The Philippine Debtor's New Clothes

By , James K. Boyce is an associate professor of economics at the University of Massachusetts, Amherst.

WITH the signing of a new agreement between Mexico and the banks, the spotlight in the continuing drama of third-world debt is turning to the Philippines, which is next in line for a deal under the Bush administration's new debt strategy. Nowhere are the strategy's shortcomings more glaring. The 20-year misrule of Ferdinand Marcos left the Philippines with a $28 billion foreign debt. Since 1986 the Aquino government has paid billions of dollars in interest on this debt, without making a dent in the principal owed.

The debt strategy unveiled this spring by Treasury Secretary Nicholas Brady was packaged as ``voluntary debt reduction.'' Ironically, the Mexican deal may leave that country with more debt than before. The agreement gives the banks a choice between debt write-offs, interest reductions, or lending new money, and many are likely to choose the latter. Seven years into the debt crisis, this ``solution'' - grudging advances of new money to pay interest on the old money - has a distinctly hollow ring.

The Brady plan did mark a departure in one respect. The official fiction that third-world debts will someday be repaid in full has been abandoned. But the Bush administration has not acknowledged the basic reason that so many countries cannot repay: They have nothing to show for their borrowed billions. Washington has not yet admitted that the emperor of third-world debt has no clothes - only that he cannot pay his tailors.

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If the money borrowed in the Marcos era had been invested productively, repayment would not impose an unduly heavy burden upon the country's economy. Instead, foreign borrowing financed capital flight amounting to at least $22 billion in 1986 dollars, a sum equivalent to more than three-fourths of the country's outstanding debt.

The role of the banks in spinning the revolving door of external debt and capital flight is illustrated by a $25 million loan made in 1981 to a Philippine firm, the Asian Reliability Company. Like many private borrowings, repayment was guaranteed by the Philippine government. The loan's ostensible purpose was to finance semiconductor production in the Philippines. Instead, the bulk of the money was diverted to the purchase of three firms in California. Former Philippine Prime Minister Cesar Virata states that Credit Suisse First Boston, the lead bank in the lenders' syndicate, was ``in cahoots'' with the firm.

When the company defaulted, the Philippine government refused to accept liability for the debt. In response, the bank syndicate held up the country's 1984 debt-restructuring negotiations until the government, desperate for a settlement that would permit the resumption of trade credits, agreed to shoulder the obligation.

In her first state-of-the-nation address to the Philippine Congress, President Corazon Aquino gave vent to Philippine frustration with the foreign creditors who, she said, have taken ``unfair advantage'' of the country's troubles. Yet to date, the Aquino government has continued to service the foreign debt, no matter how dubious the uses to which the borrowed funds were put.

The government's National Economic and Development Authority projects a net transfer - that is, debt service payments above and beyond new money inflows - of $3 billion annually for the next five years, an outflow equivalent to 7 percent of the country's gross national product: This from a country in which 60 percent of families live below the meager official poverty line.

Many Filipinos are asking why they should be saddled with debts contracted to finance capital flight under the Marcos dictatorship.

United States taxpayers have the right to ask the same question. The Bush-administration strategy offers the banks publicly financed guarantees through the International Monetary Fund and the World Bank in exchange for their agreement to reduce debt payments or lend new money. If a third-world government cannot or does not repay the guaranteed debt, taxpayers in the creditor countries, including the US, will ultimately pick up the tab.

The financial markets have given their verdict on the plan. The price of third-world debt on the secondary market has jumped sharply. Philippine debt, which traded at 38 cents on the dollar in early March, rose to 54 cents in mid-July, an appreciation of 42 percent in four months. In other words, the market is saying that the position of the creditor banks has dramatically improved.

While the Brady Plan brings debt relief to the banks at the taxpayer's cost, the poor majority in the Philippines, Mexico, and other debtor nations continues to suffer from the depressed living standards called ``austerity.''

When the Filipino people repudiated Mr. Marcos three years ago, the world applauded. It is time now to repudiate his legacy of debt. US taxpayers and their representatives in Congress can help, not by bailing out the banks with public guarantees, but by demanding a genuine write-off.

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