Mortgaging the Joy in One Part of the World

There was a disturbing reminder just before Christmas that all is not well in the world. The United Nations Children’s Fund, UNICEF, reported that children are starving in the Third World as developing economies, groaning under debts to international banks, have stopped expanding and gone into decline.

The problem is not simply food, but medical care. As governments cut back on health services, children die from preventable diseases or because vaccines are lacking.

The story has a Scrooge-like quality, conjuring images of grasping bankers and hungry waifs. And to be sure, interest on total debts of $1.3 trillion is overwhelming many economies in Asia, Africa and Latin America. About one-third of that total is owed by Latin American countries, mostly to U.S. banks.

But the problem is complex and must be understood in all its parts--from the self-inflicted wounds of the developing countries to the links between starving children and Americans enjoying a comfortable dinner today.

And the problem is urgent. President-elect Bush says U.S. positions on Third World debt will be re-examined in the coming year, and the presidents of seven Latin American nations want a meeting to discuss debt relief and new loans.

The Latin presidents say their countries should get credit for good performance--that they have paid more than $120 billion in interest and principal to the banks in the last five years. And that’s true, but like the loan shark’s customer, they keep falling further behind. Latin debt still stands at $420 billion, with $300 billion owed by Argentina, Brazil and Mexico.

But, a question arises: Why do resource-rich countries like Argentina want debt relief, when they should be attracting investment? Latin countries “with willing and able workers, especially Mexico” should be lands of opportunity, says one economist.

So why don’t they get the investment? Because they often discourage it; nor do they invest in themselves. In Argentina--once an economically promising country--almost all business is controlled by the military or the labor unions. Inflation is currently 60%--and can get up to 500%--and the military threatens frequently to overthrow the government. Argentines, like many people in Latin America, send money abroad rather than investing at home. Domestic investment in Latin countries has fallen by a third since 1983.

Economic development problems in Latin America are historic. Instead of small farmers, Latin countries favored plantation agriculture, which made for wealthy families and poor peasants but discouraged industry.

U.S. Interconnection

A class system persists today. Middle-class government employees in Mexico City, for example, have many more servants at their beck and call than do government workers in Washington. As in many developing countries, bribes and payoffs sustain that life style. Mexico’s new president, Carlos Salinas de Gortari, seeks to reform the system, but progress will be slow.

But lest Americans feel smug, they should realize how they interconnect with that system. The major U.S. banks, which account for 28% of U.S. business lending, hold most of the developing country debt. If Latin borrowers had not paid $120 billion over the last five years, credit would have been tighter for U.S. borrowers.

More to the point, if the banks had written off the Latin loans as bad debts--as many experts demand--it would have reduced or wiped out their base capital and caused either a recession or a massive U.S. government rescue effort. So in one way Christmas is a little brighter because the impasse continues on Latin debt.

But in another way, the price is high. “We have lost $30 billion a year in exports because of the debt impasse,” says Sol M. Linowitz, former U.S. ambassador to the Organization of American States.

So pressure is building to solve the problem.

What must be done? Loans must be reduced or stretched out--but that will be relatively easy. U.S. banks have already written off portions of loans. But inspiring investment will be up to the Latin nations themselves. That’s the real problem to be solved for the sake of the children--ours and theirs.