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$LANOONI Fokfwokd Dr F1\UL 1\$ : DLUffKINT rOK CUANOf Cl\KLOS (j~Kl\LDO LANOONI fOKfWOKD Dr f1\UL 1\. VOLe KEK INTEKNATIONAL CENTEK fOK ECONOMIC 6KOWTU The International Center for Economic Growth is a non-profit research institute founded in 1985 to stimulate international discussions on economic policy, economic growth, and human \velfare. The Center sponsors research, publications, and con ferences in cooperation with an international network of correspondent institutes, which distribute publications ofboth the Center and other network members to policy audiences around the world. The Center's research and publications program is organized around five series: Sector Studies; Country Studies; Studies in Human Development and Social Welfare; Occasional Papers; and a Reprint Series. The Center is affiliated with the Institute for Contemporary Studies, and has headquarters in Panama and a home office in San Francisco, California. Publication signifies that the International Center for Economic Growth believes a work to be a competent treatment worthy of public consideration. The findings, interpretations, and conclusions of a work are entirely those ofthe author and should not be attributed to ICEG, its affiliated organizations, its board ofoverseers, or organi zations that support ICEG. For further information, please contact the International Center for Economic Growth, 243 Kearny Street, San Francisco, California 94108 U.S.A. Phone (415) 981-5353. ICEG Board of Overseers Y. Sayyid Abdulai Adalbert Krieger Vassena OPEC Development Fund, Austria Argentina Abdalatif AI-Hamad Pedro-Pablo Kuczynski Arab Fund for Economic and Peru & USA Social Development, Kuwait Agustin Legorreta Roy Ash Inverlat S.A., Mexico Ash Capital Partnership, USA Sol Linowitz Nicolas Ardito-Barletta, Chairman Coudert Bros., USA Panama Jorge Mejia Salazar Raymond Barre Colombia France Saburo Okita Roberto Campos Institute for Domestic and National Senator, Brazil International Policies Studies, Carlos Manuel Castillo Japan Costa Rica Tomas Pastoriza A. Lawrence Chickering Banco de Dessarrolo International Center for Economic Dominicano, S.A., Dominican Growth, USA (ex-officio) Republic Gustavo Cisneros John Petty Organizacion Diego Cisneros, Marine Midland Bank, USA Venezuela John S. Reed Roberto Civita Citibank, USA Editora Abril, Brazil Stephan Schmidheiny A. W. Clausen Eternit A.G., Switzerland BankAmerica Corporation, USA Anthony M. Solomon Edmund B. Fitzgerald S.C. Warburg (USA), Inc., USA Northern Telecom, USA J. J. Vallarino Ivan Head InterAmerican Council of International Development Commerce and Production, Research Center (IDRC), Canada Panama The Development Crisis THE DEVELOPMENT CRISIS Blueprint for Change by Carlos Geraldo Langoni Foreword by Paul A. Volcker International Center for Economic Growth Affiliated with the Institute for Contemporary Studies TO MY FAMILY VERA BERNARDO EDUARDO PATRICIA The Development Crisis Copyright © 1987 by Carlos Geraldo Langoni Printed in the United States ofAmerica. All rights reserved. No part ofthis book may be reproduced in any manner without written permission except in the case of brief quotations in critical articles and reviews. Inquiries, book orders, and catalog requests should be addressed to Inter national Center for Economic Growth, 243 Kearny Street, San Francisco, CA 94108 (415) 981-5353. Book design and production by Marian Hartsough Library of Congress Cataloging-in-Publication Data Langoni, Carlos Geraldo. The development crisis. Translation of: Crise do desenvolvimento. Bibliography: p. 147. Includes index. 1. Monetary policy-Brazil. 2; Debts, External Brazil. 3. Debt relief-Brazil. 4. Monetary Policy Developing Countries. 5. Debts, external-Developing countries. 6. Debt relief-Developing countries. 7. International Monetary Fund. I. Title. HG835.L3613 1987 336.3'0981 87-29350 ISBN 0-917616-95-2 ISBN 0-917616-94-4 (pbk.) Table of Contents Tables and Figures Vll Preface IX Foreword Xl Introduction 1 Summary of Recommendations 7 CHAPTER 1 The Roots of the Crisis 13 CHAPTER 2 Rescheduling and the Banks 39 CHAPTER 3 Development vs. Adjustment: The Role of the IMF 71 CHAPTER 4 Internal Equilibrium and the Issue of External Debt 91 CHAPTER 5 An Agenda for the Future 123 Notes 135 Selected Bibliography 147 Index 151 Table and Figures CHAPTER 1 Table 1.1 Basic Indicators of the Brazilian Foreign Sector 16 Table 1.2 World Economic Indicators 18 Table 1.3 Interest Rates and the Price of Oil 22 Table 1.4 Brazil: Inflation and Growth 25 Table 1.5 Selected Items in Brazil's Balance of Payment 26 Table 1.6 Indebted Developing Countries by Region: External Debt, by Class of Creditor, End of Year, 1977-86 32 Table 1.7 Indebted Developing Countries: External Debt and Debt Service, 1977-86 36 Figure 1.1 Changes in Petroleum Prices 20 Figure 1.2 External Interest Rates 24 CHAPTER 2 Table 2.1 Brazil: Structure of the External Debt 40 Table 2.2 Brazil: Rescheduling Terms 46 Table 2.3 Comparison of Two External Shocks 54 Table 2.4 Exposure of the International Banks 68 Figure 2.1 Long-Term Loans Made by Private Financial Institutions 51 Figure 2.2 External Credit Squeeze-Net External Credit to Indebted Developing Countries 66 viii THE DEVELOPMENT CRISIS CHAPTER 4 Table 4.1 External Adjustment 97 Table 4.2 External Adjustment in Latin America 98 Table 4.3 Internal Adjustment in Latin America 99 Table 4.4 External Adjustment: Latin American Main Debtors 102 Table 4.5 Brazil: Internal Adjustment 110 Preface Difficulties in finding solutions to the LDC debt crisis are aggravated by conflicting perceptions ofwhat the essence ofthe crisis is. The devel oped countries see the problem as a debt crisis, while the LDCs them selves see it as a crisis in development. The Development Crisis: Blueprint for Change reflects this important LDC viewpoint. In publishing this book, the International Center for Economic Growth makes available to the English-speaking policy audiences an important new perspective on the present quandary. Carlos Geraldo Langoni's outlook is that ofa former LDC central bank president who led his country's debt rescheduling negotiations and managed its mone tary policy through a year ofthe crisis. The book was originally pub lished in Portuguese for an audience in the author's native Brazil. It has been expanded and updated to reflect recent events and to address the interests of a worldwide audience. Although Mr. Langoni centers his attention on the Brazilian expe rience, he shows the extent to which the debt crisis is part ofa major, worldwide economic adjustment. This adjustment has involved and x THE DEVELOPMENT CRISIS affected all nations, as well as the international public and private finan cial institutions. The major burden, however, has fallen on the LDCs. Langoni argues that restoring economic growth and human develop ment will require adjustments by the LDCs and complementary, con sistent, and coherent actions by the developed countries and the international financial institutions. ICEG offers this book as a contribution to strengthening the part nership among countries and institutions that understand the impor tance ofeconomic growth as a means to improve the lives ofindividuals and the balance of wealth among nations. Nicolas Ardito-Barletta General Director International Center for Economic Growth Panama City, Panama September, 1987 Foreword Carlos Langoni has qualifications that, in combination, are uniquely suited to making intelligent analysis ofthe international debt crisis acces sible to a large readership. He is, to start with, a solidly-trained economist. He was head of the central bank ofBrazil-Latin America's largest country and largest debtor-in 1982 when the crisis struck, and was engaged first-hand in the efforts to contain and diffuse it. His present position as Director of the Getulio Vargas Foundation, the leading Brazilian economic research center, has provided a vantage point for both reflection and analysis. He is, at the same time, an advisor and participant in finan cial markets, a practical man of affairs, aware ofthe opportunities as well as the pressures emerging from the debt crisis. He is, not least for present purposes, articulate in English! Readers of The Development Crisis: Blueprintfor Change are the beneficiaries ofMr. Langoni's talents and experience in all these respects. He places the debt crisis against the larger backdrop of the develop ment strategy adopted by most of Latin America in the earlier post- xii THE DEVELOPMENT CRISIS war period- a strategy that, he emphasizes, was becoming exhausted by the 1980s. As Mr. Langoni sees it, the crisis has forced a rethinking of the older approach characterized by heavy governmental interven tion in the economy, widespread subsidies and protectionism, all sup ported by large borrowings. He looks toward a new approach, toward growth consistent with greater economic and political freedom. But if that promise is to be fulfilled, more than internal reform will be required. Ways and means will have to be found to deal con structively with external economic and financial restraints. Mr. Lan goni offers specific suggestions to that end. One need not agree with every one of his proposals and recom mendations to recognize the relevance ofthe issues he raises; the tech nical sophistication with which he considers the detailed institutional, negotiating, and financial issues; and his understanding ofthe larger economic and political setting-within and without Latin America- in which these more technical questions need to

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