The Business of America/Third World Deadbeats
Stelzer, Irwin M.
THE BUSINESS OF AMERICA THIRD WORLD DEADBEATS by Irwin M. Stelzer No one was—or should have been —surprised when George Bush decided to throw about $50 billion of taxpayers' money into the hopper...
...That review, which may be completed by the time this issue appears, will not end the argument...
...If Venezuela does press us, perhaps we can suggest that they first withdraw from OPEC and stop gouging American consumers...
...Argentina is rich in agricultural resources...
...That exposure has since been reduced to $76 billion, while bank capital has doubled, so that loans to the Baker-fifteen now come to only 58 percent of bank capital...
...The potential effect on the U.S...
...Venezuela has billions if not trillions of barrels of oil in the ground, but chooses to restrict its production by remaining a member of the OPEC cartel—and, under Perez, an increasingly loyal member...
...If we don't grow because of the debt burden, we don't pay," warns Mexico's young president, the Harvard-trained Carlos Salinas de Gortari...
...Brazil has huge, rich reserves of iron ore, manganese, gems, and gold...
...It also forced the borrowers to become more competitive in world markets: their exports have risen so that interest payments have fallen from one-third of exports to one-quarter...
...state enterprises are still regarded as job and patronage providers, rather than as business units aimed at producing high quality goodsat competitive prices...
...And living standards have dropped—by some 15 percent in the 1980s, according to the Rev...
...THE BUSINESS OF AMERICA THIRD WORLD DEADBEATS by Irwin M. Stelzer No one was—or should have been —surprised when George Bush decided to throw about $50 billion of taxpayers' money into the hopper to help bail out improvident savings and loan associations...
...It is interesting to examine the reasons Bush is being given to support a rethinking of the so-called Baker Plan, which has been the basis for American policy toward debtor nations in the past several years...
...meet its obligations, American bank exposure to the fifteen countries associated with the Baker Plan totalled $90 billion, a sum equal to 136 percent of the banks' capital...
...Half the population of Lima lives in houses built by black marketeers, illegal contractors who have, since 1960, built forty-seven times as much low-income 34 THE AMERICAN SPECTATOR APRIL 1989 housing as has the state...
...Corruption remains a way of life...
...Some of these IOUs are worthless or nearly so: Peru's bring about five cents on the dollar...
...U nfortunately, it has been difficult to persuade most Latin American countries to adopt this free enterprise program...
...This economic malaise, which hits the poor harder than the rich, is blamed on American banks' insistence that the interest and, at times, a bit of the principal on their loans be repaid...
...assemblage of countries that would, if given the chance, appropriate and then squander America's wealth...
...So it resumed payments.parent determination to reduce rampant corruption—the powerful head of the oil workers' union was spectacularly arrested by police who knocked on the door of his estate with a bazooka—and there is reason for optimism...
...But Brazil tried reneging and, as Salinas well knows, found that it couldn't function as a pariah in world markets...
...Those favoring overt or covert government-assisted debt relief can be expected to carry on their fight...
...Or from some misplaced desire to spread "the American way of life...
...That success has been due to the fact that market forces pressured the banks into increasing their capital bases, and into developing markets in which debt instruments could be sold, or swapped for equity...
...Rather, they were based on the idea that such reforms would stop the flight of capital from these countries, and would stimulate economic growth sufficiently to make debt repayment possible without a serious fall in the debtor nations' standards of living...
...For they feel their cause is just...
...Add to these pleaders America's banks...
...greater reliance on market forces to set prices, wages, and exchange rates...
...Mexico's experience perhaps proves that internal reform can work, making debt forgiveness—overt or covert—unnecessary...
...After all, that paragon of economic managers, Mikhail Gorbachev, has urged America to be lenient with its debtors, this in a much-reported speech to the U.N...
...Consumer price increases there are holding to what, by Latin American standards, are moderate levels (about 2 percent a month...
...This despite an easing of price controls...
...And why not...
...That may be why rich Mexicans are bringing their capital home: some $700 million returned to Mexico in the first month of this year alone...
...Why did these builders operate illegally...
...Besides, the day when a strike by a debtors' cartel could mortally wound the American banking system is long past...
...In collaboration with the Institute for Liberty and Democracy, de Soto gathered data on what in Peru is called "the informal economy"—activities of entrepreneurs, often operating illegally in areas reserved by law to the state...
...J. Bryan Hehir of the United States Catholic Conference...
...Venezuela's new (and former) president, Carlos Andreas Perez, has taken a leading role in explaining to Bush and, at his lavish inaugural, to the likes of Dan Quayle, Fidel Castro, and Daniel Ortega, that the debtors simply cannot meet their obligations...
...their goods to us, while keeping their markets closed to all save a trickle of American products...
...Colombia can count among its resources not only cocaine but also emeralds, coal, and iron ore...
...They hold some $76 billion in notes from the fifteen leading debtors...
...Because obtaining state sanction is almost impossible...
...Under that plan, banks and international financial institutions would be encouraged to make new credits available to debtor nations if, and only if, those nations adopted a series of economic reforms...
...His findings are astonishing...
...In short, a barrier too steep for a fledgling entrepreneur to surmount...
...Or privatize the oil industry, nationalized by Perez in his last incarnation as president...
...Add to this the regime's apTHE AMERICAN SPECTATOR APRIL 1989 35...
...The institute experienced these difficulties when it tried to set up a fictitious clothing factory, paying only two of the ten bribes solicited by government bureaucrats...
...Bush has said he opposes "forgiveness" but favors taking "a whole new look at the situation," and has assigned that review to the Brady bunch at the Treasury...
...These conditions sprang not merely from a Reaganesque ideological belief in market mechanisms...
...The stifling effect such economic mismanagement has on Latin living standards is brilliantly laid out by Peruvian economist-entrepreneur Hernando de Soto in his recently published The Other Path: The Invisible Revolution in the Third World (Harper & Row...
...Others are estimated to be worth more—market makers will buy Chile's notes at 60 cents on the dollar...
...Why America should interfere with the sovereign right of these countries to select dictators from one or the other end of the political spectrum is nowhere explained...
...This was a lot more useful than the new $3.5 billion loan we offered—and which Mexico refused...
...Certainly if a regime is no threat to America (as is Nicaragua with its desire for airstrips to accommodate offensive aircraft, or as was Grenada, for a similar reason), and especially if it has a popular mandate, it is not our job to prevent it from coming to power...
...Indeed, if required to do so, they will have a choice of defaulting (they've done that before) or of so cutting into their citizens' living standards as to provoke left-wing revolutions (Mexico) or right-wing coups (Argentina...
...So a Latin American nation's threat to cut off its democratic nose to spite our bankers' faces should be given little weight in Bush's current policy reappraisal...
...Mexico may yet provide an example of this emerging turnaround...
...have expressed no desire to repay the United States, in money or gratitude, for the resources devoted to Japan's postwar reconstruction...
...exchange rates are set at levels bearing no relation to those in the free black markets...
...So, too, would fear...
...The Japanese, too, have asked us to be gentler and kinder to the debtor countries, unembarrassed by the fact that they have carefully tied their own lending to requirements that the recipients spend the money on Japanese goods...
...After all, many of the sick banks are in his adopted home state of Texas, from which also hail his secretary of state, the Speaker of the House, and the chairman of the Senate Finance Committee...
...Let's hope Bush and Brady realize that, and ignore populist Latins' pleas for debt relief and more loans, and liberal Democrats' urgings that debt relief, rather than fundamental reform, is a cure for "Third World" problems...
...So, too, Mexico, which sits on huge reserves of oil, and cooperates with OPEC by restricting output...
...Equally short shrift should be given to the notion that most of these debtor nations are in some sense intrinsically "poor...
...Lest we forget: OPEC restricts the production of crude oil in order to keep prices high, thereby imposing an enormous tax on American consumers...
...banking system of the debt problems of developing countries has been managed with some degree of success," Manuel Johnson, vice chairman of the Federal Reserve System's Board of Governors, understated to a House committee...
...And, if the Japanese press us to be kinder to our debtors, we can always offer a deal: we forgive one dollar of Third World debt for every dollar of American IOUs that the Japanese tear up...
...One need not agree with Bush's move to understand it as a response to a noisy and powerful constituency...
...In 1982, when Mexico triggered the so-called crisis by announcing that it could not (would not...
...These were to include a reduction of the state's ownership role in the economy (i.e., Thatcherist privatization...
...These nations' debt problems do not result from nature's niggardliness, any more than do our own...
...But no such easy explanation exists for the administration's apparent flirtation with some form of a debt forgiveness program for so-called Third World countries...
...Rather, they result from poor economic organization—bloated welfare states, dominated by inefficient state-owned enterprises and corrupt bureaucracies...
...and trade liberalization...
...Unless situations such as de Soto describes are changed, it would be foolish for us to fling good money after bad by forgiving past debts: the new loans will end up in bureaucratic pockets or in Miami and Swiss bank vaults...
...The registration process took nearly ten months and a skilled group of applicants, and cost the equivalent of thirty-two months of wages (at the minimum wage rate...
...Latin threats are quite empty...
...Little wonder that the Institute of International Finance, representing 186 banks in forty countries, has called for creditor governments (read taxpayers) to guarantee bank loans to debtor countries...
...Altruism would be misplaced...
...and have not suggested tearing up the billions of dollars of American IOUs that they have accumulated by shipping Irwin M Stelzer is director of the Energy and Environmental Policy Center of the John E Kennedy School Harvard University, and an American correspondent for the London Sunday Times...
Vol. 22 • April 1989 • No. 4
