Third-world debt: Should the IMF role be reduced?
IS the International Monetary Fund obsolete? The question is suggested by a combination of world economic trends: Third-world foreign debt grows, and the capacity to service it decreases. Countries borrow new money to pay the interest on old loans.
The third world does not share even in the modest economic growth of the industrial countries. Production is down; unemployment is up. Imports cost more; exports earn less and are threatened by protectionism in the United States.
All of this is happening despite the efforts of the IMF, the Treasury, the Federal Reserve Board, and various consortia of private banks. Brazil, Mexico, Argentina, the Philippines, Nigeria, Peru -- among others -- are in deep trouble. Rumblings of rebellion against the IMF are noisier.
The fund has traditionally been run by a group of orthodox West European technocrats, an arrangement the US has found very convenient. It has enabled the US to escape a good share of the unpopularity that comes from imposing tough conditions on wayward third-world finance ministers.
The fund has taken the heat and diverted the political lightning from Uncle Sam to faceless international bureaucrats. This has prevented much broken glass in American embassies.
The conditions the fund imposes in return for its financial help typically involve such measures as a reduction in government budget deficits (meaning reduced subsidies), a devaluation of the currency (meaning fewer and more expensive imports and a rise in the cost of living generally), and -- the ultimate horror -- an increase in taxes.
All of these things make good economic sense, but they also mean a period of austerity and lower living standards as imbalances are adjusted. These imbalances come about because governments find it politically popular to run large budget deficits, stimulate consumption, and keep the price of imports down by maintaining an overvalued currency.
(The above is a good description of the Reagan administration's economic policies, which have made the US the world's biggest debtor. The consequences have not yet been generally felt, because the US is rich enough to carry these burdens longer than most countries.)
Economic austerity puts a strain on political systems, especially democratic systems which in the third world tend to be fragile. Where IMF conditions have been adhered to, they have generally worked.
The question that the fund, the governments, and the banks of the industrialized countries must now face is: Has third-world debt grown so big that third-world political systems will no longer support austerity for a long enough time to enable these troubled nations to get to the light at the end of the tunnel?
This is where economics and politics collide. Unfortunately, neither economists nor politicians are very good at understanding what the others are talking about.
All of this suggests a more defiant mood toward the IMF than has been seen heretofore. The proposal put forward by Treasury Secretary James Baker at the meeting of the fund and the bank last month implies a reduced role for the fund.
But the new lending in the secretary's plan by the World Bank and the commercial banks -- $29 billion over three years -- would not even pay the interest on what is already owed.
Third-world debt amounts to $865 billion. This represents a transfer of resources, most of it over the last 15 years, from industrialized to developing countries -- a foreign-aid program far larger than anything governments have dared to call foreign aid. It is most unlikely that a significant portion will ever be repaid, but it is not politic to say so out loud.
Third-world leaders seem to be realizing that the enormity of their problems strengthens their hand.
``If I owe you $5 billion,'' a Brazilian said to a visiting American a few years ago, ``I've got a problem. If I owe you $50 billion, you've got a problem.''
Brazil now owes $100 billion. Maybe it's time to go back to the drawing board.
Pat M. Holt, former chief of staff of the Senate Foreign Relations Committee, writes on foreign affairs.