The International Debt Problem; M. Adamson

Michael Adamson The International DebtProblem: TheCaseofArgentina THEgovernment of Raul Alfonsin in herited a nation burdened with mas sive economic problems when it was elected in December of 1983. Seven years of military rule had all but de stroyed a once growing economy un der the machinations of the state. During the period of military rule, the government tremendously in creased its foreign borrowing, from $8.3 billion in March, 1976 to $43.6 billion in December, 1983.1 The Argentine situation is one ex ample of a larger problem: the in currence of debt worldwide by gov ernment. Since August 20, 1982, when Mexico announced that it could no longer meet its debt service payments, some 30 nations have re negotiated terms on up to $100 bil lion of external debt. Argentina it self declared a moratorium on its debt principal late in 1982. Interest Michael Adamson is a graduate business student at Arizona State University.

732 payments, which consume roughly two-thirds of Argentina's annual ex port earnings, were refinanced in March, 1984 by a package deal in volving the governments of Brazil, Colombia, Mexico, and Venezuela so that American commercial banks would not have to list their Argen tine assets as nonperforming. Today, the Alfonsin government quibbles with the International Monetary Fund (IMF) over austerity programs which enable Argentina to borrow more money from the Fund. Because the strength of the dollar makes prices of imports to America rela tively cheaper, the so-called "debt crisis" has abated temporarily. Yet the only solution to the problem-the market solution-has not been ap plied. When the relative value of the dollar falls (it is presently overval ued against most industrial-nation currencies), the debt problem will again become a major issue.

THE INTERNATIONAL DEBT PROBLEM 733 The idea behind many popular so lutions to the sovereign debt prob lem (borrowing by government) is more government intervention in the form of continued capital flow through some IMF arrangement or similar mechanism until the debtor nation is "stable" enough economi cally to be able to accumulate suf ficient dollars from the exportation of goods to meet its obligations. Such IMF-type austerity plans may avert the political repercussions to gov ernment of making the necessary adjustments to a market economy, but, through a misallocation of re sources, they exacerbate the prob lem in the long run. A solution to the debt problem re quires a market system based on the idea of private property rights. The approaches to the problem taken by the IMF are not producing, nor will they produce, an answer. IMF pro grams are matters of short-term ad justment, the goal of which is to buy time for nations to solve their eco nomic woes. They are, in fact, a sort of protectionism which, in the end, subsidizes the interventionist poli cies of the debtor nations. They also rely on a macroeconomic approach by government to adjust such items as unfavorable balances of trade by fine-tuning monetary and fiscal pol icy in hopes of finding a way out of the woods, so to say. This assumes that the state is somehow capable of planning equitably and efficiently on behalf of millions of individuals it has deemed incapable of pursuing their own self-interest. Thus, many commentators have advocated an expansion of IMF quota limits, evi dently unconcerned about the fact that it is individual taxpayers who must foot the bill for the programs of the IMF and World Bank.

Several nations, including South Korea and Taiwan, are servicing substantial debt requirements on the strength of relatively strong market economies. Yet, when a nation such as Argentina has a debt service problem as a result of intervention in the economy by the state, the IMF typically proposes a slower growth austerity program entailing export ing goods and accumulating dollars with which to service the debt. This so-called trade surplus is generally secured by restricting imports. By not regarding trade as a two-way ex change in which both parties benefit when it is done voluntarily, the in dividual is made to suffer as he be comes less well-off materially. As barriers around free trade are con structed, the problem grows. The Growth of the Problem Today's debt problem in general can be traced to the reaction of in terventionist governments to eco nomic changes in the 1970s. The ini tiation of floating exchange rates in 1971 was followed by a decline in the relative value of the dollar, which fa734 THE FREEMAN December cilitated the expansion of trade be tween the United States and many of the so-called developing nations.

Governments, such as Argentina, fi nanced this expansion largely by borrowing external funds. These in creasing debt levels were expected to be serviced through continued eco nomic growth. The oil-importing developing na tions adjusted to the OPEC oil price increases of 1973 by borrowing ad ditional funds. These loans, made from "petrodollars" accumulating in American commercial banks, were considered to be of little risk, as eco nomic growth and a weak dollar in creased export earnings from which the debt could be serviced. 2 It should not surprise anyone, then, that from 1974-80, many governments used these borrowed funds to expand pub lic expenditures and exports sub stantially at the expense of capital formation. 3 Real-interest rates turned sharply positive in 1978, as the governments of Western Europe, followed by the United States, began to adopt re strictive monetary policies to reduce inflation. In addition, terms of trade fell significantly from 1979-82, as recession was accompanied by a rise in protectionist trade measures.

With oil prices increasing again in 1979, governments were strained to meet their debt service obligations and by 1982 the banking system was on the verge of financial collapse. The Case of Argentina The case of Argentina illustrates the distortions created by state in terventionism in the market econ omy. From 1973-84, public expen ditures expanded enormously. To finance this expansion, the govern ment resorted to deficit spending. From 1973-82, these fiscal deficits averaged 5.2 per cent of gross do mestic product (gdp).4 They were largely financed through borrowing abroad. The growth of the state and the debts which it incurred eroded the base .of real saving and private in vestment. The state was becoming the sole investor. However, the ab sence of a market test for the state allowed it to waste a large amount of resources on prestige and ill-con sidered projects, which was done fla grantly by the military gove-rn ment. 5 Accounting was so poor that much of the debt was not even reg istered in the Central Bank. 6 Mr. AI fonsin and his elected Radical Party inherited the world's highest infla tion rate and its third highest sov ereign debt in 1983.

From 1976-79, the military tried certain steps to solve Argentina's economic woes. Consumption of beef and grain was restricted, while ex ports of both were increased. 7 Real wages fell as government fixed wages while the market determined prices. In response to the unpopu larity of these policies, the govern1985 THE INTERNATIONAL DEBT PROBLEM 735 ment increas~d the money supply. Thousands of Argentines then con verted their pesos into dollars or other currencies to move out of the country. Capital flight was exten sive; some $11 billion was moved into foreign bank accounts. 8 Roughly half of the proceeds from loans to Argen tina were reinvested abroad and re main there because economic chaos continues at home. 9 The gdp in 1983 was lower in real terms than it had been eight years earlier. to - Mr. Alfonsin did not apply the market solution to the economy. In stead, he promised that the govern ment would fight inflation and pull business and labor out of the reces sion with easy credit and real wage increases. ll Hundreds of state-owned companies (which composed roughly 60 per cent of industry in terms of output) were to be closed or sold and government spending was to be cut. 12 The actual program was limited to price controls on selected consumer items and a week-long ban on the sale of beef. Despite efforts to peg wages to prices, prices have risen by as much as 30 per cent per month. 13 In such an environment, investment is reduced in favor of consumption and economic development becomes impossible. Argentina's once mod ern industrial structure is in danger of becoming obsolete. 14 Most recently, in June, 1985, the government announced new mea sures to fight inflation through a dramatic reduction in the budget deficit, mostly through new taxes and new tariffs. An indefinite freeze on prices and salaries is now in ef fect. A new currency, the austral, is being introduced, which it is hoped will be more stable than the peso, and will therefore draw out some of the estimated $4 billion worth of American dollars now being saved by Argentines in mattresses and other places. 15 None of these mea sures is a move toward a free econ omy. As long as the government commands the economy, Argentin a's woes will continue, and with them the external debt problem.

In Conclusion Attempts by the Argentine gov ernment to manage the economy have resulted in a distorted alloca tion of resources and a reduced stan dard of living for the people. Inter vention in the form of wage and price controls, tariffs, public borrowing and investing, and inflation have ne glected the ultimate user, the con sumer, and have restricted his right to peaceful action. The society has become more and more stratified, with various groups in conflict with each other. The nationalistic policies of the state have retarded economic growth and will lead to ever lower per capita standards of living. The whole question of the proper role of government has been totally for gotten.

736 THE FREEMAN As to the debt problem itself, there are only three ways out: 1) an inter nal adjustment economically and po litically within Argentina entailing a return to the free market system, 2) an assumption of bad debt loss by the lending institutions if Argentina is unable to repay its loans, or 3) an assumption of risk on the part of the governments of creditor nations (and ultimately on their taxpayers).16 Only alternative one insures that the problem will not recur. Alternative three is the method being employed today by the IMF and other govern ment agencies to prevent the polit ical consequences of alternative two. If there is a return to a free econ omy, individuals, by pursuing their own self-interest, will direct re sources to the production of those goods and services demanded by con sumers. As consumer demands are satisfied, the returns to investment (profits) insure an ever expanding economy. Through this process, sav ings can be set aside which will ser vice and eventually repay the debt.

As government, reduced to its proper function of protecting life and prop erty, is removed from the economic scene, its need and ability to borrow will be eliminated. The individuals, whom the government is required to protect, will pay for this service with some form of taxation. Whether Ar gentina, or any nation, will ever have the political means to apply the economic solution, is beyond the scope of this article. There are only two alternatives: a free economy based on private property rights or a command economy in which the state exists at the expense of the in dividual. The latter leads to eco nomic chaos and social instability. Only the former results in peace and prosperity. @}) -FOOTNOTES1Andrew Thompson, "Alfonsin Walks on a Knife Edge," South 43 (1984): 88-89. 2William C. Freund, "What's Behind the Debts of Developing Countries?" Journal of Accounting, Auditing, and Finance, Fall, 1983, pp.90-95.

SInter-American Development Bank, Exter nal Debt and Economic Development (Washing ton, D.C., 1984). 4International Monetary Fund, International Financial Statistics: 1981, 1984 (Washington, D.C., 1981, 1984). 5Mary Speck, "The Argentine Dilemma," In quvy, June, 1984,pp. 22-25. 6Linda Schuster, "Politics Played a Crucial Role in Argentina Lending," Wall Street Jour nal, 17 May 1984, p. 34. '''The Breaking of a Continent," The Econ omist, 30 April 1983, pp. 17-2l. 8Schuster,op. cit. 9Larry A. Sjaastad, "International Debt Quagmire-To Whom Do We Owe It?" World Economy 3 (1983), 305-24. lorrhompson, op. cit. llSpeck, op. cit. 12Neil Ulman, "Argentina Lists Plans To Curb Deficit, Inflation." Wall Street Journal, 27 January 1984, p. 35. ls"A Gambler's Throw?" The Economist, 22 June 1985, pp. 68, 70. 14"The Breaking of ..." op. cit. 15"A Gambler's Throw?" op. cit. 16Sjaastad, op. cit.