C2—Lancaster Farming, Saturday, November 3,1984
WASHINGTON, D.C. - Some of
America’s best customers are
having trouble paymg their debts
and that may slow any
significant expansion in U.S. farm
exports through the rest of the
decade.
The foreign debt at issue now
totals more than $BOO billion, and
the question of its repayment
continues to haunt the world’s
financial community. One country
Bolivia simply suspended its
debt payments this year, pending
new talks with creditors. Other
countries are negotiating
aggressively and successfully for
more time to pay off their
obligations. ,
Among the top U.S. farm export
markets facing debt difficulties
are Mexico, Brazil, and the
Philippines. Excluding our in
dustrialized country markets, the
18 major purchasers of U.S. farm
products (each buying $2OO million
or more) hold about 60 percent of
the total debt owed by all the
world’s developing nations.
Affects trade
Two economists with the
Agriculture Department’s
Economic Research Service,
Mathew Shane and David
Stallings, have been studying the
debt situation and analyzing its
impact on trade. Their
assessment, presented in a recent
issue of USDA’s FARMLINE
magazine, is not encouraging.
They conclude that both U.S. and
international trade could be
severely constrained by the debt
problems of the developing
countries for at least the next 5
years.
The effects of a complicated debt
situation that had its origins in the
1970’s are easy to see today, Shane
maintains.
Easy Credit
“During the last half of the
previous decade, middle-income
countries such as Mexico, Brazil,
and Nigeria were the fastest
growing markets for U.S.
agricultural exports. The
recession of 1981-83 brought this
growth in sales to an abrupt halt,
particularly in those countries that
had accumulated large debts. ” ■*>
Oil importers borrowed to
sustain economic development
plans in the face of rising
petroleum prices. Oil exporters,
assuming oil prices would continue
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World debt slows U.S. farm exports
to increase, borrowed against
anticipated future revenues to
modernize and diversify their
economies.
Easy credit contributed to the
rapid economic growth of
developing countries during the
1970’5. Economies such as Brazil’s
and Mexico’s grew at un
precedented rates of 8 percent a
year or more during this time.
But the “Brazilian Miracle”
collapsed in 1981, along with the
growth of most of the other
developing nations. Worsening the
problem since 1981 has been the
mix of high interest and un
favorable exchange rates for these
countries. Shane says the situation
now approaches the point where a
serious challenge is being posed to
the world’s financial health.
“The potential for a prolonged
period of sluggish world trade
growth, or worse, is very great
unless fundamental solutions are
found and aggressive actions taken
to overcome the debt problem by
both the developing and developed
nations,” he says.
No easy solution
Certainly, the dimensions of the
problem suggest that no single,
simple solution is likely.
“The magnitude of the problem
since 1981 has been of a different
order than anything that has come
before,” Shane says. More than 40
percent of total debt an amount
exceeding $3OO billion was at
risk in the 25 developing countries
involved in debt renegotiations and
debt rescheduling between 1981
and 1983.
“Debt grew at a rate of more
than 20 percent a year from 1974 to
1981, exceeding the growth in
world GNP and exports,” says
Shane.
He describes the outlook for
some debt-impacted countries as
so severe that lenders including
commercial banks, the U.S.
government, and international
funding agencies may have to
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consider forgiving a portion of the
outstanding loans. “Simply putting
off debt service payments for these
countries will not lead to a feasible
payment scenario.”
Involved in this admittedly
“grim analysis are the Latin
American countries of Bolivia,
Chile, and Peru, as well as some
low-income African and Asian
countries. Freeing up more money
for these countries by deferring
interest and principal payments on
debt may not be sufficient to solve
their financial difficulties.”
Shane says that debt problems
could mean falling per capita
incomes in the affected nations.
“Latin America will not return
to the economic growth rates of the
1970’s in this decade. Growth rates
of less than 1 percent for Brazil and
3 percent or less for Colombia and
Mexico probably will not exceed
their population growth. This
implies that per capita incomes
will be falling in many of the
strongest economies of Latin
America. The implications for
their weaker neighbors, such as
Bolivia, Chile, and Peru, are even
worse.”
Political instability
He goes on to say that “despite
the apparent financial solvency of
countries such as Brazil, Colom
bia, and Mexico, the question
remains whether growth rates
which imply falling incomes over a
5-year period are politically
sustainable. The stakes in the
international debt problem are
more than just economic. One
must consider the possibility of
political instability when there are
long-term declines in per capita
incomes and trade. And that’s
what the current debt situation
seems to imply for much of the
Third World.”
Shane cites the cases of the
Dominican Republic, Tunisia, and
other countries, where violent
protests have erupted over rising
inflation and falling incomes
brought on by government
imposed austerity programs. Riots
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left hundreds dead and injured,
and threatened the collapse of
some governments.
The current world crisis has
grown from events that occurred
more than a decade ago when oil
exporters agreed to unite in order
to lobby for better prices. The
result was OPEC the
Organization of Petroleum Ex
porting Countries and the price
of oil quickly rose.
“Almost as quickly, the global
economic equilibrium was upset
by the quadrupling of oil prices,”
Shane says.
With all revenues pumping up
private bank reserves, lenders
looked for ways that “petrodollars
could be recirculated.” Mean
while, oil importers were looking
for ways to pay the higher prices
without sacrificing their economic
development plans or suffering a
deterioration in their already-low
standards of living.
He explains that the “industrial
countries accommodate the in
flationary pressure of oil price
rises with expansionary monetary
and fiscal policies. Almost all
prices for minerals, raw
materials, and other natural
resources went up substantilly,
and exports of developing coun
tries expanded.”
Most of the funds borrowed were
used to finance productive in
vestments that increased foreign
exchange earnings by more than
the amount of repayment. Brazil
and Mexico were just two of the
beneficiaries. In both nations,
annual growth rates of 8 percent
were common in the 1970’5. “There
were no previous periods of such
growth,” Shane notes.
The mix of factors at play
produced what Shane describes as
a “radical change in the global
economic outlook that favored the
resource countries. Prices of raw
materials were so high that the
profit on manufactured goods
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made by industrialized countries
was hurt.”
Then came the second round of
oil price increases in 1979, shaking
the world’s stability again. “The
response of the resource countries,
expecting the same reaction from
the industralized world, was to
borrow even more,” adds Shane’s
colleague, USDA economist David
Stallings. The debtor nations were
wrong.
World recession
“The monetary restraint of the
West produced a recession which
led to declining trade,” Stallings
says, “pressuring the sensitive
financial balance of the less
developed world."
In early 1981, he says, “the
situation deteriorated rapidly.”
Debt service obligations (the total
of principal and interest
payments) for many countries
began to rise faster than their
ability to meet them. “In the most
serious cases, the interest and
principal payments due, or the
interest payments alone, exceeded
the amount these countries were
earning from exports.”
Most hurt were nations that had
contracted loans in dollars, he
says. “In the United States, real
interest rates rose as inflation
abated. As a consequence, the
value of the dollar also increased
sharply. This abruptly reversed
the circumstances for many
borrowers, who contracted loans
at what they thought to be low real
interest rates. These loans had to
be repaid with their depreciating
local currency.”
The dollar’s real appreciation
against the monies of the less
developed world “has been
dramatic, substantially reversing
the downward trend of the 1970’5.
Tremendous pressure now exists
on the external financing of most
affected countries. ”
Depressed trade
World trade has already been
hampered by the debt crisis,
(Turn to Page C 3)
ETC.