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The international financial community can assess its management of the international debt "crisis" of 1982-83 with a certain sense of satisfaction. Creative ad hoc solutions to individual countries' problems kept adequate credit flowing. Unpredecented cooperation among the International Monetary Fund (IMF), central banks, and private lenders restored confidence and prevented the "crisis" from playing out to a tragic conclusion-massive defaults, the freezing of new credit, bank failures, and perhaps ultimately a worldwide depression.
Nevertheless, many of us in international trade view the current situation with lingering misgivings. For the moment, the most critical stage of the crisis appears to have passed, although any fluctuations in interest rates would have a dramatic effect on debt levels. The enduring effects of the international debt situation on trade are apparent, and some of the most serious may not yet be fully felt.
The short-term effects are seen most directly in trade flows. Debtor countries were forced to cut back drastically on imports within a very short time; exporters in industrialized nations felt the impact almost immediately. To maintain these exports and to enable high-debt economies to purchase imports, it is necessary for industrialized countries to continue to provide export credits. The United States already has made efforts to extend export credit guarantees and insurance through the Export-Import Bank. However, it will be necessary to expand such efforts on a multilateral basis to avoid interruptions in commercial transactions and economic activity in high-debt countries.
However, the long-term effects of the international debt situation will be more difficult to resolve. For example, the need for high-debt countries to increase exports, while curtailing nonessential imports, creates strain in the international trading system. Industrialized countries, which feel they are losing export markets while being forced to absorb more imports, fall prey to calls for increased protectionism. Avoiding the temptation to resort to protectionism requires a concerted effort by all industrialized countries.
Likewise, high-debt countries need to continue to make sacrifices in domestic policy choices. They postpone taking necessary economic adjustment measures for fear of the social or political consequences, and in the process they only prolong conditions of poor growth and inefficient economic performance.
These countries could hamper their own chances for recovery by avoiding some of the hard policy choices now facing them. If they refuse to open their markets and fail to adopt more outward-looking economic policies, they will be stuck with lower growth rates and less efficient export production. At the same time, failure to institute reforms and to liberalize their trade regimes could undermine the industrialized nations' efforts to dampen protectionist pressures, ultimately leading to decreased access for the high-debt countries' exports. Such an outcome would be a prescription for disaster: high-debt countries would fail to establish conditions for growth, both internally and externally.
We are, fortunately, a long way from the brink.
There is much we can do to avert an international trade crisis. First, industrialized countries need to keep markets open for exports from the high-debt countries. At the same time, debtor countries need to adopt policies which contribute to their long-term competitiveness and which foster conditions for real and efficient economic growth. Fiscal and monetary discipline are prerequisites. Then trade liberalization, as a part of a multilateral effort to reduce trade barriers, could be instrumental in ensuring growth in global and domestic commerce.
In addition, increased attention to the trade effects of adjustment programs negotiated by the IMF and World Bank loans not tied to specific projects will help to ensure that economic assistance preserves the benefits of international trade. Beyond such direct institutional coordination, trade and finance officials can benefit from increased contact and from a greater awareness that each field has significant implications for the other.
In the pages which follow, I discuss the increasing importance of developing countries in international trade and the effects which their often restrictive trade policies have on their own economies and on the international trading system generally. This is followed by a brief overview of the origins of the international debt crisis. Then the search for a trade-oriented solution to the debt crisis is reviewed, both in its multilateral and bilateral aspects.
The discussion concludes with a consideration of the role which a new round of multilateral trade negotiations could play in increasing the prosperity of developing countries (especially the high-debt nations). The importance of foreign direct investment as a source of additional resources and the need for adequate flows of credit to finance trade are also highlighted.
Trade between industrialized and developing countries expanded enormously during the 1970s. The share of developing country exports in the consumption of manufactured goods in the industrial countries doubled over the decade-from 1.7 percent in 1970 to 3.4 percent in 1980. The United States has absorbed a substantial portion of these shipments. In 1982, for example, of total exports of manufactures from developing countries to the major industrialized nations (the United States, the European Community, Canada and Japan), 55.6 percent went to the United States alone.
At the same time, exporters in industrial countries found growing markets in developing countries. This too was especially true in the case of the United States. Overall, developed country shipments to the developing countries, as a share of total exports, grew from 23 percent in 1973 to 28 percent in 1980. For the United States, at the end of the decade, the comparable figure was just under 40 percent. This share was greater than total shipments to "traditional" export markets-Europe and Japan. Until 1983, Mexico was our third largest export market, behind only Canada and Japan. Last year, Mexico moved to fourth place as a result of the debt situation.
In short, developing countries are no longer an insignificant influence in world trade, particularly in manufactured goods. By 1980, they had made their presence felt and in many instances were having an important influence on domestic prosperity in industrial countries, through import competition and through purchases of developed countries' goods and services.
A country's basic orientation toward trade-whether it chooses to insulate its domestic economy from external influences or opts to expose its farms and factories fully to international competition-has fundamental implications for its overall growth prospects and economic development. Economists have argued that outward-looking trade policies, with their emphasis on realistic pricing and exchange rates, and less government interference in the operation of the economy, contribute to more efficient production and higher rates of growth.
The international debt difficulties of the recent past emphasized the importance of countries' trade policies by exposing major differences among countries in their abilities to cope with large debts. In general, those countries that have followed an outward, market-sensitive orientation for the longest periods have been better able to weather debt difficulties than those which relied less on market forces to guide economic policies.
This should not be surprising. Countries following an outward-looking orientation are more likely to avoid excessive restrictions on imports needed for the production of exports, and they are less inclined to hamper their private sectors with burdensome government regulations. They are also more likely to rely on prices to allocate scarce resources. The relative openness of such economies in turn makes them more attractive as sites for investment, strengthening the export sector to an even greater extent. Success breeds success.
An import substitution strategy, by its very nature, increases the role of government in managing the economy. It introduces price distortions in the production process. It also discourages realignment of the exchange rate in response to balance-of-payments disequilibria. Import substitution frequently is administered through a system of tariffs, or more often, quantitative restrictions regulated by complex import-licensing systems.
Governments control (or sometimes prohibit) the flow of goods through allocations of import licenses and foreign exchange. Domestic production fostered by such protection is not internationally competitive, and exporters using the domestically produced item are forced to purchase it at a higher price. Consequently, to enable the exporter to compete in the international marketplace, the government must subsidize exports in some way to compensate for price distortions. As a result, the system becomes doubly burdened; the government first allocates resources inefficiently and later has to pay for the resulting export inefficiencies.
Finally, the policy tends to make currency realignment less attractive as a way to readjust prices because the government consciously seeks to use exchange rates as a way to keep the prices of needed imported capital goods as low as possible. The typical result is an overvalued exchange rate, which discourages exports and encourages imports. Additional quantitative restrictions on trade and capital controls become necessary. Such policies contribute to extensive governmental control over business activity and discourage investment. At a minimum, such policies encourage an inefficient allocation of resources within the economy, setting the stage for future economic problems.
A market-oriented export promotion strategy, combined with sound macroeconomic policies, is a more certain avenue to efficient, sustainable economic growth. It has been found that export growth rates accelerated appreciably following a switch in the trade regimes of Brazil, Colombia and South Korea from import substitution to export promotion.1 In each case where such a shift had taken place, the country experienced an especially rapid growth of manufactured exports, an important precursor of economic growth.
These findings mirror the way that various developing countries handled the international debt situation. First, it seems clear that the magnitude of a country's external debt is not what determines how serious the difficulties are going to be. Korea, for example, is among the five highest debtor nations among developing countries. Yet Korea has emerged from the international debt crisis in reasonably good shape. This is attributable to its success in building a diversified, competitive export sector that has enabled the country to service debt burdens. Moreover, its prospects for future export growth arouse great international confidence.
In one of its World Financial Markets reports last year, Morgan Guaranty Trust Company highlighted a revealing statistic contrasting the export capabilities of debtor countries in Latin America with those in Asia: exports of goods, services, and private transfers as a percent of nominal gross national product in 1982 for the Latin American debtors were less than half those for major Asian borrowers.2 The comparable figure for Brazil was eight percent; for Korea 44 percent. The debt burden can be borne by borrowing less and cutting back on imports, or by exporting more. Ultimately, there are limits to austerity; export expansion offers the only sure way out of the debt situation in the long term. It is evident that debtor countries in Latin America could benefit substantially from a major effort to expand exports, along with moves to implement adjustment policies too long postponed while access to external capital was relatively easy.
The willingness of industrialized countries to maintain open markets and to take additional liberalizing measures will depend, in part, on actions undertaken by the developing countries themselves. To the extent that high-debt developing countries postpone liberalization of their own markets, arguing their need to limit imports while expanding exports, industrialized countries will face the prospect of increased trade deficits. Their exports to developing countries will have slowed at the same time that they are being urged to absorb increased imports from developing countries.
As has happened in the United States, which owes a significant portion of its record 1983 trade deficit to depressed export trade with high-debt countries, there is a growing dissatisfaction with the lack of market access abroad, which leads to increased calls for protection at home. Although our own trade deficit is aggravated by the current high value of the dollar, it is easy for interest groups to focus on lack of access to overseas markets as a justification for limiting access domestically.
Action by developing countries, especially by those which are more economically advanced, to liberalize their own markets could do much to defuse such calls for protection. Preserving market access in industrialized countries is particularly vital for the high-debt countries, which will depend increasingly on expanded exports to improve their economic situation. If these countries avoid making necessary adjustments in their regimes now, not only will they hamper their own prospects for growth and perpetuate their vulnerability to a new debt crisis, but they also run the risk of losing some of the market access they presently enjoy. It is unlikely that the high-debt countries will be provided with greater market access to the industrialized countries in the absence of such liberalization.
In analyzing the origins of the international debt crisis, one is tempted to assign blame. It is easy to conclude that too many banks were making too many questionable loans in search of easy profits. It is also easy to chastise borrowing countries for relying on easily accessible foreign capital while putting off some of the policy changes that would have enabled them to cope better with the changing economic environment. However, the effort to identify a guilty party obscures our understanding. Undoubtedly, mistakes were made-both by the commercial banks and by the borrowing countries-but it also could be argued that the major fault was a general willingness to be too optimistic-to assume that the economic conditions of the 1970s would continue indefinitely.
Rapid-growth international lending became possible after the 1973 oil shocks, when large amounts of wealth were transferred within a short period to oil-exporting nations, which then deposited petrodollars with Western banks. The banks were eager to put the capital to productive use. Demands for capital eventually outstripped what was available from recycling, and banks extended new lines of credit. Inflation and relatively low interest rates during the period ensured that real interest rates on loans were quite low, or even negative. Accessibility to foreign capital made it possible for creditworthy oil-importing countries to borrow the funds they needed to meet growing current account deficits without having to make fundamental adjustments in their economies to respond to the changing real cost of energy.
At the time, many countries preferred to cushion domestic economies from the external effects by pursuing stimulative economic policies and shoring up uncompetitive industries through subsidies and protection. Inflationary domestic policies and slower growth led to ever higher current account deficits and an increasing need for external borrowing. Oil-exporting countries, in some cases, also borrowed abroad extensively, banking on untapped oil reserves and expected export receipts from petroleum to finance ambitious development projects.
The second oil shock in 1979 precipitated the chain of events which eventually led to the debt crisis in 1982. The policy response to the first oil shock had been for the leading Western economies to inflate and pull the rest of the world out of recession. By 1979, concern about inflation was overriding, especially in the United States and Britain, and tight monetary policy was seen as the best way to curtail inflationary pressures.
The world economy experienced rapid changes, which in combination caused severe problems for debtor countries: in addition to higher oil prices, the real exchange value of the dollar appreciated by 55 percent, interest rates soared, and a world recession led to low demand for debtor country exports (and increased protectionist pressures in cases where their exports remained competitive). Much of the outstanding debt was denominated in dollars, and much of it was short-term debt, lent at floating interest rates, so that interest increases showed up quickly in debt service figures. At the same time, lower demand for primary products as a result of recession led to a decline in many developing countries' export earnings.
Lower oil prices after 1981 did not appreciably alleviate the situation. Although lower oil prices obviously were of considerable benefit to oil-importing countries, oil exporters experienced a marked reduction in their export earnings.
The Council of Economic Advisors has estimated that the net effect of lower oil prices after 1981 was to exacerbate the level of indebtedness among countries. Although the drop in the price of petroleum had a positive effect by lowering oil import bills for many countries, it also greatly reduced revenues for oil-exporting nations, whether or not they were members of the Organization of Petroleum Exporting Countries. Thus, just as the increase in petroleum prices in 1973-74 had initiated the chain of events which ultimately culminated in the international debt crisis, so did the subsequent softening of the oil market intensify the balance-of-payment situations facing a number of countries.3 The Council attributes the difference from 1973-74 to the fact that, by 1981, oil-exporting countries also had amassed extensive debt obligations.
On the face of it, the banks' approach to international lending at the time did not appear unreasonable according to the indices used to assess countries' creditworthiness: the ratio of debt-service payments to exports, or the ratio of overall debt to exports. Because developing countries as a group were growing rapidly and maintaining healthy export levels until the end of the 1970s, their overall debt-service-to-export ratio did not change over the course of the decade. For all developing countries, the debt-service ratio in 1970 was 13.5 percent; in 1980, the figure was barely changed at 13.6 percent. By 1982, however, this figure had risen to 20.7 percent (estimated).
This rapid increase reflected higher incidences of short-term debt, the effect of variable interest rates on overall debt service, and the impact of lower export earnings. Overall debt levels kept pace with aggregate export growth during the 1970s, but the composition of the debt shifted from primarily medium- and long-term loans increasingly to short-term borrowing (at least partly because the latter was easier to get). The ratio of debt-to-exports increased from 76 percent to 104 percent between 1980-82; with short-term debt added in, the final ratio jumped to 150 percent.4
Such aggregation, of course, obscures differences among countries. Commercial banks based their lending decisions, at least in part, on their assessment of a particular country's export and investment growth potential. As long as growth prospects looked promising, and provided that a country's political situation did not change drastically, it seemed reasonable to continue lending. All it took for the crisis to come to a head, and for everyone in the system to be brought up short, was a loss of confidence-in this case triggered by Mexico's announcement in August 1982 that it no longer could pay its debts. Financial flows had begun to tighten in the middle of that year, but in the wake of the Mexican announcement, it was then understandable that Brazil, Argentina, and gradually other higher-debt nations, would find the banks no longer willing to make new loans. It was at this juncture that coordinated intervention was necessary to avoid massive defaults.
The largest concentration of debtor countries was in Latin America, and the major portion (about 40 percent) of their debt was held by U.S. banks. Not only were the financial risks of default high-with over $300 billion in outstanding debt-but the potential trade effects of not managing the situation successfully were substantial. The export sector of the U.S. economy has been the fastest growing in recent years, accounting for four out of every five new jobs in the manufacturing sector. Because of close regional ties with Latin America, about 13 percent of our total exports is directed to those markets.
In the case of Mexico, exports fell by $10 billion between the end of 1981 and the end of 1982. It has been estimated that each billion dollars in U.S. manufacturing exports translates into 24,000 jobs. Thus, the Mexican debt crisis alone resulted in a loss of roughly 240,000 jobs for the U.S. economy. Even if the debt crisis had not spread to other countries, these figures demonstrate that the United States had a clear self-interest in helping to manage the crisis in Latin America so that the region could regain economic stability and avoid political upheaval.
The international financial community has averted a very major disaster. Joint efforts to restructure developing countries' debts have been front-page news, with international bankers attracting a degree of media attention formerly reserved for television or sports personalities. At the same time, less dramatic but equally important efforts have been underway to solve the fundamental balance-of-payments problems of high-debt developing countries and return them to the business of economic development.
For at least the past two years, the Third World debt situation has permeated multilateral efforts to improve the trading system and has been a central factor in the formulation of U.S. trade policy.
The participants at the Ministerial Meeting of the General Agreement on Tariffs and Trade in Geneva in November 1982 clearly recognized the links among poor economic growth, high debt and international trade. The combination of debt problems and poor economic growth throughout the world was pushing trade in a restrictive direction. Good intentions to resist protectionist pressures were likely to be insufficient without a broader, comprehensive effort to move world trade in a liberalizing direction. The ministers in Geneva responded to this situation by committing their governments to resist protectionism while working within the GATT to address in a comprehensive and coherent manner the shortcomings of the trading system not resolved by the Tokyo Round.5
Throughout 1983 the GATT examined ways in which trade and trade policies could alleviate the problems of the high-debt countries. Discussion of the trade-finance link and possible means to improve coordination of trade and financial policies dominated the two meetings of the GATT's informal steering group, the Consultative Group of Eighteen (CG-18).6 Measures considered by the Group included the reorientation of the GATT's balance-of-payments consultative process to include an examination not only of the trade policies of the high-debt countries but also of those of their leading trading partners; increased efforts by the GATT to inform the World Bank and IMF of the trade policies of those countries consulting with the Fund; notification to the GATT of the trade policy commitments agreed to by countries consulting with the Fund; the possibility of synchronizing the GATT consultations with those of the Fund; and the desirability of quantifying the potential impact which trade liberalizing measures undertaken by a high-debt developing country's major trading partners may have on its balance-of-payments situation. Unfortunately, many of these worthwhile suggestions have been opposed by several of the high-debt countries.
The GATT permits developing countries to take certain protective measures to alleviate difficulties in their balance of payments; however, actions taken are to be notified promptly to the GATT and reviewed periodically by the Contracting Parties in consultations to determine if a particular country's economic situation might have improved sufficiently to warrant the removal of the measures. The GATT has long recognized that the external trading environment faced by a consulting country has a bearing on that country's efforts to bring about balance-of-payments equilibrium. Such factors have been considered routinely in the course of consultations in the Balance of Payments Committee. But to suggest, as some have done, that steps by the developed countries alone are the key to solving the current crisis, is to ignore the development lessons of the past two decades. Liberalizing steps by developed countries must be accompanied by similar measures on the part of developing countries.
Recently, the GATT Secretariat completed its study of the possibilities for increasing trade between developed and developing countries, which was requested by the GATT Ministerial Meeting in November 1982. The findings and recommendations of this study should provide the basis for more serious discussion of the potential benefits of additional trade liberalizing efforts by developed and developing countries alike.
Concern about protectionism and the threat of a more restrictive international trading system has not been confined to the GATT. The meeting of the joint Development Committee of the IMF and the International Bank for Reconstruction and Development in April 1983, the Organization for Economic Cooperation and Development (OECD) Ministerial of 1983 and 1984, and the recent economic summit meetings all identified the need for trade liberalization as an essential condition for successful adjustment by developing countries and for a durable global economic recovery.
In its discussions of the trade-finance link since it took up the subject at its April 1983 meeting, the Development Committee has stressed that open markets for developing countries' exports are indispensable to the adjustment programs being undertaken with IMF resources. The Fund has backed up this prescription by conducting more rigorous analysis of developed countries' trade regimes in the context of the Fund's Article IV consultations. (These consultations, conducted annually between the Fund's staff and each Fund member, review each member country's monetary, fiscal, trade and other economic policies.) This is entirely appropriate, and closer cooperation between the Fund and the GATT could make the consultations even more meaningful.
At the same time, the Development Committee has stated clearly that developing countries should liberalize their trade regimes too. Shortages of foreign exchange will necessitate a slower pace of liberalization by some developing countries than would otherwise be the case, but the Committee has left no doubt that the correct direction for policy, even in very heavily indebted developing countries, is toward more open trade and exchange. This orientation is increasingly reflected through inclusion of more specific trade-related measures (e.g., replacing protection through quotas with a tariff-based system) in the Fund's individual adjustment programs.
The Development Committee's articulation of the linkages between the removal of distortions in developing countries' economies and the effect of such liberalization on their economic growth has provided a strong underlying rationale for a rollback of existing trade barriers. These actions are encouraging evidence that international institutions are moving beyond rhetoric on the issue of the trade-finance link.
Political commitments to resist protectionism and to dismantle trade barriers are the first step in reversing the momentum of protectionism. Recognizing this fact, the members of the OECD have undertaken an examination of recently imposed trade barriers and trade-distorting measures in basic industries, with the objective of effecting a progressive, mutual dismantling of such measures. While it will be some time before the major trading countries actually take the concrete trade-liberalizing steps to which they have agreed in principle, this process has led the industrialized countries to focus on trade liberalization as the appropriate means to promote economic recovery and to maximize the chances for success in the developing countries that have launched major adjustment programs.
In order to generate sufficient momentum in dismantling existing barriers, the trade ministers of the four major trading entities-the United States, the European Community, Japan and Canada-have held several informal meetings. Beginning in the summer of 1983, the so-called "Quadrilateral" countries began to identify actions that they could take to reduce trade frictions and to set international trade firmly on a liberalizing track. The four gave priority attention to accelerating the tariff reductions agreed to in the Tokyo Round, originally scheduled for full implementation on January 1, 1987. By completing the Tokyo Round implementation two years ahead of schedule, a positive signal would be sent to the world trading community that the four major trading partners were prepared to push the system and their own countries in the direction of more openness and, therefore, greater opportunities for outward-looking developing countries. Japan, Canada and the European Community have recently informed the United States that they are prepared to accelerate their Tokyo Round concessions when the United States is prepared to do so. The Reagan Administration has submitted a legislative proposal to the appropriate congressional committees and is working for rapid passage.
A second item under consideration by the Quadrilateral group is the removal of barriers to the imports of the least-developed countries. Here again, the United States intends to extend duty-free treatment to trade with the least developed, provided other countries do the same.7 The Executive Branch is consulting with Congress to develop appropriate legislative proposals. Our trading partners are supportive of this step as well.
The success of the Quadrilateral process has prompted us to apply the same format to a wider grouping, including several key developing countries. In early May, trade ministers from the Quadrilateral countries, Australia, New Zealand, Korea, the Association of Southeast Asian Nations, India, Brazil, Mexico, Sweden, Switzerland, and Yugoslavia met to discuss means of strengthening the trading system and promoting adjustment. While it is too early to predict what new steps may be taken as a result of the meeting, it proved particularly useful in gaining a better understanding of the political and economic constraints currently facing each government.
It is becoming increasingly clear that the time for a new multilateral round of trade negotiations is ripe. In view of their increasingly significant role in international trade, developing countries must be active participants in any new round if it is to be successful. And they should involve themselves from the earliest planning stage for a number of reasons: first, a new round would strengthen the political determination in all participating countries to resist the protectionist pressures which still remain strong.
Second, turning the tide on protectionism can be of direct benefit to the debtor nations, which must rely on access to the industrial nations for their exports if they are to overcome balance-of-payments deficits. Security of access to industrial markets for their goods creates a greater incentive for investors than do measures such as unilateral, temporary tariff preferences. Increased investment flows can be a vital source of new capital for these countries, in addition to the traditional benefits foreign direct investment offers, such as increased employment and access to technology and know-how.
Finally, enough time has passed since the Tokyo Round to enable us to identify the critical areas of trade which will be of importance later in this decade and into the 1990s. Developing countries, and especially the high-debt nations, should have a considerable interest in establishing international "rules of the game" to govern emerging areas of commerce, such as services or high technology. The Tokyo Round, through its pathbreaking attempt to set up new multilateral discipline over non-tariff barriers, made a promising start in expanding its mandate into areas not specifically contemplated when the GATT was formed in 1947. But there is much unfinished business left from the last round. For problem areas which have been with us for some time now, such as agriculture, developing countries have an important role to play in making sure that their trading interests are not overlooked as priorities and objectives for a new round are established.
Plans for a new round are in the formative stages at present. The hope is to work with our trading partners closely during the course of this year and into 1985 to identify an agenda and to launch studies in preparation for the new round. Ministers of all the Contracting Parties to the GATT then could convene in 1985 to make the decision to call for negotiations. This is an ambitious timetable, to be sure, but it is an achievable one if all participating countries exercise the political will to keep the momentum going.
Developing countries will be instrumental in this planning and implementations process. An important start for enlisting their participation was the conference in Seoul, Korea, last April. Sponsored by the Trade Policy Research Centre, the meeting brought together trade ministers from most of the Pacific nations for a discussion of priorities for a new round. A key consideration during the conference was to identify areas of primary interest to developing countries. A new GATT round would be the first in which the developing nations were involved from the initial stages.
In past rounds, developing countries generally have chosen to be passive observers. They were reluctant to become involved in seemingly complex discussions, where they felt deficient in technical preparation, and where they were expected to give a measure of reciprocity in return for negotiated concessions. The United States made a promising start with a number of developing country trading partners during the Tokyo Round, when trade agreements were concluded with 28 developing countries. However, the stakes are much higher now, for the developing countries as well as the industrial nations, and it is imperative that we all use the opportunity of a new round to the best advantage.
Trade liberalization no longer can be one-way; it must be reciprocal. The need exists for industrial countries to liberalize their markets and to rationalize their less competitive sectors. However, our ability to do so will be lessened considerably if developing countries do not join in a good faith effort to undertake appropriate reforms. Especially in the case of the more advanced developing countries, it is unjustifiable for them to maintain trade barriers which are inconsistent with their level of economic development or their degree of export competitiveness. For all countries to benefit from a new round, each must be willing to make concessions.
The importance of secure, liberal access by developing countries to world markets is directly relevant to the Reagan Administration's efforts to renew the U.S. Generalized System of Preferences. Since its implementation in 1976, the U.S. GSP has contributed to the growth of developing countries' exports by granting preferential duty-free treatment to a wide range of their products. It not only has enabled developing countries to compete more effectively with developed country suppliers, but it has also facilitated a diversification of their economies, better positioning them to weather the volatile market conditions associated with traditional developing country export products.
Statutory authority for the U.S. GSP expires next January. The Third World debt situation makes renewal of this authority more important than ever, with five high-debt developing countries ranking among the program's top ten beneficiaries. The Administration has transmitted to Congress a GSP renewal proposal that is designed to reinforce the program's development objectives, while also recognizing the need to promote the further integration of developing countries into the international trading system as their economies progress.
In addition to the trade aspects of the international debt situation, one of the key longer-term solutions to the debt problem is an increased flow of private direct investment from developed to developing countries. Private direct investment provides an important alternative source of foreign capital that has not been adequately tapped by debtor developing countries. Moreover, private direct investment offers a number of notable advantages over private direct bank lending and official assistance. First, no fixed interest payments attach to private direct investment. Earnings need only be repatriated if the investment is profitable. This is in contrast to many of the bank loans made to developing countries in recent years that went into unprofitable ventures, but for which interest payments continue to fall due. Second, private direct investment is a superior method of transferring technology and managerial expertise to developing countries. This is essential if developing countries are going to improve their productive capabilities, and diversify and expand their economies and international trade potential.
Finally, the existence of foreign private direct investment in developing countries helps to integrate more fully the economies of these countries into the international political economy. In this regard, it has been my experience that the strongest supporters of an open trading system are companies that have overseas investments, particularly in developing countries. These companies are active participants in the current political debate over U.S. trade policy and are the natural allies of developing countries in ensuring that the outcome of this debate leads to more open, and not more restricted, developed country markets. As such, they are an important counterbalance to the protectionist constituencies that exist today, not only in the United States but in all developed countries. The importance of having politically influential partners in the United States with similar interests is often overlooked, but is crucial to the developing countries' long-term trading interests.
Unfortunately, there exists no consensus in debtor developing countries today that private direct investment can play a positive and important role in helping to resolve the debt problem. Too often, developing countries remain wed to the prejudices and policies of the past that were based on the assumption that foreign direct investment is a source of economic exploitation and a direct threat to national sovereignty.
As a result, many of these countries continue to maintain foreign investment regimes that are overly restrictive and that tend to repel, rather than attract, foreign investors. Under these regimes, foreign investors are subject to a panoply of equity restrictions, local content requirements, export requirements, and discriminatory technology and labor laws, to name a few. Given these burdensome foreign investment regimes, in conjunction with worldwide economic recession, unsound macroeconomic policies and concerns about continued access to developed country markets, it is not surprising that potential foreign investors have been reluctant, if not altogether unwilling, to make new investments in much of the developing world.
In view of these circumstances, what is clearly needed to improve the environment and to increase the prospects for meaningful flows of private direct investment to developing countries over the longer term is a concerted effort at reorientation. The Reagan Administration is making such an effort in the conduct of its international investment policy. The policy itself was articulated by the President in September 1983.8 A major thrust of this policy is to improve the framework for U.S. private direct investment in developing countries through a process of dialogue and negotiation with these countries. In this regard, the Reagan Administration has begun negotiating bilateral investment treaties with interested developing countries. Such treaties are intended to provide a stable legal framework within which U.S. direct investment can flow. For countries where it is unlikely that such treaties can be negotiated in the short term (Brazil and Mexico are good examples), the Administration has initiated low-key bilateral consultations, the intent of which is to encourage these countries to gradually adopt less restrictive and more economically beneficial foreign investment policies that will better serve the trade, investment, and financial interests of these countries and the United States.
In addition, developing countries themselves can benefit from a revision of their own investment policies. For example, Mexico recently amended its Foreign Investment Law to allow 100 percent foreign ownership (previously limited to 49 percent) in certain sectors which the government has targetted for future growth. With the improvement in the Mexican economy, this pragmatic approach toward foreign direct investment could yield considerable dividends. The Reagan Administration fully supports the activities of the Overseas Private Investment Corporation, which are aimed at inducing private investment flows to the developing world through a series of investor insurance and facilitation programs. The Administration has also stepped up the traditional investment promotion and facilitation programs of the Commerce and State Departments (including those of the Agency for International Development).
In sum, increased private direct investment flows from developed to developing countries must be an essential component of any long-term solution to the international debt problem. In recognition of this fact, the Reagan Administration is pursuing an activist international investment policy in an effort to create an international environment conducive to such flows.
Finally, I must point out that the search for solutions has not been confined to long-term trade liberalization or investment promotion. Major short-term trade financing measures have been taken by the U.S. Export-Import Bank to maintain the flow of U.S. exports to the high-debt developing countries. This has been necessary not only to provide needed inputs and capital equipment (or parts to maintain the existing capital plant) but also to prevent loss of jobs in export-intensive industries in the United States.
While neutralizing foreign credit subsidies through the provision of direct and medium-term credits may have constituted the most important function of the Eximbank in the recent past, increasingly the Eximbank is viewed as a means to ensure access to capital for foreign purchasers through its guarantee and insurance programs. Further, the Eximbank is playing a critical role in providing and "facilitating" bridge financing to developing countries to ease them through short-term liquidity crunches.
Examples of the Eximbank's role as a "credit bridge" are the extraordinary financing programs the Bank has adopted for both Brazil and Mexico. The program for Brazil consists of up to $1.5 billion in guarantees and insurance that may be made available to purchasers of U.S. goods with a host government guarantee. For Mexico, Eximbank has adopted two extraordinary financing programs. The first involves two $100-million insurance facilities with major financial institutions, as well as an increase in the aggregate limit on its insurance facility with PEMEX, the Mexican oil company, from $125 million to $275 million. More recently, an additional $500-million guarantee/insurance facility has been made available to help ensure continued private credit flows in Mexico.
An extraordinary financing facility is not appropriate for responding to every country's liquidity problems. There are costs associated with the program in terms of Eximbank's authority as well as risks inherent in increasing exposure in high-debt countries. However, in selected instances it is an important component of overall efforts to restore liquidity in selected countries.
Another way in which the Eximbank could respond to financing problems experienced by certain high-debt less-developed countries is through greater use of the Export Expansion Facility. The EEF could be used for specific projects rather than as part of a plan to restore the overall liquidity of a country.
The EEF is a revolving fund of $500 million for which the standard for repayment is "sufficient likelihood" rather than "reasonable assurance." This fund could be used to support export transactions for which risks were higher. Such transactions would have to meet some predefined standards based upon factors such as the country's balance-of-payments positions, the impact of the project on host country development, the political importance of the transaction, and compliance with an IMF agreement. It also would be necessary for the Bank to have an acceptable guarantee that would satisfy the sufficient likelihood of repayment standard.
Trade admittedly is not the sole solution to the international debt problem. Even if the United States, Europe and Japan were to drop all barriers to developing country exports, such liberalization would apply to only about $4 billion of their trade initially, and even the increased exports that high-debt countries could generate under such circumstances would go only part of the way toward paying off the more than $800 billion in debt now outstanding. However, while trade cannot solve the problem singlehandedly, it is the key to the solution. These countries must be able to sell their goods abroad to service their debts. If their access to industrialized countries' markets is impaired through protectionism, the developed world will be condemning the indebted nations to perpetual financial crisis.
The assumption that all countries will share in a world economic recovery depends upon the industrialized nations' refusal to take a protectionist path. A return to protectionism would slow down the potential growth that international trade could provide and would be a return to mercantilism in its worst sense-forcing each nation to grab whatever wealth it can at everyone else's expense. Of course, such an approach ultimately would help no one-trade flows would stagnate, producers would be unable to import needed components to manufacture goods, and consumers would pay higher prices and face much more limited choice for everything from the most sophisticated personal computer to the shoes on their feet.
Some high-debt countries may hesitate to commit themselves to meaningful trade liberalization in the near future, arguing that their present need to maintain austerity makes it extremely difficult for them to implement trade liberalization at this time. It may be, however, that these governments should consider the matter carefully. It will take some time for a new round to be launched and for negotiations to be carried out; economic conditions undoubtedly will be much improved by the time any concessions are exchanged. Some of the new areas being discussed for inclusion in the negotiations, such as agriculture, high technology and services will provide a basis for new planning and investment strategies that could lead to substantial economic growth. Even for more traditional trade in goods-perhaps even for the most sensitive of product areas-concessions negotiated during the new round would provide developing country exporters with greater security of access to overseas markets than is presently the case. Likewise, multilateral liberalization provides a means to defuse protectionist sentiment in the industrialized countries. It will be more difficult for industries to seek protection if it is clear that fellow exporters will pay the price once countries retaliate for restrictive actions.
The high-debt countries will require extensive flows of trade credits in the years to come. As the economies of these countries regain momentum, imports of goods and services needed to sustain production will increase markedly. A multilateral facility to ensure that such credits are forthcoming, even in times when normal lending may be curtailed, would do much to ensure continued growth. Such a facility would need to operate in concert with the IMF, to ensure that austerity programs are complied with, but the flows it would provide would maintain a productive nucleus within the economies that would form the basis for future growth. Since most of the imports in question likely would be supplied by the industrialized countries, the facility would hardly be a "giveaway"; rather it would generate increased demand for exports in markets which, for the last decade or so, have been among the world's fastest growing.
The debt situation also provides the backdrop against which the debtor nations should evaluate their investment policies. Foreign direct investment in the past has provided developing countries a source of capital, but most importantly, it has provided them with sources of employment, managerial expertise, and access to new technology. These latter services can contribute to the economy in myriad ways, and thus are as significant for their ancillary as for their direct effects.
Mexico provides an example of how debtor nations might evaluate their investment climates. Whatever political criticism governments may encounter for opening up their economies to foreign enterprises will be outweighed by the economic growth the increased investment is certain to generate.
Although we seem past the crisis point in the international debt situation, its aftermath creates a real need to liberalize the international trading system. The debt problem has only been managed, not solved. The high-debt countries in Latin America are not paying principal, and rescheduled debt for Brazil comes due in 1985 and for Mexico in 1987. Thus, the pressure to create the conditions which can reestablish economic prosperity is not diminishing but building continuously.
We can choose to delay the next crisis for a short time, or we can move with foresight to take some of the hard steps which must be taken now, while we have the luxury of selecting options. Trade liberalization is a necessary element in sustaining the global economic recovery and in aiding the high-debt countries in their quest for economic stability.
2 "Global Debt: Assessment and Long-term Strategy," World Financial Markets, Morgan Guaranty Trust Company of New York, June 1983, p. 4.
3 Council of Economic Advisors, Economic Report of the President, 1984, Washington: GPO, 1984, p. 75.
5 The Tokyo Round, inaugurated in 1973 and concluded in 1979, was the seventh round of multilateral trade negotiations to be held under the auspices of the GATT. The round continued the traditional approach of negotiating reductions in tariffs, but also broke new ground in the negotiation of multilateral codes to discipline the use of proliferating non-tariff barriers. These codes covered the areas of export subsidies, government purchases, technical barriers to trade (standards), customs valuation, and import licensing. Several important matters affecting international trade, however, were still outstanding at the close of the Tokyo Round. These included strengthening GATT coverage of trade in agricultural products, an area which has remained outside GATT discipline thus far; achieving multilateral agreement on the use of safeguard measures; and a code to discipline, the trading of counterfeited goods. These, and a number of emerging areas of international trade, such as trade in services, high technology goods, and trade-related restrictions on investment, were taken up by the trade ministers in 1982.
6 The Consultative Group of Eighteen was established in 1975 as a temporary body and later made permanent in 1979. The group serves as an informal steering group and provides the GATT Secretariat with an overview of international economic developments. It follows international trade developments in an effort to forestall any sudden disturbances which could threaten trade relations in general. It also is responsible for facilitating international balance-of-payments adjustment, and in that context, seeks to enhance coordination between the GATT and the IMF. Membership in the group rotates among the GATT Contracting Parties (except for the major countries) and at any one time consists of nine developed and nine developing countries.
7 In the case of the United States, the eligible least-developed countries would be: Bangladesh, Benin, Bhutan, Botswana, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Gambia, Guinea, Haiti, Lesotho, Malawi, Maldives, Mali, Nepal, Niger, Rwanda, Somalia, Sudan, Tanzania, Uganda, Upper Volta, Western Samoa, and the Yemen Arab Republic.
8 International Investment Policy Statement, September 9, 1983.