In Third World Debt Charade, Both Sides Lose

Finance ministers, bureaucrats and bankers converge on Berlin this week for the annual International Monetary Fund/World Bank meeting. They have little cause for rejoicing.

The Third World debt crisis has been dragging on for six years now, and everybody is losing. The technical fixes offered by public and private creditors are stopgap measures at best, unable to deal with root causes. It is high time for creative thinking to resolve a situation which no one benefits from--not even the banks.

Everybody is losing. In 1981, the last year before the crisis broke, total U.S. exports to Latin America and Africa were $52 billion. Last year they were $40 billion, a drop of 23%. American farmers have been especially hard-hit. They lost more than 40% of their sales to these two developing continents between 1981-1987. Indebted countries cannot both service their debts and buy our products.

A good rule of thumb is that every billion dollars in lost exports equals 24,000 lost jobs--mostly well-paid ones in manufacturing. In 1987 alone, then, compared with 1981, sales forgone to Latin America and Africa cost 288,000 jobs. Add the multiplier effect of this lost economic activity; add the competition for U.S. products from debtor nations struggling to earn hard currency, and it becomes clear that Third World debt is sabotaging the American economy. The same is true in Europe, where exports to Latin America were $20 billion less in 1986 than in 1981.

Our woes, however, pale beside the damage debt is doing in the Third World itself. In Latin America and Africa, growth is a dim memory, living standards have plummeted, infant mortality is rising again, life expectancy is diminishing. Under the harsh tutelage of the IMF, whose policy is made by the rich Western nations, country after country is slashing health, education and social-welfare budgets, abolishing food subsidies, cutting back on basic services--and watching its children die.

Cardinal Paulo Evaristo Arns of Sao Paulo, Brazil, has asked, “Must we pay back the debt with the hunger and misery of our people?” So far, the answer is yes. The latest figures from the Organization for Economic Cooperation and Development reveal that from 1982-1987, the Third World as a whole received $552 billion in official development assistance, export credits, bank loans and direct private investment. During the same period, Third World nations paid out $839 billion in interest and amortization on debt. The poor world thus provided the rich one with $287 billion net in six years--roughly the equivalent of four Marshall Plans. Its only reward was to be a third deeper in debt than in 1982, with no end in sight.

The environment is losing, too. The indebted half of the world is ravaging our common planet in a desperate attempt to pay back. Tropical forests are felled, soils are exhausted to grow cash crops, minerals are dug up at an accelerating rate. All in vain: Commodity prices have remained at record lows throughout the 1980s, and small wonder, since dozens of countries at once are trying to export a limited range of products.

What is all this destruction and misery for ? Would the international financial system collapse if Third World debt went entirely unpaid--a most unlikely scenario? Not at all. Commercial banks have reduced their exposure; loans to the Third World today account for only 6% of their total loan portfolios. Furthermore, only about half the total public and private Third World debt--now estimated at $1.2 trillion--is “problem” debt, of which banks hold about $325 billion. The debt crisis is now a crisis for at most two or three large U.S. banks.

Do governments fear setting a dangerous precedent--creating what bankers call a “perverse incentive”--if they soften terms on Third World debt? This precedent was set long ago, by the United States itself. British economist Michael L.O. Faber reminds us that in 1947, the terms of a large U.S. loan to war-torn Britain stipulated that interest payments would be waived--not reduced, but forgiven entirely--should that interest exceed 2% of British export revenues in any given year. British parliamentarians and the press bitterly denounced these “harsh” terms, and economist John Maynard Keynes, who had led his country’s negotiating team, was hard-pressed to defend them.

Forty years later, Peru is on the IMF’s blacklist, ineligible for further loans because it has unilaterally reduced debt service to 10% of export revenues. Sub-Saharan Africa is paying more than 20% of its export income to its creditors, Latin America 40%.

Remedies currently applied are Band-Aids at best. The dignitaries meeting in Berlin have always claimed their goal was to restore credit-worthiness in developing countries. In this they have notably failed. Banks now provide new money only when forced, and mostly so that client countries can send it back to them straight away as interest payments. The Paris Club, which manages debt for creditor governments, last year collected and subsequently re-lent $26 billion. In Joseph Heller’s novel “Catch-22,” Lt. Milo Minderbinder explains an intricate business deal, saying, “I’m the people I buy from.” Where Third World debt is concerned, we’re the people we lend to.

How long can this charade continue? In a U.S. election year, no one expects a breakthrough this week in Berlin. Democratic Latin American governments cannot hold out forever against increasing pressures from their beleaguered peoples. The only hopeful sign is IMF/World Bank acceptance that their structural-adjustment policies are indeed hurting poor people. They now promise “adjustment with a human face.”

This is not enough. More than 100 technical-financial schemes for alleviating Third World debt have been floated since 1982. None has succeeded, nor is any likely to make more than a marginal difference.

Responsibility for the crisis is shared. The debtors borrowed for current consumption, military spending, huge unproductive projects and sent billions northward in capital flight. Borrowed money fueled a development model of scant benefit to their people. The lenders throughout the 1970s unloaded vast sums on the Third World, on the false assumption that the loans could not go bad since “countries do not fail to exist,” as Walter Wriston, then president of Citibank, put it.

Taking the market seriously means accepting the consequences of poor economic judgment. We can either continue to wage undeclared war against the Southern Hemisphere or seek ways to create prosperity of ultimate benefit to everyone. The best way to create genuine development in the Third World is to get money--and the political power that goes with it--directly to the poor majorities at the grass roots.

We could start with the poorest countries, especially in Africa, where commercial bank exposure is negligible.

Payments of interest and a suitable part of the principal could be made over several years, in local currency, into national development funds, on the express condition that these funds be democratically co-managed by authentic representatives of the people--including women--working alongside representatives of the state. These funds would provide capital for projects devised by villages, peasant associations, women’s groups; small loans to local entrepreneurs and farmers; minimum wages for ecological renewal, tree-planting, anti-erosion measures, small irrigation works and the like. Non-governmental organizations already working in Third World countries could play an important supporting and monitoring role. So could reliable U.N. agencies like the International Fund for Agricultural Development and UNICEF, the United Nations Children’s Fund.

Particularly repressive governments that refused to share responsibility for development with their own people would continue to pay interest in hard currency. This might concentrate their minds wonderfully.

Banks, too, could convert part of their debt at discounted secondary-market prices and contribute the proceeds to development projects. Northern government regulators should not penalize them for choosing this course.

Citizen organizations would be happy to help banks identify projects, and the banks would improve their image as responsible world citizens. The 3-D solution--debt, development, democracy--provides an honorable issue for all concerned, and real hope for the future.

In Joseph Heller’s novel ‘Catch-22,’ Lt. Milo Minderbinder explains an intricate business deal, saying, ‘I’m the people I buy from.’ Where Third World debt is concerned, we’re the people we lend to.