What a Relief! Plan Decided To Ease Poor Country Debts
The story of how Japan blew its trade surplus with the US and other mysteries of international finance
Over the last decade, Japan has had a trade surplus with the United States of about $500 billion. In the same period, Japan's losses on its investments in the US have been approximately the same - $500 billion.
"Amazing," says economist C. Fred Bergsten, who made the rough calculation of Japan's losses.
What it means, in a sense, is that Americans as a group got a free gift of about a half trillion dollars of Toyota Camrys, Sony TVs, Panasonic VCRs, and lots of other Japanese imports.
This is just one hint of the importance of international finance and economics to people around the world, though their eyes may quickly glaze over at talk of special drawing rights, quotas, and financing gaps. The latter three are in the news as the International Monetary Fund and the World Bank prepare to start their joint annual meeting in Washington tomorrow.
Mr. Bergsten, who is director of the Institute for International Economics, a think tank based here, admits his estimate of Japanese losses may be off by tens of billions. But, he adds, it does indicate that those huge annual Japanese trade surpluses - prompting so many flights of trade negotiators across the Pacific and so much worry about American competitiveness - "were frittered away by lousy financial investments."
Of course, there remains the question of distribution of the gains and losses involved in these Japanese-American transactions. The American who bought a Honda Accord paid good dollars for it. The Detroit autoworker who was laid off because of Japanese car imports may well have suffered loss of pay.
But the owners of Rockefeller Center and various Hawaiian properties made a killing when they sold to Japanese investors, and the Japanese investors took severe hits when they sold these assets years later at a lower price. Many Japanese investors suffered huge losses in the entertainment industry, California real estate, and elsewhere.
The controversy attracting the most attention at the IMF-World Bank gathering has been financing of a debt-relief program for the world's poorest nations. The cost of relief sought for about 20 countries is between $5.6 billion and $7.7 billion, spread over several years. These countries, including Burundi, Mozambique, Nicaragua, and Sudan, have per capita incomes of less than $865 a year. They also have large amounts of "official" debt - that is, loans from governments of rich nations or from multilateral institutions like the World Bank and the IMF.
"Small potatoes," says Bergsten of the $6 billion or so in debt relief.
"Peanuts," says Ted van Hees, coordinator of the European Network on Debt and Development, a nongovernmental organization based in Brussels pressing for debt relief.
For comparison, if the 12,000 or so people attracted to this meeting as participants or observers had each an annual salary of $100,000, their aggregate income would be $1.2 billion - probably enough to do the debt relief job. Since a few hundred of the attendees are finance ministers and central bankers of the 181 member nations, and many hundreds more are top commercial and investment bankers, the $100,000 average salary may not be too great an exaggeration.
Mr. van Hees compares the sum with the $98 billion in German marks that fled Germany in one recent year to Luxembourg to avoid taxes.
Another comparison could be the $315 billion of foreign direct investment by businesses in 1995, an upsurge of nearly 40 percent, that was reported last week by the UN Conference on Trade and Development in Geneva.
Whatever, the debt relief has been tangled for two years in questions of who should foot what portion of the bill and how much of the debts should be forgiven. The Paris Club, which represents creditor nations, met in Paris last week on the issue. Its key members decided here Saturday on up to 80 percent relief. Executive boards of the IMF and World Bank endorsed a program involving use of profits of the two institutions. The bank will provide $2 billion.
Put off until early in the next century was a decision whether the IMF would sell $2 billion of its $40 billion of gold and use the interest on that $2 billion for debt relief. (Gold earns no income unless it is sold at a gain.)
Germany, along with Switzerland, Italy, and Finland, opposed the gold sale. German officials think of it as something like selling the family silverware, says van Hees. They also saw it as a precedent for further sales. Some IMF gold was sold in the 1970s for financing the Fund's enhanced structural adjustment facility - a bureaucratic title for an IMF body making loans to poor countries on easy terms.
With a deal mostly in place, perhaps finance ministers and other officials of African and other poor nations will spend less time on the road to negotiate debt relief packages - relief vital to the economies of these nations. In the past 10 years, according to van Hees, the ministers attended 8,000 meetings with the Paris Club or with individual nations to work out adjustments.
They might have more time for economic reforms at home, van Hees says.