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Debt Disaster?: Banks, Government and Multilaterals Confront the Crisis

Edited by JOHN F. WEEKS
Michael P. Claudon Series Editor
Copyright Date: 1989
Published by: NYU Press
Pages: 312
https://www.jstor.org/stable/j.ctt9qg11q
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  • Book Info
    Debt Disaster?
    Book Description:

    Written for the nontechnical reader and intended to intervene in the policy debate, Debt Disaster? offers informative analysis, controversial assessments, and concrete solutions to bring a close the bleakest period for the Third World since the end of World War II. Out of this volume comes a clear message: the indebted countries cannot grow if they seek to pay their debts, no matter what policies they follow. The contributors include: Barry Herman, Rolph van der Hoeven, Karin Lissakers, Paul M. Sacks, Chris Canavan, Robert Liebenthal, Peter Nicholas, Robin A. King, Michael. D. Robinson, Richard D. Fletcher, JOse D. Epstein, William L. Canak, Danilo Levi, Louellen Stedman, Peter Hakim, Vali Jamal, Bruce Morrison, Rudiger Dornbusch, Osvaldo Sunkel, William Darity, Jr., and MIchael Pl. Claudon.

    eISBN: 978-0-8147-8490-7
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
  3. LIST OF FIGURES
    (pp. ix-x)
  4. LIST OF TABLES
    (pp. xi-xii)
  5. ACKNOWLEDGMENTS
    (pp. xiii-xiv)
    John F. Weeks
  6. FOREWORD
    (pp. xv-xviii)
    Michael P. Claudon

    The surge of unprecedented private, commercial credit from Northern financial centers to the developing countries of the South, which originated about 1973, erupted in 1982 into a global debt crisis, a crisis that today is still very much with us.

    Economists are fond of assuming "other things equal," but the most important "other things" are very different in 1988 than they were fifteen years ago. The post-World War II economic boom has finally run its course. Growth in the 1990s is unlikely to match, or possibly even come close to, that of the last two decades. The OPEC surpluses of...

  7. INTRODUCTION
    (pp. xix-xxii)
    John F. Weeks

    From the end of World War II until the late 1970s, the field of development economics focused on the structural problems of underdevelopment in the context of growth: the population explosion, the desirable balance between agriculture and industry, and, particularly in the 1970s, the equitable distribution of the gains from growth. A fundamental characteristic of the development literature was the presumption that the growth of per capita income in the Third World was the rule, almost a given, and the issue was growth—growth at what rate, its composition, and for whom. The debt crisis changed all that. It is...

  8. PART I DEBT CRISIS IN THE THIRD WORLD
    • [PART I Introduction]
      (pp. 1-2)

      In August 1982, just as the International Monetary Fund was about to convene its annual meeting in Toronto, the government of Mexico stunned the international financial community by announcing its inability to service its debt. Most date the "debt crisis" from that time, and it is still very much with us. The subsequent approach of the international financial community, both private and official, to the debt crisis has been to foster (impose, some would say) a package of policy measures in developing countries ostensibly designed to facilitate repayment of debt. The three essays in this first section of the volume...

    • 1 THE OUTLOOK FOR DEVELOPMENT
      (pp. 3-20)
      Barry Herman

      We wish to say something about the outlook for development in the rest of the century. In essence, that is the same as wanting to say something about the experience of development in the 1980s. Whether done through estimated models or informal projections, futurology is based on the relationships we see today. The objective of this paper is to try to look to the future by saying some things about the present and by observing some things about economic attributes shared by most developing countries, though interestingly enough not by all.

      In a field like economic development, some definitional issues...

    • 2 EXTERNAL SHOCKS, ADJUSTMENT, AND INCOME DISTRIBUTION
      (pp. 21-40)
      Rolph van der Hoeven

      For more than a decade developing countries have undergone a number of external shocks. Depending on their intensity and the characteristics of the economic structure in place, these shocks had direct consequences on developing countries' capacity to pursue domestic economic and social policies; employment and income levels in many countries have been negatively affected in many countries. The various external shocks did not take place simultaneously, but rather overlapped (Table 2-1). After the commodity price boom in 1977, the terms of trade for developing countries deteriorated for five consecutive years, improving slightly in 1983 and 1984, and declining again in...

    • 3 LOSERS PAY REPARATIONS, OR HOW THE THIRD WORLD LOST THE LENDING WAR
      (pp. 41-64)
      John F. Weeks

      In the late 1970s, the economies of Latin America and Africa entered into an economic depression worse than that of the 1930s, plunging the populations of these countries to levels of poverty and unemployment of a decade before. A disturbing aspect of this profound economic and social crisis is that most of the concern of the international community has focused on what in human terms is a minor side effect of this catastrophic depression—the inability of governments to service their foreign debts. In any rational world, the financial side of the crisis would be the least of our worries,...

  9. PART II THE DEBT CRISIS AND COMMERCIAL BANKS
    • 4 BACKGROUND TO THE DEBT CRISIS: STRUCTURAL ADJUSTMENT IN THE FINANCIAL MARKETS
      (pp. 67-74)
      Karin Lissakers

      Post-1982 analyses of the debt crisis and the search for a solution have focused on the economic successes and failures of debtor countries. Far less attention has been given to major structural changes in international financial markets in this decade, changes that have come about coincidentally with the debt crisis but not necessarily because of it, changes that will have a direct and profound impact on its resolution.

      Beginning in 1979-1980, there was a series of events—of which the Mexican moratorium is only one—that created a set of conditions in world financial markets fundamentally different from the conditions...

    • 5 SAFE PASSAGE THROUGH DIRE STRAITS: MANAGING AN ORDERLY EXIT FROM THE DEBT CRISIS
      (pp. 75-88)
      Paul M. Sacks and Chris Canavan

      In the last year, a growing number of experts and participants have concluded that the debt crisis is worsening. They cite militance of debtor countries, some of which have halted interest payments, an event that shook the world's financial system when threatened by Mexico in 1982. Banks have displayed equal drama: Citibank, America's largest bank, took record losses in 1987, claiming that Brazil's moratorium had forced its hand. In the minds of many, these events conjure up images of a process unravelling beyond anyone's control.

      Despite this apparent anarchy, the debt crisis has a distinct logic. The market that interlocks...

  10. PART III STRUCTURAL ADJUSTMENT:: SOLUTION OR PART OF THE PROBLEM?
    • [PART III Introduction]
      (pp. 89-90)

      Many things made this seminar exciting, and perhaps the most catalytic ingredient was the presence of both high officials from international agencies—willing to speak openly and unbureaucratically—and academicians specializing in debt and structural adjustment issues. The result of this interaction comes out clearly in the chapters in this part of the book.

      In Chapter 6, Robert Liebenthal and Peter Nicholas lay out clearly and with cautious optimism the experience of the World Bank with structural adustment lending. The role and posture of the World Bank on structural adjustment is particularly important, for, unlike the IMF, the Bank has...

    • 6 WORLD BANK-SUPPORTED ADJUSTMENT PROGRAMS
      (pp. 91-102)
      Robert Liebenthal and Peter Nicholas

      An escalating economic crisis in the early 1980s led the World Bank to emphasize more strongly than before the introduction of economic policy reforms by developing countries and to support the reforms through adjustment lending. There are two aspects to this crisis, the first of which is recession. Over the past nine years, there has been a major adverse change in the environment for almost all developing countries, caused by several events: the second oil shock; record-high real interest rates; the commodity price collapse; lower OECD growth coupled with rising protectionism; and the reversal of net lending flows. Not since...

    • 7 ASSESSING STRUCTURAL ADJUSTMENT PROGRAMS: A SUMMARY OF COUNTRY EXPERIENCE
      (pp. 103-124)
      Robin A. King and Michael D. Robinson

      This paper attempts to answer two important questions about the structural adjustment policies implemented as a part of debt rescheduling: What are the economic impacts of structural adjustment? And, do these policies improve a country's chances of meeting debt service obligations in the short term? Some studies have attempted to capture the economic effects,¹ but no study has addressed the implications of these effects on the future ability to pay of rescheduling countries.² Thus, there is a major gap in our knowledge about international debt rescheduling. This paper endeavors to fill this gap by determining the impact of rescheduling and...

    • 8 UNDERVALUATION, ADJUSTMENT, AND GROWTH
      (pp. 125-130)
      Richard D. Fletcher

      Devaluation—or "exchange rate action," as it is euphemistically called—has become a standard feature of IMF conditionally in the 1980s. In 1981-1983, for example, 80 percent of IMF-supported programs (excluding those involving members of currency unions) included devaluation as part of the package (Johnson 1985). The IMFs preference for devaluation is not generally shared by politicians in the LDCs. As the Finance Minister of Guyana recently remarked, "The IMF uses devaluation like a man with a hammer who believes that everything is a nail."¹ The skepticism of politicians about the usefulness of devaluation is understandable. After all, they can...

    • 9 OLD WINE IN NEW BOTTLES: POLICY-BASED LENDING IN THE 1980s
      (pp. 131-140)
      José D. Epstein

      On March 30, 1988, Secretary of the Treasury James A. Baker III testified before the Appropriations Committee of the Senate Subcommittee on Foreign Operations in support of the FY 1989 budget proposals for multilateral development banks, in particular the World Bank. He made several references, in several contexts, to policy-based lending and its impact on the private sector:

      … policy-based lending is an important element of Bank private-sector development efforts. Such lending has become an important component of World Bank activity. The impact of such lending is broader than project loans, affecting the borrower's macroeconomic policies rather than a specific...

  11. PART IV STRUCTURAL ADJUSTMENT:: IMPACT IN THE THIRD WORLD
    • [PART IV Introduction]
      (pp. 141-142)

      In the first part of the book, Rolph van der Hoeven provided a survey of the impact of external economic shocks on Third World countries. In Part IV, three authors take that analysis to a less aggregative level, with the emphasis on the two areas most affected by structural adjustment programs, Latin America and Africa.

      In Chapter 10, William L. Canak and Danilo Levi provide an interpretation of the role of the multilateral agencies in the management of the debt crisis, then apply this analysis to Latin America. While data are somewhat limited (partly due to the relative newness of...

    • 10 SOCIAL COSTS OF ADJUSTMENT IN LATIN AMERICA
      (pp. 143-164)
      William L. Canak and Danilo Levi

      The objective of this paper is two-fold: first, to develop a theoretical framework for understanding the relationship between constraints on international economic growth and the development of an interorganizational rationale for regime policies; and second, to consider the effects of structural adjustment policies in Latin America. In the following sections we will discuss the issues, the institutions, the policies, and the consequences of structural adjustment policies.

      The neoclassical model for economic growth, which has been the foundation for most economic studies of development, is a world without transaction costs and institutions (Coase 1960; North 1981). Historically, national wealth has been...

    • 11 POLITICAL CHANGE AND ECONOMIC POLICY IN LATIN AMERICA AND THE CARIBBEAN IN 1988
      (pp. 165-174)
      Louellen Stedman and Peter Hakim

      The debt crisis has deeply affected the lives of Latin Americans. After three decades of uninterrupted growth, the economy of nearly every Latin American and Caribbean country went into a tailspin in 1982 and 1983. Now after four straight years of slow growth (1984 to 1987), the region's per capita income is still some six percent below its 1980 level. Throughout Latin America and the Caribbean, wages have fallen; jobs have disappeared; housing, schools, hospitals, and other public services have deteriorated; and Latin Americans have endured food shortages and mounting street crime. Poverty and already skewed distributions of income have...

    • 12 THE DEMISE OF THE LABOR ARISTOCRACY IN AFRICA: STRUCTURAL ADJUSTMENT IN TANZANIA
      (pp. 175-192)
      Vali Jamal

      Structural adjustment programs as currently applied in African countries exhibit many common features, including restraints on wages, suspension of subsidies on food products, liberalization of markets, and devaluation. The objective of these measures is to shift resources in favor of rural areas. The common justification for this shift is that past policies have created distortions that support inflated living standards in the urban areas. Pricing policies for agricultural crops and wages policies for urban workers are particularly singled out as culprits. As a result, urban wage earners allegedly gain through price twists and terms of trade transfers at the expense...

  12. PART V SEEKING A SOLUTION
    • [PART V Introduction]
      (pp. 193-194)

      In the final part of the book, five authors attempt to move us toward a solution to the debt crisis, which has become in effect a development crisis. In Chapter 13, Representative Bruce Morrison indicates what is perhaps the greatest barrier to achieving a policy solution—the absence of a meaningful debate in the United States over the role of the multilaterals. If a solution is to be reached, it will require concerted action by the largest creditor country (which, ironically, is also the largest debtor country). Congressman Morrison's call for using the General Capital Increase of the World Bank...

    • 13 FACING THE REALITIES OF THE DEBT CRISIS
      (pp. 195-206)
      Bruce Morrison

      It is educational to see how the debt issue has and has not been presented in the context of Congress and the U.S. political system. My experience with the debt problem tells a bit about the growth of—importance may be too strong a word—recognition within the Congress of the issue. I shall then examine current actions that are being taken, both in terms of the proposed innovations in the trade legislation Congress passed and the debate over the General Capital Increase (GCI) for the World Bank.

      I was elected to Congress for the first time in 1982. My...

    • 14 FROM ADJUSTMENT WITH RECESSION TO ADJUSTMENT WITH GROWTH
      (pp. 207-222)
      Rudiger Dornbusch

      Where does the debt problem stand today, and how does structural adjustment fit into it? I consider these questions in two ways. First, I review the belief in 1982 about the debt problem, that it would go away by itself. How have views changed now that we have reached 1988 and know the debt problem is alive and well? Second, what are the good stories one might tell today, and why are they not really right? I then will address how the "generic" solution would work, focusing specifically on a cure for Mexico. I conclude that recycling of interest payments...

    • 15 FROM ADJUSTMENT AND RESTRUCTURING TO DEVELOPMENT
      (pp. 223-232)
      Osvaldo Sunkel

      It is necessary to understand both the present and the past when considering the restructuring of developing economies. It is essential to go back in history before moving forward because, as I have argued since 1984 (Sunkel 1984; Sunkel 1985; Griffith-Jones and Sunkel 1986), the debt crisis is no mere financial phenomenon, but the culmination of a profound development crisis that was emerging in Latin America already by the late 1960s. What is needed, therefore, is not just a solution to the debt crisis, although this is a necessary condition, but a renewed development effort to overcome this double crisis....

    • 16 IS TO FORGIVE THE DEBT DIVINE?
      (pp. 233-242)
      William Darity Jr.

      Why not call the whole thing off? The lingering external debt crisis of the developing countries lingers into the late 1980s with no apparent resolution in sight. Formal repudiation is not in the offing; Brazil's moratorium on payments was a short-lived attempt at temporary repudiation. The precise points of leverage that preclude national leaders of debtor LDCs from declaring their government's refusal to continue to service foreign claims are not known with certainty. Bulow and Rogoff (1988) recently have shown that it is misleading to argue that leaders fear that their nation's credit reputation will be tarnished so badly that...

    • 17 FOREIGN LENDING AT THE BRINK
      (pp. 243-254)
      Michael P. Claudon

      Is the world debt situation a temporary liquidity problem or a debt crisis of major proportions? Wringing our collective hands over the U.S twin deficits (federal government budget and trade) is very much in vogue of late. These deficits are highly visible, close to home, and relatively easy to perceive. LDC debt, by contrast, is a distant, poorly understood problem between some tiny countries and isolated U.S. banks. In the halls of Congress and on Main Street USA, global debt is viewed as a curiosum, unrelated and nonthreatening to American economic well-being, that will sort itself out in time.

      Nothing...

  13. BIBLIOGRAPHY
    (pp. 255-270)
  14. INDEX
    (pp. 271-284)
  15. ABOUT THE CONTRIBUTORS
    (pp. 285-288)
  16. ABOUT THE EDITOR
    (pp. 289-290)
  17. Back Matter
    (pp. 291-291)