The recent fall in U.S. interest rates afforded a measure of relief to Third World debtors. The debt service burden on their economies has eased.
But Henry Kauffman, the Wall Street oracle of interest rates, has predicted they will soon spurt upward. What then? Probably a series of Argentine standoffs between the debtors and their creditors. Buenos Aires recently reached a new accord with the International Monetary Fund (that will clear the way for $4.2-billion in new loans from Western banks), but not before the Argentines had once more threatened to leap from the precipice of payment arrears into the abyss of insolvency.
The international financial system has thus far been able to handle these recurrent crises on a case by case basis rather than resort to comprehensive relief for all debtors. For the West to subsidize interest repayment across the board would reward equally the responsible Third World nations which have taken painful steps to improve their economies and the irresponsible ones which have refused to face the music.
Nevertheless, as Globe publisher Roy Megarry noted in a recent article, if the West fails to devise a collective solution for the debtors, it may one day face a collective act of defiance by the debtors. The idea of a debtors’ cartel, which began in Peru, may not stop there. Unlike OPEC, a deadbeats’ cartel would mobilize the economic weakness rather than the economic power of its members. But a conjuncture of apprehended defaults could tax the stamina of Western bankers in a way that the sequential development of such threats has not.
As Mr. Megarry adds, however, the debt problem requires more than lenders’ leniency. “The most constructive long- term contribution we can make is improving the terms of trade with underdeveloped countries so they can earn the foreign exchange to service and repay their debts. Trade is the only way they can do it.” Indeed, much of the austerity medicine the debtors are told to swallow by the IMF is prescribed on the assumption that it will improve their export performance. Currency devaluations and wage restraint are supposed to make their products more competitive abroad.
But the same Western nations which exhort the Third World debtors to follow these painful remedies often seek to insulate themselves by protectionist policies from the patients’ recovery. Brazil, for example, has been forced to reduce its exports of steel to the United States as a result of trade barriers. Chile has been forced to reduce its copper exports to the United States for the same reason. Canada continues to impose quotas on apparel and footwear from the most competitive Third World producers.
While the harm such barriers inflict on Third World incomes is obvious, their detrimental impact on Western prosperity is less apparent – but nonetheless real. Canada sells 12 per cent of its merchandise exports to underdeveloped countries. The United States sells almost 40 per cent; Australia, 44 per cent. When debtor nations are unable to export to the West, they are forced to buy less from the West. The North-South Institute calculates that Canada may have lost 135,000 jobs in the past three years for this reason.
This is the bottom line of interdependence. Third World austerity contracts Western economies. Third World recovery can fuel Western expansion. A vicious circle can become a virtuous one.