Why is Latin America so dependent on loans?

of left-wing President Alberto Fernández, who took charge on the eve of the country&#8217;s current crisis. Three months after being sworn in, the Covid-19 pandemic reached Argentina&#8217;s borders. The country&#8217;s Central Bank says the economy is set to suffer a 9.5-percent drop in 2020.&nbsp;</p> <p>While this is certainly good news for Argentina, the country now turns its attention to another debt problem waiting in the wings: the USD 44 billion borrowed from the International Monetary Fund (IMF) during the administration of <a href="https://brazilian.report/latin-america/2019/10/29/legacy-mauricio-macri-leave-argentina/">Mr. Fernández&#8217;s predecessor</a>, Mauricio Macri. With the first debt terms resolved in August, now the government intends to resume its negotiations with the IMF until April 2021, believing that the positive outcome with private creditors may increase confidence in the country&#8217;s economic team.</p> <p>Though Argentina has a particular penchant for borrowing, several other countries in the region have a history of resorting to international credit when money is short. This became even more intense during the coronavirus crisis when the collective GDP of Latin America and the Caribbean is tipped to fall 9.4 percent this year — the biggest regional recession in history.</p> <div class="flourish-embed flourish-scatter" data-src="visualisation/2641242" data-url="https://flo.uri.sh/visualisation/2641242/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>Latin America and loans: a long-term commitment</h2> <p>Though the current financial calamity is the worst since the Great Depression in 1929, it won’t be the first time Latin America seeks out global creditors for financial aid. In 2019, before the coronavirus outbreak, the World Bank Group mobilized over USD 14.4 billion to support “sustainable development and poverty reduction” in Latin American and the Caribbean. With or without the virus, the economic mess in the region has been a constant reality.&nbsp;</p> <p>According to Axel van Trotsenburg, the Bank’s VP for the region, “to eliminate poverty and improve the lives of the people in the region” is the organization’s “overriding priority.” But this is nothing new, with similar platitudes issued about Latin America ever since these institutions were created after <a href="https://brazilian.report/guide-to-brazil/2017/10/15/brazil-world-war-ii/">World War II</a>. And still, the region is suffering financially, with almost 30 defaults registered since the 1950s, leading many to question whether these financial institutions are actually helpful to Latin America amid its constant economic convulsions.&nbsp;</p> <p>According to Marcelo Kfoury Muinhos, an economics professor at the Fundação Getúlio Vargas School of Economics (FGV-EESP), these institutions can help, but they are by no means a magic solution, especially when these developing countries don’t invest in <a href="https://www.batimes.com.ar/news/opinion-and-analysis/latin-america-infrastructure-woes-add-to-inequality.phtml">stable macroeconomic cornerstones</a>.&nbsp;</p> <p>“Many Latin American countries face a scenario of low savings. If we compare them with Asian developing countries, we see that these Latin nations end up depending on foreign capital and, as a result, always resort to loans to keep the economy running,” he tells <strong>The Brazilian Report</strong>.</p> <p>To reach this current situation of huge foreign dependence, Latin America can lay the blame on its perpetual sociopolitical turbulence, with more than 100 coups d’etat in the region since 1948, according to the University of Costa Rica. And even though Latin America largely stayed out of the two World Wars of the 20th century, they were still left economically unstable.&nbsp;</p> <p>But regardless of the reasons that led the region to this scenario, fixing Latin America&#8217;s macroeconomic standards is a pressing matter, showing these governments have to look to the future if they want to stop calling upon the World Bank, the IMF, the Inter-American Development Bank, or even their neighbors for help.&nbsp;</p> <p>“Saying the ‘fault’ is because they are former colonies is not a good answer. For example, Southwest Asian countries like India and Vietnam were also colonies until the middle of the last century, and they don&#8217;t have the same problem. Things are much more related to macroeconomic balance and dollar savings. Otherwise, when you want to finance your national development plan, you need foreign capital and the country ends up being held hostage to it,” the expert explains.&nbsp;</p> <h2>Born to borrow&nbsp;</h2> <p>Among the best examples of how this dependence on lending can lead to bad management and a vicious cycle of debt is Haiti, the poorest country in the hemisphere, according to the World Bank. In what was once the richest European colony in the Americas, independent Haiti was born as a free nation with an astronomical debt to pay. Last year, it recorded a GDP of just USD 20.8 billion, ranking it 142nd in the world.&nbsp;</p> <p>In 1825, three decades after the Haitian Revolution overthrew French rulers in the slave colony of Saint-Domingue, creating the country we know today, then president Jean-Pierre Boyer signed a deal with King Charles X of France, who promised to reinsert the newborn republic in the global community. Haiti&#8217;s founding principles of abolition and equality displeased many countries around the world, who still say the slave trade as a successful business model.</p> <p>France set about extorting Haiti to preserve its &#8216;diplomatic freedom,&#8217; with the young country running up a debt of 150 million francs, equating to around USD 21 million in today&#8217;s money. And Haiti has never effectively recovered from this liability, bouncing from recession to recession every few years.</p> <p>Almost 200 years since the French shakedown of Haiti, the domestic economy is once again contracting, boosted by the pandemic. Continuing the vicious cycle of lending, the Haitian Finance Ministry announced a new USD 229 million loan from the IMF, and USD 20 million from the World Bank.&nbsp;