It may be that in commercial banks we have found the mechanism - unwitting and unwilling though it is - for transferring resources from rich countries to poor countries. Such a mechanism had eluded a search of 30 years until it was inadvertently provided by the bad judgment of private bankers.
These bankers imprudently lent the greater part of the $600 billion which the poor countries owe the rich ones. Now the poor countries cannot pay even the interest, let alone the principal. The amounts involved are so staggering that a default by even one of the larger borrowers (Mexico and Brazil each owe more than $80 billion) would likely trigger a worldwide financial panic. This prospect is too horrible to contemplate; so the banks will reschedule and roll over the debts forever before they declare them in default. The bankers know, or ought to know, that they will never get their money back, but, as long as they don't admit it, they avoid the unpleasant consequences.
In this, they are mightily helped by the International Monetary Fund which has come to the rescue with resources of its own, but the fund's assistance is conditioned on tough austerity programs by the borrowers and continued lending by the banks. The fund, therefore, is not really bailing out the banks. On the contrary, it is insisting that the banks stay in. The banks don't like it, but they have no reasonable alternative. This is why it is important that Congress approve an increased United States contribution to the fund's resources.
There is rich irony here. For a generation it has been apparent that the world economy was lopsided, with most countries poor - and getting poorer - while a handful became rich. Paraphrasing Lincoln, President Kennedy worried that the world could not continue half rich and half poor and that the rich could not preserve what they had without finding a way to help the poor. The rub was in finding that way.
Government-to-government aid programs have not worked. Congress has been quarrelsome about providing the money. The bureaucracy of the Agency for International Development has become expensive, cumbersome, and generally inefficient. Both Congress and the State Department have insisted on diverting what money there was from economic development to short-term political purposes. These ranged from such things as maintaining certain governments in power to punishing others for incurring American displeasure in any of a variety of ways. Government aid programs, in short, have generally been a mess.
In this respect, the Eisenhower and Reagan administrations have not been significantly different from those which came in between. But the Eisenhower administration especially emphasized the potential of private investment as the answer to the search for a mechanism to transfer resources. The principal source of this sentiment was the Treasury Department, then presided over by Secretary George M. Humphrey. Let the poor countries provide an attractive climate for foreign private investment, the argument ran, and money would flow in and economic growth would occur. The Reagan administration is ideologically in tune with this thinking.
The trouble with it is threefold. A number of poor countries, however misguided they may seem from Washington's viewpoint, feel that private foreign investors (which really means multinational corporations) are more interested in exploitation than in development. These countries are, therefore, reluctant to take sufficient steps to attract investment. In addition, even in cases in which investment flows to a country, it does not necessarily flow into projects that would make the greatest contribution to economic growth. Finally, in some countries the opportunities for investment simply do not exist regardless of how attractive the climate may be.
Enter now the banks, fueled by greed and the mountains of petrodollars generated by the oil shocks of 1973 and 1979. Let it be recognized that by recycling these petrodollars the banks performed a valuable service. They cushioned the impact of the oil shocks on developing and developed countries alike.
In the process, they poured more money into the third world, by a considerable amount, than the government-to-government aid program has done since its inception. It is more, even, than multinational corporations have invested. It has not all been used to optimum advantage, but in such countries as Mexico and Brazil it has been crucial to rapid economic growth. At the same time, it has significantly supported US exports and employment.
Somewhere along the way, however, the bankers misplaced their better judgment and overextended themselves. Most of them admit, at least privately, that if they had foreseen the present situation, they would have been more conservative and that, indeed, they regret their past exuberance.
But they're stuck with it now. They have a tiger by the tail and cannot let go.