April 6, 1989
"Tie Bailouts to Reforms"
San Jose Mercury News
By Timothy Taylor
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IF Mexico, Brazil, Argentina, Venezuela and the rest of the less-developed debtor nations had sat down in 1970 and fantasized about how much money they would be able to extract from American banks in the next decade or two, they probably wouldn't have dreamed half as high as what they actually received.

In 1970, the total government debt of what the World Bank calls the "low-income" and "middle income" economies of the world was about $50 billion, or about one-seventh of the combined GNP of these countries. By 1986, total public debt of the less-developed countries had climbed to almost $800 billion, which was slightly over half of the combined GNP of those countries. The interest payments alone are now a crushing burden to those economies.

Many loans to those countries are now worth less than 50 cents on the dollar, which means that over half of the hundreds of billions of dollars has been dissipated in unproductive investments ranging from the honest but ill-fated to the foolish and even the corrupt.

It's amazing to me that hundreds of billions of dollars can just evaporate. But recognizing that fact is crucial both to establishing a debt-relief program and to setting the stage for future growth in the debtor countries.

Every plan to help the debtor countries, including the Brady plan being pushed by the Bush administration, involves a unlikely-sounding trade-off. On one hand, banks would agree to give up on collecting a large percentage of their loans from places like Venezuela and Argentina. The banks should be willing to do this because, as interest payments fall and the debtor nations become good risks for new loans, the economies of the less-developed debtor nations should expand and they will be able to repay the rest of their debts.

But why should bankers who have just lost tens of billions of dollars in loans to (say) Latin America, believe that if they forgive half the debt, the rest is any more likely to be repaid? In addition, why should these bankers want to roast their toes over an even hotter fire and loan out still more money to these countries?

Any plausible debt relief plan must answer these questions, or they will knock the feet out from under the proposed trade- off. During the 1930s, practically every Latin American country defaulted on its foreign debts, and the result was that those countries were virtually unable to borrow any money in world capital markets for three decades. If that scenario of default and ostracism from the capital markets is repeated today, it could cripple development in these countries for decades.

The only real solutions have a whiff of imperialism. They involve forgiving some of the debt and sending the debtor nations more cash, but only after attaching a lot of strings.

One set of strings are the requirements that debtor governments change some of their policies as a condition of debt relief. The Economist summarized recently, "Raise the prices paid to farmers; make sure interest rates are above the rate of inflation; keep the exchange rate competitive; keep the budget deficit low; give state firms tight financial targets, but managerial autonomy; do all these things and you will at least set the framework for an economy to grow."

These policies are often unpopular with groups in the government that receive their political support from urban food consumers, not farmers; that live high on deficit spending and use inflation to reduce their debts; that use state firms for power and patronage. But these policies do pay off in greater economic growth.

Foreign aid is a second place to attach strings. The Global Poverty Reduction Act (HR 594; S 369) currently before Congress would set some clear goals for foreign aid, like increasing literacy or reducing infant mortality and poverty. If aid to one country isn't working, it should be redirected to where aid can work.

Multinational corporations provide a third way of tying strings to new capital. Banks are more willing to send money to a debtor nation if they know a multinational corporation also has a stake in the project, and will be keeping a close eye on it.

Of course, multinational companies were getting Darth Vadar PR only 10 or 15 years ago. But a recent U.N. report, Transnational Corporations in World Development, now says, "The old policy of confrontation is now being replaced by a pragmatic approach, and the assumption of unavoidable conflict has largely given way to acceptance of the likelihood of mutually beneficial cooperation between host countries and transnational corporations." The most important reason for the new cooperation, says the U.N., is "the foreign debt burden which affects most developing countries."

The Bush administration talks a lot about debt relief, but not much about the strings and conditions that will make debt relief workable. But the loans that have already gone down the drain are proof enough that throwing money at development just doesn't work.

No one owes the governments of the developing world another chance to squander a few hundred billion dollars.

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