Where Did the Money Go?

By Alexander L. Taylor III

Few subjects infuriate Argentine President Raul Alfonsin more than what happened to the billions of dollars his country borrowed in the late '70s. Says he: "The foreign debt's most irritating feature for the Argentines is that the money was not converted into the expansion of the economy and the creation of capital. Quite the contrary." That caustic observation could apply to nearly every Latin American country. Although their debt load has quadrupled since 1973 to $350 billion, the borrowers have tragically little to show for it.

The most productive loans were for development projects like dams, factories and roads, which can help build the basis for future prosperity. Brazil, for example, borrowed $7.5 billion to make its steel industry into a world-class competitor. But many other projects turned into financial sinkholes, in part because of bad planning and incompetent management. Brazil and Paraguay are cooperating in the construction of Itaipu, the world's largest hydroelectric project, which has a dam almost five miles long. To date, nine years after it was begun, Itaipu has cost $18 billion and has generated not a single kilowatt of electricity for Brazil and only a small amount for Paraguay. Says Joao Camilo Penna, the Minister of Industry and Commerce: "We have $50 billion worth of incomplete projects with zero degree of usefulness."

Much of the money from foreign loans has gone to prop up the value of national currencies, which makes foreign goods cheaper and encourages consumers to go on import-spending sprees. Even though Chile's unemployment rate in 1981 was 35%, the country was a major importer of radios, TV sets, refrigerators and cars. The surge in foreign auto sales has made Santiago one of the world's most polluted capitals. Argentina went on a similar binge starting in the late 1970s, a period known as La Plata Dulce--the sweet money.

The same currency-rate imbalances that made it advantageous to stock up on foreign consumer goods spurred wealthy Latins to buy property abroad and deposit their money in U.S. and foreign banks. Even as loans poured into those countries, the rich were investing their money overseas. Says Richard Mattione, a research associate at the Brookings Institution: "Individuals and firms did the very sensible thing: they moved money out of the country. It was a mistake of government policy to have such an extremely overvalued exchange rate." The exact amount of this flight capital is unknown, but experts believe that since 1979 as much as $70 billion has left Latin America. That is well over one-third of the debt accumulated during that period.

The greatest amount of flight capital, $28 billion, came out of Mexico. Middle-class Mexicans developed a taste for condominiums in Vail and Aspen, and real estate investments from San Diego to Europe. Venezuela suffered $23 billion in foreign outflows, followed by Argentina with $12 billion.

Venezuela had a hungry bureaucracy that swallowed up huge amounts of cash. Of its $27 billion public debt, more than half was run up by 47 state agencies. One of the worst offenders was the Venezuelan Development Corporation, which borrowed $2.3 billion. Much of the money is now tied up in businesses that have gone bankrupt, including hotels, gold mines, textile mills and cement companies.

Is the money lost for good? In the case of funds that went into foreign bank accounts, there is hope that some will return home if currency rates are corrected and investment opportunities improve. But the money that was wasted or stolen is undoubtedly gone forever. --By Alexander L. Taylor III. Reported by Gavin Scott/Buenos Aires, with other bureaus

With reporting by Gavin Scott/Buenos Aires, with other bureaus