Fri, 11 Feb 2000

A lasting and just solution to the Third World's debt

By Ellen Frank

BOSTON: Question: What if the IMF, World Bank and G-7 governments canceled all debts of the poorer countries right now, fully, and with no strings attached? Answer: Within five years, most would be up to their necks in debt again. While a Jubilee 2000 debt cancellation would provide needed short-term relief for heavily indebted countries, the bitter reality of the current global financing system is that poor countries are virtually doomed to be debtors.

When residents of Haiti or Zambia buy maize or medicine in America, they are required to pay in dollars. If they don't have dollars they must borrow them from the International Monetary Fund (IMF) or World Bank or from a commercial lender.

Quite unlike ordinary loans, though, loans of foreign currency eventually become liabilities of the borrower's government. As restrictions on global trade and investment collapse, poorer countries are rapidly losing what levers they had to control cross-border buying, selling, lending and borrowing.

Even the best-managed governments are only an earthquake or crop failure away from a foreign currency debt. Once incurred, servicing charges mount quickly and the debt balloons.

Many poorer nations, hoping to avoid borrowing, have attempted recently to lure foreign investor dollars in with the bait of high interest rates or casino-style stock exchanges. But the global debt trap is not so easily eluded. Thailand, Ecuador, Indonesia and many others discovered that this speculative money is quick to turn heel and flee, leaving debtor countries even deeper in the hole.

If plans to revamp the international "financial architecture" are to help anyone but the already rich, they must address this issue. Developing countries need many things from the rest of the world -- manufactured goods, skilled advisors, technical know-how -- but loans are not among them. A global payments system based on the borrowing and lending of foreign currencies is, for small and poor nations, a life sentence to debtors' prison.

There are alternatives. Rather than scrambling endlessly for the foreign currency they cannot print, do not control and cannot dependably earn through exporting, developing countries could be permitted to pay for foreign goods and services in their own currencies.

Americans already do this, issuing dollars to cover a trade deficit approaching US$300 billion this year. Europe too can finance external deficits with issues of euro-denominated bonds and bank deposits. Private financial firms, however, won't hold assets denominated in sucre or pesos or gourd, so developing countries are compelled to take on foreign currency debts.

But the governments of the world could agree to hold these minor currencies, even if private investors will not. The world needs an international central bank, democratically-structured and publicly-controlled that would allow countries to settle their trade balances politically, without relying on loans of foreign currencies.

The idea is not new. Keynes had something similar in mind in the 1940s and Cambridge economist Nicholas Kaldor toyed with the concept in the 1960s. Recently, a number of international financial specialists have revived this notion, calling for a global settlements bank that could act not -- like the IMF -- as a lender of last resort to international banks, but would serve as lender of first resort for payments imbalances between sovereign nations.

The idea is beguilingly simple, eminently practicable, and easy to implement. It would benefit poor and rich countries alike, since the advanced nations could export far more to developing countries if those countries were able to settle international payments on more advantageous terms.

A global central bank, however, would dramatically shift the balance of power in the world economy and will be fiercely opposed by those who profit from the international debt trap.

If developing countries were not so desperate for dollars, multinational corporations would find them less eager to sell their resources and citizens for a fistful of greenbacks. That nations -- like Ecuador or South Africa -- rich in people and resources could, for lack of foreign currency, be deemed bankrupt and forced into debt peonage, is not merely a shame. It is absurdity -- an artifact of a global finance system that enriches only the rich.

-- Observer News Service