Our national interest in achieving a workable solution to the world debt problem, especially as it burdens the developing countries, is not purely a matter of trying to save some major American banks from incurring huge loan losses--to the point of bankruptcy in several cases.
We also have a keen interest in seeing that this problem does not block our--and the world's--economic recovery, which has been taking place for almost five years. This is apart from the sheer importance of helping economic development in the Third World.
The key concept toward gaining an understanding of the problem is "feedback." The question is, how much do we in the United States depend on good economic health in the developing world for absorbing our exports.
There can be little doubt that our foreign trade is in bad shape, having deteriorated seriously from the surplus position that existed in 1980-81. Simple arithmetic tells us that we must expand exports and restrain imports of goods and services in order to put things right once again.
Not everyone realizes that during the good period, when our current account was in balance, about 40% of our exports went to developing countries. Our export volume to the Third World grew steadily during the latter part of the 1970s, and the fraction of our total exports that went to developing countries also grew, but not in every year.
Turn for the Worse
Then, there was a sudden turn for the worse. Mexico had to cut back imports from the United States during 1982, when demand for oil fell and the debt burden became intolerable.
Other large debtors did the same thing. In fact, our incipient recovery in the spring of 1982 was reversed when exports faltered; it did not get under way again until November, 1982, when interest rates began to decline, not only domestically but internationally for the major debtor countries.
By 1983, the decline in exports to developing countries got more serious, and the fraction fell to about 36% from more than 40%. By 1986, the fraction exported to the developing countries was only 33.5%.
We could certainly benefit from a significant rise in the ability of the Third World to absorb our imports.
The feedback between industrial nations (lenders) and developing nations (borrowers) shows why we teach macroeconomics as a special subject, starting with our freshmen students.
Some economists argue that macroeconomics--the economics of nations, regions and the world as a whole--does not exist as a separate subject, apart from the mere adding up of established microeconomic relationships.
But at the micro level, where we study the behavior of individual households and firms, the units are too small to have a feedback effect on the total market, from which they receive readings of total economic performance, such as gross national product and prices.
In dealing with the debt problem, we must take into account the effect that our solving (or failing to solve) the debt problem for developing countries will affect their ability to import--which, in turn, will be a major factor in determining our ability to export--and thus turn our trade accounts in a more favorable direction.
The fall of the dollar should help to right our own situation, but when we leave very little buying power in the hands of the developing countries, which used to buy 40% of our exports, we find that the lower exchange value of the dollar works very slowly and by very small steps.
The process has been painful during this entire past year.
Capital Transfer of $20 Billion
In some recent calculations with our world modeling systems (project LINK) at the University of Pennsylvania, we have examined the debt-relief plan of Sen. Bill Bradley (D-N.J.), who proposes to limit interest payments to a rate of 5%. With our near-term projections for benchmark interest rates, we estimate that his relief involves a capital transfer of some $20 billion from creditor to debtor countries.
If this sum were to be raised in international capital markets, interest rates would generally rise and the United States economy would suffer from weakened business investment, residential construction and other interest-sensitive activities.
The developing countries would benefit, but the creditors would suffer in terms of economic recovery. On the other hand, if the monetary authorities in the leading creditor nations were to accommodate this capital transfer by increasing the money supply, interest rates could be held at base line rates, and both creditors and debtors could improve their economic growth rates, perhaps by about one-fourth to one-half a percentage point annually.
This would not be an inflationary program in today's circumstances, with abundant fuel and food inventories all over the world, reviving productivity growth in manufacturing, subdued wage claims and restrained interest costs.
Not a Full Solution
Of course, I do not think that Sen. Bradley's proposals or any of the other popular debt plans will actually provide a full solution to the problem. They are mainly ameliorative.
What is needed is a clean slate for developing countries to grow in a healthy way through an international adaptation of Chapter 11 bankruptcy techniques in which burdensome obligations are scaled back to levels that permit successful economic operations in the future under prudent management.
If we can expect to receive favorable feedback from the Bradley Plan--accompanied by Federal Reserve easing of monetary policy--we would get even more favorable feedback from our customers in developing countries if they had their debt reorganized to a point that would permit healthy growth.