Write Down the Debt

Jonathan Power

December 21, 1990|By Jonathan Power

LONDON — London---WHEN STUPIDITY is compounded by short-sightedness and reinforced by ideological rigidity and then lack of compassion, it's difficult to tell those most harmfully affected to just grin and bear it.

Nearly 10 years of debt crisis in the Third World have squeezed whole societies to the wall. The policy of ''growing out of debt'' by pruning and belt tightening, supposedly leading to renewed economic growth, is totally discredited. The poor have been kicked around for too long in the pursuit of free-market solutions.

The dam of frustration will break when nihilistic revolutionary slogans look more appealing than the unimaginative ploddings of the present governments. People may look to a right-wing populist dictator as seems to be happening in the Philippines or join up with the Maoist Shining Path guerrillas in the Peruvian Andes. But the loser will be democracy and the chance of making painful economic transition without violence.

The arithmetic of the damage done by the debt crisis needs only a word. Between 1984 and 1988 Third World countries transferred to the industrialized countries a net amount of $163 billion in repayments. According to UNICEF half a million child deaths, two thirds of them in Africa, were directly caused by the debt crisis and the 1980s recession. In Latin America urban real wages are 20 to 40 percent below 1980 levels; in Argentina, Uruguay and Peru they are even below 1970 levels.

And it is set to get worse. The developing world is $24 billion behind in interest payments to the big Western banks. That is three times the size of the arrears when the U.S. secretary of the Treasury, Nicholas Brady, announced his reform plan in March, 1989.

The Brady plan is not working. Progress is not being made. The debt burden is so enormous that most of the afflicted economies stand little chance of regaining momentum. It is abundantly clear that the only way they can one day make a contribution to paying off some of their debt is if a sizable portion of that debt is now forgiven.

Many of these countries have enormous potential once they get going again. Before the debt crisis Brazil could rightly claim to be the economic success story of the 20th century, significantly outrunning both Taiwan and South Korea.

The debt problem could be solved within a year, if only the free-market absolutists would step aside.

Developing-country debt exceeds $1.1 trillion, but most of it is owned by countries not having trouble servicing their debts. Only about $400 billion is owed by problem debtors. That is less than 1 percent of the wealth of the creditor nations, and the debt service on these loans is less than one third of 1 percent.

Take Mexico's $80 billion debt. How much would it cost creditors to forgive $10 billion of it? Certainly not $10 billion. Nobody in the banking community has confidence that Mexico will ever pay all its debt. This is why Mexican debt sells on the secondary market for 40 cents on a dollar. The true market value of this $10 billion is $4 billion.

So if we should cut by half the outstanding debt owed by the most seriously indebted countries we would be talking about only $80 billion. Paul Krugman, of the Massachusetts Institute of Technology, goes even further. He argues that in fact it would cost creditor countries only $25 billion in real terms, since if half the debt were written off countries would then recover and prosper. The chances of creditors getting more than 40 cents a dollar on the remaining debt would dramatically improve -- money they'd otherwise never see.

Shared among the industrialized countries the $25 billion becomes even less significant -- maybe as little as $6 billion for the U.S. This would cost American taxpayers less than one twentieth of 1 percent of the savings-and-loan bailout.

Two continents in crisis cannot be sacrificed on the altar of economic theory. Sometimes when grave mistakes are made and catastrophe looms the state has to step in: 600 million people cannot simply be flushed down the toilet.

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