For a generation, one of the salient world economic problems has been how to transfer resources from rich industrial countries to poor nonindustrial ones. This is more usually described as foreign aid of one kind or another.
There have been brilliant success stories - Taiwan, South Korea, Singapore, Brazil, and, despite its problems, Mexico.
There have been dismal failures - Bangladesh, Zaire, Bolivia, practically the whole of the fourth world.
Foreign aid has been managed by governments (the United States and the members of the Organization for Economic Cooperation and Development), international agencies (the International Monetary Fund and World Bank), private charities (CARE, church groups), and private business. The aid extended by private business has included both direct investment and loans by commercial banks. These loans may now total as much as $400 billion, out of a total third-world foreign debt of more than $600 billion. Half of it is due in the next three years, and there's the rub.
Government foreign aid programs have long been unpopular. Except in a few special cases, they have made precious little contribution to economic growth, because neither the US Congress nor a succession of American presidents has been able to resist the temptation to use them for noneconomic (i.e., political) purposes. The largest recipients of what passes for American foreign aid, for example, are Israel and Egypt.
Private business is the clear ideological preference of the Reagan administration to be the channel for the transfer of resources. But as the administration has made clear in the International Harvester case, it also believes that there really ought to be risk in risk enterprise. It will not, in other words, bail out the losers.
Or at least it says it will not. But consider the case of the banks. Some of their loans to the third world were ill-advised to the point of being irresponsible. Some went to enrich corrupt dictators. These two categories can only be explained by a combination of bad business judgment and greed enhanced by high interest rates. But in making a good many, perhaps most, of these loans, the banks were performing a function which otherwise would inevitably have been dumped on governments. They were recycling petrodollars and keeping the third world alive in the aftermath of the oil price shocks.
Things have now reached the point where new loans are being used to pay the interest on old loans. There is not the slightest possibility of any significant payments on the principal. Default is the only alternative to continued extension of credit, and even one signifi-cant default would send shock waves through the international monetary system. So the banks are on a treadmill. They can neither collect old loans nor stop making new ones. This obviously cannot continue forever.
There are political voices in Congress urging that Poland, for example, be formally declared in default as a means of punishing its martial law government. The practical effect of this would be that Poland's creditor banks would have to write off their Polish loans as losses. A default in Poland would likely trigger defaults in other countries. It would not take very many of these to turn black ink into red for some of the biggest banks, and perhaps set off a domino effect.
It is hard to feel much sympathy for the bankers, especially when they themselves are largely responsible for the extent of their predicament. There is something appealing about the administration's no-bail-out policy.
There is, however, a broader public interest. It is not just the third world that is in an economic bind. The industrialized world - and the communist world, too, for that matter - find the times piled high with difficulties. The Penn Square failure in the US and the plight of the savings and loan industry indicate that we are perhaps not far from crisis even without the matter of foreign loans.
When the volume of new bank loans is cut back - as seems inevitable - there is going to be a financial crunch in the borrowing countries. An urgent question will be how to keep that crunch from getting out of hand with both political and economic repercussions that would be bad for everybody. Two ways, not mutually exclusive, suggest themselves. One is government-to-government loans, substituting in effect the public money of governments for the private money of banks. This would certainly not appeal to the lending governments, least of all to the Reagan administration, because of its budgetary impact.
The other way to deal with the crunch is through the International Monetary Fund which has an admirable track record though it has never had to handle a crisis of such potential worldwide breadth and depth. If the IMF is to deal with this, however, it needs more resources, and these must come from its member governments. The Reagan administration has resisted such proposals. But, as it examines the alternatives, it may find expanding the fund less unattractive.