Congress has before it a particularly important jobs bill; legislation increase the resources of the International Monetary Fund. Its fate will significantly affect that of hundreds of thousands of American workers whose jobs depend on exports to developing nations. In fact, because roughly 4 percent of U.S. GNP depends on Third World markets, this legislation, and additional support for the World Bank, must be part of any serious strategy for sustained U.S. recovery.
There is a curious paradox today in Washington. On one hand, strong concerns are raised about problems caused or made worse by high developing-country debt: political unrest abroad, particularly in South America, and large U.S. trade deficits, with the attendant loss of American jobs. On the other hand, there is strong resistance in many quarters to providing adequate resources to the very institutions responsible for facilitating a smooth resolution of the debt problem -- the IMF and World Bank.
So far developing-country debt has not led to the financial crisis many feared. Now, however, is it close to being resolved. Most high-debt countries continue to recognize the need to reduce the gap between debt and their ability to service it and to overcome structural problems that weaken economic competitiveness. But high world interest rates slow recovery in many industrialized countries, trade barriers and commodity subsidies that impede developing-country exports, and the cost and scarcity of new loans are placing a heavy burden on these countries.
Factories in a number of high-debt developing countries are already beginning to fall into dispute and disrepair because of the lack of funds to impede necessary spare parts and raw materials. Budget restraints force cuts in health, nutrition and education problems; this hurts people already suffering from deprived economic growth and high unemployment. And investment in new productive capcaity is being postponed.
These factors are generating intense social and political pressures. Most developing nations have high rates of population growth, no unemployment benefits and only recently established political systems. Long periods of economic decline, high unemployment and loss in social programs cause severe hardship. The potential for instability is enormous. Even relatively localized dissidents, whose objectives are primarily political or parochial, can magnify their influence by playing on economic discontent. Such discontent has surely strengthened the forces that are causing the U.S. concern in Central America. It would be considerably more alarming if economic problems encouraged, and strengthened support for, extremists of the right and left in the larger countries of the hemisphere.
But the economic plight of developing countries does not affect their citizens alone. From 1975 to 1981, U.S. exports of goods and services to Third World countries increased from $40 billion to almost $100 billion -- cresting approximately 1.5 million new jobs in this country. Altogether in 1981 nearly 2.5 million American jobs depended on exports to developing areas.
As developing nations have pursued austerity policies to reduce debt, their imports have fallen dramatically. This is particularly true for Latin America -- the largest developing-area market for U.S. products and the region with the largest debt burden. In 1982 exports to Argentina fell by roughly 40 percent, to Mexico and Chile by about 35 percent, to Brazil by 10 percent. 1983 has seen a further fall. More than 300,000 U.S. jobs have been lost as a result of declines in Latin American growth and imports. This has had a particularly adverse effect on U.S. firms that produce capital goods (e.g., tractors and machinery) and industrial supplies (e.g., metals and chemicals) and on American farmers.
Next week's annual meeting of the IMF and World Bank will need to address the debt situation with a sense of urgency. Declines in growth, by causing a trade surplus, improve the ability of countries to service their debt but reduce public support for doing so. Most developing countries seem prepared to accept austerity and net outflows of capital for a limited time in order to repay at least a portion of their debt. They bear such costs in part t maintain access to foreign private and government-supported financing, in part to avoid the trade disruptions that would follow debt repudiation, and in part because they expect that after a reasonable time austerity can be eased and capital inflows will resume.
But, if heavily indebted countries suffer prolonged net capital outflows, if their access to foreign markets and borrowing from commercial banks and government institutions is frustrated, and if their economies continue to decline, the debt issue will become increasingly publicized within and among them. Pressures will grow for unilateral (as opposed to negotiated) measures including various types of moratoriums.
Wealthy world recovery would, of course, considerally improve the outlook. But this cannot be counted out. And even a relatively strong recovery would not eliminate certain structural problems. Moreover, resolution of the debt problem itslef will be an important component in ensuring sustained recovery in the industrialized countries. Therefore a focused set of measures to address the debt issue specifically is needed.
The IMF and World Bank must be given increased resources if they are to help facilitate resolution of the debt problem without political instability or sharp reductions in growth. An increase in their funds is not, of course, the whole answer. But, if effectively utilized, such increases can help ease the debt burden and in so doing create the incentives to encourage: a) continuation of adjustment efforts and repayment of debt; b) prudent increases in commercial bank lending; and c) willingness to reconcile differences through negotiation between borrowers and lenders.
The most urgent requirement is passage of legislation, without inappropriate encumbrances, to provide the U.S. share of recently agreed increases in IMF quotas and in the General Arrangements to Borrow (an IMF "backup fund"). Unless the IMF has additional resources it will be unable to meet new requirements to support adjustment measures. High-debt countries unable to obtain IMF support will suffer a further sharp reduction in growth. New commercial bank lending will decline. Political stability will suffer a serious blow, as will American trade.
In a very real sense, in addition to being important to avoid unrest in this hemisphere, this is a "jobs bill" -- which will improve export prospects for U.S. industries still suffering from high unemployment. An increase in IMF Special Drawing Rights to bolster depleted foreign exchange reserves would also add a margin of growth and trade. And, toward these same ends, industrialized countries shoudl agree to facilitate IMF borrowing in their markets in the event that becomes necessary to augment its liquidity.
Additional development assistance through the World Bank -- and more co-financing between it and commercial banks -- is needed to help high-debt countries to strengthen the productive sectors of their economies, orient production away from import substitution, and improve opportunities for private investment. World Bank funds are also critically needed to address social and human needs.
The World Bank also should be permitted to accelerate lending to spare parts, industrial supplies and new equipment to overcome stagnation in key sectors. And it should be encouraged to develop new arrangements -- perhaps even a new facility -- that permits it to guarantee a portion of new commercial bank loans to supplement World Bank lending. Finally, and of greatest importance to the poorest nations, it is vital that there be a large replenishment of the International Development Association, the World Bank's soft loan window. These funds are vital to the low-income people of Arica and South Asia, and also free up somewhat higher cost funds for the Western Hemisphere.
While Congress and the administration must clearly make budgetary trade-offs, and the choices are particularly hard in light of pressures to cut the budget deficit -- which is my judgment is the key to sustained U.S. and world recovery -- it would be wrong to believe that funds could be withheld from the IMF or World Bank without a major cost to the United States. The same country that spends so much to unter threats to stability in Central America, Africa and the Middle East must see the lack of wisdom in failure to provide the relatively small sums needed to avoid the conditions that breed instability in this hemisphere and elsewhere in the world. And, if we are serious about recovery in the United States and reducing unemployment, then we surely cannot fail to support programs to resolve the debt problem, for to do so would jeopardize markets in developing countries that take a larger percentage of our exports than Europe and Japan combined.