The Money Doctors: Foreign Advisers and Foreign Debts in Latin America
Drake, Paul
The Mexican peso crisis of December, 1994, produced a series of rapid consultations between U.S. and International Monetary Fund (IMF) advisers and Mexican government officials. Guided...
...government dispatched economists along with troops to install eco- nomic as well as political institutions in the colonies and semicolonies it acquired...
...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...
...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...
...His activity paralleled visits to Poland and Bolivia over sixty years ago by another U.S...
...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 ecoUnited States...
...Robert Devlin, Debt and Crisis in Latin America: The Supply Side of the Story (Princeton: Princeton University Press, 1989...
...4 From the 1890s through the 1920s, every Latin American country except Argentina and Brazil contracted U.S...
...The United States encouraged loans because of their intrinsic profitability and because they underwrote the purchase of U.S...
...Sachs had proved his mettle previously by designing sweeping reform programs for heavily indebted Poland and Bolivia...
...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...
...lenders that they were safe investments...
...8 In a narrow sense, the most basic function of these financial and fiscal physicians has been to transfer technology and institutions...
...government found it increasingly efficacious to export expertise through private agents rather than government officials...
...6 fter decades during which public funding replaced private lending, conditions in the 1970s came to resemble those in the 1920s...
...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...
...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...
...In many cases, advantage of the advising teams' institutional reforms to these advisers have promoted the concentration, urban- recast and restaff bureaucracies...
...investors and Latin American debtors took their own risks in private transactions...
...goods...
...Private loans to Latin American governments mushroomed...
...They did so mainly to reassure U.S...
...8. Jeffrey D. Sachs, Developing Country Debt and Economic Performance (Chicago: University of Chicago Press, 1989...
...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...
...Most countries suspended payments for at least a decade until they could be resumed after negotiated reductions...
...The implementation of principles and practices taken from U.S...
...private banks and financial intermediaries, the lending frenzy of the 1920s generated millions of dollars through bond issues on the New York Stock Exchange...
...and Howard Handelman and Werner Baer, eds., Paying the Costs ofAusterity in Latin America (Boulder: Westview Press, 1989...
...academic economist, Dr...
...drugs and medical equipment, military trainers can inspire them to buy U.S...
...Albert O. Hirschman, Journeys Toward Progress (Westport: Greenwood Press, 1965...
...Through these channels, Latin America received the greatest influx of U.S...
...For U.S...
...Lauchlin Currie, The Role of Economic Advisers in Developing Countries (Westport: Greenwood Press, 1981...
...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...
...Desperately short of resources, Latin American governments struggled to avoid default on their staggering foreign debts...
...economist from Harvard, Jeffrey D. Sachs, counPaul Drake is Professor of Inter-American Affairs and Dean of Social Sciences at the University of California at San Diego...
...Those loans were secured by a variety of safeguards, including treaties, contracts, legislation, soldiers and money doctors...
...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...
...Those governments have attractive to governments as trustworthy political instrubecome better able to collect revenues, control expendi- ments...
...In these cases, the adviser's primary role is to deliver and authenticate the orthodox institutions and ideas of the era...
...Harvard's Jeffrey D. Sachs, a contemporary Money Doctor of the new governments had defaulted...
...experienced the most success when helping polish and legitimize proposals already favored by the ruling elites...
...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...
...3 In the opening decades of the 20th century, the U.S...
...Federal Reserve Board, IMF officials and U.S...
...officials had achieved through force of arms in the Caribbean Basin: exchange stability, fiscal rectitude, modern banking, efficient customs administration, reli33 8 33 VOL XXXI, No 3 Nov/DEc 1997REPORT ON THE DEBT able debt servicing and an "open door" and equal treatment for foreign capitalists...
...Whatever their own motivations, these consultants have served three interrelated political purposes: 1) they have helped wealthier nations expand their influence over poorer regions...
...Competing widespead in Latin America...
...During the 1980s and early 1990s, Latin American governments often used visits by the Chairman of the U.S...
...1 0 revolution...
...Intrusion in the management of foreign economies involved the installation of U.S...
...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...
...laws into the legal codes of recipient nations has compensated for the lack of easily enforceable international regulations for transactions...
...Catherine M. Conaghan, "Reconsidering Jeffrey Sachs and the Bolivian Economic Experiment," in Drake, Money Doctors, 236-266...
...Yet they did not do away with the procedures and institutions imposed by money doctors in the preceding decades...
...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...
...In the wake of Kemmerer's reforms, private U.S...
...Guided by their First World advisers, these Mexican technocrats designed an austerity program to curtail public spending, privatize state industries, ease price controls and cap wages...
...This "hands-off" policy defused anti-interventionist criticism at home and abroad...
...private finance capital prior to the 1970s...
...That concern led to U.S...
...creditworthiness to private lenders...
...Normally, money doctors have of the 1980s still lingers just beneath the surface...
...Kemmerer and the IMF tendered similar recommendations: equilibrate exchange rates, control the money supply and discipline government spending...
...5 At the end of World War II, the victors institutionalized money doctoring in the IMF The initial goal was to restore the free-flowing international economy that had prevailed prior to the Great Depression...
...Agency for International Development (AID), the U.S...
...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...
...investors engaged in massive lending to Latin American governments...
...Portfolio Investment in Latin America, 1900-1986 (Berkeley: University of California Press, 1987...
...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...
...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 inflahas 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...
...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...
...interven- tions in putatively sovereign countries in the Caribbean and Central America...
...health experts can induce foreigners to purchase U.S...
...In rewarding those policies, the IMF had more direct influence than Kemmerer, 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...
...Anthony College, 1987...
...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...
...Rosemary Thorp and Laurence Whitehead, eds., Latin American Debt and the Adjustment Crisis (Hampshire: MacMillan/St...
...In Latin America, the first of these cycles occurred during the wars of independence of the early 19th century, during which naive Europeans invested in the fledgling new republics...
...entertainment, educators to assign U.S...
...He departed from orthodoxy by also recommending the reduction of the country's foreign debt obligation...
...Yet much like his predecessors, Sachs delivered technical expertise and international legitimation...
...7 In the 1920s-1930s cycle of debt infusion and hemorrhage, the U.S...
...The Fund made its loans to clients conditional on their promise to carry out the prescribed policies...
...arms and doctrines, agronomists to prefer U.S...
...Like Kemmerer, the IMF normally helped design and implement policies favored by Latin American as well as North American elites...
...Foreign Financial Advising, 1898-1929," Journal of American History 74 (June, 1987), 59-82...
...advisers operating overseas...
...standing vis-a-vis each other and foreign competitors...
...Since the 1970s, many countries with debt or development problems have turned to new academic money doctors like Jeffrey Sachs for a variety of reasons...
...4. Emily S. Rosenberg and Norman L. Rosenberg, "From Colonialism to Professionalism: The Public-Private Dynamic in U.S...
...financial consultants...
...The State Department knew that the same advice would be more acceptable from private economists than from official representatives of U.S...
...The Money Doctors 1. Riordan Roett, ed., The Mexican Peso Crisis: International Perspectives (Boulder: Westview Press, 1996...
...Incorporating translations of U.S...
...Ever since the 1890s, for example, Washington has recognized that its economic and strategic interests could be furthered by U.S...
...Edwin W. Kemmerer of Princeton University...
...the right to intervention...
...5. Paul W. Drake, The Money Doctor in the Andes: The Kemmerer Missions, 1923-1933 (Durham: Duke University Press, 1989...
...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...
...BY PAUL DRAKE seled Yeltsin on how to acquire foreign loans and construct a capitalist system...
...From the 1890s to the 1920s, security and economic motivations led to U.S...
...override internal opposition to authority and reforms...
...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...
...With the Depression, the costs of continued compliance with the rules of international finance came to outweigh the benefits, leading the governments of many of the countries in the region to disobey the prescriptions of the hegemonic power...
...As a result, the republics have become nomic orthodoxy...
...In contrast with the "Chicago Boys" in Chile, he has insisted on advising only "democratic" governments...
...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...
...Sometimes the foreigners' stature has elevated certain ideas, institutions and individuals to almost untouchable positions of power...
...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 citizens are too hostile toward the Fund...
...Yet more than simply conveying new knowledge, foreign economic advisers have been a political device for a large number of actors in both lending and borrowing countries...
...9. Charles Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries (Berkeley...
...When the international recession hit in the early 1980s, external financing dried up and interest rates soared...
...The external economy was dominated by Great Britain throughout this period...
...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...
...officials were also appointed, for example, to collect customs receipts and regulate the money supply...
...7. On the debt disaster of the 1980s, see Pedro-Pablo Kuczynski, Latin American Debt (Baltimore:Johns Hopkins University Press, 1988...
...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, 18201930 (Princeton: Princeton University Press, 1989), and Barbara Stallings, Banker to the Third World: U.S...
...Direct commercial bank credits-not bond issues in the stock market-became the main source of finance capital...
...After the Spanish-American War in 1898, the U.S...
...2 In 1991, for example, four years prior to the Mexican bailout, U.S...
...The hemisphere suffered the worst depression since the Great Crash of 1929...
...The United States provided no legal guarantee of protection or assistance...
...Known as the "Money Doctor," Kemmerer restructured those countries' economies and rewrote their economic legislation in order to placate foreign lenders...
...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...
...involvement in these nations' fiscal and financial affairs to guarantee that sufficient revenues were available for debt servicing...
...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 international organizations...
...institutions and procedures...
...In addition to Bolivia and Poland, Sachs has worked for Ecuador, Venezuela, Peru, Yugoslavia and Russia...
...In extreme cases, U.S...
...Stanching hyperinflation or creating a market economy proved more challenging than stabilizing exchange rates...
...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 favoring independent missions hired voluntarily by host countries, Washington avoided any appearance of complicity with advisers and lenders...
...These institutional sources of technical 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...
...2) they have served the aims of political and economic contenders within the host countries...
...academics to certify the rectitude of their spartan policies...
...banks become the primary lenders to these republics, often arranging new loans to pay off dangling debts to Europeans...
...leaders have hoped that technical missions would generally improve relations with the Third World...
...Governments have also capitalized on these experts to justify sacrifices to their citizens and to lobby for leniency from their bankers...
...blueprints has reduced uncertainties for international traders and investors...
...The evolution of their practice has been deeply tied to the cycles of debt and repayment that have accompanied Third World economic development...
...Another outcome of intervention was that it became more convenient for the United States to have U.S...
...government took essentially the same laissez-faire position it would take in the 1970s-1980s cycle of accumulation and collapse...
...Thus, missions legally independent from Washington and Wall Street used persuasion in South America to replicate much of what U.S...
...Noncapitalist countries that did not belong to the IMF also engaged the services of freelance money doctors...
...Whether in the 1920s or the 1990s, more deeply integrated into twentieth-century global foreign economic wizards have called for stable capitalism...
...3. Scott Nearing and Joseph Freeman, Dollar Diplomacy...
...government or business...
...As growth and employment plummeted, the 1980s became known as "the lost decade...
...Then the Great Depression laid waste to this "dance of millions" and to Kemmerer's free-market policy prescriptions...
...However indirectly, and whatever their motives, U.S...
...Educated at the University of Chicago, the civilian advisers to Chilean dictator Augusto Pinochet (1973-90) gained notoriety for dismantling the statist and protectionist policies that had accumulated in their country since the Great Depression...
...The United States carried out the most thorough financial sanitation in countries that became protectorates under treaties that conceded the U.S...
...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...
...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...
...University of California Press, 1985...
...They employed these wisemen to reassert their worthiness as recipients of new private and public loans, which have in turn allowed them to maintain at least token payments on their external obligations...
...ideas...
...textbooks and intellectuals to imbibe U.S...
...In addition, U.S...
...In the ensuing decades, the IMF and other newly created agencies provided economic advice and financial sanitation to Latin America nations...
...The most successful economic ambassador was Princeton University's Edwin W. Kemmerer...
...A Study in American Imperialism (New York: The Viking Press 1925...
...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 themgrowth 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...
...Some governments have preferred these independents to get a wider range of advice than that proffered by the IMF...
...9 Money doctors can increase a government's prestige While experts have helped external powers penetrate not only abroad but also at home...
...Federal Reserve and other multilateral and bilateral agencies...
...They were nei- ther able to revive their war-torn economies quickly nor fund the new state apparatus-let alone repay their external obligations...
...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...
...In both eras, Washington officially argued that U.S...
...They have claimed penury, and they have counted on money doctors to legitimize the reduction or suspension of their payments to foreign creditors...
...From the 1950s onward, Latin American governments began relying on national economists trained in universities in developed countries and endowed with creditworthy reputations in international financial circles...
...Such treaties were in effect at various times in Cuba, Panama, the Dominican Republic, Haiti and Nicaragua...
...and 3) they have been used to justify and fund governmental growth...
...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...
...seeds and farm machinery, artists to consume U.S...
...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...
...As foreign loans and exchange evaporated, domestic pressures compelled governments to halt payments on their foreign debt...
...In Bolivia, Sachs supported one of the most dramatic interventions ever implemented to stop hyperinflation...
...Despite some nationalistic domestic groups-such as bankers and industrialists- resentments, many Latin Americans have viewed forhave capitalized on foreign missions to improve their eign technocrats as being above local partisan divisions...
...The phenomenon of "money doctoring" has a long history in the so-called Third World due at least in part to the chronic economic and political instability that has characterized underdeveloped countries...
...By inspecting and restructuring indebted economies, they have served as intermediaries between debtor/borrowers and creditor/ lenders, sending reassuring signals to foreign investors...
Vol. 31 • November 1997 • No. 3
