Nearly every country in the world looks to the U.S. economy to help extricate it from the grip of the recession: we are seen as the locomotive, and if only our economy would expand vigorously, we would pull the rest of the world behind us. But alone we cannot do it, and if the recovery is not dynamic, the locomotive may soon run out of steam.
Developing countries usually are not seen as actors in the world economic recovery. Yet as a group, the newly industrializing countries (NICs) of Latin America and Asia have become almost as important in world trade as the United States, and more important than Japan or any of the countries in Europe. But all of the NICs in Latin America and some of them elsewhere are deep in debt. As long as they are smothered by current interest and principal payments, they cannot contribute to an international economic expansion.
Still, there is a pent-up demand for imports in the developing countries. This demand is not for consumer goods, but for machinery, equipment, replacement parts, industrial supplies and technology in order to continue industrialization. The NICs were doing very well during the 1960s and 1970s; their economic growth was much faster than that of the industrial countries. Despite the oil shock of 1973-74, they kept on growing, in Latin America in large measure due to easy access to credit from the private banks in industrial countries. That dynamism translated into increasing imports of capital goods from the United States and other developed countries. As long as their expansion continued, the NICs had no difficulty in meeting the obligations of their rising debt burden.
Then came the second oil price explosion of 1979 and the subsequent dramatic increase in real interest rates as the industrial countries set out to fight inflation. The collapse of raw material prices precipitated by the ensuing recession was the final blow. By 1982, all of the NICs and most other countries in Latin America found themselves unable to service their huge debts. The necessary restructuring of this debt has strained the international financial system.
The other side of the story is that, after taking care of their minimum external debt obligations, Latin American countries have little left over to import the capital goods essential for their economic development. Thus the sharp decline in these imports from the developed countries has made it more difficult to get out of the world recession speedily.
In order for NICs to revive their industrialization, they need breathing space from their debt burden. Even a large infusion of new loans may not relieve them from having to use a hefty portion of their scarce foreign exchange earnings for payment of interest and principal. Debt service will have to be postponed longer than the few months requested by several countries and usually granted by the private foreign banks (which have had few other options). A relief of about two years will be needed to reestablish the health of the industrializing economies. This would not only facilitate eventual full debt servicing but would also quickly increase their imports from the developed countries.
What would be the mechanism for the postponement of debt service? The private creditors, primarily banks from the United States and other industrial countries, are unlikely to agree to such a scheme unless they are assured of an adequate return or convinced that the alternatives are worse. Therefore, if such a long-term debt restructuring is considered essential, private bank loans may need to be transferred to public bodies, such as national governments or central banks, international agencies like the World Bank or the Inter-American Development Bank or, preferably, to a not-yet-existing world central bank. The private banks would be compensated at slightly less than the full value of their developing country loans.
Would this not serve to bail out irresponsible developing country governments and greedy private banks? Perhaps, but no purpose is served by finger-pointing or by apologia at this stage. All energies ought to be marshaled for a rapid, sound and long-lasting world economic recovery.
New credits to developing countries, including those from the International Monetary Fund, should be based on good projects and sound government programs. Obviously, reforms and austerity should be part of these; curtailing vital imports of industrial inputs, implicit in some current IMF conditions, should not.
If the NICs, particularly those hardest hit in Latin America, are not given the opportunity to continue and accelerate their economic growth, a vital impetus to a more vigorous world recovery will be lost. Even worse, in the absence of a significant recovery, debt moratoriums may be forced on the international financial community as governments in Latin America find it politically impossible to squeeze their populations further. This may easily cause panic in the world financial markets, with devastating consequences for U.S. economic recovery.
It is better to take international action now than to paper over future crises by ad hoc measures that will prove to be more burdensome and deficient in long-term results. It is time to broaden our thinking about international interdependence: let the intrinsic dynamism of the emerging countries help fuel a resurgence of the world economy.