Debt management today is unfair and kills growth worldwide. Since 1982, the debt crisis has stalled development in the Third World and destroyed jobs in the United States, Canada, Europe and Japan.
As a result of austerity programs, resources have poured out of developing countries on their way to wealthier creditors in the form of forced trade surpluses and capital flight. Third World living standards have tumbled.Let's take Latin America. In order to repay their debts, Latin American countries have cut imports to the bone and subsidized exports.
U.S. industries and farms find it impossible to sell their products in Latin American markets and are under fierce attack from Latin America's desperation exports. U.S. exports to Latin America shrank by one-third during the first year of the debt crisis. Altogether, one million U.S. workers have lost their jobs as a direct result of the debt crisis.
What has been the resulting benefit to Latin America? The bridge loans arranged by the International Monetary Fund have served only to finance debt payments, not to rekindle economic growth. As a result, living standards have plummeted as much as 19 percent in some Latin American countries.
Austerity efforts have brought internal investment to a halt and fueled capital flight. And in the United States a widespread Latin default would still wipe out the capital and reserves of the nine largest U.S. banks.
The economies and political systems of the inter-American community remain hostage to debt. This story is repeated the world over.
Jobs will not be restored in the industrialized countries and hopes will not be revived for progress in the Third World until we change four facts of modern economic life today.
The plan of Treasury Secretary James A. Baker III asks commercial banks to provide $20 billion and multilateral agencies to provide $9 billion over three years. Any of 15 indebted developing countries implementing tax cuts, budget cuts, minimum wage cuts and large-scale privatization would be eligible for loans. The emphasis of the Baker plan is supposed to be growth, not austerity. But on closer examination, the plan just replaces austerity with requirements for debtors to implement a particular kind of economic program.
Since the Baker plan calls for new loans instead of interest rate and debt relief, it creates more debt, not less. This will increase the already precarious exposure of banks to a possible default. Adding to the debt burden of these countries will discourage new investment and increase capital flight. In other words, the plan prolongs the policies that created the debt crisis in the first place.
The Baker plan calls for $6 billion to $7 billion a year or $20 billion in new commercial loans over three years. That represents just half the level of commercial lending to Latin America during the three years since the crisis began. It is 20 percent of the annual debt service of the major Latin borrowers.
At this level of lending, new loans will simply return to creditors in the form of interest payments or capital flight. No cash will change hands. Only the books will look better. In the meantime, the debt will pile up and capital flight will continue.
Some bankers estimate that up to 50 cents of every dollar lent to Mexico escapes into untraceable bank accounts, real estate, or luxury items like gems. These loans will not create growth.
The only alternative is debt and interest rate relief. Any plan that excludes debt or interest relief cuts itself off from the only real hope of restoring growth.
Bankers voice three concerns with debt relief. First, they claim that debt relief could weaken the creditworthiness of indebted developing countries. But a country receiving emergency bridge loans can be no more creditworthy than a country receiving debt relief. Besides, debt relief immediately improves the
financial position of any debtor, and hence its creditworthiness.
Second, bankers claim that forgiving part of the loans to an indebted developing country could destroy the value of other loans to that country, or of loans to similar countries. But if debt relief is provided on a country-by- country basis, and if it is provided in order to finance debtor efforts to improve growth and investor confidence, then it should either improve or have no effect on the rest of banks' portfolios.
Third, debt relief must be offered on a multilateral basis. Suppose Japanese and British banks provide debt relief to an indebted developing country, but Canadian and German banks do not provide it to the same country. Then the Canadian and German banks benefit from having more creditworthy debtors at the expense of Japan and Britain. The Japanese and British banks would take a loss and operate at a competitive disadvantage to the banks that did not provide debt relief. A workable debt relief proposal must be country specific, related to debtor efforts to restore investor confidence, and coordinated among all creditors.
An acceptable answer to the debt crisis must not throw the Third World into recession or forever burden industrialized country workers with a structural trade deficit. And it must lead to a reduction in Third World debt, not an increase. I believe such an answer must build a partnership for growth between developing debtor nations and industrialized creditors. The key concept underlying this partnership is exchange. And the upcoming round of multilateral trade talks of the General Agreement on Tariffs and Trade provides a perfect forum for this exchange.
The president of the United States should convene a trade relief summit to be held annually in the first three years of the new round of multilateral trade talks. The summit should include representatives of the governments of all major creditor countries, as well as small and large banks from Europe, the United States, Canada and Japan. Otherwise, the creditors that did not participate would get a free ride at the expense of the creditors that did participate. Banks and governments should have equal representation at the summit, with at least three representatives each to ensure some diversity of views. The president of the World Bank should chair the summit. There would be no need for overlap between negotiators in the GATT round and negotiators in the trade relief summits.
As a goal and only a goal for the total value of yearly trade relief packages that the summit would offer to eligible countries, I suggest:
3 percentage points of interest rate relief for one year on all outstanding commercial and bilateral loans to eligible countries.
3 percent write-down and forgiveness of principal on all outstanding commercial and bilateral loans to eligible countries.
$3 billion of new multilateral project and structural adjustment loans for eligible countries.
Trade-debt relief packages should be country-specific. And the resources they release should not just ratify trade barriers, free debtor dollars for capital flight, or substitute for domestic development. For this reason, the value of each yearly trade relief package should depend on the uses that each debtor has made of a previous year's package.
I propose six guidelines that suggest the goals behind trade relief packages while recognizing that debtor reforms must come from within. Debtors should:
Liberalize trade so their industries and consumers can purchase competitively priced goods and services from the United States and other industrialized countries.
Reverse capital flight because there is no reason for outsiders to invest in Third World countries if their elites will not invest in their own future.
Encourage internal investment to promote self-reliance rather than dependency on external finance.
Pursue domestic policies that promote economic growth.
Choose policies that have broad internal political support.
Keep debt management free from scandal.
Trade relief packages including commercial and bilateral debt relief, as well as new multilateral loans, could relieve up to two-thirds of the yearly debt burden on participating Third World countries. If the 10 largest Latin American countries were to participate fully in three consecutive years of trade-debt relief packages, banks would contribute $42 billion of debt relief, compared with $20 billion of new loans under the Baker plan. Even the largest U.S. money center banks would lose no more capital over a three-year period than they have made (on average) in any one of the last three years. Most U.S. banks would lose no more than 3 percent of capital.