Apr 1, 1987
UNCTAD-VII: NEW INTERNATIONAL DEBT STRATEGY ADVOCATED.GENEVA MARCH 30 (IFDA/CHAKRAVARTHI RAGHAVAN) -- Under current rends and policies, third world countries would be unable to revive their pace of development and at the same time service their debt, and a new international debt strategy is needed, according to the UN Conference on Trade and Development. Such a new strategy, UNCTAD says, should be brought into the process of macro-economic coordination designed to promote higher growth in major industrial countries. Also, there should be internationally-agreed, detailed and operational set of guidelines to deal with debt problems. The guidelines would have to deal with such matters as the respective roles of creditors and debtors in resolving debt difficulties, the manner in which adequate growth rates can be incorporated into programmes to deal with debt difficulties, and the way in which financial policies and practices could be made fully congruent with present and prospective external earnings. These views of the UNCTAD Secretariat are in its report (TD/328/ADD 2) to the forthcoming seventh session of the conference (UNCTAD-VII) due to be held in Geneva from July 9 to 31. Dealing with the international debt question the Secretariat has called for improvements in current strategy and has indicated the broad lines of approach, but has not made any specific proposals. Some detailed proposals and recommendations are however expected to be advanced by the Secretary-General of UNCTAD, Kenneth Dadzie, in his separate report to the conference. But in his address to the recent meeting of African Trade Ministers at Addis Ababa, Dadzie suggested negotiations at UNCTAD-VII on the need "to selectively relax the general principle that debt and interest thereon must ultimately be paid, whatever the social costs ton the debtor developing country". In its present report, the Secretariat underlines that rarely, if ever, have the stakes in resolving the financial difficulties of the third world been so high for all concerned. For the debtor countries, growth and development prospects in the immediate future and the longer term would be importantly influenced by the degree of success in addressing the debt problems, and the characteristiques of the measures deployed to that end. For creditor countries, the recovery of their export markets, the health of individual domestic financial institutions, and perhaps of the banking system itself would all depend on the ability to arrive at viable solutions. According to UNCTAD, after an initial period of ad hoc measures, the international debt strategy that has evolved in the 1980's, has had a remarkable constancy on the fundamental objectives and the framework within which it should operate. A sharp distinction has been drawn between bilateral ODA debt and all others, and a number of donor countries have given outright debt relief to the poorer countries, and in a substantial number of cases past loans have been converted into grants. But for all other debt, the view has prevailed that while obligations on amortization and interest could be postponed, "they must eventually be paid in full". There have been rescheduling of the principal and capitalization of interest in the context of the Paris Club Renegotiations (on official and officially-guaranteed debt), while for Commercial Bank debt new loans have been provided to enable a debtor to make prompt payment of interest. Multilateral lending institutions were at first excluded from such rescheduling,s but these too have been increasingly drawn towards a model provided by Commercial Banks, though the debt itself has not been rescheduled in these cases. These firm views of creditors have been on the assessment that after a period of adjustment debtors would not only be able to return to normal servicing of outstanding debts but also meet payments being currently postponed. Earlier it was felt that the adjustment period could be short, but later it was realized that it could be quite lengthy for many countries. Despite considerable evidence that changes in external environment beyond the control of debtors was the proximate cause of the sharp and severe deterioration in the external position of debtor countries, the international debt strategy has focused primarily on shortcomings in policy formulations in debtor countries. This is on the basis that there have been "significant economic mismanagement" in the debtor countries (such as in poor investment decisions, internal disequilibria like large budget deficits and rapid inflation rates, etc.). But no one has explained why within a short period there should have been such grave shortfalls in management simultaneously in such a large number of countries, UNCTAD points out. Even where external shocks have been seen as explaining the difficulties, it was argued that an appropriate overall strategy for growth and development characterized by outward orientation and reliance on market forces would enable the countries to cope with these disturbances. This view that the economic adjustment should be borne entirely by the debtors led to creditors trying to keep debtors on a tight leash, and making external financing conditional on domestic policy reforms. But all in all, "the impression has sometimes been given that the main purpose of external financing is to encourage policy changes rather than to transfer resources", UNCTAD comments. The Baker initiative brought about some shift in conceptualization, by its explicit recognition of the need to move the restoration of growth to the centre of the international debt strategy, and in recognising the long-term character of the process of overcoming difficulties of growth and debt. But even this did not lead to any significant change in the broad principles and assumptions of the debt strategy. At the end of 1986, UNCTAD notes, the main debt indicators remain at historically high levels. The external debt of all net debtor third world countries amounted to around 835 billion dollars in 1985, or about 203 percent of their total exports of goods and services, compared to 153 percent in 1982. Preliminary indications for 1986, UNCTAD adds, point to a continuation of these trends, and most debtor countries would appear to be still far from being able to reconcile growth and creditworthiness. While UNCTAD has not referred to it, other analysts have provided even more horrendous pictures of the debt profile. The Indian Economist, Sukhamoy Chakravarty, has cited some studies to suggest that the debt problem could be "assumed away" only on the basis of a sustained real export growth of eight percent and effective interest rate of five percent. However, Chakravarty has pointed out that while for the OECD countries the real rate of interest (nominal rates adjusted by the OECD GDP deflator) was around 4.5 percent in 1985, the real interest rates (nominal rates deflated by their non-oil commodity export prices) worked out to 21.7 percent for the third world countries. Even if the entire exports are taken into account, when nominal (LIBOR) rates are deflated by export unit values of third world countries, the real interest rates moved from a minus three percent in 1980 to a very high positive rate of 23.5 in 1981 and 24.15 in 1982 - the year when the debt crisis broke. It came down to 12.77 in 1983 and 10.49 in 1984 (when there was a small rise in commodity prices), but has risen again to 15.95 percent in 1985. Many third world economists have pointed out that apart from the violent fluctuations in these real interest rates (due to severe fluctuation in commodity prices), which would inhibit any investor, no productive investment for exports would be possible at such high real interest rates. UNCTAD points out that the amounts of new money envisaged under the Baker Plan would be inadequate since it implied attainment of "historically unprecedented expansion of exports if output growth is to be restored to reasonable levels". For 18 debtor countries, an UNCTAD simulation suggests the need to achieve at current prices annual growth rates of exports of between 20 and 15 percent, and investment coefficients of between 20 to 25 percent, in order to attain a GDP growth of four percent. "Even if such export growth rates are attainable, the simultaneous efforts of several countries to expand their exports of manufactures and primary commodities are likely to result in downward pressure on commodity prices", UNCTAD comments. The first major weakness of the current strategy, UNCTAD underlines, is due to lack of symmetry - the "disproportionate burden" of macro-economic and trade adjustment on the debtor countries and the distribution of financial costs between debtors and creditors. Also, the stimulation of financial flows necessary for the strategy have not also been forthcoming. Additional flows from commercial banks have been smaller than envisaged under the Baker Plan, while official and officially-guaranteed export credits (under the direct influence of these governments) have failed to expand. A third weakness of the Baker Plan is in its perception of policies needed in debtor economies - heavy reliance on supply side measures to increase flexibility of productive structures through liberalization and increased reliance on market forces. The appropriate role of state and private sectors and market forces, UNCTAD notes, are complex matters giving rise to controversy. While there is need for proper incentives and efficient use of resources, "such measures do not constitute a complete and viable strategy for restoring growth in domestic of debtor countries even when fully supported by external financing". "There is need", UNCTAD comments, "for a more balanced and complete growth strategy giving adequate attention to the magnitude and behaviour of variables such as aggregate demand and investment, as well as efficiency of resource use". But the most striking shortcoming of the debt strategy, the report further underscores, is in the "failure to conceive it within a broader strategy for accelerating growth in the world economy". The prospect of slow growth in the OECD countries in the period ahead casts doubts on the prospect for rapid growth in export earnings of most debtor countries. Yet rapidly expanding export earnings are fundamental to any successful debt strategy, and without them the objectives of accelerating growth in debtor countries and achieving financial viability cannot be reconciled. The prospect of weak growth in export earnings would mean need for additional financial flows to support adjustment and accelerate growth. But in present circumstances, the need for increased flows conflicts with need to limit the growth of debt. This conflict, the report adds, is further aggravated by current financial practices such as borrowing to finance current interest payments, rescheduling of interest payments, or borrowing to finance maintenance imports. These may be appropriate and useful if export earnings could be assumed to recover in the relatively near future, but it would intensify future debt difficulties if earnings cannot be expected to rise vigorously.