The Latin American and Caribbean countries are facing a serious financial crisis. External debt in the region is over $360 billion, and seven South American countries are among the ten largest debtors in the world. Interest payments alone required, in the years of 1982, 1983, and 1984, more than 35% of total regional exports of goods and services, a percentage which reached the extreme level of over 50% for one country. To be sure, this problem mostly affects the largest economies, since most of the Central American and Caribbean countries apply to interest payments less than 20% of their exports. The debt problem is a reality for the entire region, and it makes it difficult for all the countries to obtain new external financing.

Schooling is thought to be of great importance in Latin America and elsewhere in the developing world. The World Bank (1980, 1981), Colclough (1982), Psacharopoulos (1981, 1983), and others emphasize strongly the critical role of schooling in increasing productivity, equalizing income distribution, improving health and nutrition, reducing fertility and in pursuing other objectives.

In part because of such emphasis, there have been considerable and increasing resources devoted to schooling in recent decades in Latin America and in other developing regions. There also have been numerous studies that attempt to evaluate what determines investment in schooling and what are the private and social rates of return to schooling. The latter group of studies generally finds that such returns are fairly high, suggesting that expanding schooling indeed should be a high priority activity.

The title of my essay, invoking, as it does, the justifiably famous Japanese cinema verité production of Rashomon, might well strike a discordant note. My aim, however, is to clarify, not to confuse. The film describes a variety of eyewitnesses to a murder, each one of whom, infused with different motives, “saw” the event differently from the other eyewitnesses. This is little more than a modern-day version of Walter Lippmann's observations on the ideological, interest-laden nature of the formation of public opinion in modern society, but it serves us well in introducing the topic of this essay.

What I am suggesting with respect to the International Monetary Fund (IMF), and what I hope to demonstrate, is that we are now experiencing a similar paradox in the sociology of knowledge.

The purpose of this paper is to evaluate the development policies applied to Latin American countries in the post-war period, particularly those designed to develop manufacturing production for the domestic market through tariff protection. The paper will try to find out whether such policies (1) brought about reasonably high rates of growth; (2) distorted the structure of domestic prices and hindered the later development of manufactures exports; (3) provoked persistent balance of payments disequilibria, thereby forcing the countries to borrow abroad in large quantities; and (4) weakened the countries' capacity to resume development in the future, once the current debt crisis is overcome.

Advancing conclusions, the first and fourth questions can be answered with a relatively high degree of confidence: inward-oriented policies promoted a high rate of growth during the three decades spanning 1950 to 1980, but narrowed the import coefficient to a degree that will force the countries to depend almost solely on export promotion to resume their development in the future.

Differences in the degree of economic development and diversification among members of economic integration systems could easily create obstacles to economic integration, as they tend to have an impact on the distribution of costs and benefits of economic integration processes.

There are several reasons why the Least Developed Members (LDMs) within integration movements in Latin America are likely to be losers in the integration processes taking place within the region. First, the economies of these countries are less diversified than those of the more advanced countries. The LDMs have manufacturing sectors which are not well developed and which are concentrated in productive branches which process natural resources. When these countries join an integration movement with countries with more advanced and diversified manufacturing sectors, they would tend to import manufactured goods which are more protected than the natural-resource-based goods which they are likely to export.

The international debt crisis has received a great deal of attention at the macroeconomic and the political levels, but there have been few analyses of its impact upon individual sectors. Thus this article will consider the consequences of the Latin American debt crisis for manufacturing industry, particularly the adjustments that this sector has made in its response to the crisis.

The adjustment process which the manufacturing sector has undergone has produced implications which depend partly upon factors exogenous to the sector and partly upon the nature, and degree of competitiveness, of the manufacturing activity in each of the countries. In turn, the latter factors have been influenced by those very macroeconomic and exogenous variables. Some variables, such as the exchange rate, play major roles in determining the competitiveness of industry, as has frequently been emphasized in recent years. This is true of a number of variables at the industry and enterprise level as well.

Central America has always seemed to me a particularly fruitful object of study, of economic and particularly monetary affairs, because of the existence of six countries of not too different size and economic structure. This situation provides an opportunity for assessing the workings of certain economic principles.

In economic terms, the countries of Central America are very small units. For such units, economics can provide a few analytical propositions that seem prima facie plausible. One is that such economies need not indefinitely specialize in exports of primary products, but if they diversity and industrialize their economies, it must be for export. Industrialization for the domestic market is unlikely to permit sufficient economies of scale. In this regard, the Central American countries have industrialized much less than the small republics in the Far East, and accordingly have not enjoyed as rapid a rate of economic growth.

Changes in the volume of new loans issued by the developing countries in Latin America have had a significant impact on the foreign exchange value of their currencies, and on most of their domestic macroeconomic variables. During the 1972-82 decade, the annual increase in external debt of many of these countries exceeded the interest payments on this debt. The result was a net cash inflow derived from the sale of new loans abroad. Consequently, at the time, no real economic cost was associated with this increase in external debt. After 1982 this situation changed. The annual increase in external debt diminished to the point where it was less than the scheduled interest payments. At that point Latin American borrowers began to experience a net cash outflow on their debt account. Thus, in order to generate the foreign exchange needed to pay even part of these scheduled interest charges, the economy had to undergo a costly adjustment process.

Virtually all developing countries at various times abandon laissez-faire policies with respect to international trade in order to pursue government-directed strategies of industrialization. Abandonment of free trade always means that private firms and consumers no longer base their economic decisions on world prices of goods but, rather, on distorted domestic prices that alter production and consumption decisions. For example, imposition of a tariff on automobile imports raises the domestic price of automobiles in comparison with other goods in the economy. The higher relative price of automobiles has two effects: first, consumers purchase fewer automobiles because of the higher price, relative to other goods they can buy; and, second, domestic production of automobiles increases in response to the higher selling price while domestic production of other goods falls, as labor and physical capital shift away from the other sectors and toward the automotive sector.

Public enterprise plays a key role in the economic development process in Latin America, both because of the region's cultural heritage, which has led people to look to central authority for leadership in promoting economic growth, and because of the accelerated pace of recent cataclysmic events to which only governments have had the power to respond.

Currently, Latin America is undergoing its worst economic setback in half a century, in which eight newly-elected democratic governments are struggling to regain control over their destinies. These governments face unprecedented planning and administrative problems as they move from the crisis-management phase of economic austerity programs to one of resumed growth. A central concern of these governments is, and will continue to be, the successful operations of major parastatal enterprises.

In 1982-83 Latin America experienced a depression which rivaled that of the 1930s. Real Gross Domestic Product (GDP) declined by 1% in 1982 and by 3.3% in 1983. Per capita income fell 10% below 1980 levels. The proximate cause of this depression was the crisis produced by external debt.

By 1984 several countries in the region began to show signs of recovery from the severe recession and external-sector crisis. Economic growth rebounded to 2%, and the larger countries achieved impressive improvements in external balances. Brazil's total exports grew sharply, as did Mexico's non-oil exports. In 1985 growth has surged ahead in Brazil and Mexico although falling commodity prices have placed new strains on the smaller countries (and weaker oil prices, as well as erosion in domestic policy, have undermined Mexico's external position).