A Debt Crisis That Goes On And On

December 27, 1986|By Sol M. Linowitz and Galo Plaza, cochairmen of the Inter-American Dialogue, a Washington-based group of hemispheric leaders dealing with inter-American issues. Linowitz was a negotiator of the Panama Canal treaties. Plaza served as president of Ecuador and secretary-general of the Organization of American States.

The debate over what to do about Latin America`s debt crisis goes on and on as decisions and actions that could resolve the crisis continue to be put off.

Payments on an accumulated debt of more than $380 billion are crippling Latin America`s economic prospects. The region is exporting capital at a rate twice that of Germany`s war reparations following World War I. Without the resources to invest in their own economic development or to meet basic human needs, many Latin American nations are plagued by historically high levels of unemployment and inflation, deteriorating housing and public services, food shortages and rising street crime.

In this situation, three things stand out clearly:

Latin America`s debt and growth crisis can be ended, but this will require decisive political leadership by the United States on several fronts. A broad consensus already exists on the basic elements of a solution. U.S. action must draw on these fundamentals.

Key to any solution is sustained economic growth, which is possible only if Latin American countries get greater access to outside capital and continue to reform the management of their economies.

Tragic as the failure to act has been for Latin America, it also has serious political and economic consequences for the United States, with its immense stake in the region. The United States has already lost export markets, worsening our trade deficit and eliminating as many as a million U.S. jobs. We have forfeited investment opportunities. The default of a major Latin debtor would badly damage the U.S. banking system.

Economic paralysis in Latin America, moreover, heightens pressures for migration to the United States and frustrates efforts to control drug trafficking by preventing the development of alternatives to the earnings narcotics provide.

Most important, the progressive weakening of Latin American economies inevitably threatens to reverse the region`s democratic gains. If the fragile process of consolidating democracy is undone, the best hope ever of building a community of free nations in this hemisphere will have been lost.

Treasury Secretary James Baker`s debt plan of late 1985 reflected the widely agreed view, first, that only through sustained growth can Latin America escape the debt trap and, second, that such growth will only occur if it is nourished by more external financing and nurtured by better economic management.

Latin American countries have undertaken many of the economic reforms called for in the Baker plan. In varying degrees they have expanded the role of the private sector, given greater emphasis to exports, devalued their currencies, cut public spending and lowered inflation. With these changes, the countries are now far better prepared to make effective use of external capital.

But the capital has not been forthcoming. The Baker proposals remain only that--proposals. They need to be implemented. Baker called on the commercial banks to increase their lending to debtor countries by a modest 2 1/2 percent a year, but instead the banks reduced their lending even further in 1986.

The Baker proposals also need to be supplemented. They do not, as formulated, offer enough capital to take Latin America very far toward recovery. The amount of new capital needed--$20 billion per year by informed estimates--must come mainly from commercial banks, without which no debt management program can succeed.

Getting the banks to cooperate is the first task of political leadership. Over four years, the banks have steadily upgraded their financial positions. They are in better shape to provide the new loans that Latin American countries are now better able to use. Making this happen, however, will require that the Untied States and other industrial countries take a more direct and active role in international debt negotiations.

The U.S. and other governments must not only spur the banks toward additional lending to Latin America. They must also encourage them in other vital directions, such as restructuring existing debt, increasing debt-equity swaps and writing off some loans to countries that cannot cope otherwise.

Governments must revise banking rules that inhibit these intitiatives. Banks have to be able to capitalize interest payments without penalty and absorb losses over extended periods on loans they have written down. And the United States and other creditor nations must share some of the financial risks if they are to mobilize commercial bank resources. They can do so by offering loan guarantees, cofinancing and similar incentives.

A second objective for leadership involves the international financial institutions--the World Bank, the International Monetary Fund and the Inter- American Development Bank. By raising their commitments to these critically important organizations, the United States, along with Japan and Western Europe, can reassure the commercial banks that official agencies are sharing the lending burden.

Finally, there is the most central issue of all: trade policy. Latin America needs expanded overseas markets, not further restrictions. But in the United States and elsewhere, pressures for protectionism are rising. The administration and Congress must deal with a huge trade deficit and its negative impact on workers and businesses. But they must find ways to do so without erecting new obstacles to Latin American exports.

Restoring economic vitality to Latin America is imperative. It is also possible. A year ago, the world saw in the Baker plan a U.S. commitment to active political leadership in dealing with a debt problem like that which confronts Latin America. The time to assert that leadership is now.