Down the Toilet

...Virtually nothing was invested productively...

...its oil revenues soared to $10.8 billion in 1974 from less than $5 billion the year before...

...For instance, at Perez's behest, the congress passed a law requiring that government loans of more than one year have congressional approval...

...This policy came at the expense of local agriculture, which was neglected in the rush to import...

...Treasury Secretary James Baker's much-heralded proposal calls for $29 billion in international lending to Latin American governments that reduce their public sectors through privatization...

...The foreign exchange earnings would pay off the debt and there would be enough capital left over to invest and grow...

...Smallman, Mellon Bank's representative...

...Today, the high-rise site is still an empty pit...

...Ex-president Perez stole millions of dollars of public funds, yet he is the leading contender in the 1988 presidential election...

...That's going to be the world's most expensive park," says the ex-CSB official...

...The comptroller general found that hundreds of retired and "pre-retired" individuals on INP's payroll were earning $3,000 to $6,000 per month, and called this "one of the most blatant examples of featherbedding in Venezuela...

...It exports oil...

...While most other countries were exporting capital back to their lenders, the Colombian government was actually able to increase investment by 30 percent between 1980 and 1985...

...Consider a $200 million loan CVF guaranteed to Venezuela's largest cement company, Cemento Andino...

...Their purpose, however, is not to put up a building...

...Today we have 500,000 government employees who do not work," says Tomas Enrique CarilloBatalla, a former finance minister...

...Colombia, with a current foreign debt of $13.4 billion, pursued a relatively conservative borrowing policy in the seventies and benefited from a huge inflow of dollars from its illegal cocaine industry...

...Then after work had begun, the blueprints were repeatedly changed...

...Especially important was the centerpiece of Perez's economic policy: a massive five-year Fifth National Plan...

...The company is now bankrupt...

...Where the Bradley plan comes up short is in failing to address the excessive tolerance of corruption and mismanagement that is at the heart of the debt crisis in Venezuela and other countries...

...It has been called a democracy since 1959, complete—on paper at least—with the checks and balances that might rein in excessive spending...

...International bankers and businessmen are extremely reluctant to make more loans to Latin America...

...The congress, which could be a countervailing force, rarely is...

...Dictator Augusto Pinochet used foreign borrowings to buy political popularity...

...Foreign loans also built the Caracas Metro, among the cleanest and most efficient in the world...

...CANTV's pension plan also lets workers retire at 70 percent of their final wage after just 14 years of service, or at 100 percent of salary after 20 years, and pays all medical expenses for pensioners and their families...

...Raw material prices tumbled...

...The Reagan administration doesn't have a handle on the problem either, judging by its latest plan for easing the debt crisis...

...A deeper explanation is cultural...

...One CSB project called for building a giant high-rise apartment and shopping complex in downtown Caracas...

...Started in 1972 and still not complete, Majes was originally supposed to cost $600 million—$10,000 for every hectare watered...

...The International Monetary Fund (IMF) was particularly inflexible in imposing austerity formulas...

...Cars regularly run red lights, drive the wrong way down one-way streets, and scatter pedestrians by driving on the sidewalk to get around traffic jams...

...The Baker plan calls for new loans and more debt—no solution to a crisis caused by debt...

...El Diario's editor has been jailed twice this year for quoting from a police report that alleged a politician was drunk in public and tried to urinate on an employee of a beach resort...

...Not surprisingly, the dozens of stateowned institutes and companies took advantage of the measure by borrowing short-term for longterm projects...

...They did this just so some people could make a lot of money...

...So he flooded the country with cheap imported cars, stereos, and TV sets and paid for them with borrowed money from private banks—$3.3 billion in 1981 alone...

...In Venezuela, about half of the country's $33.5 billion in foreign debt was originally lent to the private sector...

...Chile's debt of $21.5 billion is the highest per capita of any major debtor in Latin America...

...Crime pays Businessmen and government officials squandering government-financed loans, state agencies awash in red ink, widespread graft, featherbedding, pension scandals—the last decade in Venezuela could have been an investigative journalist's dream...

...During the borrowing boom of the 1970s, then-President Carlos Andres Perez used the money foreign banks loaned his country to finance a unique employment program...

...According to the comptroller general, the company's three principal owners siphoned off the $45 million by overpaying subcontracted work to other firms, of which they were also the owners...

...The design for the project was a duplicate of a nearby CSB complex called the Parque Central, but CSB spent millions of dollars to draw up plans again...

...Yet too often Latin governments simply wasted the money on grandiose public works, government deficits, subsidies, and military hardware...

...The plan, scheduled to begin in 1977, called for spending billions of dollars to exploit the nation's abunThe owners of one company siphoned off $45 million by overpaying subcontracted work to other firms that they also owned...

...Only two major Latin American debtors appear to be on sound financial footing today...

...The plan called for the construction of 50 hotels and 1,500 vacation homes...

...Today, Peruvian living standards are at 1964 levels...

...Near the park stands the Teatro Teresa Carreno, Venezuela's artistic pride and joy...

...On the streets, nothing seems illegal...

...At least in theory, borrowing looked like a quick—and perfectly responsible—way for Latin American nations to augment their own internal savings, increase investment, and raise their standard of living...

...After private- and public-sector spending of nearly $1 billion— much of it borrowed from abroad, including $40 million from Bank of America—the project is still far from finished...

...The result is that every public employee with political connections seeks a 'transfer' to CANTV just before retirement," a private analyst wrote in 1980...

...Of the money that Peru did invest, most went into middle-class housing, highways, or boondoggles like the giant Majes irrigation scheme...

...INOS's books were a shambles...

...For all these reasons, President Alan Garcia, who was elected in 1985, claims a right to shun the IMF and to restrict debt service to 10 percent of export earnings...

...Not surprisingly, INP regularly runs a deficit and has often been charged with corruption...

...If you doubt this, consider ex-president Perez...

...The foreign banks that lent to CVF weren't watching: they reasoned that the government would pay off any CVF loans that went bust...

...There is in Venezuela— and in Latin America in general—a tolerance of graft...

...After taking power in a bloody 1973 coup, Pinochet needed to shore up his middle-class support...

...Garcia recently cut the Mirage purchase in half, but the bill is still $364 million...

...their oil-rich Middle-Eastern depositors insisted on making only short-term deposits...

...Meanwhile, many banks were also profiting from helping wealthy Latins spirit capital flight dollars overseas into American bank accounts...

...Now Chile's per capita consumption has fallen to mid-1960 levels...

...The government committed itself to bigger and bigger outlays...

...In addition to bathroom attendants, Perez decreed that every public elevator have an operator...

...It was able to make loans to just about any field pertaining to development: heavy industry, tourism, agroindustry, shipping, chemicals, construction, telecommunications," says Cesar Egana, a member of the three-man board now liquidating the corporation...

...Anyone who has spent time in Venezuela quickly realizes there is only one place where civic-mindedness is conspicuous and consistent: the Caracas Metro...

...Privatizing a swamp The Venezuelan private sector matched the government's incompetence dollar for dollar...

...Initially, Venezuela was awash in cash...

...Few or none of the comptroller's suggestions are followed, no one is ever investigated for malfeasance, and the report's findings are typically forgotten for another year...

...DOWN THE TOILET by Tyler Bridges WHERE DID VENEZUELA'S LOAN MONEY GO...

...The Venezuelan press often reported charges but rarely followed up or pursued independent investigations...

...That was fine with international bankers...

...think hygiene and public relations: hand-towels courtesy of Citicorp...

...Power is concentrated in the president, who has extraordinary statutory powers to rule by decree...

...At the time, bankers, many with no international lending experience, were swarming Venezuela with open checkbooks...

...But Latin countries themselves have a lot to answer for, too...

...A foundation solid enough to support a 100-story tower was constructed, but no structure was put up...

...Forget that the program does nothing for Venezuela's economy...

...The courts are heavily politicized, with judges appointed by, and acting at the behest of, the president or party leaders...

...A freak shift in Pacific Ocean currents in 1982 destroyed its fishing industry and caused ruinous floods and droughts...

...How else can a man born into a lower-middle-class family, and who has been on the government payroll most of his life, own an expensive house in an exclusive Caracas neighborhood...

...Even this star-crossed nation, however, deserves much of the blame for its own plight...

...LATIN AMERICA ON $ 10 BILLION A DAY by Charles Lane Latin America's heavy borrowing looks like a blunder today, but it looked sensible in the 1970s...

...hope of doing that begins with a look at where the money went...

...A lot of loans were made with the idea that countries don't go bankrupt" Cake mix capitalism Perez sought to increase his popularity by freezing the prices that utilities and other independent state agencies charged customers, even though investment and payroll costs were soaring...

...Still, the government's heavy-handedness doesn't fully explain the press's timidity...

...Without the revenue to pay for the plan, Perez decided to finance his dream with foreign capital, a decision international bankers eagerly endorsed...

...Once self-sufficient, Venezuela today imports about 50 percent of its food...

...Graft was common, and much of the work shoddy...

...They adopted exchange rate policies that clobbered their own exports, subsidized imports, and systematically encouraged capital flight...

...No one—not the banks, not the central government—was keeping track of how much money hundreds of international banks were lending to the dozens of independent state agencies...

...The government invested just one-third of what it borrowed between 1970 and 1985...

...The comptroller general's annual report to the congress contains enough examples of corruption and mismanagement to bring down many democratic governments...

...Mexico barely avoided default...

...The central government, for its part, ignored the technocrats' squandering of so much money...

...It was absolutely crazy...

...Bankers who had qualms about this told themselves that if the agencies to which they lent money couldn't pay off their loans, the central government would bail them out...

...CMA borrowed heavily from abroad to finance food imports and to subsidize food prices...

...It built the Guri Dam, which will generate more hydroelectric power than almost any dam in the world, providing the country with a cheap energy source...

...It used foreign loans to pay most of the costs...

...In October 1976, a group of foreign banks lent $1 billion to the Venezuelan government...

...And it did spend a portion of its foreign loans wisely...

...Sometimes, as in the case of Mexican oil, investment went into production of a raw material, whose price later dropped unexpectedly...

...Venezuela used foreign money to modernize the three state aluminum companies, which now operate at full capacity and are an important source of foreign exchange...

...Because of delays and design changes, it took ten years and cost at least $500 million...

...Peru was heavily dependent on copper, whose price took a wild roller-coaster ride on the way to dropping roughly 25 percent between 1974 and 1984...

...CVF officials couldn't coordinate the many private companies they hired to build the complex...

...High prices for Latin America's raw materials seemed to guarantee income with which to pay off the debt...

...This kind of "efficiency" helps explain why today, the National Housing Institute has a $490 million foreign debt...

...They assumed sovereign countries would never default, blithely ignored early signs of trouble, and when the recession came, they turned usurious, insisting on ever greater interest payments in order to protect their profit statements...

...Another part of the borrowing went to fattening up the Venezuelan bureaucracy: the number of civil servants nearly tripled from 1974 to 1984...

...The success of their borrowCharles Lane is an associate editor at The New Republic...

...45 million of the loan is unaccounted for...

...When the 1982 recession hit, new capital ceased to flow Chile's way, imports had to be drastically cut to save foreign exchange for debt service, and the consumer fiesta came to an abrupt end...

...Officials at the National Ports Institute (INP) apparently also flunked Accounting 101...

...In 1986, the economy will grow by 8 percent for the second year in a row...

...In the middle of the 1982 recession, the Air Force contracted to buy 26 French Mirage 2000 planes for $728 million...

...The platforms on the Metro are spotless, and the passengers whisper...

...From 1976 to 1978, Venezuela's public-sector foreign debt more than quadrupled to $7.2 billion...

...But it contained a massive loophole: state agencies could still get loans for less than one year without congressional approval...

...Only one of the 50 hotels has been built...

...Much of the rest went to finance government budget deficits that were caused not only by the recession, but also by bureaucratic bloat and subsidies on gasoline and imported food...

...The idea was that if the private borrower went bankrupt, the commercial banks could demand payment from the government...

...The question of culpability for the debt crisis is far from academic...

...If you put your feet up on an empty Metro seat another passenger will invariably scold you...

...In 1981, the National Housing Institute was supposed to have financed the construction of 100,716 low-cost housing units, according to a report by the Venezuelan comptroller general...

...Aside from a somewhat independent but powerless comptroller general, government oversight in Venezuela is non-existent...

...Peru, with a current foreign debt of $14.3 billion, may be the debtor most victimized by forces beyond its control...

...Financed by foreign loans, the now defunct Venezuelan Development Corporation (CVF) made millions of dollars worth of loans to the private sector during the 1970s...

...You would lend to Sidor (the state steel company) thinking that the Republic of Venezuela would guarantee payment if Sidor went bankrupt," says V.E...

...Growth stopped...

...He decreed that every public bathroom have an attendant...

...Soon they were back lending to a host of state agencies...

...Bankers were incredibly cavalier about disbursing their cash...

...The businessmen, along with a former CVF president involved in the scam, have fled the country...

...I've never seen such theft in my life...

...100 million park At first glance it seems Venezuela should have avoided going deeply into debt...

...The nightmare of ever more onerous debt payment began...

...The central Venezuelan authorities left everything up to CVF officials...

...He ordered CANTV, the state telephone company, to count all years in public service—not just those at the phone company—when calculating retirement benefits...

...dant natural resources and industrialize the economy...

...The groundwork for the debt crisis in Venezuela—and around the world—was laid in 1973, when world oil prices quadrupled...

...A case in point is Corpomercadeo (CMA), the state agency created in 1971 to oversee the country's food production...

...I f you want to understand how Latin America spent $365 billion in foreign loans, go visit the restroom of any public building in Venezuela...

...Its annual interest bill of $2 billion is half of its export earnings...

...Changing the plans meant new billings," explains a former CSB official...

...Although subsidizing the cost of food, water, and electricity made Perez popular, by 1978 the focus of the country's borrowing had shifted from modernizing infrastructure to covering operating deficits...

...By November of that year only 14,366 apartments had been built...

...Not only does Bradley's plan avoid the Baker plan's distinction between public and private lending, which is nearly meaningless in Latin America, Bradley specifies only that debtor nations receiving relief adopt internally generated reforms...

...The developer, Daniel Camejo, couldn't sell or even promote such a huge venture...

...The money gave Perez, who became president in February 1974, enough funds to meet his ambitious plans to finance roads, electric power plants, sewers, bridges, schools, hospitals, and scores of other projects...

...The comptroller general discovered that in 1982 that water agency had failed to register more than $30 million in its bank accounts...

...One reason why it hasn't repaid its loans is that until mid-1983 INOS billed customers for only 35 percent of the water it provided, and it collected a mere 25 percent of what it billed...

...Latin citizens now hold more than $100 billion in assets outside the region...

...A 1983 private analyst's report stated: "CMA went through ten presidents in less than a decade, all of whom promised (and failed) to reorganize the corporation...

...abroad strategy hinged on investing loans efficiently in new productive capacity or in expanding existing capacity to produce more exports...

...Below ground, however, all is quiet...

...And today Perez is a vice president of the Socialist International, and also the leading contender in the 1988 presidential election...

...Argentina's military dictators outdid Pinochet...

...The project was supposed to take four years to build and cost $100 million...

...CMA's terrible reputation was unmatched by any other of the nation's many inefficient entities...

...Meanwhile the banks were charging higher interest rates on new credit: Peru's interest burden doubled between 1975 and 1985...

...Development on the cheap was exposed as a pipe dream...

...It calls for relieving Latin American debtor nations of two-thirds of their annual $30 billion debt burden by cutting interest rates by 3 percent over a threeyear period, and at the same time forgiving 3 percent of the loan principal...

...The big international bankers were awash in petrodollars, and were eager to unload them...

...It is widely believed that Perez stole millions of dollars of public funds...

...According to Richard Webb Duarte, a former president of Peru's central bank, Peru devoted less than 10 percent of the loans it got between 1970 and 1985 to investment in export or industrial activities...

...I couldn't believe the amount of imports available when I arrived here," says C. Michael Kruse, Bankers Trust Company's representative...

...In the Metro, the citizens of Caracas seem to have found a public institution of which they can be proud...

...Throughout the [debt years], there was an evident lack of supervision and analysis on whether the funds were needed and how they were used," says a former high ranking finance ministry official...

...It's not as if significant evidence isn't available...

...The only people paying attention were the CVF officials themselves—and the only thing they attended to was lining their pockets...

...Cost overruns and inflation have approximately doubled the project's price over the last 14 years...

...Any Tyler Bridges recently left Venezuela after 20 months as a reporter for the Daily Journal, Venezuela's English language newspaper...

...In 1976, at the very moment the then-military government was promising its bankers austerity, the Peruvian Air Force bought $250 million worth of Sukhoi aircraft from the Soviet Union...

...Things didn't work out as planned...

...When finished in 1979, the resort was supposed to attract more than one million people a year...

...Those willing to do so want Third World governments to be involved in loans to private companies, so that the lenders will be protected if the loans go sour...

...El Diario de Caracas, the only newspaper in Venezuela that has a muckraking tradition, had four investigations of corruption involving the government halted earlier this year by the current president, Jaime Lusinchi...

...The businessmen have fled the country...

...Nevertheless, Venezuela has amassed the fourth largest unpaid debt in the region, behind Brazil, Mexico, and Argentina...

...Real interest rates soared...

...Today, CANTV has a foreign debt of $685 million...

...A sign at the site proudly proclaims it will become a park...

...But not Venezuela's...

...The amount of money Latin America has thrown down the toilet in recent years is staggering...

...Another CVF-sponsored project involved a plan to turn government-owned swampland into one of the biggest resorts in the world...

...There is no question that the international banks deserve a good deal of the blame for this outcome...

...There was every kind of Betty Crocker cake mix imaginable:' From 1971 to 1982, CMA had $3 billion in operating losses, yet threw away thousands of metric tons of spoiled food each year...

...Brazil, with a current foreign debt of $104.7 billion, also had a penchant for grandiose investments...

...The private sector debt was primarily in loans made by commercial banks to private parties, using state-owned banks and development agencies as middlemen...

...After a decade of inactivity, construction crews have recently returned...

...Boondoggles like this abound...

...Indeed, its corrupt administration was so apparent and all-encompassing that anyone working for CMA, or associated with it, was frequently assumed to be dishonest" Today, CMA is bankrupt and in the process of being liquidated...

...One wonders what would happen if the Venezuelans allowed this attitude to become a national obsession...

...There was no planning, no one charting the direction we should head" Lack of accountability is built into Venezuela's political system...

...INOS has never been able to produce a balance sheet," says a former finance ministry official...

...Baker's approach will not solve Latin America's financial woes...

...Underground obsession The most sensible way out of the debt crisis is the plan put forth by Sen...

...Today it has a foreign debt of $115 million...

...The Perez government began to sink the money into vast building projects, many of which had been planned by Centro Simon Bolivar (CSB), a government housing agency...

...But if you had read the Venezuelan newspapers, you'd have precious little idea how wayward the country had become...

...it also offers a way .to ease the debt burden without throwing good money after bad...

...Economist Rudy Dornbusch of MIT estimates that, before giving way to a democratically elected government in 1983, they wasted $30 billion on an overvalued currency, corruption, subsidies to cover the deficits of military-owned industrial companies, capital flight, and, most foolish of all, the Falklands War...

...Its $1.2 billion foreign debt has been assumed by the state-owned Banco Industrial de Venezuela...

...These mistakes piled up because government technocrats at the state agencies that managed the projects were inexperienced and corrupt...

...One reason for INP's high operating costs is that the agency is a safehouse for the gainfully unemployed...

...Equally amazing, few people—borrowers or lenders—seem to know where the billions went...

...But many of its investments turned out to be productive, and it has stepped up manufactured exports so that its trade surplus is now more than enough to pay the interest it owes...

...The truth is that the private sector is nearly as responsible for the debt problem as any government...

...Altogether, CSB spent an estimated $100 million in foreign loans on the site...

...But by 1976, oil income had leveled off...

...One reason the press buries the comptroller general's reports is that the government is not afraid to silence its critics...

...He is now traveling throughout South America, freelancing for several newspapers...

...Still, those who blame the banks and those who find fault with the countries themselves, do agree on one thing: no solution to the debt crisis can work unless the debtor nations themselves take steps to restructure their economies toward greater efficiency, sensible exchange rates, and production for export...

...Almost no negative publicity is tolerated by the government...

...The report's release each year signals the beginning of a fruitless ritual: two weeks of headlines, handwringing, and horror stories, followed by oblivion," a private analyst wrote in 1984...

...Rather than demanding a role in charting the government's expenditures, the Venezuelan congress was content to make laws that only gave the appearance of oversight...

...The tradition of support for the strong man, or caudillo, is deeply ingrained in Venezuelan culture As for judicial review, forget it...

...There is in Venezuela —and in Latin America in general—a tolerance of corruption...

...But the 1981-82 recession snapped inflation...

...Many of their positions are make-work jobs...

...Bill Bradley...

...In 1979, INP was charging companies $30 to move a metric ton of cargo for which it paid $40 in wages alone...

...Having put a large number of Venezuelans on the public payroll, Perez also created a generous and innovative retirement plan for some of them...

...Another example of Perez's mistaken generosity to his constituents is INOS, the state water company, which currently has a foreign debt of $772 million...

...Though Venezuelans have voted for their president and congressional representatives every five years since 1959, these free elections mask an almost total lack of checks and balances...

...two others were started but their financing ran out...

...Inflation kept real interest rates low so debtors could service their debts with dollars that would be worth only slightly more, or in some cases less, than those they had borrowed...

...They couldn't produce enough revenue to meet their payroll and fixed costs, so they borrowed abroad," says economist Pedro Palma...