Share this story
Close X
Switch to Desktop Site

Foreign aid: remedy or bribe?

During the last decade there have been many programs and much discussion concerning the obligation of rich nations to help the poor, less-developed countries (LDCs) of the world. The age-old question of what the ''haves'' owe the ''have-nots'' touches more than heartstrings. This same decade has seen third-world debt increase 10 times, to nearly $700 billion. This is money the developing countries owe to private banks and international agencies such as the International Monetary Fund and the World Bank, which are funded by the industrialized nations.

The LDCs are not only unable to pay off these loans, they are having to borrow more money just to pay the interest on the debt. For example, the external debt service payments of Mexico, Brazil, Chile, and Argentina exceed their total earnings from exports. There is serious concern that they may find it economically beneficial to default. This would threaten the industrialized nations with a veritable tidal wave of bank failures and possible collapse of their currencies. So private lenders (banks) are encouraged to continue lending rather than to cut their losses by refusing to pour good money after bad. The encouragement comes from the Federal Reserve Board's promise to ''bail out'' the banks if the foreign debtor defaults.

About these ads

The Federal Reserve Board was responsible for all this excessive lending in the first place. By overexpansion of the money supply during the '70s, they made available unprecedented amounts of money for banks to lend. The LDCs offered these banks higher returns than local borrowers because the money was to be invested in capital-intensive projects such as hydroelectric power plants and steel mills. The fact that these projects were often totally unsuited to the economies of the countries concerned should have made customarily cautious bankers hesitate, but they were reasonably secure in their hunch that any bad loans would be covered by some form of government ''bail-out.''

Right they were. The International Monetary Fund recently received substantial increases in contributions from the industrialized nations so it can come to the rescue of countries threatening to default. However, IMF loans, which are accompanied by in-structions in government belt-tightening, actually compound the problem. Many of the same economic errors are allowed to continue, now shored up by infusions of new money. Under the guise of watchful supervision , government controls proliferate, sapping the energy of profitable enterprises while expanding the power of inept administrations. Had they permitted the whole mess to collapse, thereby getting rid of the costly errors and the politicians responsible for them, the citizens of these unfortunate countries wouldn't be stuck with their uneconomic programs and corrupt administrations. In the presumption of saving the banking systems of the rich nations, these third-world countries cannot choose to reform their economies.

Instead, they should be encouraged to imitate Taiwan and South Korea, independent of foreign aid since the mid-'60s and currently flourishing. Like Hong Kong and Singapore, they have stimulated growth by freeing the private sector from government controls, lowering taxes, and encouraging labor-intensive industries. Consequently, they have higher rates of economic growth, greater increases in both public consumption and social programs than most socialist countries. Meanwhile, the per capita income of the third world declined for the first time in nearly a generation.

Furthermore, the IMF's ''security net'' plus the Federal Reserve's ''bail-outs'' require expansion in the money supply in the US. If the economies of the ''have'' nations don't dramatically reverse course from recession to abounding prosperity, this monetary policy will cause further inflation. Although that may make the foreign debt less critical by reducing its relative value, it will do proportionate damage to the economies of developed nations. Because the welfare of the ''have not'' nations depends on their ability to sell their exports to the ''haves,'' all sides will suffer with the economic decline of the latter.

The question at issue is whether the industrialized free world can afford to continue to subsidize the extravagantly uneconomic policies of the third world. Their viable economic programs need no subsidy; private lenders will compete for the privilege of investing, providing there is no government interference, such as exchange controls. Our ''security nets'' and ''bail-outs'' only encourage the LDCs to continue their past errors. Politicians may freely continue to buy votes with welfare programs and costly monuments to their chauvinism, such as empty national air lines. The citizens of these countries are the true victims of our misplaced beneficence. If the taxpayers of the free world don't refuse to go on giving such foreign ''aid,'' maybe the citizens of the third world will save us by refusing to accept it.