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La Decada Perdida

Background

Big economic events create ripple effects in all aspects of a country’s stability – La Década Perdida was no exception. La Década Perdida, also called “The Lost Decade” was a huge financial event affecting all aspects of society in Latin America. "Sometimes the term us used in exclusive reference to Mexico" (copied from La Década Perdida), however this affected all Latin American countries. Economic and political systems were particularly affected. The Lost Decade can simply be defined as a period of financial crisis in Latin America during much of the 1980s and into the 1990s. This economic crisis was caused by economic issues like petroleum fluctuations and defaults on loans and by a lack of confidence in the government.

Prior to the 1980s, countries in Latin America were financing, very generously, to social expenditures by foreign credit. However, at the beginning of the 1980s, interest rates increased substantially. This large amount of debt and how to service it became an issue for Latin American countries. In 1988, the gross domestic product in Latin America grew by less than 1% among other economic factors like per capita income, investment, and inflation. Per capita income decreased by one-and-a-half percent. Investment went down 25 percent to 16 percent. Inflation was particularly difficult in the countries of Brazil, Peru, and Nicaragua. Foreign debt in 1987 stood at $420 billion, compared with less than $100 billion in the beginning of 1980.

Politically, Latin America suffered as well. With the economy in turmoil, those in Latin America experienced closings and layoffs of workers in large-scale factories. With the loss of jobs and a loss of a sense of financial security, people also lost faith in the government. Therefore, The Lost Decade is also a time of attempted unity for political parties. Latin American countries struggled to ban together in these hard times.

Economic Reforms

The 1980 debt crisis was followed by several approaches to try to relieve the debt that consumed Latin America. Some approaches Latin America took to address the debt crisis were loans through commercial banks, assistance from the International Monetary Fund (IMF) or other multilateral lending agencies, and Brady Bonds.

Beginning in 1982 Latin America’s debt crisis was managed by the creditor governments, the international financial institutions (the IMF and the World Bank), and the money-center banks.Commercial bank creditors were optimistic for an economic recovery because of the belief that the difficulties these nations experienced in meeting their debt obligation were due to a temporary liquidity problem.This led Latin American countries and their commercial bank creditors to engage in a cycle of rescheduling repayments with full interest servicing, lending new money at market interest rates, and an opposition to debt reduction.Additionally, the International Monetary Fund negotiated assistance in exchange for cuts in government spending and increased exports.

After several years of the cycle continuing with no progress in relief from the debt crisis, the Brady Plan was introduced. The Brady Plan was a U.S. strategy introduced in 1989 that, “emphasized debt forgiveness for highly indebt developing countries based on market conditionality.” The proposal offered relief from multilateral agencies and commercial banks in exchange for market-oriented reforms. Market-oriented reforms meant tax reductions, privatization of state-owned enterprises, reduction of trade barriers, and investment liberation.

These economic reform approaches sparked up political debates because there were varying opinions on Latin American's stance in debt and its improvement, nonetheless, other concerns were the different approaches available and the conditions that had to be agreed upon for debt relief.

Sociopolitical effects

In the wake of the economic collapse of the 70’s, many Latin Americans believed that social progress would also bring about economic reform. Models of economic development during this time often deliberated social benefits, and eventually most agreed that social unity and liberal policymaking were two precursors of progress. Following the economic decline, the 80’s was therefore marked by a wave of consensus and democratization in various Latin American countries..The liberal concepts of cooperation and integration among these Latin American countries dominated the political discussions seeking to solve the problems that the recession brought. Politics in the 80’s often employed rhetoric that consisted of positivity and unity, contrasting with the nationally individualistic tone of the past decade. During the 80’s, regional integration among nations holding similar interests was generally common. The new wave of sociopolitical unity accounted for the creation of certain organizations such as the Contadora Group (composed of Mexico, Colombia, Venezuela, and Panama), who sought peace after military tension among certain Central American countries (El Salvador, Nicaragua, and Guatemala) threatened to destabilize the entire region (see: Central American crisis), and the Rio Group, which comprised 24 Latin American and Caribbean countries whose heads of state attended annual conferences to promote agreement and integration among the nations’ leaders, among many other groups. In Latin America, the answer to most issues during this lost decade was to band together and cooperate as a collective state of protection, as opposed to a network of exclusive states which characterized the 70’s.

Political Regrowth

After la Decada Perdida, also known as the Lost Decade, Mexico had a slow economic regrowth. “the 2 years following the crisis, real wages fell by almost 30%... the Mexican peso depreciated by 95% against the US dollar.” The government basically took over the country’s banking system and obtained holdings on private companies that formerly belonged to these banks. Also, large investors were not attracted to Mexico anymore because of their inability to pay their debt, thus making them unappealing. These are a few ways that Mexico was not able to progress well after the crisis they had just come from, but they did regrow slowly. A reason for Mexico’s slow incline to regrowth could be that they waited until the 1980s to enforce structural reforms. Mexico was very protected during the mid-1980s, and industries favored by the government were treated the best. There were “tariffs and import licenses protect[ing] 100% of domestic production.” After this time, Mexico began investing in a more liberal standpoint of their trade policy, and exports percentages were going up.  “Mexico with oil export revenues on the order of US$16 billion per year in 1983–1984—and through a drastic import compression—generated a massive trade surplus that more than compensated for the interest payments on external debt and achieved a surplus in the current account.” Trade between hegemonic countries like the United States allowed it to start its regrowth, and the change in the tax system allowed Mexico to gain back some of what it had lost. Commercial bank deposit interest rates formerly were set to a maximum amount allowed, but those ceilings were removed. Also, credit subsidies were reduced, and soon after Mexico began privatizing all of their national banks.

Some might argue that the regrowth was not successful. For example, the social assistance institutions that went into place after the crisis, were not as effective as they intended. They were not anticipating something this large, thus the inability to respond to such high rises in poverty, etc. These aids “gave way to social funds and sectoral programs targeting vulnerable groups.” These groups were often the elderly, indigenous people, or women. They were not able to address the widespread issue because these programs typically targeted the same groups each time thus becoming insufficient to the country-wide issue.

Overall, Mexico was able to somewhat come back from this crisis, although very slowly. They are still coming back from this apparently. Currently, Mexico still has some national debt remaining from this lost decade, but they have accomplished a lot since then. They were unsuccessful with a few things like assistance institutions, but with liberalizing features of their country like commercial banks and tax reforms, they were able to come back from it. Mexico served a great loss, but they slowly regrew economically.