Third World debt crisis: trade is the only panacea

Third world debt is currently estimated to exceed $900-billion U.S. In the past few years, at 90-day intervals, panic has swept the developed world’s financial community as bankers, International Monetary Fund officials and debtors have scrambled to reschedule, rearrange and refinance the overdue payments of another developing country.

And every 90 days or so comes an announcement that a new agreement has been reached between the bankers and the debtors. A new pretence is constructed to show that the loans are all productive, that no one is in default and that massive write-offs or moratoriums on repayments will not have to take place.

The fact is that some of this $900-billion will probably never be repaid. Much of it will not be repaid as it falls due. (Peru, for example, with more than $18- billion in foreign debt, has simply abandoned repayment of principal, is in arrears in interest and has no agreement with the IMF.) Most of it will have to be rescheduled over 20- to 30-year periods.

Debtors and creditors know this, but the charade continues. Why? Bank regulators around the world have very specific ground rules for determining non-productive loans and the reserves that have to be set aside to cover them, called loan loss provisions.

In Canada, for example, the Inspector- General of Banks has ruled that by October, 1986, all Canadian banks must establish loan loss provisions of 15 to 20 per cent of their outstanding loans to 32 financially troubled countries. Without the charade that all is well with Third World debts, many banks would have to set up loan loss reserves that would send shock waves through the financial community.

Managing the debt problem by stumbling from crisis to crisis is no solution. And suggesting that Third World countries simply tighten their belts (by introducing austerity programs and reducing government spending) is like telling a starving man to go on a diet for the sake of his health. The developed world would eventually pay a heavy price for the massive outbreak of social unrest that could result in the Third World.

And these nations might eventually find themselves forced to form a debtors’ cartel. Cartels don’t usually negotiate – they dictate, as we learned from the Organization of Petroleum Exporting Countries.

Part of the medicine that we expect the debtor countries to swallow is the devaluation of their currencies, so their exports will become cheaper and will increase. All too often this does not work, because of protectionist measures in the developed world. Brazil, for example, has been forced to reduce its exports of steel to the United States as a result of U.S. protectionist measures. Chile has been forced to reduce its U.S. copper exports for the same reason. Canada maintains quotas on textiles and footwear from Third World countries. Europe and Japan are equally at fault.

On the other side of the fence, Third World countries have been slapping controls and barriers on imports. In 1984, the developing countries reduced their imports from the United States alone by $35- billion. These actions are depressing our economies. We have set in motion a vicious cycle of counter-productive policies. The debt crisis is no longer simply an economic problem but a political one – and it cannot be “solved” until the governments of the developed countries get involved in the negotiations. Until then, the financial system of the developed world will be at risk, for if the Third World repudiated a major portion of its debts, it would cripple or collapse our financial system.

So far, however, the major Western governments have insisted that the problem be addressed strictly on a-case-by- case, country-by-country basis among the IMF, the commercial banks and the debtor countries. This is ludicrous. Any agreement reached by these three parties can be undone by events beyond their control – exchange-rate fluctuations, higher interest rates, import restrictions or the increased value of the U.S. dollar in a world where commodities such as oil and food are tied to the U.S. dollar.

But contained in every problem are the seeds of an opportunity.

The Third World in fact presents us with huge potential markets for our goods and services.

The World Bank annual report indicated that in 1982, 39 per cent of all U.S. merchandise exports went to developing countries. Of Canada’s merchandise exports, 12 per cent went to developing countries. For Australia, the figure was 44 per cent. So it is for most of the developed world.

The $900-billion in Third World debt fuelled dramatic growth in world trade in the past few decades, and we benefited greatly from it. Today’s unemployment in the West is partly a result of the underdeveloped countries reducing their imports from the industrialized world. (Canada’s North/South Institute reported in a recent study that we may have lost 135,000 jobs in the past three years for this reason.) It is becoming increasingly obvious that the motivation for aiding the Third World should be enlightened self-interest. Yet instead of dealing realistically and earnestly with the issues, we have constructed a list of Third World cliches. Some of them go like this: Third World countries are all corrupt. Of course there is corruption – but what about organized crime in North America? Income tax evasion? Corporate crime? The growth of the underground economy – $40-billion of unreported income in Canada? They borrowed beyond their means. Perhaps they did – but at the end of the nineteenth century, U.S. foreign debt was higher than Brazil’s or Mexico’s today as a percentage of Gross National Product. Is Canada’s debt not approaching $200-billion? Did many Canadian businessmen not borrow beyond their means in the past decade? They foolishly borrowed on the mistaken assumption of high commodity prices. They did indeed, but the commercial banks of the developed world made loans on the same basis.

They spend too much on arms. In many cases they do. But the arms are supplied by the same countries whose banks are at risk.

They are governed by a bunch of dictators. In too many instances this is so, but often the West was responsible for keeping them in power – Batista in Cuba; Somoza in Nicaragua; the Shah of Iran; Pinochet in Chile; Marcos in the Philippines and many others.

Internal strife is rampant and they can’t develop until they settle their internal squabbling. In some countries, but by no means all, this is true. But the United States went through a civil war in its early stages of development; strife rages in Northern Ireland; terrorists are active in Spain, Italy and other European countries. We had our own FLQ (Front de Liberation du Quebec) crisis in Canada. The use of force to facilitate change or to right a wrong is not a Third World monopoly. The scale of poverty in the Third World, more than any other reason, explains the scope of social unrest.

Are these cliches simply an excuse – an excuse for our incredible affluence, existing alongside their incredible poverty? The global balance sheet is lopsided. The assets – economic wealth, agriculture resources, educated work forces, military power, technology – are largely owned by the developed world. The liabilities – illiteracy, burgeoning population, poor health, starvation and malnutrition – are the Third World’s.

This imbalance cannot be allowed to continue indefinitely. There is already evidence to support the contention that if the developed countries do not move to correct it, Third World countries will take unilateral action.

Before the early 1970s, the industrial world’s economic structure rested on the assumption of abundant, cheap oil as our major energy source. Yet cheap oil was the most sensitive component of our economic system. Sensitive because most of it came from outside the developed world, largely from politically unstable countries and regions whose inhabitants were among the poorest of the world.

When you have the poorest people of the world supplying the richest people with a key ingredient to maintain that wealth, you have the potential for massive change. But when the oil-exporting countries formed OPEC and took control of the petroleum, we were taken by surprise – we were too busy enjoying our affluent society to anticipate anything but its continuance.

Once the shock and anger subsided, fear set in – the flow of funds from the developed world to OPEC was going to bring Western economies to their knees.

Yet the world economy adjusted to the new reality. The affluent (read wasteful) society became the conserver society, at least in energy. Instead of producing global financial disaster, OPEC produced a redistribution of wealth between the developed and the underdeveloped world. The change has largely been good for all parties.

The current debt crisis presents us with a similar set of circumstances. We should be taking a long-term, comprehensive view of the situation. This might yield such actions as: Rescheduling short and medium-term debts to 20- and 30-year terms.

Writing off some debts of countries suffering the greatest hardship.

Limiting the Third World’s exposure to increases in interest rates.

Creating a climate to encourage foreign investment in Third World countries.

The assuming of some of the existing and new debt by governments and international financial institutions. But the most constructive long-term contribution we can make is improving the terms of trade with underdeveloped countries so they can earn the foreign exchange to service and repay their debts. Trade is the only way they can do it.

Too often we dwell upon the negative aspects of opening our markets to Third World exports. However painful this might be, the consequences of not accommodating it would be worse: massive repudiation of Third World debts, a dramatic reduction in our exports, starvation on an unthinkable scale and social unrest of global proportions.

Our future prospects for economic growth are tied to an improvement in the economies of Third World countries. The Third World accounts for almost 80 per cent of the planet’s population, and even in its current underdeveloped condition represents a huge market for our exports.

The Ethiopian crisis proved that we are compassionate. Now the $900- billion debt owed by the Third World has focused our self-interest. The opportunity for expanded global trade – and harmony – should challenge our intellect.


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