"La Década Perdida" in Spanish or "A Década Perdida" in Portuguese ("The Lost Decade") of Latin America is a term used to describe the economic crisis suffered in Latin America during the 1980s, which continued for some countries into the 1990s. In general, the crisis was composed of unpayable external debts, taxes, and volatile inflation and exchange rates, which in the majority of the countries in the region were fixed.
During the 1970s, the rise in prices of raw materials (primarily oil) and the decrease in the value of the dollar caused US dollars to flow into Latin America, a region that then debated between an industrial model directed from the state or a market based model.
In 1980, the decreased price of raw materials and the rise of interest rates in the industrialized countries generated a lack of resources, which provoked a massive depreciation of exchange rates, appreciating the real interest rate on the debt, a situation made worse by the presence of excessively large bureaucracies.
In response to the crisis, the majority of the nations had to abandon their economic models of industrialization by substituting with imports, and they adopted a growth strategy oriented toward exports. This strategy was encouraged by the International Monetary Fund. There were exceptions, like Chile or Costa Rica, which briefly adopted reformist strategies. The real growth rate of gross domestic product (GDP) for the region was only 2.3% between 1980 and 1985. Between 1982 and 1985, Latin America paid 108 billion dollars in past debts.
In the beginning of the 1990s, Latin America was recuperating from the crisis, which nevertheless reconfigured the economic landscape of the region. The countries who previously were regional leaders like Argentina, Mexico, and Venezuela were left with diverse effects that hadn't been overcome. Meanwhile, countries that had fallen behind previously like Chile, Brazil, Peru, and Colombia stood out in the late 20th century with high economic growth and a better social wellbeing in relative terms.
By country
Argentina
Since the early 1950s, the Argentine economy had experienced an almost permanent state of malaise, with irregular growth rates and inflation that continued to increase over the years, making economic management unsustainable. In 1975, the Minister of Economy under the government of María Estela Martínez de Perón, Celestino Rodrigo, implemented a shock plan that became known as the “Rodrigazo.” It sought to control the inflationary spiral but only succeeded in worsening the economic situation, representing a turning point in the country’s economic history.
In March 1976, the self-proclaimed National Reorganization Process military regime came to power and initiated a series of macroeconomic reforms, primarily through a process of economic liberalization marked by a massive influx of imports. This caused the decline of domestic industry, accompanied by a significant increase in unemployment, numerous bank runs, and corporate bankruptcies. Beginning in 1979, a series of devaluations took place, generating intense social unrest. This unrest worsened after the failed Falklands War in 1982, which paved the way for the return of democracy the following year.
When Raúl Alfonsín took office in 1983, attempts were made to revive the import-substitution model, with limited results. In 1985, the “Austral Plan” was launched under the supervision of the IMF. Despite its initial success, excessively expansionary economic policy prevented Argentina from meeting its payments, leading to a gradual economic deterioration that reached its peak between 1989 and 1990, with two episodes of hyperinflation. In 1989, Carlos Menem was elected. Following a new agreement with the IMF in 1990, he implemented a series of liberal policies, including the massive privatization of public companies and the establishment of parity between the peso and the U.S. dollar. These measures reduced inflation at the cost of higher unemployment, a development that became evident during the 1998–2002 crisis.
Bolivia
After experiencing a major economic boom during the 1970s, the Bolivian economy began to experience a slowdown in GDP growth, along with high inflation and an indiscriminate increase in debt.
Historically, the Bolivian economy had been based on tin mining. In 1982, the United States announced the sale of its large tin reserves, causing the price of the material to fall worldwide. This severely affected Bolivia, which at the time depended on extractive mining, as its hydrocarbon industry was not yet sufficiently developed.
After a long period of coups and military dictatorships in Bolivia, democracy returned to the country in October 1982 under President Hernán Siles Zuazo. One of his first measures was to restore the official exchange rate, but with exchange controls. The exchange rate was fixed after devaluing the official exchange rate of the previous system by 77%. Along with the return to a fixed and, initially, single exchange rate, the newly installed democratic government ordered a substantial increase in the prices of publicly provided goods and services, “de-dollarized” contracts between residents that had been agreed upon with dollar clauses, and significantly increased the minimum wage. At the same time, it announced that three months later a system for indexing wages to the cost of living would be introduced.
In May 1984, the government, under pressure from labor unions, declared a temporary suspension of payments to international commercial banks. This declaration had the opposite effect from what was expected: instead of easing the debt situation, it worsened it by opening another front with official financing institutions.
The worsening inflation led to significant political deterioration. President Siles Zuazo was forced by the opposition to call early elections in October 1984. Although unconstitutional, this measure provided a possible nonviolent way out of the crisis.
Subsequently, following a period of hyperinflation of the Bolivian peso, on November 28, 1986, President Víctor Paz Estenssoro signed a law providing for the introduction, on January 1, 1987, of a new fully convertible national currency, the boliviano, equivalent to one million pesos and with a flexible exchange rate against the dollar. After a transition period, it became the only legally accepted currency as of January 1, 1987. At that time, 1 dollar was worth 1.8–1.9 million pesos, while 1 boliviano was approximately equivalent to US$1.80.
Brazil
During the 1970s, the military regime took advantage of high oil prices to exploit its “comparative advantages” with the aim of deepening industrialization and thereby achieving high economic growth between 1974 and 1980, at the cost of increasing debt and inflation. By 1981, Brazil faced serious difficulties in meeting its obligations as interest rates rose. This led to the imposition of an austerity plan that unsuccessfully attempted to reduce the large fiscal deficits. The economic situation caused a major political crisis that, in 1985, brought 20 years of military dictatorship in Brazil to an end and marked the return of democracy under the Social Democratic Party.
By then, it had become imperative to adopt a fiscal policy capable of sustaining the public sector without resorting to inflation. The “Cruzado Plan” (Plano Cruzado) of 1986 was the first and most important of three heterodox economic shocks undertaken with the aim of neutralizing inflation through price controls. However, a series of mistakes—primarily the failure to address the situation of the public sector—led to their failure, while inflation continued to accelerate toward the end of the 1980s.
In 1990, the government of Fernando Collor de Mello initiated a series of free-market reforms that sought, among other things, to address Brazil’s technological lag resulting from the strict protectionism of the 1970s and 1980s. Although inflation was eventually brought under control, social cuts and a shortage of circulating money caused a political and social crisis that continued even after Collor’s removal from office in 1992. His successor, Vice President Itamar Franco, appointed Fernando Henrique Cardoso as Minister of Finance. Between 1993 and 1994, Cardoso developed the Real Plan (Plano Real), which stabilized the economy through greater economic liberalization, parity with the U.S. dollar, and fiscal balance.
Chile
The 1982 Chilean economic crisis took place during the military dictatorship led by General Augusto Pinochet, following years of economic reforms. Between 1977 and mid-1981, the economy experienced a period of economic expansion known as the Chilean miracle, characterized by a low value of the U.S. dollar. However, by the end of 1981, rising interest rates and lower copper prices led to excessive indebtedness. Combined with the unfavorable position of domestic industry in the face of imports, this resulted in a virtual paralysis of the economy, which the government attempted to overcome through Keynesian-style measures. In June 1982, the government devalued the peso by 100%, raising the price of the dollar from $39 (the fixed exchange rate since 1979) to $78. In August of that year, the foreign exchange market was liberalized, moving from a fixed system to a hybrid model.
On January 13, 1983, the Chilean state carried out a massive intervention in the banking sector, taking control of five banks and dissolving three others. By 1984, the state controlled more of the economy than the socialist government of Salvador Allende had prior to the military coup. Due to the limited results of the reforms, beginning in 1985 the military dictatorship changed its economic course by appointing Hernán Büchi as Minister of Finance. This brought about a prolonged period of high economic growth that continued into the early 1990s.
Supporters of the dictatorship's liberal economic policies have argued that the crisis originated outside Chile and affected all of Latin America in what became known as the Latin American debt crisis. Historians Gabriel Salazar and Julio Pinto Vallejos have responded that such crises are inherent weaknesses of the liberal model, or alternatively, of its abrupt implementation. It was the worst economic crisis in Chile since the Great Depression of 1929 and the 1973 economic crisis. Chilean GDP declined by 14.3%, while unemployment rose to 23.7%. The crisis has been identified as the trigger for a wave of protests against the military dictatorship, which continued for years as social indicators remained poor.
Colombia
During the 1980s, Colombia experienced a process of diversification in the coffee industry. Although the debt crisis did not have entirely direct consequences in Colombia, the country was able to cope with the situation, aided by the generally strong performance of its domestic industry. During that decade, the Colombian economy maintained an average annual growth rate of 5%. However, it had to confront a highly adverse internal situation due to the intensification of the Colombian armed conflict involving guerrilla groups and drug cartels.
Costa Rica
The 1980–1982 Costa Rican economic crisis was a severe financial crisis that struck the Central American country during the 1980s under the administration of Rodrigo Carazo Odio. It is considered one of the worst economic crises in the country's history and the worst of the 20th century.