made them exceptionally their capabilities for growth. Those governments have attractive to governments as trustworthy political instru- become better able to collect revenues, control expendi- ments. And as long as Latin America covets financial tures, manage the bureaucracy and obtain foreign loans, assistance from more affluent countries, money doctors In the afterglow of a renowned money doctor, the state will probably continue to proctor those transactions, is often better equipped to negotiate with foreign and especially at a time when the memory of the debt crisis domestic capitalists. Normally, money doctors have of the 1980s still lingers just beneath the surface. The Money Doctors 1. Riordan Roett, ed., The Mexican Peso Crisis: International Perspectives (Boulder: Westview Press, 1996). 2. The best sources on foreign investments in Latin America are provided by Carlos Marichal, A Century of Debt Crises in Latin America: From Independence to the Great Depression, 1820- 1930 (Princeton: Princeton University Press, 1989), and Barbara Stallings, Banker to the Third World: U.S. Portfolio Investment in Latin America, 1900-1986 (Berkeley: University of California Press, 1987). 3. Scott Nearing and Joseph Freeman, Dollar Diplomacy. A Study in American Imperialism (New York: The Viking Press 1925). 4. Emily S. Rosenberg and Norman L. Rosenberg, "From Colonialism to Professionalism: The Public-Private Dynamic in U.S. Foreign Financial Advising, 1898-1929," Journal of American History 74 (June, 1987), 59-82. 5. Paul W. Drake, The Money Doctor in the Andes: The Kemmerer Missions, 1923-1933 (Durham: Duke University Press, 1989). To explore the 1930s debt debacle, see Rosemary Thorp, ed., Latin America in the 1930s: The Role of the Periphery in World Crisis (London: MacMillan 1984). 6. Patricio Silva, "Technocrats and Politics in Chile: From the Chicago Boys to the CIEPLAN Monks," Journal of Latin American Studies, 23:2 (May, 1991), 385-410. 7. On the debt disaster of the 1980s, see Pedro-Pablo Kuczynski, Latin American Debt (Baltimore:Johns Hopkins University Press, 1988); Rosemary Thorp and Laurence Whitehead, eds., Latin American Debt and the Adjustment Crisis (Hampshire: MacMillan/St. Anthony College, 1987); Robert Devlin, Debt and Crisis in Latin America: The Supply Side of the Story (Princeton: Princeton University Press, 1989); and Howard Handelman and Werner Baer, eds., Paying the Costs ofAusterity in Latin America (Boulder: Westview Press, 1989). 8. Jeffrey D. Sachs, Developing Country Debt and Economic Performance (Chicago: University of Chicago Press, 1989). Catherine M. Conaghan, "Reconsidering Jeffrey Sachs and the Bolivian Economic Experiment," in Drake, Money Doctors, 236-266. 9. Charles Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries (Berkeley. University of California Press, 1985). 10. Albert O. Hirschman, Journeys Toward Progress (Westport: Greenwood Press, 1965). Lauchlin Currie, The Role of Economic Advisers in Developing Countries (Westport: Greenwood Press, 1981).
