More than twenty years ago I published a short article on Inter-American relations with the title “Out of Phase.”1 Intellectual fashions in thinking on development, I tried to show, tended to go through changes in the United States that were matched, but in the opposite direction, by shifts occurring at about the same time in the mood of Latin America, the result being an “orgy of misinterpretation and misunderstanding.” I was writing about the concrete experience of the five-year period that lay just behind us then, without any attempt to argue that this mismatch has a necessary or permanent character. But looking at the current scene and noting that my title applies more than ever I almost wonder whether I might have stumbled on some sort of law.

In the earlier paper I talked about switches from one set of beliefs to another. This time I am concerned with a more fundamental, if less easily defined, shift: from total confidence in the existence of a fundamental solution of social and economic problems to a more questioning, pragmatic attitude; from ideological certainty to open-ended, eclectic, skeptical inquiry. Latin Americans have of course long been criticized in the North for the ideological rigidity with which they are supposed to approach many issues. And in the field of economic policy—where discussion often proceeds along ideological lines, the consequence of a long history of antagonistic debate in the North—it is probably true that many Latin Americans have tended to take “ideological” positions (of both left and right) on such matters as planning, the market mechanism, foreign investment, inflation, the government’s role in economic development, and so on.

But recently there have been signs of substantial change in this picture, largely as a result of bitter experience. In the aftermath of the repressive authoritarian regimes that came to power in the Sixties and Seventies, many Latin Americans did more than rally to a politics that accommodates a range of opinions (each of which is firmly held). They were sufficiently shaken in their certainties to wish to engage in open-ended dialogue and deliberation, ready to discover something new about their own opinions and values.2 In Argentina, the Latin American society that has had perhaps the most severe internal conflicts over the past fifty years, the idea of social “concertation,” a process involving much give and take on the part of various social groups, has achieved considerable prestige during Alfonsin’s presidency; and I was told that nobody would today proudly give the name Intransigente to a political party—even though a minor party with that name (dating, as might be expected, from the Sixties) still is functioning. At the same time, the spectacular miscarriage of economic policies inspired by ideology (again of both left and right) has given rise to a new experimental spirit among Latin American economists, intellectuals, and policy makers. This spirit, with its readiness to draw on a wide variety of insights, was strongly evident in the monetary reforms enacted to control inflation under Argentina’s Plan Austral in June 1985 and Brazil’s Plan Cruzado in March 1986.

In both Argentina and Brazil inflation had been running at or close to three-digit levels for some years, since 1975 in Argentina and since 1980 in Brazil, Argentina’s inflation rate being in general two or three times higher than Brazil’s. (For example, prices increased 700 percent in Argentina and 250 percent in Brazil in 1985.) To have inflation proceed at such levels for so long without its accelerating to hyperinflation and getting entirely out of control is unusual. It means that both countries were equipped with elaborate mechanisms for indexing wages, salaries, exchange rates, interest rates, etc., which contributed mightily to making inflation both tolerable and self-perpetuating. In the two countries, fiscal deficits played initially an important role in contributing to the inflation, but as some prices continued to rise sharply for a number of years, it could be argued that the deficit, or a very large part of it, was as much an effect as a cause of inflation.

In 1981, the United States economy went into recession, international interest rates rose sharply, and net international lending came to a full stop in 1982 when the Mexican government declared a moratorium on its debt. As a result, the Brazilian and Argentinian economies came under strong pressure to contract in order to adjust their balances of payments. In the course of the ensuing recession, deep cuts in imports were achieved, helped along by some large devaluations. All the while, however, inflation continued unabated, indeed it accelerated. Under these conditions it is easy to understand why the customary advice of the International Monetary Fund to fight the inflation by contracting the economy even further met with enormous resistance.

In the Fifties and Sixties, a group of Latin American economists had proposed a “structuralist” alternative to the “monetarist” analysis and prescriptions of the International Monetary Fund. The structuralists made a distinction between, on the one hand, “fundamental” inflationary pressures arising from domestic social structures (such as antiquated land tenure systems) and, on the other, the more surface “propagation” phenomena such as the wage-price spiral and monetary expansion. Whatever the merits of this distinction when inflation was in the lower part of the two-digit range, as was the case in the Fifties in the more inflation-prone Latin American countries, it lost plausibility and usefulness once inflation accelerated to the three-digit range. It then became obvious that the “propagation mechanisms” had taken off on their own and had themselves turned into the “fundamental” factors that were driving the inflation. They were now dubbed “inertial inflation” and desperately needed to be attended to.


Faced by increasing threat of hyper-inflation, policy makers in Argentina and Brazil were in a quandary. Disliking the IMF model and left without a serviceable countermodel of their own, they looked for a different approach to policy. They were fortunate in being assisted by a group of economists who, drawing on a wide variety of insights (from the sociological theory of inflation to rational expectations theory) and being endowed with considerable theoretical acumen and practical imagination of their own, had conceived of a novel formula designed to bring inflation under control: the “heterodox shock” treatment of inflation, which was first used in Argentina in 1985 and was then applied again, with a few improvements and under rather more favorable circumstances, at the beginning of 1986 in Brazil.3

Here is a very brief outline of the principal elements of the two reform plans:4

1) The old currency is replaced by a new one (one unit of the latter = 1000 units of the former).

2) Prices and wages are temporarily frozen.

3) Indexation of wages, salaries, monetary instruments, etc., is abolished.

4) With the return to price stability, which thereby improves the fiscal position on several counts, and with the help of additional austerity moves, the governments will cut borrowing from the Central Bank—in Argentina the government pledged to give it up entirely.

5) Prereform contracts involving payments at future dates are assumed to have made provision for expected inflation and their terms are changed by applying to future payments in the new currency a conversion table (tabela), which establishes a series of equivalences between the new and the old currency. Depending on maturity these equivalences are set in line with an official estimate of expected inflation under the old and new regimes.

The principal objective of these measures was to break inflationary expectations and to contain any recessionary impact by not relying exclusively on changes in the monetary aggregates. A very important role was to be played by price and wage controls and this was the principal “heterodox” aspect of the plan, while the tabela was its major technical innovation. To a considerable extent, the success of the reform was thought to rest on the hoped-for replacement by a new “social contract” or by “social concertation” of the tug of war for income shares among different social groups that had long fueled the inflation—unionized workers, price-setting producers, and the state, with its taxing and money-issuing authority. It was this tug of war, institutionalized as it was through widespread indexation of wage rates as well as exchange and interest rates, that was thought to be responsible for the ever larger inertial component of the inflation during its accelerating phase.

Both reforms have already made monetary history. During its early months Brazil’s Plan Cruzado has done remarkably well in bringing inflation down to quite low levels. In Argentina prices have recently begun again to rise at rates of 4 to 5 percent per month. But then Argentina has been even more inflation-prone than Brazil in recent decades, and its powerful unions have political ties to the Peronists who are in opposition to the Alfonsín government. Under the circumstances, it was quite an achievement to have brought down inflation from about 25 percent per month before the reform to present levels.

The remarkable parallels between the Brazilian and Argentinian reforms have several explanations. For one, both countries experienced, at approximately the same time, three-digit inflation and the threat of its getting wholly out of control. More significantly, ideas about the “heterodox shock” had been worked out in intensive, often joint discussions among a group of prominent Argentinian and Brazilian economists who, having both strong democratic convictions and new technical proposals to offer, were given influential policy or advisory positions in the two countries when the inflation took a turn for the worse in 1985–1986. But a third common condition of the two countries is the most interesting: both countries had just recently reinstalled civilian government after a long spell of military rule. At the time of the reforms the new governments had held power for some eighteen months in Argentina and for almost a year in Brazil; in both countries inflation had worsened during those periods, causing the new governments to lose prestige and popular appeal.


Actually both phases—the worsening of inflation and the subsequent successful reform move—through which the fledgling democracies of Argentina and Brazil passed can be seen as conditioned by the politics of the postauthoritarian situation. When a civilian, democratic government first comes into power after a long period of repressive military rule, it is normal for various, newly active groups of the reborn civil society—particularly the long-repressed trade unions—to stake substantial claims for higher incomes. The initial impulse of those to whom the demands are addressed is to grant at least some of them, be it for the sake of social peace or out of a sense of obligation to undo past oppression and injustice. New inflationary and balance-of-payments pressures are of course likely to result from the granting of such demands.

Inflation can nevertheless be a useful mechanism in this situation: it permits newly emerging or reemerging social groups to flex their muscles, with inflation acting as a providential safety valve for accumulated social pressures.5 This works only up to a point, however, with the tolerance for additional inflation varying from one case to another. For example, in post-Franco Spain the tolerance for an acceleration of inflation was probably much greater than in post-authoritarian Argentina and Brazil: in these two countries the inflation was already at a triple-digit level when the civilian governments took over, so that the acceleration of the inflation risked a plunge into hyperinflation with obvious dangers for the prestige and survival of the new democratic regimes.

It does not take much imagination to visualize a simple, and dismal, cyclical sequence: replacement of a military regime by a civilian democratic government; renewed combativeness of different social groups; granting of new demands; worsening inflation; disrepute and crisis of the civilian regime; return of the military. But fortunately the relations between the return to democratic governance and inflation are more complex, as has precisely been demonstrated by the new monetary reforms of Argentina and Brazil. To be sure, new democratic governments, especially when they take over from greatly detested or despised authoritarian regimes, will have to cope with a new burst of combativeness of social groups. But at the same time they can call upon a special reserve of good will and trust, which stands to their credit as a result of the political liberties and human rights they have restored or established. It is this considerable asset of the new Argentinian and Brazilian governments that was a basic factor in the success of the monetary reforms; for if the inflationary tug of war, in which the various social groups have engaged so intensively for so long, is suddenly to be replaced by cooperation and a willingness to believe in the success of the new policy, there must be some basic trust in the state that enunciates the new program. This trust is conditioned less on the program itself, however technically excellent it may be, than on the promise a government embodies and on the mission with which it has been entrusted.6

This special asset of trust and hope can therefore serve as a counterbalance to the tendency toward stronger inflationary pressures that also comes in the wake of political change toward a more humane and more open as well as a more openly contentious society. Of course, there can be no question of any mechanical balance—only of two forces working in opposite directions, at different times, and with varying strength. Also, while the pressures toward inflation are only too obvious, the ability to call up “from the vasty deep” the spirits of trust and solidarity can never be taken for granted, as Hotspur reminds us. Indeed, in both the Argentinian and Brazilian cases, the reforms were enacted with much trepidation as a last resort by governments which were fast losing their grip and which were the first to be surprised by the enthusiastic response and cooperation of the public.

This was so particularly in Brazil where President Sarney, in announcing the reform, had made the daring but, as it turned out, highly effective move of asking each citizen to be an “auditor (fiscal) of the president” in checking on prices posted in stores and supermarkets and in enforcing the price freeze. This was perhaps the most heterodox component of the reform, and one which had not even occurred to the economists responsible for the Plan Cruzado; for, according to one of my informants, this invitation to a direct participation of the individual citizen in the “war on inflation” was added by the president himself to the speech that had been prepared for him by his technical advisers. The response to the invitation was substantial in the major cities during the first days after the reform: many citizens inspected supermarkets with their price lists and, having located some infractions, called upon police to help them close the delinquent stores—all of this being duly televised for presentation at prime time. In this manner, the war on inflation became an exercise in populist politics—a marvelous metamorphosis from the anti-inflationary prescriptions of the IMF which had long been denounced as “imperialist plots against the people”!

The experimental spirit of the Brazilian and Argentinian reforms I have just described suggests what I mean by being “out of phase.” Just when many influential Latin Americans are in a postideological mood, with considerable mistrust toward any system of thought that pretends to have all the answers to the complex problems faced by their societies, they are confronted, particularly in economic policy, with relentlessly ideological positions taken up by the current government of their principal trading partner, foreign investor, and creditor. This is of course not the first time that the United States or multinational institutions strongly influenced by the United States have convinced themselves that they possess the key to progress and development for all those wayward, hence backward, foreign countries. During the Fifties, the World Bank attempted to condition its lending on whether a country established some form of overall economic planning.7 In the Sixties, with the Alliance for Progress. Latin American countries were strongly advised to institute land and fiscal reforms—the latter then meaning stiffer taxes for the rich. But never have Latin Americans been lectured and admonished as insistently as in recent years, this time along very different lines, on the virtues of free markets, of privatization, and of private foreign investment, and on the perils of state guidance and intervention, of excessive taxation, not to mention planning. Such lectures, moreover, now have a captive audience of top Latin American economic policy makers who must make frequent trips to Washington to renegotiate and reschedule the heavy debt burdens most of their countries accumulated during the Seventies.

Ideological preachings of this sort are vastly counterproductive. Besides raising concern among Latin Americans for the sovereignty and dignity of their countries, they now evoke protests to the effect that the world is far too complex a place to be set right by the mechanical application everywhere of some identical and simplistic formula. Ironically, Latin Americans are now returning against their would-be preceptors from the United States the conservative critique of Edmund Burke, with its emphasis on “circumstances” and its refusal to “give praise or blame to anything which relates to human actions, and human concerns, on a simple view of the object, as it stands stripped of every relation, in all the nakedness and solitude of meta-physical abstraction.”8 By pretending to export its free-market credo as a universal remedy, the Reagan Administration is inadvertently cutting itself off from any kind of rapport with the new leadership of the emergent Latin American democracies.

The failure of communication between the United States and Latin America is particularly evident—and dangerous—in connection with the just mentioned topic of the debt. This is a very large subject on which almost everything has been said, yet I feel that I must come forward with a short statement. My emphasis will be, precisely, on the way in which contrasting perceptions and ideologies contribute to complicating the problem.

As Senator Bradley has recently noted in a forceful and constructive speech, the debt accumulation of the Seventies which came to an abrupt halt in 1982 and is now known as “the debt problem” has turned into a disaster.9 But it is a man-made disaster, so presumably man can unmake it. The question is then: What keeps debtors and creditors from dealing decisively with this problem that has festered for over four years?10 One reason is that creditors and debtors, or North Americans and Latin Americans, have very different ideas on where the principal responsibility for the debt accumulation belongs. North Americans have generally behaved as though the responsibility were exclusively the borrowers’. They seem to hold to what has been called the “wallflower theory of finances” according to which banks never take the initiative of a loan and wait to be asked by the would-be borrower, who therefore must shoulder the primary responsibility for the transaction and for everything that might go wrong with it.11

This conception is of course contrary to the most elementary notion of economics, which teaches that any deal entered into voluntarily two or more parties is made on the basis of anticipated mutual benefit so that there is no reason to expect one of the parties to be wholly passive. Moreover, it is well known (and has been nicely documented in a now famous confessional article of a former American banking official12 ) that commercial banks engaged during the Seventies—as they had done in the Twenties and British banks at various times during the preceding century—in vigorous “loan pushing,” sometimes even going to the point of using whatever diplomatic leverage they could bring to bear on “recalcitrant” countries, such as Colombia.

So the “wallflower” theory is not tenable. One might oppose to it an alternate metaphor according to which the Latin American borrowers were the ones to have been courted by the lenders and to be led down the garden path—at the end of which they were administered the “Volcker shock” of steeply rising interest rates.13 Some Latin Americans tend to see the story more or less in this light, but most would probably agree that the responsibility was shared. One of the difficulties in forming a debtors’ cartel has been precisely that some Latin American countries fell so much more readily into the debt trap than others.

The governments of Chile, Argentina, and Mexico, for example, allowed or caused their currencies to be overvalued for prolonged periods in the late Seventies and early Eighties, thus providing strong incentives for excessive imports and capital flight, both of which activities led to, and were facilitated by, intensive borrowing. On the other hand, there is at least one major Latin American country, Colombia, that managed to hold down its foreign indebtedness to a moderate level simply because it maintained centralized and somewhat restrictive control over foreign borrowing, public as well as private.

Mexico is an instructive case of particularly poor joint performance of a borrower and the international banking system—principally that of the United States. Here was a country that had discovered and developed large sources of petroleum at a time of very favorable prices for this commodity. Now, development-minded economists had long advised countries with a sudden export “bonanza” of this sort to tax the ensuing new income flows so as to prevent the resulting foreign exchange earnings from being wholly spent on imports of consumer goods.14 Such taxes were to finance investment or would simply ensure the accumulation of foreign exchange to serve as a cushion against a reversal in fortunes. What happened in Mexico was the exact opposite of this policy. Not only did the country fail to accumulate a portion of the newly earned foreign exchange, but it borrowed large amounts of funds on top of the “bonanza” export proceeds, and a good part of these funds were “dissipated”—as the phrase went not so long ago when investment planning stood in high repute—in imports of consumer goods and capital flight.

Yet the responsibility for these events is as much that of the international banking community as that of the Mexican private and public decision makers. A few years ago, before the debt crisis, the banks were often congratulated for the agility and smoothness with which, in the Seventies, they channeled funds from Middle Eastern petroleum exporters to the petroleum importers whose balances of payments were hard hit by the sudden price increases. But the cases of Mexico, Nigeria, and others demonstrate that the banks lent with even greater abandon to those petroleum exporters that were busy developing, against all rules of prudence, a capacity to absorb foreign funds over and above their swollen export receipts. The international banks appear to have been instantly charmed by those poor countries which, unlike so many of the other under-developed areas, could boast of so solid an asset, of unquestioned security, as petroleum in the ground. Their desire to make clients out of such countries was simply overwhelming. In this way the banks contributed, as much as the borrowing countries’ policy makers, to turning the bonanza into a disaster.

The Latin American perception, then, is that there is no good reason for their being lectured at so unilaterally. And they are similarly unreceptive to the message of the lectures, with their unqualified praise for the free market and their condemnation of the state. For one thing, the authoritarian rulers of Southern Cone countries intensively and unsuccessfully experimented during the Seventies with policies inspired by free-market doctrines, so that these experiments are now associated in the minds of democratic Latin Americans with both ruthless military regimes and pitiful failure.15 Moreover, if all the heavy Latin American debtors have had to pass through the painful contraction of the recent period, this was precisely because of the untrammeled operation of the international free market in loanable funds in the years before the debt crisis of 1982. It is indeed remarkable how, after almost thirty years of orderly and productive capital transfers organized under the auspices of governments and multinational institutions, such as the World Bank and the Inter-American Development Bank, the suddenly unleashed energies of free enterprise in international finance have managed to produce international economic havoc in less than a decade.

Here are some specific reasons for the current desencuentro—failure of encounter—among North and Latin Americans. But the more basic obstacle to a useful dialogue between the two parties is the strange switch I have discussed. North Americans, so proud not long ago of their pragmatism, have taken a distinctly ideological turn while Latin Americans have become skeptical of their former sets of certainties and “solutions,” and are naturally exasperated by the neophytes from the North who are intent on teaching them yet another set.

This Issue

December 18, 1986