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Debt 'Solution' Is Full of Problems

June 08, 1986

The Viewpoint column by David Felix ("Take Action Against Flight of Latin Capital," May 18) argues that assets held abroad by Latin Americans should be used to pay the region's international debt and presents this as a virtual panacea for solving the problem.

However, one can strongly question the feasibility, desirability and relevance of this type of approach.

First, there is the question of the size of the asset holding in relation to the total debt.

I find it hard to believe--and have seen no solid evidence to justify the claim--that total Mexican assets abroad today "probably equal Mexico's $100-billion foreign debt."

(It would mean that virtually no part of Mexico's foreign exchange inflow was used productively in the country.)

And certainly for Brazil, which has had strong exchange controls during the period of rapid debt buildup and consequently relatively low capital flight, debt repayment by using foreign-placed assets is hardly relevant.

Second, if the United States intervenes in the capital market in the way Felix suggests, Asians and Europeans will become concerned that the processes of their investing in the United States may someday also be characterized as "capital flight" and subject to the risk of expropriation.

This could lead to a reduction in the flow of foreign investment or to the demand for a much higher rate of return, hardly in this nation's interest.

Third, there is the equity issue. Felix argues that foreign asset mobilization "would distribute the burden of the debt crisis among the rich and poor more equitably than do current adjustment programs."

However, it seems to me that a rich-poor dichotomy oversimplifies the equity issue by ignoring the interests of the middle class.

Since the middle classes in many Latin American countries have experienced strong real income drops due to the debt crisis, the elimination of the possibility of holding assets abroad to protect against capital loss could further aggravate the decline in their economic position.

Fourth, there is the problem of fingering those who acquired foreign assets, especially when a country's leading political figures are likely to be on the list.

In 1982, the Mexican Congress initiated an investigation to find the names of sacadolares , and not much ever came of it.

Finally, there are other alternatives to using either appropriated exported capital or whatever Felix means by "beggars' bowls" to try to solve the debt problem.

One can consider the relative merits of exchanging debt for equity in Latin American public and private industries, the lifting of trade barriers in industrialized countries to facilitate the entry of the region's exports, further renegotiation of the terms of repayment and interest rates, encouragement of foreign investment in Latin America and creation of conditions that promote voluntary repatriation of capital.

JONATHAN KING

Chula Vista

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