(^494) THE WEALTH AND POVERTY OF NATIONS
official international lenders (World Bank, IMF) and from private com
mercial banks, acting with the encouragement of their governments
and, no doubt, tacit assurances of a rescue safety net. Much of this
money found its way back to secret private accounts in the United
States, Switzerland, and other cozy shelters.
The combination of mismanagement, profligacy, corruption, and
open-ended borrowing—development without efficiency constraints—
cannot long endure. Such structures are intrinsically brittie, because
everyone is straining to the limit and everything is interconnected.
Sooner or later, someone gets worried; the balance sheets do not bal
ance; the lenders get cold feet; it becomes impossible to pay old debts
with new. Panic!
This happened in the Mexican peso crisis of 1994-95. It couldn't
have come at a worse (some would say, a better) time, just after the
American administration managed to squeeze through the North
American Free Trade Agreement (NAFTA) by calling in every politi
cal chip and committing to a mountain of anti-economic favors. Now
it had to find tens of billions to reassure the market and give investors
and monetary allies the time to pull their chestnuts out. But this time
it could not get fast action from a recalcitrant, narrow-minded Con
gress. Not to worry: the technicians, led by economist Lawrence Sum
mers, found some $20 billion lying quietly in an account established
over half a century earlier with the profits realized in the 1930s by re
pudiating obligations in gold. These ill-gotten gains had been set aside
at the time to protect the American dollar... Well, one could say that
a collapse of the peso and the liquidation of American holdings in
Mexico would have done terrible damage to NAFTA and the Ameri
can dollar... Those $20 billion plus another $30 billion cobbled to
gether from international lending organizations saved the day. The
American government subsequentiy made much of quick repayment by
Mexico, and the press played down, or never noticed, the fact that the
Mexicans had to borrow the money. New debt for old.
The heart of the matter is Latin America's need to go on borrowing,
if only to pay interest on older loans. A research student from Latin
America once complained to me about this burden of old debt and the
vexatious, small-minded foreign insistence on repayment. "You don't
have to repay," I pointed out; "a sovereign nation can always repudi
ate." "Yes," he replied, "but then where shall we go to borrow more?"
Exactiy. Now, however, the banks are wary, and international lending
organizations are tying their support to fiscal and trade reform in the
nora
(Nora)
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