US seeks new ways to step up flow of money to the third world
The United States wants to get more money flowing into the developing debtor nations. ``We would look at any and all proposals,'' a high Treasury official says.
Indeed, the Treasury invited the chairmen of major American banks to a meeting last Tuesday to discuss new ways to deal with the debt issue.
What has prompted this desire is increased concern with the political and financial strains in these developing nations, especially those of Latin America and Africa.
Last year, according to calculations of the Inter-American Development Bank, net financial outflows from Latin America totaled about $29 billion.
Most of this money went toward repayment of the region's huge debts. The outflow has continued this year.
In effect, this means real resources are moving from these poor nations to the rich industrial nations of North America, Europe, and Japan.
Less capital is available to stimulate domestic growth in the developing countries, burdened with rapidly growing populations.
Last month Latin leaders, worried by the political impact of domestic austerity programs, sounded off at the United Nations.
Peru's President, Alan Garc'ia P'erez, threatened to withdraw from the International Monetary Fund (IMF) unless the monetary system is changed to bring about a ``distribution of world liquidity in a fair manner.''
Brazilian President Jos'e Sarney charged that IMF austerity programs assume ``that sacrifice is all that is required of a third-world debtor to settle his foreign accounts.''
To some degree the Latin leaders may be grandstanding for domestic audiences with their complaints.
But they also apparently feel deeply that their economic sacrifices have not paid off fast enough in sounder growth.
In any case, American officials wonder how long these leaders can stand the political heat.
There are several channels for money flows to the debtor nations:
1. Commercial banks. Following the oil price increases imposed by the OPEC nations in 1973-74 and 1979, the banks succeeded in recycling huge amounts of petrodollars to developing countries. Then the economic environment changed abruptly.
The world went into a recession, slowing developing-country exports. Oil and commodity prices fell. Interest rates rose. The dollar strengthened sharply, making it more difficult for the developing countries to service their debts.
When Mexico announced in August 1982 that it could not make timely payments, the debt crisis began. Other heavy debtors were immediately tarred by the Mexican problem. The credit well dried up.
Since then, bank loans to the main debtor nations have been involuntary. They have grown -- at a much more modest pace -- because fresh money was needed to safeguard old loans and because the IMF insisted on bank participation whenever it made a loan of its own to a developing country facing a balance-of-payments crisis.
And as a rule banks would not reschedule their loans unless the debtor nation accepted an IMF austerity package intended to bring that country's international payments into better balance.
Banks' loans have grown more slowly than inflation. So their total loans are declining in real terms.
Experts doubt this will change until key debtors -- say Mexico or Brazil -- are in such good economic shape that ``voluntary'' lending resumes.
The banks themselves have been urging governments to step up their ``official'' lending, such as foreign aid or export credits, to the debtor nations.
This would ease the adjustment problem of the developing countries, notes Anthony Bottrill, chief economist of the Institute of International Finance in Washington, a cooperative organization set up by commercial banks around the world to help them deal with the debt crisis.
2. International institutions: The Reagan administration purposely slowed the growth of the World Bank and similar, regional banks during its first years in office.
Now, under a new secretary, James A. Baker III, the Treasury is urging the World Bank to get money to the developing countries quickly.
The World Bank, one high official notes, has done ``a good job'' in demonstrating over the past two or three years that so-called ``structural adjustment loans'' and ``sectoral loans'' can bring about policy changes in the developing countries.
These loans are not tied to specific projects, such as the construction of a dam or a highway. Rather, they help finance change in a whole industry, for example.
From the standpoint of the debt issue, their advantage is that the money is disbursed quickly rather than over the several years that a project may take to complete. This money helps stimulate growth in the developing country and may free up other funds for debt-servicing payments.
Because of budget restrictions, at the annual meetings of the World Bank and IMF in Seoul next week the US will not go with ``an open-wallet approach,'' the official says. Rather it will see what these institutions can do to expand the money flow without it needing appropriations.
For example, the IMF has a trust fund built up by the sale of some of that institution's gold; money from that fund could be relent to poorer nations at a rate of about $500 million a year.
The World Bank could engage in more loan guarantees or co-financing deals that use private investment funds to step up the money flow. These measures stretch the bank's own funds further.
3. Private investment. Considering the political uncertainties in many developing countries, foreigners are often reluctant to make investments.
Indeed, one key factor in the debt crisis was an outflow of private capital to the US and other industrial nations. Flight capital from Argentina, for instance, is said to almost match that nation's total external debt.
A return of flight capital would do much to ease the debt and growth problem. That flow, however, hangs on domestic investor confidence.
The industrial countries also hope to encourage foreign investment in the developing countries. The World Bank has just set up a Multilateral Investment Guarantee Agency to issue long-term guarantees against noncommercial risks surrounding foreign investment, such as government expropriation.
The International Finance Corporation, which is the World Bank affiliate that lends to the private sector, boosted its investment approvals by 56 percent last fiscal year, to $609 million.
A new study by Donald R. Lessard and John Williamson of the Institute for International Economics suggests the World Bank should increase its lending by $4 billion to $5 billion a year on top of last year's $11.3 billion.
To do this, the two economists say, the governors of the bank should approve in Seoul a $40 billion increase in the bank's capital. They also call on the bank to shift part of its $17 billion in liquid funds, through an acceleration of its disbursements, to borrower countries pursuing prudent economic policies.
Mr. Lessard and Mr. Williamson also propose that developing countries relax their restraints on foreign investment in plant and equipment, equities, and real estate; that mutual funds be designed to attract flight capital for investment in developing countries; and that Japan urge its institutional investors to put 25 percent of their money to be invested abroad in developing countries.
With these and other suggestions, the two call for a boost in the flow of lending to developing countries by some $15 billion to $20 billion a year to step up developing-country growth rates.
The US Treasury seems much more sympathetic to such ideas for getting money into the poorer nations than before. A Treasury official cautions, however, that the debt problem was a long time in coming and that working out of it will also be a ``long-term process,'' marked occasionally by debtor crises in individual nations. CHART: The payment squeeze Trade balances and interest payments for key Latin American countries in 1984 (in millions) Argentina Trade balance Interest payments Brazil Trade balance Interest payments Chile Trade balance Interest payments Colombia Trade balance Interest payments Mexico Trade balance Interest payments Peru Trade balance Interest payments Venezuela Trade balance Interest payments $3,732 5,764 11,089 11,400 -231 2,124 -1,167
1,107 14,191 11,607 699 1,275 7,020 4,075 Source: Inter-American Development Bank