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Solutions/ Recommendations [I]One fact is undeniable: Someone is going to have to pay for past debts. It could be the people in debtor countries, or the banks, or the people in advanced industrial countries. Most likely it will be some combination Of these three groups. In the last ten years, there have been a variety of proposals which, unfortunately, usually reflect only the special interests Of the groups proposing them. Generally speaking, these solutions fall into three categories: repudiation, minor adjustments in repayments, or reduction.
Debt repudiation, in the sense off unilateral cessation of repayment, occurred n a number of countries: Bolivia, Brazil, Costa Rica, Dominican Republic, Ecuador, Honduras, Nicaragua, Panama, and Peru. With the exception of the Peruvian cessation, however, most of these actions have been taken with assurances that the stoppages were only temporary. Peru announced that it was unilaterally limiting its debt repayments too percentage of its export earnings; and since Peru took this action, other nations have indicated that they will act similarly, There have been no serious proposals for a widespread and coordinated repudiation Of global debt,
The economist Jeffrey Cash offers several reasons for this absence of a general repudiation,F-iris, debt repudiation is a dramatic and abrupt act, Most nations would prefer to defer such decisions as long as there are advantages to muddling through, and growth prospects are sufficiently ambiguous to make this muddling a viable course. Second, debtor countries fear retaliation from commercial banks. Fifth banks were to cut off nodded related activities, such as trade credits, the situation could be made even worse.
Third, the debtor countries fear retaliation from creditor governments and multilateral lending agencies. Grants from development banks could be affected, and trade relations would probably be seriously disrupted. Finally, the leaders Of most Of the debtor countries have interests in maintaining good relations with the richer countries, and repudiation would jeopardize these interests. Repudiation would also seriously disrupt global economic relations, probably far beyond the immediate losses of the debts themselves.
Retaliations would follow, because it would be politically impossible for lenders not to react, and because there would be a conscious effort to warn other potential defaulters against similar action. The escalation of economic warfare would have the effect of sharply reducing international economic interactions in trade, investment, and exchange. Such an outcome is in no one’s interest. The vast bulk of activity since 1982 has involved adjusting the timing and method of repayment.
The number of specific proposals is bewildering,One can read about debt-equity swaps, in which businesses or properties in the debtor country are purchased at a discount by the banks as partial repayment; debt-for- debt swaps, where bonds are offered as discounted repayments; exit bonds, which are long-term bonds tendered essentially as take-it-or-leave-it offers to creditors who have no interest in investing any further and wish to cut their losses; or cash buy-backs, where the debtor country simply buys back its loan at a deep discount.
Some of these proposals, notably the debt-for-nature swaps, where the debtor country promises to protect the environment in return for purchases of the debt by outside groups, are creative and could have important effects. This array of proposals is referred to as a “menu” approach to debt repayment, and its logic is superficially sound. It was the logic Of the plan Offered by Secretary of the Treasury James Baker in 1985.
By providing a number of different options, repayments can be tailored to the specific circumstances of a country, thereby easing the burden. Critical to the success of the menu approach is the assumption that countries will “grow out of” their debt. Yet, the evidence suggests that this assumption is not entirely sound. This approach further assumes the repayment of debts on terms that are essentially dictated by the creditors, No lender is obligated to accept any one of these possibilities.
Moreover, the opportunities for swaps and buy backs are limited: there are, after al, a relatively small number of investment opportunities in poorer countries, and the debt crisis itself has further limited those possibilities. Finally, some of these swaps can actually increase the drain on the capital off country, particularly if profit remittances on successful investments turn out to be very high. The final proposals have to do with debt reduction, and these only became a real possibility in the spring of 1989 with the announcement of a new plan, dubbed the Brady Plan, after IS_S.
Secretary of the Treasury Nicholas Brad The plan originally called for a total reduction of about 20 percent of global debt, with he IMP and the World Bank offering guarantees for the repayment Of the other 80 percent of the debt. Since 1 989, Argentina, Brazil, Costa Rica, Mexico, Morocco, the Philippines, and Venezuela have reached agreements concerning their debts under the auspices of the Brady proposal. This approach recognizes that many of the menu approaches were, in fact, schemes for debt reduction on a case-by- case basis.
This formal recognition of the need for systematic debt reduction is a hopeful sign, but the plan clearly does not go far enough. In market terms, developing-country debt is already selling on the secondary market at about hairy-five cents to the dollar. In other words, debt reduction has already occurred in the marketplace, and any plan that incorporates reductions must take this into account. There are some serious problems with debt reduction. Debt reduction could reduce the incentive for debtor nations to make economic changes that could lead to greater efficiency.
Or, it could set a precedent that would have the effect to reducing, or even eliminating, the possibility tort any future bank lending tort economic development projects, Finally, debt reduction could have the effect of addling public lending agencies, like the World Bank, with enormous burdens, thereby vitiating their future effectiveness. These concerns are genuine. Counterpoised to these possibilities, however, is the stark reality of hundreds of millions of people living in desperate conditions with no hope of relief in the near- or medium-term future.
Any plan for easing the debt burden, therefore, must try to incorporate a number of legitimate, but competing, concerns of varying importance. First, the repayment of the debt itself has ceased to be the central concern. Private banks obviously have an interest in the repayment of the debt and, to the extent possible, these interests must be accommodated. But the security Of the international banking system is no longer at risk, and that, as a legitimate public concern, can no longer dictate possible necessary actions.
The central concerns now are the reestablishment of economic growth in the heavily indebted countries, the effective and meaningful distribution Of that growth into all sectors Of their societies, and their reintegration into the international economic system. Only after sustained economic growth returns to the heavily indebted countries can the international immunity even begin to determine manageable rates and methods of debt repayment. Second, the International Monetary Fund must fundamentally reassess its policies.
Programs of structural adjustment may be appropriate for the original purpose of the MIFF-to assist nations having temporary difficulties in maintaining currency values because of transient balance-of-payments difficulties. Taut these programs are profoundly counterproductive in current circumstances and, indeed, are guided by a wildly inappropriate perspective. The inflows of capital to the MIFF from the heavily indebted countries were more than a gross embarrassment: they were conclusive evidence of the Miff’s misunderstanding of the causes of the debt crisis.
The IMP should shift its perspective to more creative or appropriate ways of stabilizing or depressing interest rates rather than raising them, or bays to prevent capital flight from developing countries, or any number of issues that concern the specific conditions of economic growth. The mechanical application Of a “model” of economic growth is wrongheaded. ” Third, the resolution of the debt crisis depends upon a clear recognition that much Of the debt, as formally constituted, Will not, because it cannot, be repaid.
Some countries, such as those in sub-Sahara Africa, ought not to repay their debts. Other countries, particularly the heavily indebted ones, can pay something on their debts, and perhaps the appropriate percentage is about half. Viewed in this light, the real question becomes one of allocating the costs of this nonpayment of debts. The current emphasis of forcing the poor to pay with broken lives and broken spirits is demeaning to both rich and poor, and Elsevier the long-term interests of rich as well as poor. Finally, there are genuine issues of responsibility that deserve to be made explicit.
The debt “crisis” is only a symptom of an international economic system that tolerates growing and abysmal poverty as normal condition. This need not, and should not, be the case. The developed countries have a responsibility to create conditions whereby the poorer countries can interact more productively in international economic activities: their single most important contribution to this end might be in the area of reducing trade restrictions on the products of poorer countries. Similarly, the developing countries have a responsibility to see that money is more effectively utilized within their own borders.
The obscene personal profits accumulated by such leaders as Marco’s of the Philippines and Mobbed of Zaire should not be fostered by the strategic interests of other countries. The banks should also face up to the fact that their single-minded pursuit of profits almost led them to the brink of bankruptcy. The lesson to be learned from this experience is that for economic growth to be sustained, close attention must be paid to the mutual interests of all parties involved. [I] Forearm, V and Roster, M (1994) , World Security: Challenges for a New Century, (New York: SST. Martin’s Press)