In the October 1993 issue of its World Economic Outlook, the International Monetary Fund muses on the question, "Is the debt crisis over?" The answer is a qualified yes.
It's become a commonplace in the business press that the Third World debt crisis, which began in 1982 when Mexico announced that it could no longer service its debts, came to an end sometime in the late 1980s. Of course, by this the business press means that Third World debt is no longer capable of bringing down the global financial system, as seemed possible in the mid-1980s.
You have to hand it to the global money elite — they handled the matter masterfully. They managed to use the crisis to get everything they wanted from Third World governments — a free market transformation of the southern hemisphere in the Reagan-Thatcher mode, including the dismantling of nationalist-protectionist development strategies, cuts in social spending and public investment, privatisation of state enterprises and financial deregulation. The result was to widen the income gap between North and South and to transform previously recalcitrant countries into pliant servants of big capital.
While using the debt as a political lever, the IMF, the World Bank, and the First World treasury ministers and central bankers bought their private commercial banks enough time to rebuild their financial strength — in part by shifting risk to public institutions like the World Bank and away from private banks.
In 1985, commercial banks held 49% of Third World debt, and official agencies 36%; in 1993, the banks held 35% and officialdom 45%. Latin America's creditors changed more dramatically, with official agency debts more than doubling (+137%) while bank debt shrank by 11% before inflation. This relief from 1970s debacles left banks free to move on to the debacles of the late 1980s, like loans to takeover artists and real estate developers.
Brady plan
While debt reduction has been the mantra of the new policy, debt has still grown. Since 1989, when the Brady debt reduction initiative (named after Bush's dim Treasury Secretary, Nicholas) was announced, the amount the world's poor countries owe to the rich has grown by 23%, to just under $1.5 trillion.
Under Brady, bank debts were extinguished and new tradeable bonds issued in their place, fresh loans were offered by the World Bank, and loan guarantees by the US government; it was a complex way of writing off part of the debt and shifting risk to public creditors. Official creditors accounted for 57% of the 1989-93 debt increase, but even bank debt grew over the period.
The IMF helpfully provides the tables that permit these calculations, though the fund doesn't bother to point out the oddity of proclaimed debt reduction coexisting with actual debt growth. Instead, it proclaims the success of market reforms in Latin America, and then asks, "In the light of these successes" — one wonders what failure would be — "is the debt crisis over? The answer is", the Fund proclaims, "that the international financial system is no longer at risk but much remains to be done. Many low-income and lower-middle-income countries continue to experience serious debt-related problems ..."
Livelier Latin debtors have restructured and gotten over the worst, while the poorest countries, mainly in Africa, remain under a crushing load. Meanwhile, a new problem debtor, actually a constellation of a dozen debtors, has emerged — the former Soviet Union.
Despite the debt reduction schemes, the best thing that ever happened to the debtor countries has been the more-or-less steady decline in interest rates since their 1981 peak. That's not surprising, since the proximate cause of the debt crisis in the first place — proximate, that is, as opposed to longer-term causes like colonialism and neo-colonialism — was the 1979-81 spike in US interest rates engineered by Federal Reserve chair Paul Volcker.
Interest rates on much Third World debt are tied to the six-month London Interbank Offered Rate (LIBOR), the interest rate banks offer each other in the unregulated London dollar market. The effective interest rate — annual interest payments as a percentage of outstanding debt — has fallen, but nowhere near as sharply as LIBOR. Had the effective rate fallen as hard as LIBOR since 1989, interest payments would have been $41 billion rather than $85 billion this year. Still, the effective interest rate drop has enabled debtor countries to keep annual interest payments constant while total indebtedness grew.
The new regime
In the 1970s, poor countries found it easy to borrow money from Northern banks. They could do so with few questions asked — meaning that kleptocrats could steal the money and stick their public with the bill, and less thievish countries could spend the money as they saw fit.
That changed with the onset of the debt crisis. Countries had to swallow the very bitter medicine of austerity to earn a few dollops from the IMF and the rest of the gang. Even so, the flow of new lending wasn't enough to cover the cost of servicing old debts.
As the 1980s drew to a close, the only outside money available to poor countries — and most of them need outside money because their economies are too weak to generate enough of a surplus to fund growth, especially with foreign creditors and investors skimming the cream — was in the form of portfolio and direct investment. (Portfolio investment is the flow of outside capital into paper assets, like stocks and bonds, while direct investment is the flow of outside capital into real assets, like plantations, mines and Coca-Cola plants.)
On paper, however, these flows look pretty impressive. Portfolio flows quadrupled between 1989 and 1992. But, as the IMF is compelled to admit, these flows have been concentrated in a handful of countries — Argentina, Brazil, Mexico, Korea and Turkey alone account for over three-quarters of the flow.
Mexico
Mexico is an interesting case, since it is a heavy debtor and the darling of the market reformers. The value of existing US direct in vestment, before inflation adjustment, fell between 1982 and 1987. But it took off in the late 1980s, rising 133% between 1988 and 1992, and probably rising in 1993, too, though we won't know for some months. Yearly direct investment flows into Mexico from all countries followed a more dramatic pattern, falling 86% between 1981 and 1984, then rising 1305% since. During the days of heavy debt service and capital flight, financial resources drained out of the country — a net drain of $28 billion from 1983 to 1988. However the capital-friendly policies of the Salinas regime have since lured a remarkable influx of money — $73 billion in financial inflows plus $21 billion in direct investment between 1989 and 1993. The euphoria over Mexico and other "emerging markets" has a very bubble-like feel to it, with expectations levitating far above present realities.
That bubble may be bursting. Early Wall Street reaction to the Chiapas rebellion was extremely complacent; the uprising was dismissed as a local affair that could be quickly, if not bloodlessly, repressed. Now that that seems not to be the case, hot money is leaving quickly. The exodus can be traced in part to the general mini-panic that took over world financial markets in February, but it's been amplified by the recognition that the Mexican miracle isn't quite as miraculous as it seemed when NAFTA was passed.
But direct investment can't leave quickly; it sticks around to make things. So far, it has yet to deliver an export miracle. Exports have grown since the late 1980s, but imports have grown three times as fast. The import surge is doubtless caused in part by foreign investment — US auto makers, for example, use capital equipment from the US when outfitting Mexican plants, which counts as a Mexican import from the US; presumably, the balance on this kind of trade will soon reverse, as new plants export finished goods to the US.
Financial balances have improved since the worst days of the debt crisis, in the early 1980s, but Mexico still remains heavily in the red, thanks to interest payments and the withdrawal of profits by foreign investors. Evidently, foreign investors are doing very well in Mexico; while U.S. multinationals lost money on their Mexican subsidiaries in the early 1980s, their profit rate (profits divided by value of investments) now averages around 19%.
If Mexico is to be the new South Korea, it needs to make some radical changes. Fixed investment (plants, machinery, housing) is about 19% of GDP, a bit more than half South Korea's rate of 36%. Mexico put in a much better investment performance in the 1960s and 1970s, averaging about four-fifths of Korean investment levels, but the debt crisis led to an investment collapse in the 1980s, while Korean investment accelerated.
Over the last 30 years, Korea has never had periods of retrenchment and austerity like Mexico had over the last decade; instead, it's seen consistently ripping growth rates, not only in GDP, but in real wages as well. Growth, not stringency, leads to new growth. Mexican real wages shrank in the 1980s, and have risen only slowly since. GDP growth was barely positive in 1993, the worst performance in years.
Investment
Mexico, and the US NAFTAns, tout foreign investment as the engine of Mexican growth, but South Korea offers a contrary precedent. Foreign investment — adding together direct and financial investments — played a relatively small role in Korean industrialisation, averaging under 2% of total fixed investment between 1963 and 1990; it's since risen to 5-7%. For the last 30 years, Mexico has been consistently more open than Korea, with foreign investment averaging almost 5% of total fixed investment between 1963 and 1989, and rising since to 25% or more (figures are spotty, and should be taken as approximations, not revealed truth).
This makes sense; with foreign investment, profits are shipped abroad rather than being available for re-investment; also, reliance on foreign investors lessens national control over development strategy, since managers at distant headquarters make crucial decisions, leaving little say for local governments.
The Chiapas rebellion has exposed the popular failures of Mexican economic strategy, but the comparison with South Korea shows that the strategy fails on conventional measures as well. And Mexico is the star of the post-debt crisis era. For other countries, the situation has undeniably gotten less critical, but prosperity is nowhere near being around the corner. As even the World Bank admits, the nations it calls severely indebted low-income countries — mainly in Africa — are still in trouble, and would require "deeper reductions" in indebtedness than creditors have been willing to provide "to restore external viability."
External viability means credit-worthiness in the eyes of banks and a profitable stability in the eyes of foreign investors. Internal viability — the basics of civilised life, like food, housing, education and health services — is apparently a concern beneath mention.
[Reprinted from Left Business Observer. To subscribe for one year (11 issues), send US$20 to 250 West 85th St, New York, NY 10024-3217, USA.]