We have made a labyrinth and got lost in it. We must find our way out.
The first oil price rise at the end of 1973 led the less developed countries of the world to begin borrowing very heavily from the governments, private markets, and banks of the West. Much of the money they borrowed came from the surpluses of the OPEC nations and was recycled to them by Western banks. They now probably owe around $800 billion, something under half of it to private banks. The bankers gave little serious consideration to the inability of the less developed countries (LDCs) to pay the interest on the debt or make payments on the principal. The LDCs were sovereign countries, and for the bankers default was unthinkable; new credit would therefore always be available. But the process of snowballing debt made these confident assumptions harder and harder to believe.
For some time now most of the LDCs have been unable to raise the money on private markets to meet their debts to the private banks: they have been obliged to renegotiate them, usually after agreeing to alter their economic policies. This process, known as “rescheduling,” is simply an agreement on the terms for deferring capital repayment obligations and interest payments.
All of this has been done on a “pragmatic,” case-by-case basis, which means that the creditor banks and governments have dealt separately with each debtor country’s situation. Where you are dealing with the difficulties of an individual debtor this response is all that is required to provide the necessary breathing space within which resumed payment can be organized. But where most of the debtors cannot meet their obligations punctually there is a generalized international debt problem, and a more fundamental analysis is required to discover what has gone wrong and how to put it right. Unfortunately no such analysis, or outline strategy derived from it, has been attempted by the leading governments concerned.
The central question that must now, belatedly and explicitly, be asked is whether a system of large-scale, purely commercial lending by the private banks to poor countries can be sustained. Commercial lending is based on the assumption that the transfer of resources that it makes possible will sufficiently strengthen the ability of the borrower to create wealth that will allow him to pay interest on his loan and ultimately repay the capital; the lender would correspondingly come to enjoy the interest—”rentier income”—until the repayment occurs.
When the lending is across frontiers, the borrowing country usually starts off with a deficit in its overall trading accounts, reflecting the inflow of imports obtained on credit. If the debt involved is to be repaid, the borrower must at some future time achieve a trading surplus. The current practice of rescheduling payments could only provide a solution if we believe that the debtor countries will at some point start to run large and continuing trading surpluses with the developed world.
But the sums to be repaid are already …