It is a gross oversimplification to view poverty as the outstanding threat to democracy. Poverty by itself does not undermine democracy; it creates social tensions which sometimes manifest themselves in violent incidents and political upheaval.
The real threat to democracy derives from certain groups, in particular the military, that tend to usurp the political rights of the people on the pretext of maintaining "law and order." These groups use authoritarian political mechanisms to impose economic policies which postpone satisfying the needs of the poor.
Similarly, the unbearable debt cannot be blamed when authoritarian regimes seize power. But the debt problem may provide the pretext for subverting democracy because debt is one of the main constraints on economic growth.
The proposals of Cuba's Fidel Castro, Peru's Alan Garcia, and Argentina's Raul Alfonsin all recognize that the current burden of debt repayment obliterates any prospect for improving the standard of living for the majority of Latin Americans. Given the impossibility of postponing the needs of the people, debt servicing must be limited to amounts that allow sufficient foreign exchange to finance economic growth in the newly emerging democracies. And it is only through democracy that, at the national level, suitable development strategies are likely to be devised and, at the international level, debt relief negotiated.
It is true that US support for dictatorships in Latin America facilitated bank lending and the escalation of Latin indebtedness. But the debt problem, the roots of which are an intricate interaction of events that took place in and outside of Latin America, is more complex than that.
Within Latin America, governments began borrowing to offset externally induced declines in growth. They borrowed in the belief that the global recession which emerged around 1971 and intensified after the first oil shock in 1973 was only temporary. Faced with unprecedented balance of payments deficits and the dearth of concessional balance of payments financing, these governments accepted the readily available and rapidly expanding funding from transnational commercial banks involved in recycling petrodollars. IMF loans that were attached to harsh and inappropriate repayment conditions provided even more incentives to borrow from the banks.
Outside Latin America, nationalistic protectionism and monetary policies which included high interest rates produced a prolonged recession. This transformed manageable repayment schedules into disaster scenarios. The second shock of oil price increases in the late 1970s and then the collapse of commodity prices in the 1980s soon followed.
Limiting Debt Service
The prevailing debt-deflation spiral offers alternative scenarios for both debtor and creditor countries. Debtor countries must either sacrifice growth in order to service their debt or limit their debt service to maintain minimum levels of growth. Creditor countries either collect debt payment while experiencing reduced exports or they seek export growth at the expense of capital recovery. All of these options are unacceptable and unsustainable.
Since August 1982, the IMF and the banks have realized that this debt and development dilemma is grave. But they remain locked into a self-induced "disaster myopia" and have steadfastly refused to accept the pragmatic approach of limiting debt servicing to a percentage of export earnings.
The proposal James Baker put forth at the IMF meeting in Seoul in 1985, which sought to preserve the fragile international banking system with new financing for the 15 largest debtor countries, is totally inadequate, particularly in terms of the amount of financing suggested.
Citibank has restored rationality to its accounts by writing off a substantial section of the debt, but we should not laud this belated and grudging realization that debt servicing contradicts growth and social stability. Banks such as Citibank and Bank of America have profiteered without the necessary incremental increases in loan/loss provisions.
The current range of proposals including interest rate relief, insurance schemes, and debt-equity swaps is likewise incapable of handling all aspects of the debt problem because none of these faces up to the basic reality of the debtor countries. Limiting the debt service is an immediate necessity. Unless growth can be restored, this is a situation out of control.
A Proposed Solution
The primary tasks of the IDO would be to provide a manageable way of paying off the debt and to establish a mechanism for channeling new capital flows.
First, IDO bonds backed by the developed countries would be issued to the commercial banks and other lenders in exchange for the developing countries' debts. The bonds would be issued at rates of interest and maturity dates tailored to the individual situation of each country. The aim should be to hold debt servicing obligations in the range of 20% of export earnings on an annual basis.
Second, the major industrial countries would make contributions in proportion to their share of total world trade to create a special fund that the IDO would administer. This fund would secure matching loans from commercial banks and private financial institutions for the developing countries; provide co-financing for project, program and sector loans granted by the World Bank or a Regional Development Bank; and extend long term loans to major private sector enterprises involved in industrial and agricultural exporting.
Countries benefiting from the relief afforded by the scheme would be required to adhere to policies which ensure that their debt servicing difficulties do not recur. Such conditions would include the promotion of export expansion and diversification, monetary stability and elimination of capital flight.
The success of the IDO will depend in part on whether the developing countries, in addition to increasing their export earnings and diversifying both their markets and products, become more self-reliant. The dynamism of Latin American development will have to be internal and regional. Each debtor country will have to use domestic savings to a much greater extent to fund investment, and trade will have to increasingly be channeled through regional economic coordination and South/South cooperation. Mixed economies will be best suited to this task.
The End of the Monocentric World Economy
In the nascent pattern of capital flows and international trade, new economic powers are destined to play an increasingly significant role. Count Brazil, Mexico and possibly Argentina among these. The new panorama holds both possibilities and problems for an increasingly marginalized group of developing and underdeveloped countries. How they fare will depend not only on the internal development of each, but on whether they can jointly reignite the Latin American engine of growth.