Luiz Carlos Bresser-Pereira and Carmen Varela

Journal of Post Keynesian Economics, edited by Louis-Philippe Rochon and Claude Gnos, 2004.

It took more than 10 years to Latin America to overcome the debt crisis, turned into a fiscal crisis of the state. Yet, in the early 1990s most Latin America had undergone deep reforms (particularly trade liberalization and privatization), and, thanks to exchange rate devaluation and fiscal adjustment, they had reduced relatively the foreign and the public debt. Yet, growth was not resumed. The basic reason for that was the adoption of the growth cum foreign savings strategy coupled with financial opening (the Second Washington Consensus). The huge capital inflows created serious solvency problems as the foreign indebtedness threshold was exceeded. On the other hand, capital inflows appreciated the national currencies, artificially increased wages and consumption, having as trade-off the reduction of domestic savings and, again, the increase of the foreign debt. Despite sizable direct investments, the total investment rate remained constant, as growth did not resume. Just the foreign financial and patrimonial debt increased.