Opinion pieces and speeches by EPI staff and associates.
THIS PIECE ORIGINALLY APPEARED IN THE NATION ON NOVEMBER 22, 1999.
Debt: Just Forget It
by Jeff Faux
For two decades the International Monetary Fund and its major client, the U.S. Treasury, have made privatization, austere social budgets and market deregulation conditions of loans to the world’s poorest nations. The goal has been to turn these economies into models of American-style capitalism, which among other benefits would generate the growth to enable them to pay back the money.
Instead, per capita growth has slowed, debts have piled up, and today these countries are trapped in a downward spiral of poverty and social disintegration. Nations in sub-Saharan Africa, for example, spend more on annual debt repayments than they do on education and health combined. In Zimbabwe–not the poorest nation–real incomes have fallen 37 percent since 1991, 25 percent of the country’s population has HIV/AIDS and a fourth of its national income goes to pay off debts.
International pressure from First World religious, labor and humanitarian groups has pushed a reluctant IMF to provide some debt forgiveness to about forty of the most heavily indebted poor countries. Bill Clinton and Republican congressman Jim Leach, who chairs the House Banking Committee, have proposed canceling some of the debts owed to the U.S. government. But these proposals would require debtor nations to tighten their belts further in the name of “sound economic policies,” i.e., to reduce labor costs so that they can increase exports to earn enough foreign currency to pay back their loans. Their labor, however, is already dirt-cheap. Add primitive infrastructure and deteriorating public health, and the IMF formula holds out no prospect of these countries growing their way out of their financial holes.
If most of the debt is unpayable, why do their creditors continue to squeeze these destitute nations? Ask the bankers and they will lecture you on the principle of “moral hazard”–the notion that if people are allowed to avoid the consequences of their economic mistakes, they will continue to make them. As an observation about human psychology, this may be reasonable, if oversimplified. But as applied to poverty-stricken societies, it is hazardous morality and bad economics. The people who are being hounded to pay back the loans are not the people who took them out. Much of the debt represents the residue of cold war-era payoffs to corrupt dictators and their cronies who are long gone, having taken the money with them. As Michael Harrington once quipped about foreign aid, such loans were a transfer of resources from “poor people in rich countries to rich people in poor countries.”
Excessive concern with moral hazard flies in the face of the experience of the world’s currently most successful economy. America is the Land of Moral Hazard. We are the world’s largest debtor (we don’t even pay our dues to the United Nations), our people have a zero savings rate and consumer debt is at record highs. More to the point, this is the easiest nation in the world in which to declare bankruptcy and escape the consequences: 1.5 million individuals and businesses do it each year. When they come home from bankruptcy court and turn on the TV, they are bombarded with offers for more loans from companies whose business it is to lend money to people with bad credit.
There is method to this seeming madness. First, in a modern economy supply tends to outrace effective demand for goods and services, so anemic incomes need to be supplemented by credit. Easy credit, moreover, is not only fueling the U.S. economy; by maintaining demand for Asian goods while Asia’s own markets tanked, the U.S. consumer’s cavalier attitude toward debt has saved the world economy from depression.
Second, escape hatches for debtors reflect a sound economic principle: If you really can’t pay, then it is not in society’s interest to have you spend the rest of your life hopelessly trying to work off the purchase of an asset that is now worth less than the value of the effort you are making to pay for it. Bankruptcy law allows you to liquidate the debt by selling off the assets and sharing the loss with your creditors–who, after all, were partners in creating the loan that went sour.
Compare the United States with a nation like Japan, where inadequate bankruptcy protection leaves millions of Japanese stuck making payments on houses and business real estate now worth half the value of the mortgage–paralyzing consumer spending and investment. In America, you can give the key to the bank, move to the next state and start all over again. Indeed, in America the rich get richer precisely by exposing their economic morality to hazard. When the ninety-nine multimillionaires who invested in the now infamous Long Term Capital Management Fund bet wrong on the Russian ruble, the Federal Reserve and the Treasury browbeat the fund’s bankers into lending them even more money to go out and do the same thing again.
If the world’s financiers really want to export American capitalism to the world’s impoverished societies, they should knock off the homilies on frugality and let the poor in on the real secret of U.S. prosperity–debt relief.
[ POSTED TO VIEWPOINTS ON DECEMBER 7 ]
Jeff Faux is the president of the Economic Policy Institute.
